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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998
REGISTRATION NO. 333-50049
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DTI HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI
(State or Other Jurisdiction of
Incorporation or Organization)
4813
(Primary Standard Industrial
Classification Code Number)
43-1674259
(I.R.S. Employer
Identification Number)
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11111 DORSETT ROAD
ST. LOUIS, MISSOURI 63043
(314) 253-6600
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------
RICHARD D. WEINSTEIN
PRESIDENT, CHIEF EXECUTIVE OFFICER AND SECRETARY
11111 DORSETT ROAD
ST. LOUIS, MISSOURI 63043
(314) 253-6600
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copy to:
J. MARK KLAMER, ESQ.
BRYAN CAVE LLP
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102
(314) 259-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
DTI DIGITAL TELEPORT LOGO
OFFER TO EXCHANGE
12 1/2% SERIES B SENIOR DISCOUNT NOTES DUE 2008
FOR ALL OUTSTANDING 12 1/2% SENIOR DISCOUNT NOTES DUE 2008
OF
DTI HOLDINGS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON SEPTEMBER 15, 1998 UNLESS EXTENDED
------------------------
DTI Holdings, Inc. ("DTI" or the "Company") is hereby offering (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount at maturity of its 12 1/2%
Series B Senior Discount Notes due 2008 (the "Exchange Notes"), which exchange
has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement of which this Prospectus
is a part (the "Registration Statement"), for each $1,000 principal amount at
maturity of its outstanding 12 1/2% Senior Discount Notes due 2008 (the "Private
Notes"), of which $506,000,000 in aggregate principal amount at maturity was
issued on February 23, 1998 and is outstanding as of the date hereof. The form
and terms of the Exchange Notes are identical in all material respects to those
of the Private Notes, except for certain transfer restrictions and registration
rights relating to the Private Notes and except for certain interest provisions
related to such registration rights. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of an Indenture dated as of February 23, 1998 governing the Private
Notes and the Exchange Notes (the "Indenture"). The Private Notes and the
Exchange Notes are sometimes referred to herein collectively as the "Notes." See
"The Exchange Offer" and "Description of the Notes."
The Exchange Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after March 1, 2003 at the redemption prices set
forth herein, together with accrued interest, if any, to the date of redemption.
In addition, at any time or from time to time on or prior to March 1, 2001, the
Company may redeem up to 33 1/3% of the aggregate principal amount at maturity
of the originally issued Notes with the net proceeds of one or more Public
Equity Offerings (as defined herein) at a redemption price equal to 112.5% of
the Accreted Value (as defined herein) thereof; provided that immediately after
giving effect to such redemption, at least 66 2/3% of the aggregate principal
amount at maturity of the originally issued Notes remain outstanding. Upon the
occurrence of a Change of Control (as defined herein), each holder of Exchange
Notes may require the Company to purchase all or a portion of such holder's
Exchange Notes at a purchase price in cash equal to 101% of the Accreted Value
thereof, together with accrued interest, if any, to the date of purchase. See
"Description of the Notes -- Redemption" and "-- Certain Covenants." There can
be no assurance that the Company will have available, or will be able to acquire
from alternative sources of financing, funds sufficient to repurchase the
Exchange Notes in the event of a Change of Control. See "Risk Factors -- High
Leverage; Ability to Service Indebtedness; Restrictive Covenants."
The Exchange Notes will be senior unsecured obligations of the Company,
ranking pari passu in right of payment with the Private Notes and all future
unsecured senior indebtedness of the Company and senior in right of payment to
all future obligations of the Company expressly subordinated in right of payment
to the Exchange Notes. As of March 31, 1998, the Company had approximately
$268.9 million of indebtedness outstanding, all of which was evidenced by the
Private Notes. Because the Company is a holding company that conducts its
business through its wholly owned subsidiary, Digital Teleport, Inc., all
existing and future indebtedness and other liabilities and commitments of the
Company's subsidiary, including trade payables, will be effectively senior to
the Notes. The Company's subsidiary will not be a guarantor of the Exchange
Notes. As of March 31, 1998, Digital Teleport, Inc. had aggregate liabilities of
$21.1 million, including $14.4 million of deferred revenues. See "Description of
the Notes."
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on September 15,
1998, unless the Exchange Offer is extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date. Private Notes may be tendered only in
integral multiples of $1,000. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer."
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH THE
EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is August 14, 1998.
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[MAP OF U.S. SETTING FORTH DTI NETWORK ROUTES COMPLETED,
ROUTES IN PROCESS AND PLANNED ROUTES]
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NOTICE TO INVESTORS
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Notes Registration Rights Agreement
(as defined herein). Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Private Notes may be offered for resale,
resold and otherwise transferred by any Holder thereof (other than any such
Holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Holder's business and
such Holder has no arrangement with any person to participate in the
distribution of such Exchange Notes. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that (i) Private Notes tendered by it in the
Exchange Offer were acquired in the ordinary course of its business as a result
of market-making or other trading activities and (ii) it will deliver a
prospectus in connection with any resale of Exchange Notes received in the
Exchange Offer. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of the Exchange Notes received in
exchange for Private Notes where such Private Notes were acquired by such
broker-dealer as a result of market-making or other trading activities (other
than Private Notes acquired directly from the Company). The Company has agreed
that, for a period of 120 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." Any holder who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes cannot
rely on the no-action letters discussed above or similar letters and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction.
Tenders of Private Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. The Exchange Offer is subject to certain
customary conditions. In the event the Company terminates the Exchange Offer and
does not accept for exchange any Private Notes, the Company will promptly return
the Private Notes to the Holders thereof. The Company will give oral or written
notice of any extension, amendment, non-acceptance or termination of the
Exchange Offer to the Holders of the Private Notes as promptly as practicable,
such notice in the case of any extension to be issued by means of a press
release or other public announcement no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
The Company can, in its sole discretion, extend the Exchange Offer indefinitely,
subject to the Company's obligation to pay Special Interest (as defined herein)
if the Exchange Offer is not consummated by September 21, 1998 and, under
certain circumstances, file a shelf registration statement with respect to the
Private Notes. The Company has agreed to pay the expenses of the Exchange Offer.
The Company will not receive any proceeds from the Exchange Offer. See "Use of
Proceeds."
Prior to the date of this Prospectus, there has been no public market for
the Exchange Notes. The Company does not currently intend to list the Exchange
Notes on any securities exchange or to seek approval for quotation through any
automated quotation system. Accordingly, there can be no assurance as to the
development or liquidity of any public market that may develop for the Exchange
Notes, the ability of holders to sell the Exchange Notes, or the price at which
holders would be able to sell the Exchange Notes. The National Association of
Securities Dealers, Inc. ("NASD") has designated the Private Notes as securities
eligible for trading in the Private Offerings. Resales and Trading through
Automatic Linkages ("PORTAL") market of the NASD, and the Company has been
advised that Merrill Lynch, Pierce, Fenner & Smith Incorporated and TD
Securities (USA) Inc. (together, the "Initial Purchasers") have heretofore acted
as market makers for the Private Notes. The Company has been advised by each of
the aforesaid market makers that it currently intends to make a market in the
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Historically, the
market for securities similar to the
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Exchange Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Exchange Notes, if
such market develops, will not be subject to similar disruptions. See "Risk
Factors -- Absence of a Public Market for the Notes."
The Private Notes were sold by the Company on February 23, 1998 (the
"Original Issue Date") in transactions which were not registered under the
Securities Act, in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement") under the Securities Act with
respect to the Exchange Notes covered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Exchange Offer Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed or incorporated by reference as an exhibit to
the Exchange Offer Registration Statement, reference is made to such exhibit for
a more complete description of the matter involved, and each such statement is
qualified in its entirety by such reference.
The Company will be subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will file reports and other
information with the Commission. The Exchange Offer Registration Statement and
reports and other information filed by the Company may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the Commission
located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a website (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Under the
terms of the Indenture pursuant to which the Private Notes were, and the
Exchange Notes will be, issued, the Company will be required to file with the
Commission, and to furnish holders of the Notes with, the information, documents
and other reports specified in Sections 13 and 15(d) of the Exchange Act,
including reports on Forms 10-K, 10-Q and 8-K. On May 15, 1998, the Company
filed with the Commission its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, in accordance with the Indenture.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INCLUDE, AMONG
OTHERS, STATEMENTS BY THE COMPANY WITH RESPECT TO (I) PROJECTED CAPITAL
EXPENDITURES AND COSTS AND THE TIMING THEREOF, (II) PROJECTED DATES OF
CONSTRUCTION OR ACQUISITION OF ROUTES, COMMENCEMENT OF SERVICE AND COMPLETION OF
THE DTI NETWORK, (III) ASSUMPTIONS ABOUT THE PRICING OF TELECOMMUNICATIONS
SERVICES AND (IV) ASSUMPTIONS ABOUT THE COST AND AVAILABILITY OF THE COMPANY'S
TELECOMMUNICATIONS EQUIPMENT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THE STATEMENTS. THE MOST IMPORTANT
FACTORS THAT COULD PREVENT THE COMPANY FROM ACHIEVING ITS STATED GOALS INCLUDE,
BUT ARE NOT LIMITED TO, (A) FAILURE TO OBTAIN SUBSTANTIAL AMOUNTS OF ADDITIONAL
FINANCING AT REASONABLE COSTS AND ON ACCEPTABLE TERMS, (B) FAILURE TO
EFFECTIVELY AND EFFICIENTLY MANAGE THE EXPANSION AND
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CONSTRUCTION OF THE COMPANY'S NETWORK, (C) FAILURE TO ENTER INTO ADDITIONAL IRUS
AND/OR WHOLESALE NETWORK CAPACITY AGREEMENTS, (D) FAILURE TO OBTAIN AND MAINTAIN
SUFFICIENT RIGHTS-OF-WAY, (E) INTENSE COMPETITION AND PRICING DECREASES, (F)
POTENTIAL FOR RAPID AND SIGNIFICANT CHANGES IN TELECOMMUNICATIONS TECHNOLOGY AND
THEIR EFFECT ON THE COMPANY'S BUSINESS, AND (G) ADVERSE CHANGES IN THE
REGULATORY ENVIRONMENT. THESE CAUTIONARY STATEMENTS SHOULD BE CONSIDERED IN
CONNECTION WITH ANY SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS THAT
MAY BE ISSUED BY THE COMPANY OR ON ITS BEHALF.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, the financial statements and
the notes thereto and other financial data contained elsewhere in this
Prospectus. Prospective investors should carefully consider the factors set
forth herein under the caption "Risk Factors" and are urged to read this
Prospectus in its entirety. References in this Prospectus to the "Company" and
"DTI" refer to DTI Holdings, Inc. and its subsidiary, Digital Teleport, Inc.
("Digital Teleport"), except where the context otherwise requires. The Company's
fiscal year ends on June 30 of each year. Unless otherwise indicated, or the
context otherwise suggests, (i) references in this Prospectus to the design or
physical characteristics of the DTI network refer to the design and physical
characteristics of the DTI network as currently completed and the presently
anticipated design and physical characteristics of the remaining network sought
to be built by the Company, (ii) references herein to years and quarters shall
refer to calendar years and calendar quarters, rather than fiscal years and
fiscal quarters, and (iii) the summary and selected financial data and the other
financial data contained herein give effect to the 100-for-1 stock split, in the
form of a stock dividend, of the common stock, par value $0.01 per share
("Common Stock") of the Company effected on October 21, 1997, the reorganization
of the Company in which Digital Teleport became an operating subsidiary of the
newly created DTI Holdings, Inc., effected on December 23, 1997, as more fully
described elsewhere in the Prospectus, and the 1,000-for-1 stock split, in the
form of a stock dividend, of the Common Stock effected on February 17, 1998.
Certain terms used in this Prospectus have the respective meanings ascribed to
them in the Glossary included as Annex A hereto, and certain capitalized terms
used herein have the respective meanings ascribed to them in "Description of the
Notes -- Certain Definitions" and in "Description of the Warrants -- Certain
Definitions."
THE COMPANY
DTI is a facilities-based communications company that is creating an
approximately 18,500 route mile digital fiber optic network comprised of 19
regional rings interconnecting primary, secondary and tertiary cities in 37
states. By providing high-capacity voice and data transmission services to and
from secondary and tertiary cities, the Company intends to become a leading
wholesale provider of regional communications transport services to
interexchange carriers ("IXCs") and other communications companies ("carrier's
carrier services"). DTI currently provides carrier's carrier services under
contracts with AT&T, Sprint, MCI WorldCom, Ameritech Cellular and IXC
Communications. The Company also provides private line services to targeted
business and governmental end-user customers ("end-user services"). DTI is 50%
owned by an affiliate of Kansas City Power & Light Company, which has agreed to
be acquired by Western Resources, Inc.
The Company's distinctive focus is on providing regional connectivity
through its planned network, which will interconnect, along self-healing SONET
rings, major IXC points of presence ("POPs") (where long distance companies are
able to take traffic onto and off their networks) with incumbent local exchange
carrier ("ILEC") access tandem offices (from which local phone companies collect
traffic from several central offices in their local markets) and large end
users. Each regional ring on the DTI network will provide a reliable means for
carrier customers to deliver telecommunications traffic from their own networks
to a single point on the DTI network, across the DTI network, and onto the ILEC
network at a point near the ultimate destination. Similarly, a regional ring
will allow a carrier customer to receive the outgoing telecommunications traffic
of end users, whose communications would be transported over the ILEC network
for a short distance, onto the DTI network, and, ultimately, to a point of
interconnection with the carrier customer's network for long haul transport.
The Company believes its technologically advanced network and regional ring
strategy will permit the Company to provide its carrier customers with improved
reliability, greater capacity, more flexibility, better pricing, and less
administrative burden than some of their current regional transport methods,
which often involve linking point-to-point segments leased from multiple
sources, some of which may be the only available provider in a given geographic
region. The Company will offer its regional connectivity services to carriers in
high capacity circuits, known as OC-48 optical windows, which are created along
fibers in its network by dense wavelength division multiplexing ("DWDM")
equipment, and in smaller capacities on a ring-redundant or a
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point-to-point basis. OC-48 optical windows are capable of transporting both
voice and data traffic, and have capacity for the equivalent of more than 32,000
simultaneous voice calls. With the Company's network architecture, this capacity
can be allocated along the regional ring as each carrier customer's traffic
requires and can be provisioned and monitored from the customer's own network
control center.
The DTI network will be an exclusively fiber optic communications system,
substantially all of which will use a self-healing, SONET ring architecture to
provide rapid rerouting in the event of a cut in a fiber ring. The Company
believes that, unlike DTI's planned network, many regional communications
transport methods available today do not provide SONET ring protection or
equivalent measures of reliability that end users are increasingly seeking from
their carriers. DTI expects that more than 90% of the DTI network will be
installed underground, providing protection from weather and other environmental
hazards affecting the reliability of communication connections.
The DTI network will have both high-bandwidth capacity and flexibility as a
result of (i) high speed transmission electronics equipment, (ii) high capacity
DWDM equipment, (iii) the selective installation on Company-built routes of
between 48 and 288 strands of fiber optic cable, incorporating Corning glass,
and (iv) extra conduits along selected long-haul routes that the Company
constructs. The installation of high-fiber-count cables and extra conduits on
selected Company-built routes will provide DTI with the ability to expand the
capacity of its network and to sell dark fibers along certain routes. Through
strategic routing and switch placement, DTI believes it can also leverage its
regional rings and long-haul capacity to permit the Company to pursue other
revenue-generating opportunities, such as providing wholesale local dial tone to
its carrier customers.
DTI has completed construction of approximately 1,800 route miles of fiber
optic cable and currently provides services over 750 route miles of its network.
As of March 31, 1998, the network included POPs or collocations in 45 sites. To
complete the planned DTI network, the Company expects to construct approximately
half of the network and to obtain long-term indefeasible rights to use ("IRUs")
fiber optic facilities of other carriers for the remainder of the network. The
Company has construction projects underway in three states. The Company also has
recently entered into definitive agreements for long-term IRUs for fiber optic
strands and related facilities along routes from Chicago to near Cleveland and
from near Indianapolis to New York City and preliminary agreements for long-term
IRUs along routes from Washington, D.C. to Texas, from Des Moines to Minneapolis
and from Portland to Salt Lake City to Los Angeles, which routes include an
aggregate of approximately 5,800 route miles, for aggregate cash consideration
of up to approximately $127 million, plus recurring maintenance and building
space fees. In order to provide services more quickly prior to the construction
of, or the execution of long-term IRUs for, planned DTI network routes, the
Company may enter into short-term leases of fiber along planned routes. The
Company expects to complete the planned DTI network by mid-2000; however, the
successful and timely completion of the DTI network will depend upon a number of
factors, uncertainties and contingencies, may of which are beyond the Company's
control. See "Risk Factors -- Substantial Capital Requirements," "-- Risks
Related to Completing the DTI Network and Increasing Traffic Volume;
Non-Compliance with Construction Schedules," "-- Competition,", "-- Need to
Obtain and Maintain Franchises, Permits and Rights-of-Way," "-- Expansion and
Managing Anticipated Rapid Growth" and "-- Dependence on Single or Limited
Source Suppliers."
The Company believes deregulation in the telecommunications industry has
created a significant market opportunity by allowing carriers such as DTI to
compete in both long distance and local markets. The FCC has reported that, in
1997, toll service revenues of long distance carriers in the U.S. were
approximately $89 billion and revenues of reporting local exchange carriers in
the U.S. were approximately $103 billion. Based on FCC data, toll service
revenues of long distance carriers and revenues of reporting local exchange
carriers grew at a compound annual rate of approximately 8.7% and 3.5%,
respectively, during the period 1992 through 1997. The Company believes that
these growth trends generally will continue and that non-facilities-based
companies will need to either invest in network facilities or lease high
bandwidth network capacity to remain competitive. The Company believes
additional network transmission capacity and faster response
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times will be required to accommodate the use of the Internet and other
high-bandwidth multimedia and data applications.
BUSINESS STRATEGY
The Company intends to:
LEVERAGE INTEGRATED LONG HAUL ROUTES, REGIONAL RINGS AND LOCAL NETWORK
DESIGN. The Company believes that the strategic design of the DTI network will
allow it to offer reliable, high-capacity transmission services on a
region-by-region basis to carrier and end-user customers who seek a competitive
alternative to incumbent providers of such services. See "Business -- Business
Strategy."
STRATEGICALLY LOCATE AND EXPAND ITS NETWORK THROUGH REGIONAL RINGS. The
Company is expanding the DTI network through the creation of additional regional
rings outside the 14-state region in the Midwest in which the Company had
previously focused its network build-out because it believes that substantial
demand for additional IXC capacity exists in secondary and tertiary markets
located around the country. See "Business -- Business Strategy."
DEVELOP A LOW-COST NETWORK. The Company will strive to develop a low-cost
network by (i) taking advantage of potential network design and equipment cost
efficiencies, (ii) continuing to deploy advanced fiber optic network technology
and (iii) entering into additional fiber optic facility long-term IRUs and swaps
with other telecommunications companies and rights-of-way agreements with
governmental authorities. See "Business -- Business Strategy."
SELECTIVELY PURSUE LOCAL SWITCHED SERVICES OPPORTUNITIES. DTI believes its
network design will allow it to cost-effectively provide local switched services
to its carrier customers and other communications companies on a wholesale basis
by creating regional and local fiber optic rings along its long-haul routes, by
strategically locating high-capacity switches in geographically diverse
metropolitan areas and by leveraging the technical capabilities and
high-bandwidth capacity of the DTI network. See "Business -- Business Strategy".
LEVERAGE EXPERIENCED MANAGEMENT TEAM. The Company's management team
includes individuals with significant experience in the deployment and marketing
of telecommunications services. Prior to founding DTI in 1989, Richard D.
Weinstein, President and Chief Executive Officer of DTI, owned and managed
Digital Teleresources, Inc., a firm which designed, engineered and installed
telecommunications systems for large telecommunications companies, including SBC
and other Fortune 500 companies. The other members of the Company's senior
management team have over 70 years of collective experience in the
telecommunications industry. See "Management."
CAPITAL SPENDING PLAN
The Company estimates that total capital expenditures necessary to complete
the DTI network will be approximately $780 million, of which approximately $80
million had been expended through June 30, 1998. The Company anticipates total
capital expenditures of approximately $530 million in fiscal 1999. On February
23, 1998, the Company consummated a private placement (the "Private Offering")
in reliance upon the exemption from registration under Section 4(2) of the
Securities Act, pursuant to which the Company issued and sold 506,000 units (the
"Units") consisting of $506.0 million aggregate principal amount at maturity of
Private Notes and warrants to purchase 3,926,560 shares of Common Stock (the
"Warrants"). The net proceeds to the Company of the Private Offering were
approximately $264.8 million. In addition to its existing debt and equity
capital, the Company expects to receive aggregate advance payments over the next
five years of approximately $21.4 million as of March 31, 1998 under existing
contracts for IRUs and wholesale network capacity. Further financing sources may
include advance payments under additional IRUs and wholesale network capacity
agreements and available cash flow from operations, if any. In addition, the
Company may seek borrowings under bank credit facilities and additional debt or
equity financings. There can be no assurance that additional financing will be
available to the Company or, if available, that it can be obtained on a timely
basis and on acceptable terms. See "Risk Factors -- Substantial Capital
Requirements,"
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"-- Risks Related to Completing the DTI Network and Increasing Traffic Volume;
Non-Compliance with Construction Schedules" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
HOLDING COMPANY REORGANIZATION
On December 23, 1997, the Company completed a corporate reorganization (the
"Reorganization"), pursuant to which DTI was formed as the parent holding
company of Digital Teleport, which became a wholly owned subsidiary of DTI.
Pursuant to the Reorganization, the outstanding shares of common and preferred
stock of Digital Teleport were exchanged for the number of shares of common and
preferred stock of DTI having the same relative rights and preferences as such
exchanged shares. The Reorganization was required in connection with the
establishment of DTI's former bank credit facility in order to permit the
lending group to take a first priority security interest in all of the issued
and outstanding capital stock of Digital Teleport owned by the Company. The
Company has since terminated the bank credit facility. The business operations,
charter, by-laws and board of directors of the Company are identical in all
material respects to those of Digital Teleport prior to the Reorganization.
The Company's principal executive offices are located 11111 Dorsett Road,
St. Louis, Missouri 63043, and its telephone number is (314) 253-6600.
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THE EXCHANGE OFFER
The Exchange Offer......... The Company is hereby offering to exchange $1,000
principal amount at maturity of Exchange Notes for
each $1,000 principal amount at maturity of Private
Notes that are properly tendered and accepted. As
of the date hereof, $506,000,000 aggregate
principal amount at maturity of Private Notes is
outstanding. The Company will issue the Exchange
Notes to Holders promptly following the Expiration
Date. See "Risk Factors -- Consequences of Failure
to Exchange." Holders of the Private Notes do not
have appraisal or dissenter's rights in connection
with the Exchange Offer under the Missouri General
and Business Corporation Law, the governing law of
the state of incorporation of the Company.
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Private Notes
being tendered or accepted for exchange.
Expiration Date............ 5:00 p.m., New York City time, on September 15,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
Notes Registration Rights
Agreement................ The Private Notes were sold by the Company on
February 23, 1998 to the Initial Purchasers, who
placed the Private Notes with institutional
investors. In connection therewith, the Company
executed and delivered for the benefit of the
holders of the Private Notes a registration rights
agreement (the "Notes Registration Rights
Agreement") providing for, among other things,
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such rights,
which will terminate upon the consummation of the
Exchange Offer. The Holders of the Exchange Notes
will not be entitled to any exchange or
registration rights with respect to the Exchange
Notes.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Private Notes being
tendered for exchange. See "The Exchange
Offer -- Conditions." The Company reserves the
right to terminate or amend the Exchange Offer at
any time prior to the Expiration Date upon the
occurrence of any such condition. NO VOTE OF THE
COMPANY'S SECURITY HOLDERS IS REQUIRED TO EFFECT
THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY
THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering
Private Notes.............. Each Holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Private Notes and any other required
documentation to The Bank of New York, as exchange
agent (the "Exchange Agent"), at the address set
forth herein. By executing the Letter of
Transmittal, each Holder will represent to the
Company,
10
<PAGE> 12
among other things, that (i) the Exchange Notes
acquired pursuant to the Exchange Offer by the
Holder and any beneficial owners of Private Notes
are being obtained in the ordinary course of
business of the person receiving such Exchange
Notes, (ii) neither the Holder nor such beneficial
owner is participating in, intends to participate
in or has an arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes and (iii) neither the Holder nor
such beneficial owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the
Company. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Private
Notes, where such Private Notes were acquired by
such broker or dealer as a result of market-making
activities or other trading activities (other than
Private Notes acquired directly from the Company),
may participate in the Exchange Offer but may be
deemed an "underwriter" under the Securities Act
and, therefore, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker or dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange
Offer -- Procedures for Tendering" and "Plan of
Distribution."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
Holder promptly and instruct such registered Holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering his Private Notes, either make
appropriate arrangements to register ownership of
the Private Notes in such owner's name or obtain a
properly completed bond power from the registered
Holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
See "The Exchange Offer -- Withdrawal of Tenders."
Acceptance of Private Notes
and Delivery of Exchange
Notes.................... The Company will accept for exchange any and all
Private Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the
11
<PAGE> 13
Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
Federal Income Tax
Consequences............. In the opinion of Bryan Cave LLP, special counsel
to the Company, the exchange of Private Notes for
Exchange Notes by tendering holders will not be a
taxable exchange for federal income tax purposes,
and such holders will not recognize any taxable
gain or loss or any interest income for federal
income tax purposes as a result of such exchange
(assuming no Special Interest becomes due). See
"United States Federal Income Tax Considerations."
Use of Proceeds............ There will be no proceeds to the Company from, and
the Company has agreed to bear the expenses of, the
Exchange Offer.
Effect on Holders of
Private Notes.............. As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Private Notes pursuant to the terms of
this Exchange Offer, the Company will have
fulfilled certain obligations under the terms of
the Private Notes and the Notes Registration Rights
Agreement and, accordingly, the holders of the
Private Notes will have no further registration or
other rights under the Notes Registration Rights
Agreement, except under certain limited
circumstances. See "The Exchange Offer -- Purpose
and Effect of the Exchange Offer." Holders of the
Private Notes who do not tender their Private Notes
in the Exchange Offer will continue to hold such
Private Notes and will be entitled to all the
rights and limitations applicable thereto under the
Indenture. All untendered, and tendered but
unaccepted, Private Notes will continue to be
subject to the restrictions on transfer provided
for in the Private Notes and the Indenture. To the
extent that Private Notes are tendered and accepted
in the Exchange Offer, the trading market, if any,
for the Private Notes not so tendered could be
adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
Exchange Agent............. The Bank of New York is serving as Exchange Agent
in connection with the Exchange Offer. See "The
Exchange Offer -- Exchange Agent."
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Offer applies to $506,000,000 aggregate principal amount at
maturity of Private Notes. The terms of the Exchange Notes are identical in all
material respects to the Private Notes, except that the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer and will not contain certain terms providing for an
increase in the interest rate on the Private Notes under certain circumstances
relating to the timing of the Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. The Exchange Notes will evidence the same
debt as the Private Notes and will be entitled to the benefits of the Indenture,
under which both the Private Notes were, and the Exchange Notes will be, issued.
See "Description of the Notes."
The Exchange Notes......... $506,000,000 aggregate principal amount at maturity
of 12 1/2% Series B Senior Discount Notes due 2008.
Maturity Date.............. March 1, 2008
Yield and Interest......... 12 1/2% per annum (computed on a semiannual bond
equivalent basis) calculated from February 23, 1998
(without giving effect to any
12
<PAGE> 14
allocation of net proceeds of the Private Offering
to the Warrants issued in the Private Offering).
Cash interest will not accrue on the Exchange Notes
prior to March 1, 2003, from which time cash
interest will accrue on the Exchange Notes at a
rate of 12 1/2% per annum. Cash interest on the
Exchange Notes is payable semiannually in arrears
on March 1 and September 1 of each year, commencing
September 1, 2003.
Original Issue Discount.... Each Exchange Note is issued with original issue
discount for United States federal income tax
purposes. Thus, although cash interest will not
begin to accrue on the Exchange Notes until March
1, 2003, and there will be no periodic payments of
interest on the Exchange Notes prior to September
1, 2003, the total amount of original issue
discount (i.e., the difference between the stated
redemption price at maturity of the Notes and the
amount of the issue price of the Units allocated to
the Notes) will accrue from the issue date and will
be includible as interest income periodically in a
holder's gross income for federal income tax
purposes in advance of receipt of the cash payments
to which the income is attributable. The Private
Notes were issued with total original issue
discount of approximately $240.8 million. Assuming
the Exchange Offer is consummated on September 15,
1998, the Exchange Notes will be issued with total
original issue discount of approximately $220.8
million. See "United States Federal Income Tax
Considerations."
Optional Redemption........ The Exchange Notes will be redeemable at the
Company's option, in whole or in part, at any time
on or after March 1, 2003 at the redemption prices
set forth herein together with accrued interest, if
any, to the date of redemption.
In addition, on or prior to March 1, 2001, the
Company may redeem up to 33 1/3% of the aggregate
principal amount at maturity of the originally
issued Notes with the net proceeds of one or more
Public Equity Offerings (as defined) at a
redemption price of 112.5% of the Accreted Value
thereof; provided that at least 66 2/3% of the
aggregate principal amount at maturity of
originally issued Notes remains outstanding. See
"Description of the Notes -- Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of Exchange Notes may require the Company to
make an offer to purchase all outstanding Exchange
Notes at a purchase price equal to 101% of the
Accreted Value thereof, together with accrued
interest, if any, to the date of purchase. See
"Description of the Notes -- Certain Covenants."
There can be no assurance that the Company will
have available, or will be able to acquire from
alternative sources of financing, funds sufficient
to repurchase the Exchange Notes in the event of a
Change of Control. See "Risk Factors -- High
Leverage; Ability to Service Indebtedness;
Restrictive Covenants."
Ranking.................... The Exchange Notes will be senior unsecured
obligations of the Company ranking pari passu in
right of payment with all future unsecured senior
indebtedness of the Company and senior in right of
payment to all future obligations of the Company
that are expressly subordinated in right of payment
to the Exchange Notes. As of March 31, 1998, the
Company had approximately $268.9 million of
indebtedness outstanding,
13
<PAGE> 15
all of which represented the Private Notes. As of
the date of this Prospectus, the Company has no
other indebtedness (including any indebtedness that
ranks pari passu with the Notes) outstanding.
Because the Company is a holding company that
conducts its business through Digital Teleport, its
wholly owned subsidiary, all existing and future
indebtedness and other liabilities and commitments
of the Company's subsidiary, including trade
payables, will be effectively senior to the
Exchange Notes, and the Company's subsidiary will
not be a guarantor of the Notes. As of March 31,
1998, Digital Teleport had aggregate liabilities of
$21.1 million, including $14.4 million of deferred
revenues. Subject to certain limitations, the
Company and its Restricted Subsidiaries (as defined
herein) may incur additional indebtedness in the
future. See "Risk Factors -- High Leverage; Ability
to Service Indebtedness; Restrictive Covenants,"
"-- Holding Company Structure; Ability to Grant
Liens" and "Description of the Notes -- Ranking."
Certain Covenants.......... The Indenture contains certain covenants that
restrict, among other things, the ability of the
Company and its Restricted Subsidiaries to (i)
incur certain indebtedness, (ii) pay dividends and
make certain other restricted payments, (iii)
create liens, (iv) permit other restrictions on
dividends and other payments by Restricted
Subsidiaries, (v) issue and sell capital stock of
Restricted Subsidiaries, (vi) guarantee certain
indebtedness, (vii) sell assets, (viii) enter into
transactions with Affiliates (as defined), (ix)
merge, consolidate or transfer substantially all of
the assets of the Company and (x) make investments
in any Unrestricted Subsidiary (as defined). The
covenants require the Company to make an offer to
purchase specified amounts of Notes in the event of
certain asset sales. There can be no assurance that
the Company will have sufficient funds to complete
any purchase of Exchange Notes upon such a sale of
assets. See "Description of the Notes -- Certain
Covenants."
RISK FACTORS
Holders of the Private Notes should carefully consider the information set
forth in this Prospectus, and in particular, should evaluate the factors set
forth under "Risk Factors" beginning on page 17, the most important of which
include, but are not limited to, (i) failure to obtain substantial amounts of
additional financing at reasonable costs and on acceptable terms, (ii) failure
to effectively and efficiently manage the expansion and construction of the
Company's network, (iii) failure to enter into additional IRUs and/or wholesale
network capacity agreements, (iv) failure to obtain and maintain sufficient
rights-of-way, (v) intense competition and pricing decreases, (vi) potential for
rapid and significant changes in telecommunications technology and their effect
on the Company's business and (vii) adverse changes in the regulatory
environment.
14
<PAGE> 16
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data presented below for each of the
three years in the period ended June 30, 1997 have been derived from the audited
consolidated financial statements of the Company, which have been audited by
Deloitte & Touche LLP, independent auditors. The summary consolidated financial
data as of and for the nine-month periods ended March 31, 1997 and 1998 have
been derived from the unaudited consolidated financial statements of the
Company, which have been prepared on the same basis as the audited consolidated
financial statements of the Company and, in the opinion of management, reflect
all normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations as of the end of and for such
periods. The results for the nine months ended March 31, 1998 are not
necessarily indicative of the operating results to be expected for the entire
year. The information set forth below should be read in conjunction with the
discussion under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and the audited and unaudited
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------- --------------------------
1995(a) 1996(a) 1997 1997 1998
------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenue
Telecommunications services
Carrier's carrier services...... $ -- $ 188,424 $ 807,347 $ 488,931 $ 1,707,914
End-user services............... 199,537 488,377 515,637 380,914 414,660
Other services(b)................. -- -- 711,006 -- --
------------ ----------- ------------ ----------- ------------
Total revenue................... 199,537 676,801 2,033,990 869,845 2,122,574
------------ ----------- ------------ ----------- ------------
Operating expenses:
Telecommunication services........ 165,723 296,912 847,190 563,791 1,024,578
Other services(b)................. -- -- 364,495 -- --
Selling, general and
administrative.................. 240,530 548,613 1,118,809 845,684 2,437,825
Depreciation and amortization..... 70,500 425,841 757,173 521,049 1,385,750
------------ ----------- ------------ ----------- ------------
Total operating expenses........ 476,753 1,271,366 3,087,667 1,930,524 4,848,153
------------ ----------- ------------ ----------- ------------
Loss from operations................ (277,216) (594,565) (1,053,677) (1,060,679) (2,725,579)
Interest income..................... 153,261 143,049 101,914 58,403 1,558,898
Interest expense(c)................. (162,777) (384,859) (152,937) (152,937) (3,697,605)
Loan commitment fees................ -- -- (784,500) (784,500) --
Equity in earnings of joint
venture........................... -- -- 37,436 37,436 --
------------ ----------- ------------ ----------- ------------
Loss before income tax benefit...... (286,732) (786,375) (1,851,764) (1,902,277) (4,864,286)
Income tax benefit.................. -- -- 1,214,331 1,042,000 2,020,000
------------ ----------- ------------ ----------- ------------
Net loss(d)......................... $(286,732) $(786,375) $(637,433) $(860,277) $(2,844,286)
============ =========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $263,231,384
Network and equipment, net................................ 60,824,950
Total assets.............................................. 338,467,861
Long-term debt............................................ 268,856,985
Deferred revenues(e)...................................... 14,037,528
Stockholders' equity...................................... 48,536,348
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------- ---------------------------
1995(a) 1996(a) 1997 1997 1998
------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash flows from operations......... $ 6,903,884 $ 299,710 $ 7,674,272 $ 4,694,799 $ 5,097,421
Cash flows from investing
activities....................... (11,804,176) (1,122,569) (19,417,073) (10,058,794) (28,210,066)
Cash flows from financing
activities....................... 5,030,000 1,500,030 15,292,316 10,314,313 281,977,123
EBITDA(f).......................... (206,716) (168,724) (259,068) (502,194) (1,339,829)
Capital expenditures............... 6,804,176 5,663,047 19,876,595 10,518,316 28,210,066
Ratio of earnings to fixed
charges(g)....................... -- -- -- -- --
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AS OF
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Route miles....................................... 520 732 1,361 1,427 1,538
Fiber miles....................................... 33,269 44,071 84,254 87,498 93,006
POP/Collocation sites(h).......................... 19 24 43 45 45
</TABLE>
- ---------------
(a) From its inception in June 1989 through June 30, 1993, the Company had no
significant operations, assets or liabilities and consisted of nominal
organizational activities. In addition, through June 30, 1996, the Company
was considered a development stage enterprise focused on developing the DTI
network and customer base.
(b) Other services revenues and expenses in the year ended June 30, 1997 reflect
the design, construction and installation of innerduct for another carrier's
fiber optic network.
(c) Interest expense is net of capitalized interest of $9,516, $1,227,149,
$562,750, $562,750 and $182,000 during fiscal 1995, 1996 and 1997 and the
nine months ended March 31, 1997 and 1998, respectively.
(d) Net loss attributable to Common Stock, loss per share data and weighted
average number of shares outstanding are not meaningful as there was only
one common shareholder and no class of securities was registered.
(e) Does not include current portion of deferred revenues in the amount of
approximately $366,000 as of March 31, 1998. See "Capitalization."
(f) EBITDA represents net loss before interest income (expense), loan commitment
fees, income tax benefit, depreciation and amortization. EBITDA is included
because the Company understands that such information is commonly used by
investors in the telecommunications industry as an additional basis on which
to evaluate the Company's ability to pay interest, repay debt and make
capital expenditures. Excluded from EBITDA are interest income (expense),
loan commitment fees, income taxes, depreciation and amortization, each of
which can significantly affect the Company's results of operations and
liquidity and should be considered in evaluating the Company's financial
performance. EBITDA is not intended to represent, and should not be
considered more meaningful than, or an alternative to, measures of operating
performance determined in accordance with generally accepted accounting
principles ("GAAP"). Additionally, EBITDA should not be used as a comparison
between companies, as it may not be calculated in a similar manner by all
companies.
(g) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income tax benefit, plus fixed charges
excluding capitalized interest; and (ii) fixed charges consist of interest
expenses and capitalized costs, amortization of deferred financing costs,
plus the portion of rentals considered to be representative of the interest
factor (one-third of lease payments). For the years ended June 30, 1995,
1996 and 1997, and for the nine months ended March 31, 1997 and 1998, the
Company's earnings were insufficient to cover fixed charges by approximately
$296,000, $2.0 million, $2.4 million, $2.5 million and $4.9 million,
respectively.
(h) Consists of interconnections with ILEC access tandems, ILEC central offices,
IXC POPs, and DTI's network control center and POP buildings.
16
<PAGE> 18
RISK FACTORS
In addition to the other information in this Prospectus, before tendering
their Private Notes for the Exchange Notes offered hereby, holders of Private
Notes should consider carefully the following factors, which may be generally
applicable to the Private Notes as well as to the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Private Notes who do not exchange their Private Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Private Notes, as set forth in the legend
thereon, as a consequence of the issuance of the Private Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Private Notes
under the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, including
Exxon Capital Holdings Corporation, SEC No-Action Letter (available April 13,
1988) (the "Exxon Capital Letter"), Morgan Stanley & Co. Incorporated, SEC
No-Action Letter (available June 5, 1991) (the "Morgan Stanley Letter"), and
similar letters, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer may be offered for resale, resold or otherwise transferred by
any Holder thereof (other than any such Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and such Holder has no arrangement with any
person to participate in the distribution of such Exchange Notes.
Notwithstanding the foregoing, each broker-dealer that receives Exchange Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with any resale of Exchange Notes received in exchange for Private
Notes where such Private Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities (other than Private
Notes acquired directly from the Company). The Company has agreed that, for a
period of 120 days from the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." Any holder who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes cannot rely on
the Morgan Stanley Letter or similar letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. To the extent that Private Notes
are tendered and accepted in the Exchange Offer, the trading market, if any, for
the Private Notes not so tendered could be adversely affected. See "The Exchange
Offer."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Private Notes pursuant
to the Exchange Offer will be made only after timely receipt by the Exchange
Agent of such Private Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Private
Notes desiring to tender such Private Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under no
duty to give notification of defects or irregularities with respect to tenders
of Private Notes for exchange. Holders of Private Notes who do not exchange
their Private Notes for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Private Notes as
set forth in the legend thereon. See "The Exchange Offer."
LIMITED HISTORY OF OPERATIONS; OPERATING LOSSES AND NEGATIVE CASH FLOW
Digital Teleport was formed in June 1989 and began offering
telecommunications services in February 1994. Prospective investors, therefore,
have limited historical financial information about the Company upon which to
base an evaluation of the Company's performance and an investment in the Notes.
The Company must increase its revenue substantially in order to make payments on
the Notes. As a result of
17
<PAGE> 19
development and operating expenses, the Company has incurred significant
operating and net losses to date. Operating losses for fiscal 1995, 1996 and
1997, and the nine months ended March 31, 1998 were approximately $277,000,
$595,000, $1.1 million and $2.7 million, respectively. DTI's operations have
resulted in negative EBITDA of $207,000, $169,000 and $259,000 for fiscal 1995,
1996 and 1997, respectively, and $1.3 million for the nine months ended March
31, 1998. In addition, the Company's accumulated deficit was approximately $6.2
million at March 31, 1998. The Company may incur significant and possibly
increasing operating losses and expects to generate negative net cash flows
after capital expenditures during at least the next two years of the Company's
expansion of the DTI network. The Company also expects to invest substantial
funds to complete the DTI network during the next several years while the
Company continues to develop and expand its telecommunications services and
customer base. There can be no assurance that the Company will achieve or
sustain profitability or generate sufficient positive cash flow to meet its debt
service obligations and working capital requirements. If the Company cannot
achieve operating profitability or positive cash flows from operating
activities, it may not be able to service the Notes or to meet its other debt
service or working capital requirements, which would have a material adverse
effect on the Company. See "-- Substantial Capital Requirements," "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
HIGH LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS; RESTRICTIVE COVENANTS
The Company is and will continue to be highly leveraged. As of March 31,
1998, the Company had approximately $268.9 million of indebtedness outstanding,
all of which was evidenced by the Private Notes. Because the Company is a
holding company that conducts its business through Digital Teleport, all
existing and future indebtedness and other liabilities and commitments of the
Company's subsidiary, including trade payables, are effectively senior to the
Notes, and the Company's subsidiary will not be a guarantor of the Notes. As of
March 31, 1998, Digital Teleport had aggregate liabilities of $21.1 million,
including $14.4 million of deferred revenues. See "-- Holding Company Structure;
Ability to Grant Liens," "Capitalization" and "Selected Consolidated Financial
Data." The Indenture limits but does not prohibit the incurrence of additional
indebtedness by the Company, and the Company expects to incur additional
indebtedness in the future, some of which may be incurred by Digital Teleport
and any future subsidiaries. The Company's leverage could result in adverse
consequences to the holders of the Notes. Such consequences may include, among
other things: (i) a substantial portion of the Company's cash flow will be
dedicated to the payment of the Company's interest expense and may be
insufficient to meet its payment obligations on the Notes, in addition to paying
other indebtedness and obligations of the Company as they become due; (ii) the
Company's ability to obtain any necessary financing in the future for completion
of the DTI network or other purposes may be impaired; (iii) certain of the
future borrowings by the Company may be at variable rates of interest that could
cause the Company to be vulnerable to increases in interest rates; (iv) the
Company may be more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (v) the Company's vulnerability
to the effects of general economic downturns or to delays in or increases in the
cost of completing the DTI network may be increased. The Company's ability to
pay the principal of and interest on its indebtedness will depend upon the
Company's future performance, which is subject to a variety of factors,
uncertainties and contingencies, many of which are beyond the Company's control.
There can be no assurance that the Company will generate sufficient cash flow in
the future to enable it to meet its anticipated debt service requirements,
including those with respect to the Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Indenture imposes and will impose significant operating and financial
restrictions on the Company, Digital Teleport and any future subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of the Company and its subsidiary to incur certain
indebtedness, pay dividends and make certain other restricted payments, create
liens, permit other restrictions on dividends and other payments by Restricted
Subsidiaries, issue and sell capital stock of Restricted Subsidiaries, guarantee
certain indebtedness, sell assets, enter into transactions with affiliates or
related persons, or consolidate, merge or transfer all or substantially all of
their assets. There can be no assurance that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities. Further, there can be no assurance
that the Company will have available, or will be able to
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acquire from alternative sources of financing, funds sufficient to repurchase
the Exchange Notes in the event of a Change of Control. See "Description of the
Notes."
In addition, any future indebtedness incurred by the Company is likely to
impose restrictions on the Company. Failure by the Company or its subsidiaries
to comply with these restrictions could lead to a default under the terms of
such indebtedness and the Notes, notwithstanding the ability of the Company to
meet its debt service obligations. In the event of such a default, the holders
of such indebtedness could elect to declare all such indebtedness to be due and
payable, together with accrued and unpaid interest. In such event, a significant
portion of the Company's indebtedness (including the Notes) may become
immediately due and payable, and there can be no assurance that the Company
would be able to make such payments or borrow sufficient funds from alternative
sources to make any such payment. Even if additional financing could be
obtained, there can be no assurance that it would be on terms that are
acceptable to the Company.
HOLDING COMPANY STRUCTURE; ABILITY TO GRANT LIENS
The Company is a holding company with no direct operations and no
significant assets other than the stock of Digital Teleport. The Company is
dependent on the cash flow of Digital Teleport to meet its obligations,
including the payment of interest and principal on the Notes. Subject to the
Indenture provisions that limit restrictions on the ability of any of the
Company's Restricted Subsidiaries to pay dividends and make other payments to
the Company, 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 the
Company. 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. There can be no assurance that Digital Teleport will be able to
pay, or will generate sufficient earnings or cash flow to distribute, any cash
dividends or make any loans, advances or other payments of funds to the Company,
the failure of which would have a material adverse effect on the Company's
ability to meet its obligations on the Exchange Notes. See "Description of the
Notes -- Certain Covenants -- Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries."
Digital Teleport is a separate legal entity that has no obligation to pay
any amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. Because Digital Teleport does not
guarantee the payment of the principal or interest on the Notes, any right of
the Company to receive assets of Digital Teleport upon its liquidation or
reorganization (and the consequent right of holders of the Notes to participate
in the distribution or realize proceeds from those assets) are effectively
subordinated to the claims of the creditors of Digital Teleport (including trade
creditors and holders of indebtedness of such subsidiary), except if and to the
extent the Company is itself a creditor of Digital Teleport, in which case the
claims of the Company would still be effectively subordinated to any security
interest in the assets of Digital Teleport held by other creditors. As of March
31, 1998, Digital Teleport had aggregate liabilities of $21.1 million, including
$14.4 million of deferred revenues.
The Notes are unsecured and will be effectively subordinated to any future
secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness. As of March 31, 1998, the Company had no secured
indebtedness and no indebtedness that ranked pari passu with the Notes. The
Indenture permits the Company or Digital Teleport to incur additional secured
indebtedness, including purchase money indebtedness in unlimited amounts, and
certain indebtedness pursuant to one or more bank credit facilities. See
"Description of the Notes." The Company expects that indebtedness under any bank
credit facility will be secured by a pledge by the Company of 100% of the
capital stock of Digital Teleport and present and future subsidiaries of Digital
Teleport and all assets held directly by Digital Teleport and its subsidiaries,
and will be guaranteed by such subsidiaries. Consequently, in the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to the Company, such assets will be available to satisfy obligations of
such secured debt before any payment can be made on the Notes. In addition, to
the extent such assets would not satisfy in full such secured indebtedness, the
holders of such indebtedness will have a claim for any shortfall that is pari
passu (or effectively senior if the indebtedness were issued by Digital
Teleport) with the Notes. Accordingly, there may only be a limited amount of
assets available to satisfy any claims of the holders of the Notes upon an
acceleration of the Notes.
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SUBSTANTIAL CAPITAL REQUIREMENTS
The development of the Company's business and the installation and
expansion of the DTI network have required and will continue to require
substantial capital. In the past, the Company has funded its capital
expenditures through a combination of advance payments for future
telecommunications services received from certain major customers, private debt
and equity financings and external borrowings. The Company is funding its future
capital expenditure requirements through the net proceeds of the Private
Offering, advance payments under existing and additional IRUs and wholesale
network capacity agreements, and available cash flow from operations, if any. In
addition, the Company may seek borrowings under bank credit facilities and
additional debt or equity financings. The Company has recently expanded the
geographic scope of its business plan and estimates that total capital
expenditures to complete the DTI network will be approximately $780 million, of
which the Company had expended approximately $80 million as of June 30, 1998.
The Company anticipates total capital expenditures of approximately $530 million
in fiscal 1999 and has existing capital commitments of approximately $150
million payable over the next 15 months. Accordingly, the Company will need to
obtain substantial additional capital to fund its estimated capital
expenditures. The Company's estimated capital requirements primarily include the
estimated cost of completing the DTI network through obtaining IRUs or by
construction and network expansion activities, including the construction of
additional local loops in secondary and tertiary cities as network traffic
volume increases. The Company also may require additional capital in the future
to fund operating deficits and net losses and for potential strategic alliances,
joint ventures and acquisitions. These activities could require significant
additional capital not included in the foregoing estimated capital requirements.
The Company is in various stages of discussions with potential customers
for additional IRUs 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 of, or obtaining IRUs for,
planned routes, 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
and 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, the Company
could modify, defer or abandon plans to build or acquire certain portions of the
DTI network. The failure of the Company, however, to raise the substantial
capital required to complete the DTI network could have a material adverse
effect on the Company and its ability to make payments on the Notes. See "--
Risks Related to Completing the DTI Network and Increasing Traffic Volume;
Non-Compliance with Construction Schedules" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company's expectation of required future capital is based on the
Company's current estimates and network expansion schedule. The actual amount
and timing of DTI's future capital requirements may differ materially from its
current estimates depending on demand for the Company's services, the Company's
ability to implement its current business strategy and regulatory, technological
and competitive developments in the telecommunications industry. There can be no
assurance that actual expenditures will not differ significantly from such
estimates. The Company may seek to raise additional capital from public or
private equity or debt sources. There can be no assurance that the Company will
be able to raise such capital on satisfactory terms or at all. If the Company
decides to raise additional capital through the incurrence of debt, the Company
may become subject to additional or more restrictive financial covenants. In the
event that the Company is unable to obtain such additional capital on acceptable
terms or at all, the Company may be required to reduce the scope or pace of
deployment of the DTI network, which could materially adversely affect the
Company's business, results of operations and financial condition and its
ability to compete and to make payments on the Notes.
RISKS RELATED TO COMPLETING THE DTI NETWORK AND INCREASING TRAFFIC VOLUME;
NON-COMPLIANCE WITH CONSTRUCTION SCHEDULES
The Company's ability to achieve its strategic objectives will depend in
large part upon the successful, timely and cost-effective completion of the DTI
network, as well as on achieving substantial traffic volumes on the DTI network.
The completion of the DTI network may be affected by a variety of factors,
uncertainties
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and contingencies, many of which are beyond the Company's control. The Company
expects to complete the planned DTI network by mid-2000. However, there can be
no assurance that the DTI network will be completed as planned at the cost and
in the timeframe currently estimated, if at all. Although the Company believes
that its cost estimates and expansion schedule are reasonable, there can be no
assurance that the actual construction or acquisition costs or time required to
complete the DTI network will not substantially exceed current estimates. In
addition, the Company must substantially increase its current traffic volume in
order to realize expected cash flows, operating efficiencies and cost benefits
of the planned DTI network. There can be no assurance that the Company will be
able to achieve such increased traffic volume. See "-- Pricing Pressures and
Risk of Industry Over-Capacity."
The successful and timely completion of the DTI network will depend upon,
among other things, the Company's ability to (i) obtain substantial amounts of
additional capital and financing, at reasonable costs and on satisfactory terms
and conditions, (ii) effectively and efficiently manage the construction and
acquisition of the planned DTI network route segments, (iii) obtain IRUs from
other carriers on satisfactory terms and conditions and at reasonable prices,
(iv) access markets and enter into additional customer contracts to sell or
lease high volume capacity on the DTI network and (v) obtain additional
franchises, permits and rights-of-way to permit it to complete its planned
strategic routing. Successful completion of the DTI network also will depend
upon the Company's ability to procure commitments from suppliers and third-
party contractors with respect to the supply of certain equipment and
construction of network facilities and timely performance by such suppliers and
third-party contractors of their obligations. There can be no assurance that the
Company will obtain sufficient capital and financing to fund its currently
planned capital expenditures, successfully manage construction, sell fiber and
capacity to additional customers, meet contractual timetables for future
services, or maintain existing and acquire necessary additional franchises,
permits and rights-of-way. Any failure by DTI to accomplish these objectives may
significantly delay or prevent, or substantially increase the cost of,
completion of the DTI network, which would have a material adverse effect on the
Company's business, financial condition and results of operations and its
ability to make payments on the Notes.
Certain of the Company's customer contracts provide for reduced payments
and varying penalties for late delivery of route segments and allow the
customers, after expiration of grace periods, to delete such non-delivered
segment from the system route to be delivered. The Company is currently not in
compliance with construction schedules under contracts with two of its
customers. The Company has received notice from a customer that it intends to
set off against amounts payable to the Company $15,000 per month, which as of
June 30, 1998 totaled approximately $90,000 (in addition to $400,000 previously
set off against other payments) as damages and penalties under the Company's
contract with that customer due to the failure by the Company to meet certain
construction deadlines, and such customer reserved its rights to seek other
remedies under the contract. The Company believes that if such $90,000 setoff
were to be made, it would not be material to the Company's business, financial
position or results of operations. The Company is behind schedule with respect
to such contract as a result of such customer's not obtaining on behalf of the
Company certain rights-of-way required for completion of certain network
facilities, and the Company's limitations on its financial and human resources,
particularly prior to the Private Offering. The Company has obtained alternative
rights-of-way and hired additional construction supervisory personnel to
accelerate the completion of such construction. Upon completion and turn-up of
services, such customer is contractually required to pay the Company a lump sum
of approximately $4.2 million for the Company's telecommunications services over
its network. The Company is also behind schedule in the construction of fiber
optic facilities for another customer, which facilities were to have been
completed in December 1997, primarily as a result of a delay in obtaining
rights-of-way required for completion of certain network facilities, and the
Company's limitations on its financial and human resources, particularly prior
to the Private Offering. The Company has obtained the needed right-of-way, and
will utilize other publicly available rights-of-way, and, as indicated above,
has hired additional construction supervisory personnel. Upon completion, such
customer will begin paying the Company $133,000 per month for the use of such
completed facilities. There can be no assurance that such customers or other
customers will not in the future find the Company to have materially breached
its contracts, that such customers will not terminate such contracts or that
such customers will not seek other remedies.
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Under its agreement with the Missouri Highway and Transportation Commission
("MHTC"), the Company has the exclusive right to build a long-haul, fiber optic
network along the interstate highway system in Missouri in exchange for
providing to MHTC long-haul telecommunications services along such network. The
MHTC Agreement requires the Company to build a total of approximately 1,200
route miles by the end of 1998, certain portions of which must be built prior to
such time. The Company also must complete construction of an additional 800
miles by the end of 1999 to maintain its rights to such additional routes. Over
1,700 route miles of the entire 2,000-mile network have been completed; however,
the Company did not meet an intermediate construction deadline for the
construction of approximately 30 route miles but has received from MHTC a waiver
of such construction delay and an extension of the 30-mile completion date to
October 1, 1998. The Company expects to complete such construction prior to such
date. The Company may lose its exclusive rights under the MHTC Agreement only in
the event of its breach and failure to timely exercise its right to cure within
sixty days of notice if any such breach, which would allow MHTC to terminate the
MHTC Agreement. The failure by the Company to meet the remaining deadline and
the loss of its exclusive rights to routes constructed in accordance with the
MHTC Agreement could have a material adverse effect on the Company's business,
financial condition and results of operations and its ability to make payments
on the Notes.
COMPETITION
The telecommunications industry is highly competitive. The Company competes
and, as it expands its network, expects to continue to compete with numerous
established facilities-based IXCs, ILECs and CLECs. Many of these competitors
have substantially greater financial and technical resources, long-standing
relationships with their customers and the potential to subsidize competitive
services from less competitive service revenues. DTI is aware that other
facilities-based providers of local and long distance telecommunications
services are planning and constructing additional networks that, if and when
completed, could employ advanced fiber optic technology similar to, or more
advanced than, the DTI network. Such competing networks may also have operating
capabilities similar to, or more advanced than, those of the DTI network and be
positioned geographically to compete directly with the DTI network for many of
the same customers along a significant portion of the same routes.
The Company competes primarily on the basis of price, transmission quality,
reliability and customer service and support. Prices have been declining and are
expected to continue to do so. The Company's competitors in carrier's carrier
services include many large and small IXCs, including AT&T, MCI, Sprint,
WorldCom, IXC Communications, Qwest Communications International Inc. ("Qwest")
and McLeod, Inc. ("McLeod"). The Company competes with both LECs and IXCs in its
end-user business. In the end-user private line services market, the Company's
principal competitors are SBC Communications, Inc. ("SBC"), GTE and
Sprint/United Telephone. In the local switched services market, the Company
expects to face competition from ILECs and other competitive providers,
including non-facilities based providers, and, as the local access markets
become opened to IXCs under the Telecommunications Act of 1996 (the "Telecom
Act"), from long distance providers. See "Business -- Regulatory Matters."
WorldCom, together with its wholly owned subsidiaries MFS Communications
Company, Inc. ("MFS") and Brooks Fiber Properties, Inc. ("Brooks Fiber"),
currently provides both local exchange and long distance telecommunications
services throughout the United States. WorldCom also announced its agreement to
acquire MCI. In addition, AT&T has announced its agreement to acquire Teleport
Communications Group, Inc. ("TCG"), a facilities-based CLEC with networks in
operation in 57 markets in the United States, SBC has announced agreements to
acquire Ameritech Corp. ("Ameritech"), one of the original seven Regional Bell
Operating Companies ("RBOCs"), and Southern New England Telecommunications Corp.
("SNET") and Bell Atlantic Corp. ("Bell Atlantic") has recently announced its
intention to acquire GTE. Further, Qwest, a communications provider building a
16,000-mile fiber optic network in the United States, announced its agreement to
acquire LCI International Inc., a retail long distance provider, which
acquisition would create the nation's fifth largest long distance company. The
Company also believes that high initial network cost and low marginal costs of
carrying long distance traffic have led to a trend among non-facilities-based
carriers to consolidate in order to achieve economies of scale. Such
consolidation among significant telecommunications
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carriers could result in larger, better capitalized competitors that can offer a
"one-stop shopping" combination of long distance and local switched services in
many of DTI's target markets.
Certain companies, such as Level 3 Communications Inc. ("Level 3") have
recently announced efforts to use Internet technologies to supply
telecommunications services, potentially leading to a lower cost of supplying
these services and therefore increased pressure on IXCs and other
telecommunications companies to reduce their prices. There can be no assurance
that the Company's IXC and other carrier customers will not experience
substantial decreases in call volume or pricing due to competition from
Internet-based telecommunications, which could lead to a decreased need for the
Company's services, or a reduction in the amount these companies are willing or
able to pay for the Company's services. There can also be no assurance that the
Company will be able to offer its telecommunications services to end users at a
price that is competitive with the Internet-based telecommunications services
offered by these new companies. The Company does not currently market to
Internet service providers ("ISPs") and therefore may not realize any revenues
from the Internet-based telecommunications market. If the Company does commence
marketing to ISPs, there can be no assurance that it will be able to do so
successfully, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to IXCs and LECs, entities potentially capable of offering
switched services in competition with the DTI network include cable television
companies, such as Tele-Communications, Inc. ("TCI"), the second-largest cable
television company in the United States, which AT&T has agreed to acquire,
electric utilities, microwave carriers, wireless telephone system operators and
large subscribers who build private networks. Previous impediments to certain
utility companies entering telecommunications markets under the Public Utility
Holding Company Act of 1935 were also removed by the Telecom Act, creating a new
competitive threat for DTI.
In the future, the Company may be subject to more intense competition due
to the development of new technologies, an increased supply of transmission
capacity, the consolidation in the industry among local and long distance
service providers and the effects of deregulation resulting from the Telecom
Act. The telecommunications industry is experiencing a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite transmission capacity for services similar to
those provided by the Company. For instance, recent technological advances
permit substantial increases in transmission capacity of both new and existing
fiber, and certain companies have begun to deploy and use ATM network backbones
for both data and packetized voice transmission and have announced plans to
transport interstate long distance calls via such voice-over-data technology.
The introduction of such new products or emergence of such new technologies may
reduce the cost or increase the supply of certain services similar to those
provided by the Company. The Company cannot predict which of many possible
future product and service offerings will be crucial to maintain its competitive
position or what expenditures will be required to develop profitably and provide
such products and services.
Many of the Company's competitors and potential competitors have financial,
personnel, marketing and other resources significantly greater than those of the
Company, as well as other competitive advantages. A continuing trend toward
business combinations and alliances in the telecommunications industry may
increase the resources available to DTI's competitors, create significant new
competitors and potentially decrease the Company's carrier customer base. The
ability of DTI to compete effectively will depend upon, among other things, its
ability to deploy the DTI network and to maintain high quality services at
prices equal to or below those charged by its competitors. There can be no
assurance that the Company will be able to compete successfully with existing
competitors or new entrants in the markets for carrier's carrier services and
end-user services. Failure of the Company to do so would have a material adverse
effect on the Company and its ability to make payments on the Notes. See
"Business -- Competition."
NEED TO OBTAIN AND MAINTAIN FRANCHISES, PERMITS AND RIGHTS-OF-WAY
In order to develop its networks, the Company must obtain local franchises
and other permits, as well as rights to utilize underground conduit, pole space
and other rights-of-way from entities such as utilities, state highway
authorities, local governments, ILECs and IXCs. The Telecom Act requires that
local governmental
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authorities treat telecommunications carriers in a competitively neutral,
non-discriminatory manner, and that most utilities, including electric companies
and most ILECs, afford CLECs access to their conduits, poles and rights-of-way
at reasonable rates and on non-discriminatory terms and conditions. However,
owners of rights-of-way, particularly the ILECs, may seek to delay the Company's
access. The Company has entered into long-term agreements with highway
authorities in Missouri, Arkansas and Kansas and with electric utilities
operating in Missouri and southern Illinois, pursuant to which the Company
generally has access to various rights-of-ways in given localities. However,
these agreements cover only a small portion of the planned DTI network. There
can be no assurance that the Company will be able to maintain its existing
franchises, permits and rights-of-way or to obtain and maintain the other
franchises, permits and rights-of-way needed to complete the DTI network on
acceptable terms. Although the Company does not believe that any of its existing
franchises, permits or rights-of-way will be terminated or not renewed as
needed, termination or non-renewal of certain of franchises, permits or
rights-of-way relating to a significant portion of the existing DTI network
could materially adversely affect the Company and its ability to make payments
on the Notes. See "Business -- The DTI Network -- Highway and Utility
Rights-of-Way."
DEPENDENCE ON LIMITED NUMBER OF LARGE CUSTOMERS
The Company has business relationships with a small number of large
customers. During fiscal years 1996 and 1997 and the nine months ended March 31,
1998 the Company's three largest customers accounted for 78%, 52% and 53%,
respectively, of the Company's telecommunications services revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, the Company's business plan assumes that a large
proportion of its future revenues will come from its carrier's carrier services,
which by their nature are marketed to a limited number of telecommunications
carriers. Carrier customers will frequently change suppliers based on very small
changes in prices. To the extent the Company sells to its carrier customers on a
short term basis, it will be particularly vulnerable to price competition.
Therefore, dissatisfaction with the Company's services by a relatively small
number of customers could have a material adverse effect on the Company's
business, financial condition and results of operations and its ability to make
payments on the Notes. See "-- Risks Related to Completing the DTI Network and
Increasing Traffic Volume; Non-Compliance with Construction Schedules." The
Company is aware that certain IXCs are constructing or considering construction
of new networks, or buying companies with local networks, which could reduce
their need for the Company's services. See "Risk Factors -- Competition." In
addition, it is possible that as IXCs expand their product offerings and
networks, and the Company expands its product offerings and the geographic scope
of the DTI network, the Company may become a competitor of one or more of its
large customers for certain end-user customers. Accordingly, there can be no
assurance that any of the Company's carrier's carrier customers will continue to
use or increase their use of the Company's services, which would have a material
adverse effect on the Company's business, financial condition and results of
operations and its ability to make payments on the Notes.
EXPANSION AND MANAGING ANTICIPATED RAPID GROWTH
The Company must grow rapidly in order to be able to make payments on the
Notes. The Company had 22 full time employees as of July 15, 1998. Rapid growth
will place a significant strain on the Company's administrative, operational,
management and financial resources. The expansion of the DTI network and the
Company's services will depend on, among other things, its ability to enter new
markets, design fiber optic network routes, construct, acquire and install
facilities and obtain rights-of-way, building access and any required government
authorizations and/or permits, all in a timely manner, at reasonable costs and
on satisfactory terms and conditions. The expansion of the DTI network and
services also will require substantial growth in the Company's management base,
systems and other operations. Implementation of the Company's current and future
expansion plans will also depend on factors such as: (i) the availability of
financing and regulatory approvals; (ii) the existence of strategic alliances or
relationships; (iii) technological, regulatory or other developments in the
Company's business; (iv) changes in the competitive climate in which the Company
operates; and (v) the emergence of future opportunities. There can be no
assurance that the Company will be able to expand its existing network or
services in a cost effective manner.
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A key part of the Company's business strategy is to achieve rapid growth by
expanding the DTI network to the east and west coasts of the United States and
using the DTI network and services to exploit opportunities expected to arise
from regulatory and technological changes and other industry developments. The
Company's ability to manage its expansion effectively will depend upon, among
other things: (i) expansion, training and management of its employee base,
including attracting and retaining highly skilled personnel; (ii) expansion and
improvement of the Company's customer service, billing and support systems and
improvement or cost-effective outsourcing of the Company's operational and
financial systems; (iii) development, introduction and marketing of new products
and services; and (iv) control of the Company's expenses. The failure of the
Company to satisfy these requirements and to otherwise manage its growth
effectively would have a material adverse effect on the Company and its ability
to make payments on the Notes. See "-- Dependence on Key Personnel" and
"Development of Accounting, Processing and Information Systems; Year 2000
Compliance".
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends to a significant degree upon the
continued contributions of a small number of key executives, particularly
Richard D. Weinstein, the Company's founder, Chief Executive Officer and
President. The Company has entered into employment agreements with certain of
these executives. Nonetheless, the loss of these individuals and the inability
of the Company to attract and retain suitable replacements could have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects and its ability to make payments on the Notes.
See "Management -- Executive Officers and Directors" and "Management --
Employment and Consulting Agreements." In the past, the Company has lost the
services of certain of its senior executives. The Company's future success and
ability to manage growth will be dependent also upon its ability to hire and
retain additional highly skilled employees for a variety of management,
engineering, technical, and sales and marketing positions. The competition for
such personnel is intense. There can be no assurance that the Company will be
able to attract and retain sufficient qualified personnel. The failure to do so
could have a material adverse effect on the Company and its ability to make
payments on the Notes.
DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS
The Company is dependent upon single or limited source suppliers for a
number of components and parts used in the DTI network, some of which components
employ advanced technologies built to specifications provided by the Company to
such suppliers. In particular, the Company is dependent primarily on Pirelli
Cable Corporation ("Pirelli") for its supply of fiber optic cable. In addition
the Company is dependent on a Pirelli affiliate and to a lesser extent, Ciena
Corporation, for DWDM equipment. To date, the Company's arrangements have
provided it with a supply of fiber optic cable at a stable, attractive price.
DTI's network design strategy also is dependent on obtaining transmission
equipment from Fujitsu which supplies such equipment to other substantially
larger customers. There can be no assurance that the Company's suppliers will be
able to meet the Company's future requirements on a timely basis. The Company
believes that there are alternative suppliers or alternative components for all
of the components contained in the planned DTI network. However, any extended
interruption in the supply of any of the key components currently obtained from
a single or limited source, disturbance in the pricing arrangements with
Pirelli, or Fujitsu, or delay in transitioning a replacement supplier's product
into the DTI network, could disrupt the Company's operations and have a material
adverse effect on the Company's operating results and its ability to make
payments on the Notes. In addition, the substitution of different DWDM equipment
might prove technically difficult, leading to delays and added expense. There
can be no assurance that such interruption, disturbance, delay or expense will
not occur or that the Company will be successful in obtaining alternative
suppliers. Significant delays in the expansion of the DTI network resulting from
interruptions in the supply of any key network components or other problems with
suppliers could have a material adverse effect on the Company and its ability to
make payments on the Notes.
Some of the technologically advanced equipment, including the DWDM
equipment, which the Company plans to deploy in the DTI network has not been
extensively field tested. The Company believes that such
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equipment will meet or exceed the required specifications and will perform
satisfactorily once installed. However, any extended failure of such equipment
to perform as expected could have a material adverse effect on the Company's
operations and its ability to make payments on the Notes.
PERFORMANCE GUARANTEES UNDER CUSTOMER IRU AGREEMENTS
The Company has a continuing obligation to guarantee the performance of the
fibers that are subject to IRUs leased by the Company to its carrier customers.
These costs are potentially significant, and the Company cannot reasonably
estimate such costs over the terms of the IRU agreements due principally to the
limited history of operations of the Company to date, the long-term nature of
the agreements and the various possible causes of service disruption that the
Company must remedy pursuant to the agreements, many of which causes are beyond
the control of the Company. There can be no assurance that such costs will not
be material or will not have a material adverse effect on the Company and its
ability to make payments on the Notes.
PRICING PRESSURES AND RISK OF INDUSTRY OVER-CAPACITY
Although the Company believes that, in the last several years, increasing
demand has corrected the telecommunications capacity supply imbalance and slowed
the decline in prices, the Company anticipates that prices for carrier's carrier
services and end-user services will continue to decline over the next several
years due primarily to (i) installation of additional fiber that provides
substantially more transmission capacity than will be needed over the short or
medium term, (ii) technological advances that permit substantial increases in
the transmission capacity of both new and existing fiber, and (iii) strategic
alliances or similar transactions, such as long distance capacity purchasing
alliances among certain RBOCs, that increase customer purchasing power. Such
price decreases could have a material adverse effect on the Company and its
ability to make payments on the Notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Since the cost of fiber and related equipment is a small portion of
building new transmission lines, persons building such lines are likely to
install substantially more fiber than they expect to use over the short or
medium term. This can lead to substantial over-capacity and price declines. In
addition, if the Company sells any carrier more capacity on its routes than such
carrier ultimately needs, then such carrier may resell such capacity, causing
further price competition. Likewise, if the Company acquires fiber on other
carriers' networks, those carriers will be well positioned to engage in price
competition with the Company. Furthermore, the marginal cost of carrying calls
over fiber optic cable is extremely low. As a result, certain industry observers
have predicted that, within a few years, there may be dramatic and substantial
price declines and that long distance calls will not be significantly more
expensive than local calls. Any of the foregoing could have a material adverse
effect on the Company and its ability to make payments on the Notes.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. For instance, recent technological advances permit substantial
increases in transmission capacity of both new and existing fiber, and the
introduction of new products or the emergence of new technologies may reduce the
cost or increase the supply of certain services similar to those provided by the
Company. While the Company believes that, for the foreseeable future,
technological changes will neither materially affect the continued use of fiber
optic cable nor materially hinder the Company's ability to acquire necessary
technologies, the actual effect of technological changes on the Company's
operations cannot be predicted and could have a material adverse effect on the
Company.
DEVELOPMENT OF ACCOUNTING, PROCESSING AND INFORMATION SYSTEMS; YEAR 2000
COMPLIANCE
Sophisticated information and processing systems are vital to the Company's
operations and growth and its ability to monitor costs, process customer orders,
provide customer service, render monthly invoices for services and achieve
operating efficiencies. The Company has developed processes and procedures in
the
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implementation and servicing of customer orders for telecommunications services,
the provisioning, installation and delivery of those services and monthly
billing for those services. However, the Company must improve its internal
processes and procedures and install additional accounting, processing and
information systems to accommodate its anticipated growth. The Company intends
to obtain and install the accounting, processing and information systems
necessary to provide its services efficiently. However, there can be no
assurance that the Company will be able to successfully obtain, install or
operate such systems. The failure to develop effective internal processes and
systems for these service elements could have a material adverse effect upon the
Company's ability to achieve its growth strategy. As the Company begins to
provide local switched services, the need for sophisticated billing and
information systems will also increase significantly and the Company will have
significant additional requirements for data interface with ILECs. Additionally,
any acquisitions would place additional burdens on the Company's accounting,
information and other systems.
While the Company believes that its existing systems and software
applications are, and that any new systems to be installed will be, 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. The failure of the
Company's systems or software applications to accommodate the year 2000 could
have a material adverse effect on its business, financial condition and results
of operations and its ability to make payments on the Notes. Further, if the
systems or software applications of telecommunications equipment suppliers,
ILECs, IXCs or others on whose services or products the Company depends are not
Year 2000 compliant, any loss of such services or products could have a material
adverse effect on the Company's business, financial condition and results of
operations and its ability to make payments on the Notes. The Company intends to
continue to monitor the performance of its accounting, information and
processing systems and software applications and those of its suppliers and
customers to identify and resolve any Year 2000 issues. To the extent necessary,
the Company may need to replace, upgrade or reprogram certain systems to ensure
that all interfacing applications will be Year 2000 compliant when operating
jointly. Based on current information, the Company does not expect that the
costs of such replacements, upgrades and reprogramming will be material to its
business, financial condition or results of operations. Most major domestic
carriers have announced that they expect to achieve Year 2000 compliance for
their networks and support systems by mid-1999; however, other domestic and
international carriers may not be Year 2000 compliant, and failures on their
networks and systems could adversely affect the operation of the Company's
networks and support systems and have a material adverse effect on the Company's
business, financial condition and results of operations and its ability to make
payments on the Notes.
Unanticipated problems in any of the above areas, or the Company's
inability to implement solutions in a timely manner or to establish or upgrade
systems as necessary, could have a material adverse impact on the ability of the
Company to reach its objectives and on its business, financial condition and
results of operations and its ability to make payments on the Notes.
REGULATION RISKS
The Company is required to obtain certain authorizations from the FCC and
state public utility commissions ("PUCs") to offer certain of its
telecommunications services, as well as to file tariffs for many of its
services. The Company has received state certification from the states of
Missouri and Illinois and expects to have filed for certification in the states
of Arkansas and Kansas prior to September 1998 and to receive such
certifications within 90 days after such filing. The Company is in the process
of preparing and filing the tariffs and applications for certification necessary
to provide services throughout the planned DTI network. However, the receipt by
the Company of necessary state certifications may be subject to delay by the
PUCs and such applications and tariffs may be challenged by third parties,
including the ILECs, which could cause the Company to delay the Company's
provision of services over affected portions of the planned DTI network and to
incur substantial legal and administrative expenses. To date, the Company has
not experienced significant difficulties in receiving certification, maintaining
tariffs, or otherwise complying with its regulatory obligations. However, there
can be no assurance that the Company will not experience delay or be subject to
third-party challenges in obtaining necessary regulatory authorizations. The
failure to obtain such authorizations on a
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timely basis would have a material adverse effect on the Company's business,
financial condition and results of operations and its ability to make payments
on the Notes.
The Company's ability to provide local switched services is heavily
dependent upon implementation of provisions of the Telecom Act. The Telecom Act
preempted state and local laws to the extent that they prohibited local
telephone competition, and imposed a variety of new duties on incumbent local
exchange carriers intended to advance such competition, including the duty to
negotiate in good faith with competitors requesting interconnection to the
ILEC's network. However, negotiations with ILECs have sometimes involved
considerable delays and the resulting negotiated agreements may not necessarily
be obtained on terms and conditions that are acceptable to the Company. In such
instances, the Company may petition the proper state regulatory agency to
arbitrate disputed issues. There can be no assurance that the Company will be
able to negotiate acceptable new interconnection agreements with ILECs or that
if state regulatory authorities impose terms and conditions on the parties in
arbitration, such terms will be acceptable to the Company. Because the FCC and
the states have yet to adopt many of the rules and policies necessary to
implement the Telecom Act, or to respond to other related local telephone
competition issues, it is uncertain how burdensome these requirements will be
for the Company.
Although the Company believes that the Telecom Act and other state and
federal regulatory initiatives that favor increased competition are advantageous
to the Company, there can be no assurance that changes in current or future
state or federal regulations, including changes that may result from court
review of the FCC's interconnection rules, or increased competitive
opportunities resulting from such changes, will not have a material adverse
effect on the Company or its ability to make payments on the Notes.
The Telecom Act also creates the foundation for increased competition in
the long distance market from ILECs, which could affect the successful
implementation of the Company's business plans. For example, certain provisions
eliminate previous prohibitions on the provision of inter-LATA long distance
services (both carrier's carrier and end-user services) by the RBOCs, subject to
compliance by such companies with requirements set forth in the Telecom Act and
implemented by the FCC. On December 31, 1997, the U.S. District Court, Northern
District of Texas (Wichita Falls) (the "SBC Court"), in SBC Communications, Inc.
v. FCC and U.S. (the "SBC Communications Case"), overturned as unconstitutional
the provisions of the Telecom Act which prohibited RBOCs from providing
inter-LATA long distance services within their own region without demonstrating
that the local exchange market was opened to local competition. The decision,
however, affects only SBC and U.S. West, Inc. Nonetheless, other RBOCs may use
the decision to petition courts in their operating regions to obtain similar
rulings. On January 2, 1998, AT&T, MCI and other intervenors in the SBC
Communications Case filed a petition for stay with the SBC Court. On January 5,
1997, the FCC also filed a petition for stay of the decision in the SBC Court.
On February 11, 1998, the SBC Court temporarily stayed its decision in the SBC
Communications Case, which stay places those provisions of the Telecom Act which
had been found unconstitutional back into effect and forecloses, temporarily,
the RBOCs from providing inter-LATA long distance service within their own
service regions without FCC approval. On March 23, 1998, on reconsideration, the
SBC Court upheld the FCC's ruling that rejected the application of SBC to offer
in-region long-distance service. The FCC also has rejected Ameritech's request
to provide in-region long-distance service in Michigan and BellSouth's requests
to provide in-region long-distance service in South Carolina and Louisiana.
BellSouth and U.S. West filed petitions for reconsideration of the FCC's
decision, which are still pending.
In addition, in response to petitions of mandamus filed by the Iowa
Utilities Board and other petitioners, the United States Court of Appeals for
the Eighth Circuit (the "Eighth Circuit"), on January 22, 1998, ordered the FCC
to abide by the Eighth Circuit's mandate and to refrain from subsequent attempts
to apply either directly or indirectly the FCC's vacated pricing policies and to
confine its consideration of whether a RBOC has complied with the pricing
methodology and rules adopted by the state commission in effect in the
respective states in which such RBOC seeks to provide in-region long distance
services. The Company would be adversely affected if the RBOCs are allowed to
provide wireline long distance services within their own regions before local
competition is established. In a related development, the FCC is considering
proposed new policies and rules that would grant the ILECs additional
flexibility in the pricing of interstate access services, and states are
considering or are expected to consider ILECs' requests for similar regulatory
relief
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with respect to intrastate services. Any pricing flexibility or other
significant deregulation of the ILECs could have a material adverse effect on
the Company. See "Business -- Regulatory Matters."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Private Notes were issued with original issue discount for U.S. federal
income tax purposes. Since the Exchange Notes are treated as a continuation of
the Private Notes for federal income tax purposes, the Exchange Notes will also
be considered to have been issued at a substantial discount. Consequently,
holders of the Exchange Notes generally will be required to include amounts in
gross income for U.S. federal income tax purposes in advance of receipt of the
cash payments to which the income is attributable. In addition, the Exchange
Notes will be subject to the applicable high-yield discount obligation rules,
which will defer and, in part, eliminate the Company's ability to deduct for
U.S. federal income tax purposes the original issue discount attributable to the
Exchange Notes. Accordingly, the Company's after-tax cash flow will be less than
if the original issue discount on the Exchange Notes were deductible when it
accrued. See "United States Federal Income Tax Considerations" for a more
detailed discussion of the U.S. federal income tax consequences to the Company
and the beneficial owners of the Exchange Notes resulting from the purchase,
ownership and disposition of the Private Notes.
Furthermore, if a bankruptcy case is commenced by or against the Company
under the United States Bankruptcy Code after the issuance of the Exchange
Notes, the claim of a holder of Exchange Notes may be limited to an amount equal
to the sum of the issue price as determined by the bankruptcy court and that
portion of the original issue discount which is deemed to accrue from the issue
date to the date of any such bankruptcy filing.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Private Notes are eligible for trading in the Private Offering Resale
and Trading through Automated Linkages ("PORTAL") market. The Exchange Notes
will be securities for which there is no public market. The Company does not
intend to apply for listing of the Exchange Notes on any securities exchange or
for quotation of the Exchange Notes on the Nasdaq National Market. The Company
has been advised by the Initial Purchasers that they presently intend to make a
market in the Exchange Notes, as permitted by applicable laws and regulations.
The Initial Purchasers are not obligated, however, to make a market in the
Exchange Notes, and any such market making activity may be discontinued at any
time without notice at the sole discretion of each Initial Purchaser. There can
be no assurance as to the liquidity of the public market for the Exchange Notes,
the ability of holders to sell the Exchange Notes, or the price at which holders
would be able to sell the Exchange Notes, or that an active public market for
the Exchange Notes will develop. If an active public market does not develop,
the market price and liquidity of the Exchange Notes may be adversely affected.
See "Plan of Distribution."
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Exchange Notes. There can be no assurances that any market for
the Exchange Notes will not be subject to similar disruptions.
CONTROL OF THE COMPANY; CONFLICTS OF INTEREST
Each of Mr. Weinstein and KLT beneficially owns approximately 45.9% of the
outstanding voting equity securities of the Company, on a fully diluted basis.
Accordingly, they are and will be able to control the management policy of the
Company and all fundamental corporate actions, including mergers, substantial
acquisitions and dispositions, and election of the Board of Directors of the
Company (the "Board"). In addition, Mr. Weinstein and KLT have entered into a
voting agreement with respect to the election of directors. See "Management --
Executive Officers and Directors" and "Principal Stockholders."
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company's shareholders and
the holders of the Notes. For example, if the Company encounters financial
difficulties or is unable to pay its debts as they mature, the interests of the
Company's shareholders and holders of the Warrants might conflict with those of
the holders of the Notes. In addition,
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the Company's shareholders and holders of the Warrants may have an interest in
pursuing acquisitions, divestitures, financings, mergers, consolidations or
other transactions that, in their judgment, could enhance their equity
investment, even though such transactions might involve risk to the holders of
the Notes. Because Mr. Weinstein and KLT are able to control the management
policy of the Company and all fundamental corporate actions, any such conflict
of interest may be resolved in favor of the Company's shareholders and holders
of the Warrants and to the detriment of the holders of the Notes.
VARIABILITY OF OPERATING RESULTS
As the Company expands the DTI network, it will incur significant costs
relating principally to fiber, switching and other equipment and construction
costs. See "-- Substantial Capital Requirements." The installation and expansion
of the DTI network has required and will continue to require considerable
expenses in advance of anticipated revenues associated with newly constructed or
acquired network routes and may cause substantial fluctuations in the Company's
operating results. The losses created by this lag in revenues are expected to
increase until the revenues from the completed DTI network overtake the costs
associated with its deployment. The Company may incur significant and possibly
increasing operating losses and expects to generate negative net cash flow after
capital expenditures during at least the next two years of the Company's
expansion of the DTI network. See "-- Limited History of Operations; Operating
Losses and Negative Cash Flow," "Performance Guarantees Under IRU Agreements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on February 23, 1998 to the
Initial Purchasers, who privately placed the Private Notes with institutional
investors. In connection therewith, the Company and the Initial Purchasers
entered into a Notes Registration Rights Agreement (the "Notes Registration
Rights Agreement"), pursuant to which the Company agreed, for the benefit of the
holders of the Private Notes, that the Company would, at its sole expense, (i)
within 50 days following the original issuance of the Private Notes ("Original
Issue Date"), file with the Commission the Exchange Offer Registration Statement
(of which this Prospectus is a part) under the Securities Act with respect to an
issue of a series of Exchange Notes of the Company identical in all material
respects to the series of Private Notes, (ii) use its best efforts to cause such
Exchange Offer Registration Statement to become effective under the Securities
Act within 180 days following the Original Issue Date, and (iii) use its best
effort to consummate the Exchange Offer within 210 days after the Original Issue
Date. Upon the Exchange Offer Registration Statement (of which this Prospectus
is a part) being declared effective, the Company will offer the Exchange Notes
in exchange for the Private Notes. The Company will keep the Exchange Offer open
for not less than 20 business days (or longer if required by applicable law)
after the date notice of the Exchange Offer is mailed to the holders of the
Private Notes. For each Private Note surrendered to the Company, the Holder of
such Private Note will receive an Exchange Note for a like principal amount at
maturity equal to that of the surrendered Private Notes. The term "Holder" with
respect to the Exchange Offer means any person in whose name Private Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in general
be freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any holder of Private Notes who is an "affiliate"
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing the Exchange Notes (i) will not be able to rely on the
interpretations of the staff of the Commission, (ii) will not be able to tender
its Private Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Private Notes unless such sale or
transfer is made pursuant to an exemption from such requirements.
Each holder of the Private Notes (other than certain specified holders) who
wishes to exchange Private Notes for Exchange Notes in the Exchange Offer will
be required to represent that (i) it is not an affiliate of the Company, (ii)
any Exchange Notes to be received by it were acquired in the ordinary course of
its business and (iii) at the time of commencement of the Exchange Offer, it had
no arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. In addition, in connection
with the resale of the Exchange Notes, any broker-dealer (a "Participating
Broker-Dealer") who acquired the Exchange Notes for its own account as a result
of marketmaking or other trading activities must deliver a prospectus meeting
the requirements of the Securities Act. The Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Notes) with the prospectus
contained in the Exchange Offer Registration Statement. Under the Notes
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use the prospectus contained in the Exchange Offer Registration
Statement in connection with the resale of the Exchange Notes.
In the event that any changes in law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer,
or if for any reason the Exchange Offer is not consummated within 210 days
following the Original Issue Date, or if any holder of the Private Notes (other
than the Initial Purchasers) is not eligible to participate in the Exchange
Offer, or upon the request of either Initial Purchaser under certain
circumstances, the Company will, at its cost (a) as promptly as practicable,
file the Shelf Registration Statement covering resales of the Private Notes, (b)
use its best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act by the 210th day after the
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Original Issue Date and (c) use its best efforts to keep effective the Shelf
Registration Statement until two years after its effective date (or until one
year after such effective date if such Shelf Registration Statement is filed at
the request of either Initial Purchaser) or such shorter period which will
terminate when all of the Private Notes covered by the Shelf Registration
Statement have been sold pursuant thereto. The Company will, in the event of the
filing of a Shelf Registration Statement, provide to each holder of the Private
Notes copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Private Notes has become effective and take certain other actions as are
required to generally permit unrestricted resales of the Notes. A holder of the
Private Notes that sells such Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Notes Registration
Rights Agreement which are applicable to such a holder (including certain
indemnification obligations). In addition, each holder of the Private Notes will
be required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Notes Registration Rights
Agreement in order to have their Private Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding liquidated
damages set forth in the following paragraph.
In the event that (i) the Exchange Offer Registration Statement is not
declared effective on or prior to the 180th calendar day following the Original
Issue Date, (ii) the Exchange Offer is not consummated or, if required, a Shelf
Registration Statement with respect to the Private Notes is not declared
effective on or prior to the 210th calendar day following the Original Issue
Date or (iii) the Exchange Offer Registration Statement is declared effective
but thereafter ceases to be effective or usable (each event referred to in
clauses (i) through (iii) above, a "Registration Default"), then the Company
will be required to pay additional interest in cash on each Interest Payment
Date in an amount equal to one-half of one percent (0.5%) per annum of the
principal amount with respect to the first 90-day period following such
Registration Default. The amount of such additional interest will increase by an
additional one-half of one percent (0.5%) to a maximum or one and one-half
percent (1.5%) per annum for each subsequent 90-day period until such
Registration Default has been cured. Upon (x) the effectiveness of the Exchange
Offer Registration Statement after the 180-day period described in clause (ii)
above, (y) the consummation of the Exchange Offer or the effectiveness of a
Shelf Registration Statement, as the case may be, after the 210-day period
described in clause (ii) above, or (z) the cure of any Registration Default
described in clause (iii) above, such additional interest shall cease to accrue
from the date of such filing, effectiveness, consummation or cure, as the case
may be, if the Company is otherwise in compliance with this paragraph; provided,
however, that if, after any such additional interest ceases to accrue, a
different event specified in clause (i), (ii) or (iii) above occurs, such
additional interest will again accrue pursuant to the foregoing provisions.
During any 365-day period, the Company will have the ability to suspend the
availability of such Shelf Registration Statement for up to two periods of up to
45 consecutive days (except for the consecutive 45-day period immediately prior
to maturity of the Private Notes), but no more than an aggregate 60 days during
any 365-day period, if any event shall occur as a result of which it shall be
necessary, in the good faith determination of the Board of Directors, to amend
the Shelf Registration Statement or amend or supplement any prospectus or
prospectus supplement thereunder in order that each such document not include
any untrue statement of fact or omit to state a material fact necessary to make
the statements therein not misleading in light of the circumstances under which
they were made.
The summary herein of certain provisions of the Notes Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provision of the Notes Registration Rights
Agreement, a copy of which is available upon request to the Company. As a result
of the making of this Exchange Offer, and upon acceptance for exchange of all
validly tendered Private Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled certain obligations under the terms of the Private
Notes and the Notes Registration Rights Agreement and, accordingly, the holders
of the Private Notes will have no further registration or other rights under the
Notes Registration Rights Agreement, except under certain limited circumstances.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount at
maturity of Exchange Notes in exchange for each $1,000 principal amount at
maturity of outstanding Private Notes accepted in the Exchange Offer. Holders
may tender some or all of their Private Notes pursuant to the Exchange Offer.
However, Private Notes may be tendered only in integral multiples of $1,000
principal amount at maturity.
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Private Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and hence will
not bear legends restricting the transfer thereof and (ii) the holders of the
Exchange Notes will not be entitled to certain rights under the Notes
Registration Rights Agreement, including the terms providing for an increase in
the interest rate on the Private Notes under certain circumstances relating to
the timing of the Exchange Offer, all of which rights will terminate when the
Exchange Offer is consummated. The Exchange Notes will evidence the same debt as
the Private Notes and will be entitled to the benefits of the Indenture under
which the Private Notes were, and the Exchange Notes will be, issued.
As of the date of this Prospectus, $506,000,000 aggregate principal amount
at maturity of the Private Notes was outstanding, all of which is registered in
the name of Cede & Co., as nominee for The Depository Trust Company (the
"Depository"). Only a registered holder of the Private Notes (or such holder's
legal representative or attorney-in-fact) as reflected on the records of the
Trustee under the Indenture may participate in the Exchange Offer. Solely for
reasons of administration, the Company has fixed the close of business on August
17, 1998 as the record date for the Exchange Offer for purposes of determining
the persons to whom this Prospectus, together with the Letter of Transmittal,
will initially be sent. There will be no fixed record date for determining
registered holders of the Private Notes entitled to participate in the Exchange
Offer.
Holders of Private Notes do not have any appraisal or dissenters' rights
under the Missouri General and Business Corporation Law or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Private Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Private Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 15, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
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In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under the caption "Conditions" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a public announcement thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
Holders, if the Exchange Offer would otherwise expire during such five to ten
business day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
No cash interest will accrue or be payable on the Exchange Notes prior to
March 1, 2003. The Exchange Notes offered hereby will accrete original issue
discount at a rate of 12 1/2% per annum from the Original Issue Date until March
1, 2003. Thereafter, the Exchange Notes will bear interest at the rate of
12 1/2% per annum which will be payable in cash semiannually on March 1 and
September 1 of each year, commencing September 1, 2003. Interest on the Private
Notes accepted for exchange will cease to accrete upon issuance of the Exchange
Notes.
PROCEDURES FOR TENDERING
Only a Holder of Private Notes may tender such Private Notes in the
Exchange Offer. A Holder who wishes to tender Private Notes for exchange
pursuant to the Exchange Offer must transmit a properly completed and duly
executed Letter of Transmittal, or a facsimile thereof, including any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such
Private Notes must be received by the Exchange Agent along with the Letter of
Transmittal or (ii) the Holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Private Notes, the
Letter of Transmittal and other required documents must be received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
The method of delivery of the Private Notes and the Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder. Instead of delivery by mail, it is recommended that Holders
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Private Notes should be sent to the Company. Holders
may request their respective brokers, dealers, commercial banks, trust companies
or nominees to effect the above transactions for such Holders.
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Private Notes, either make appropriate arrangements to register
ownership of the Private Notes in such owner's name or obtain a properly
completed bond power from
34
<PAGE> 36
the registered Holder. The transfer of registered ownership may take
considerable time and may not be able to be completed prior to the Expiration
Date.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Private Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the NASD, a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole and absolute discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Private Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Private Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Private Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
By tendering, each Holder will represent to the Company, among other
things, that (i) the Exchange Notes to be acquired by the Holder and any
beneficial owners of Private Notes pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
Exchange Notes, (ii) the Holder and each such beneficial owner are not
participating, do not intend to participate and have no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) neither the Holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company.
Each broker or dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker or dealer as a result of market-making activities or other trading
activities (other than Private Notes acquired directly from the Company), must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depository for purposes of the Exchange Offer within
two business days after the date of this Prospectus. Any financial institution
that is a participant in the Depository's book-entry transfer facility system
may make
35
<PAGE> 37
book-entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository through the
Automated Tender Offer Program ("ATOP") of the Depository and to deliver an
"Agent's Message" (as defined below) on or prior to the Expiration Date in
accordance with the Depository's procedures for such transfer and delivery.
However, if delivery of Private Notes may be effected through book-entry
transfer at the Depository and an Agent's Message is not delivered, the Letter
of Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
by the Exchange Agent at the address set forth below under "-- Exchange Agent"
on or prior to the Expiration Date or pursuant to the guaranteed delivery
procedures described below.
The term "Agent's Message" means a message transmitted by the Depository to
and received by the Exchange Agent and forming a part of a confirmation of a
book-entry transfer of Private Notes tendered through ATOP which states that the
Depository has received an express acknowledgment from the tendering
participant, which acknowledgment states that such participant has received and
agrees to be bound by, and makes the representations and warranties contained
in, the Letter of Transmittal and that the Company may enforce the Letter of
Transmittal against such participant.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Private Notes and the principal amount of Private Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Private Notes, or a confirmation of a
book-entry transfer, as the case may be, and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Private Notes in proper form for transfer, or a confirmation of a
book-entry transfer, as the case may be, and all other documents required
by the Letter of Transmittal are received by the Exchange Agent within
three New York Stock Exchange trading days after the Expiration Date. Upon
request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent
to Holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Private Notes to be withdrawn (the "Depositor"),
(ii) identify the Private Notes to be withdrawn (including the certificate
number or numbers and principal amount of such Private Notes), (iii) be signed
by the Holder in the same manner as the original signature on the Letter of
Transmittal by
36
<PAGE> 38
which such Private Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Private Notes register the transfer of such Private
Notes into the name of the person withdrawing the tender and (iv) specify the
name in which any such Private Notes are to be registered, if different from
that of the Depositor. If certificates for Private Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company in
its sole discretion, which determination shall be final and binding on all
parties.
Any Private Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Private Notes so withdrawn are validly
retendered. Properly withdrawn Private Notes may be retendered by following one
of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date. Any Private Notes which have been tendered
but which are not accepted for payment due to withdrawal, rejection of tender or
termination of the Exchange Offer will be returned as soon as practicable to the
Holder thereof without cost to such Holder.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Private
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Private Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company or
might be material to Holders in deciding whether to accept the Exchange
Offer, or any material adverse development has occurred in any existing
action or proceeding with respect to the Company or any of its
subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company or might be material to Holders in deciding whether to accept the
Exchange Offer; or
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company or might be material to Holders in deciding whether to accept the
Exchange Offer; or
(d) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby; or
(e) any of the following has occurred: (i) any general suspension of
or limitation on trading in securities on the New York Stock Exchange or in
the over-the-counter market (whether or not mandatory); (ii) any material
impairment in the general trading market for debt securities; (iii) a
declaration of a banking moratorium or any suspension of payments in
respect of banks by federal or state authorities in the United States
(whether or not mandatory); (iv) a commencement of a war, armed hostilities
or other national or international crisis directly or indirectly relating
to the United States; (v) any limitation (whether or not mandatory) by any
governmental authority on, or other event having a reasonable likelihood of
affecting, the extension of credit by banks or other lending institutions
in the United States; (vi) any material adverse change in the United States
securities or financial markets
37
<PAGE> 39
generally; or (vii) in the case of any of the foregoing existing at the
time of commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(f) the Trustee has objected in any respect to, or taken any action
that could, in the sole judgment of the Company, adversely affect the
consummation of, the Exchange Offer or has taken any action that challenges
the validity or effectiveness of the procedures used by the Company in
making or completing the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the conditions has occurred the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of Holders to
withdraw such Private Notes (see "--Withdrawal of Tenders" above) or (iii) waive
such condition with respect to the Exchange Offer and accept all properly
tendered Private Notes which have not been withdrawn. If such waiver constitutes
a material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered Holders, and the Company will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the waiver and
the manner of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Private Notes being tendered for exchange.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C> <C>
By Registered or Certified By Facsimile: By Hand/Overnight Delivery:
Mail: (For Eligible Institutions The Bank of New York
The Bank of New York Only) 101 Barclay St., Floor 7E
101 Barclay St., Floor 7E Chris Davis, The Bank of New Corporate Trust & Agency
New York, New York 10286 York Services Window
Attn: Chris Davis, (212) 815-6339 Ground Level
Reorganization Section Confirm by telephone: New York, New York 10286
(212) 815-4997 Attn: Chris Davis,
Reorganization Section
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange of
Private Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Private Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Private Notes tendered,
or if
38
<PAGE> 40
tendered Private Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Private Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Private Notes, which is face value less accrued original issue discount, as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer and the unamortized expenses related to the
issuance of the Private Notes will be amortized over the term of the Exchange
Notes.
OTHER
Participation in the Exchange Offer is voluntary and holders of Private
Notes should carefully consider whether to accept the terms and conditions
thereof. Holders of the Private Notes are urged to consult their financial and
tax advisors in making their own decisions on what action to take with respect
to the Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Private Notes pursuant to the terms of, this Exchange Offer,
the Company will have fulfilled certain obligations under the terms of the
Private Notes and the Notes Registration Rights Agreement. Holders of the
Private Notes who do not tender their Private Notes in the Exchange Offer will
continue to hold such Private Notes and will be entitled to all the rights, and
limitations applicable thereto, under the Indenture, except for any such rights
under the Notes Registration Rights Agreement which by their terms terminate or
cease to have further effect as a result of the making of this Exchange Offer.
All untendered Private Notes will continue to be subject to the restrictions on
transfer set forth in the Indenture. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for any
remaining Private Notes could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
39
<PAGE> 41
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Notes Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the Exchange Notes in the Exchange
Offer. Of the $264.8 million of net proceeds to the Company from the Private
Offering, approximately $19.0 million has been used to construct the DTI
network, $3.0 million was used to repay outstanding indebtedness of the Company
under a former bank credit facility and $1.0 million has been used to fund the
Company's operating expenses to date. The Company currently intends to use the
remaining net proceeds (i) to fund additional capital expenditures required for
the completion of the DTI network, (ii) to expand its management, operations and
sales and marketing infrastructure and (iii) for additional working capital and
other general corporate purposes. Pending such utilization, such net proceeds
have been invested in short-term, interest-bearing U.S. government securities
and other short-term, investment grade securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the actual cash, deferred revenues and
capitalization of the Company as of March 31, 1998. This table should be read in
conjunction with the "Selected Consolidated Financial Data" and the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
--------------
<S> <C>
Cash and cash equivalents................................... $263,231,384
============
Deferred revenues(a)........................................ $ 14,037,528
============
Senior Discount Notes(b).................................... $268,856,985
============
Stockholders' equity:
Preferred Stock, $0.01 par value, 20,000 shares
authorized, no shares issued and outstanding........... --
Convertible Series A Preferred Stock, $0.01 par value,
30,000 authorized, issued and outstanding.............. 300
Common Stock, $0.01 par value, 100,000,000 shares
authorized, 30,000,000 issued and outstanding(c)....... 300,000
Additional paid-in capital................................ 44,013,063
Common Stock warrants..................................... 10,421,336
Accumulated deficit....................................... (6,198,351)
------------
Total stockholders' equity................................ 48,536,348
------------
Total capitalization........................................ $317,393,333
============
</TABLE>
- -------------------------
(a) Reflects payments received by DTI in advance of the provision of
telecommunications services under IRUs and wholesale network capacity
agreements, which payments are recognized over the terms of the IRUs or
agreements on a straight-line basis. Does not include current portion of
deferred revenues in the amount of approximately $366,000.
(b) Of the $275.2 million gross proceeds from the issuance of the Units in the
Private Offering, $265.3 million was allocated to the initial Accreted Value
of the Notes and $10.0 million was allocated to the Warrants.
(c) As of the date of this Prospectus, Common Stock outstanding excludes (i)
4,229,590 shares of Common Stock issuable upon exercise of outstanding
warrants, (ii) 895,000 shares of Common Stock issuable upon exercise of
options that the Company has granted or is obligated to grant to certain of
its directors and employees under the Company's 1997 Long-Term Incentive
Award Plan and (iii) 200,000 shares of restricted stock that the Company is
obligated to issue to an employee under such Plan. See "Management --
Incentive Award Plan," Notes 6 and 13 of the notes to the audited
consolidated financial statements and Note 5 of the notes to the unaudited
consolidated financial statements.
40
<PAGE> 42
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below for each of the
three years in the period ended June 30, 1997 have been derived from the audited
consolidated financial statements of the Company which have been audited by
Deloitte & Touche LLP, independent auditors. The selected consolidated financial
data as of and for the years ended June 30, 1993 and 1994 and as of and for the
nine-month periods ended March 31, 1997 and 1998 have been derived from the
unaudited consolidated financial statements of the Company, which have been
prepared on the same basis as the audited consolidated financial statements of
the Company and, in the opinion of management, reflect all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations as of the end of and for such periods. The results for the
nine months ended March 31, 1998 are not necessarily indicative of the operating
results to be expected for the entire year. The information set forth below
should be read in conjunction with the discussion under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
and the audited and unaudited consolidated financial statements of the Company
and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH 31,
----------------------------------------------------------------------- ---------------------------
1993(A) 1994(A) 1995(A) 1996(A) 1997 1997 1998
------- ------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenues:
Telecommunication
services
Carrier's carrier
services............ $ -- $ -- $ -- $ 188,424 $ 807,347 $ 488,931 $ 1,707,914
End-user services..... -- 35,463 199,537 488,377 515,637 380,914 414,660
Other services(b)....... -- -- -- -- 711,006 -- --
-------- -------- ------------ ----------- ------------ ------------ ------------
Total revenue......... -- 35,463 199,537 676,801 2,033,990 869,845 2,122,574
-------- -------- ------------ ----------- ------------ ------------ ------------
Operating expenses:
Telecommunication
services.............. -- -- 165,723 296,912 847,190 563,791 1,024,578
Other services(b)....... -- -- -- -- 364,495 -- --
Selling, general and
administrative........ -- 15,781 240,530 548,613 1,118,809 845,684 2,437,825
Depreciation and
amortization.......... -- -- 70,500 425,841 757,173 521,049 1,385,750
-------- -------- ------------ ----------- ------------ ------------ ------------
Total operating
expenses............ -- 15,781 476,753 1,271,366 3,087,667 1,930,524 4,848,153
-------- -------- ------------ ----------- ------------ ------------ ------------
Income (loss) from
operations.............. -- 19,682 (277,216) (594,565) (1,053,677) (1,060,679) (2,725,579)
Interest income........... -- -- 153,261 143,049 101,914 58,403 1,558,898
Interest (expense)(c)..... (588) (162,777) (384,859) (152,937) (152,937) (3,697,605)
Loan commitment fees...... -- -- -- -- (784,500) (784,500) --
Equity in earnings of
joint venture........... -- -- -- -- 37,436 37,436 --
-------- -------- ------------ ----------- ------------ ------------ ------------
Income (loss) before
income tax benefit...... -- 19,094 (286,732) (786,375) (1,851,764) (1,902,277) (4,864,286)
Income tax benefit........ -- -- -- -- 1,214,331 1,042,000 2,020,000
-------- -------- ------------ ----------- ------------ ------------ ------------
Net income (loss)(d)...... $ -- $ 19,094 $ (286,732) $ (786,375) $ (637,433) $ (860,277) $ (2,844,286)
======== ======== ============ =========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF MARCH 31,
----------------------------------------------------------------------- ---------------------------
1993(A) 1994(A) 1995(A) 1996(A) 1997 1998
------- ------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ -- $ 10,512 $ 140,220 $ 817,391 $ 4,366,906 $263,231,384
Network and equipment,
net..................... -- 39,032 6,788,582 13,064,169 34,000,634 60,824,950
Total assets.............. 1,000 57,844 11,983,497 15,025,758 39,849,136 338,467,861
Long-term debt............ -- -- -- -- -- 268,856,985
Deferred revenues(e)...... -- 37,750 4,927,228 6,595,948 9,420,224 14,037,528
Redeemable Convertible
Series A Preferred
Stock(f)................ -- -- -- -- 28,889,165 --
Stockholders' equity
(deficit)(f)............ -- 19,094 (237,638) (1,100,703) (4,729,867) 48,536,348
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH 31,
----------------------------------------------------------------------- ---------------------------
1993(A) 1994(A) 1995(A) 1996(A) 1997 1997 1998
------- ------- ------- ------- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash flows from
operations.............. $ 1,000 $ 49,544 $ 6,903,884 $ 299,710 $ 7,674,272 $ 4,694,799 $ 5,097,421
Cash flows from investing
activities.............. -- (39,032) (11,804,176) (1,122,569) (19,417,073) (10,058,794) (28,210,066)
Cash flows from financing
activities.............. -- -- 5,030,000 1,500,030 15,292,316 10,314,313 281,977,123
EBITDA(g)................. -- 19,682 (206,716) (168,724) (259,068) (502,194) (1,339,829)
Capital expenditures...... -- 39,032 6,804,176 5,663,047 19,876,595 10,518,316 28,210,061
Ratio of earnings to fixed
charges(h).............. -- 33:1 -- -- -- -- --
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
AS OF
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Route miles..................................... 520 732 1,361 1,427 1,538
Fiber miles..................................... 33,269 44,071 84,254 87,498 93,006
POP/Collocation sites(i)........................ 19 24 43 45 45
</TABLE>
- ---------------
(a) From its inception in June 1989 through June 30, 1993, the Company had no
significant operations, assets or liabilities and consisted of nominal
organizational activities. In addition, through June 30, 1996, the Company
was considered a development stage enterprise focused on developing the DTI
network and customer base.
(b) Other services revenues and expenses in the year ended June 30, 1997 reflect
the design, construction and installation of innerduct for another carrier's
fiber optic network.
(c) Interest expense is net of capitalized interest of $9,516, $1,227,149,
$562,750, $562,750 and $182,000 during fiscal 1995, 1996 and 1997 and the
nine months ended March 31, 1997 and 1998, respectively.
(d) Net loss attributable to Common Stock, loss per share data and weighted
average number of shares outstanding are not meaningful as there was only
one common shareholder and no class of securities was registered.
(e) Does not include current portion of deferred revenues in the amount of
approximately $101,000, $139,000, $260,000 and $366,000 as of June 30, 1995,
1996 and 1997 and March 31, 1998.
(f) On February 13, 1998, in conjunction with the Private Offering, the Company
amended the terms of the Series A Preferred Stock to provide that it is no
longer mandatorily redeemable, and, as a result, the Series A Preferred
Stock has been classified with stockholders' equity. See "Capitalization."
(g) EBITDA represents net loss before interest income (expense), loan commitment
fees, income tax benefit, depreciation and amortization. EBITDA is included
because the Company understands that such information is commonly used by
investors in the telecommunications industry as an additional basis on which
to evaluate the Company's ability to pay interest, repay debt and make
capital expenditures. Excluded from EBITDA are interest income (expense),
loan commitment fees, income taxes, depreciation and amortization, each of
which can significantly affect the Company's results of operations and
liquidity and should be considered in evaluating the Company's financial
performance. EBITDA is not intended to represent, and should not be
considered more meaningful than, or an alternative to, measures of operating
performance determined in accordance with GAAP. Additionally, EBITDA should
not be used as a comparison between companies, as it may not be calculated
in a similar manner by all companies.
(h) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income tax benefit, plus fixed charges
excluding capitalized interest; and (ii) fixed charges consist of interest
expenses and capitalized costs, amortization of deferred financing costs,
plus the portion of rentals considered to be representative of the interest
factor (one-third of lease payments). For the ended June 30, 1995, 1996 and
1997, and for the nine months ended March 31, 1997 and 1998, the Company's
earnings were insufficient to cover fixed charges by approximately $296,000,
$2.0 million, $2.4 million, $2.5 million and $4.9 million, respectively.
(i) Consists of interconnections with ILEC access tandems, ILEC central offices,
IXC POPs, and DTI's network control center and POP buildings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto and the
other financial data appearing elsewhere in this Prospectus.
OVERVIEW
DTI is a facilities-based communications company that is creating an
approximately 18,500 route mile digital fiber optic network comprised of 19
regional rings interconnecting primary, secondary and tertiary cities in 37
states. By providing high-capacity voice and data transmission services to and
from secondary and tertiary cities, the Company intends to become a leading
wholesale provider of regional communications transport services to IXCs and
other communications companies. DTI currently provides carrier's carrier
services under contracts with AT&T, Sprint, MCI, WorldCom, Ameritech Cellular
and IXC Communications. The Company also provides private line services to
targeted business and governmental end-user customers. DTI is 50% owned by an
affiliate of Kansas City Power & Light Company ("KCPL"), which has agreed to be
acquired by Western Resources, Inc.
DTI was incorporated in June 1989. Until 1994, the Company was engaged
primarily in developing its business plan, planning its activities, and bidding
for and negotiating the following agreements with St. John's Hospital in St.
Louis, Missouri ("St. John's"), MHTC and Union Electric. Pursuant to a February
1994 agreement with St. John's, DTI commenced construction of a fiber optic
network to provide data communications services between St. John's facilities
within the St. Louis area. The Company subsequently established its network
control center in suburban St. Louis, which was then interconnected with the St.
John's routes. Following the execution of agreements with the MHTC in September
1994 and with Union Electric in October 1994, DTI began construction of a
long-haul route between St. Louis and Jefferson City, Missouri. This long-haul
route and its local portions enabled DTI to begin providing long-haul and local
carrier's carrier services in 1996 to certain IXCs, including MCI and WorldCom.
During fiscal 1995 and 1996, DTI continued construction of its network,
primarily along the Missouri highway system to Kansas City and other Missouri
locations. DTI also entered into agreements with St. Louis metropolitan
municipalities and other secondary Missouri cities to obtain rights-of-way and
construct local loops in such areas. In July 1996, pursuant to its joint venture
agreement with KLT Telecom, Inc. ("KLT"), a subsidiary of KCPL, DTI commenced
construction of a fiber optic network in the Kansas City metropolitan area. In
June 1997, DTI obtained rights-of-way for the construction of its network
facilities along certain Arkansas highways.
REVENUES. The Company derives revenues principally from (i) the sale of
wholesale telecommunications services, primarily through IRUs and wholesale
network capacity agreements, to IXCs, such as the Tier 1 carriers, and other
telecommunications entities and (ii) the sale of telecommunications services
directly to business and governmental end users. For the year ended June 30,
1997, the Company derived approximately 40% and 25% of its total revenues from
carrier's carrier services and end-user services, respectively. Of the Company's
total carrier's carrier service revenues, approximately 83% and 17% related to
wholesale network capacity services and IRU agreements, respectively. The
remaining 35% of its total revenues in fiscal 1997 were derived from
non-recurring network construction services, which involved the design,
construction and installation of innerduct for the fiber optic network of one of
DTI's carrier customers. Excluding such network construction revenues, carrier's
carrier services and end-user services represented approximately 61% and 39%,
respectively, of the Company's total revenues in fiscal 1997. For the nine
months ended March 31, 1998, DTI derived approximately 80% and 20% of its total
revenues from carrier's carrier services and end-user services, respectively.
During the past several years, market prices for many telecommunications
services have been declining, which is a trend the Company believes will likely
continue. This decline has had and will continue to have a negative effect on
the Company's gross margin, which may not be offset by decreases in the
Company's cost of services. However, the Company believes that such decreases in
prices may be partially offset by increased demand for DTI's telecommunications
services as it expands the DTI network and introduces new services. See
"Industry Overview," "Business -- Business Strategy" and "-- Products and
Services."
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<PAGE> 45
Carrier's carrier services are generally high capacity, private line
telecommunications services provided over the Company's owned facilities and
facilities obtained through long-term IRUs and, in locations where the DTI
network has not been extended or completed, over leased line capacity. Carrier's
carrier services generally are provided to (i) facilities-based carriers that
require transmission capacity where they have geographic gaps in their
facilities, need additional capacity or require alternative routing and (ii)
non-facilities-based carriers requiring transmission capacity. Carrier's carrier
is a wholesale business characterized by higher net margins than are typically
realized through end-user services primarily because carrier's carrier services
can be established more quickly and at a lower marketing cost than end-user
services.
DTI derives carrier's carrier services revenues from IRUs and wholesale
network capacity agreements. IRUs typically have a term of 10 to 20 years. The
Company provides wholesale network capacity services through service agreements
for terms of one year or longer which typically require customers to pay for
such capacity regardless of level of usage. IRUs, which are accounted for as
operating leases, generally require substantial advance payments and periodic
maintenance fees over the terms of the agreements. Advance payments are recorded
by the Company as deferred revenue and are then recognized on a straight-line
basis over the terms of the IRU agreements, as the Company has continuing
obligations to guarantee the performance of the fibers under such agreements.
These costs are potentially significant, and the Company cannot reasonably
estimate such costs over the terms of the IRU agreements due principally to the
limited history of operations of the Company to date, the long-term nature of
the agreements and the various possible causes of service disruption that the
Company must remedy pursuant to the agreements. Fixed periodic maintenance
payments are also recognized on a straight-line basis over the term of the
agreements as ongoing maintenance services are provided. Wholesale network
capacity agreements generally provide for a fixed monthly payment based on the
capacity and length of circuit provided and sometimes require substantial
advance payments. Advance payments and fixed monthly service payments are
recognized on a straight-line basis over the terms of the agreements which
represent the periods during which services are rendered. For the year ended
June 30, 1997 and the nine months ended March 31, 1998, the Company's three
largest carrier customers combined accounted for an aggregate of 70% and 66%,
respectively, of carrier's carrier services revenues, or 28% and 53%,
respectively, of total revenues. The terms of these agreements are such that
there are no stated obligations to return any of the advance payments. The
Company's contracts do provide for reduced future payments and varying penalties
for late delivery of route segments, and allow the customers, after expiration
of grace periods, to delete such non-delivered segment from the system route to
be delivered.
End-user services are telecommunications services provided directly to
businesses and governmental end users. The Company currently provides private
line services to end users to connect certain points on an end user's private
telecommunications network as well as to bypass the applicable ILEC in accessing
such end user's long distance provider. DTI end-user services agreements to date
have generally provided for services for a term of one year or longer and for a
fixed monthly payment based on the capacity and length of circuit provided,
regardless of level of usage. As of March 31, 1998, the Company has received
aggregate advance payments of approximately $15.1 million from certain of its
end-user customers. Revenues from end-user services and carrier's carrier
services are recognized monthly as the services are provided, except with
respect to advance payments, for which revenues are deferred and recognized over
the life of the agreement on a straight-line basis. Upon expiration, such
agreements may be renewed or services may be provided on a month-to-month basis.
For the year ended June 30, 1997 and the nine months ended March 31, 1998, five
customers accounted for all of DTI's end-user services revenue, or an aggregate
of 25.3% and 43.8%, respectively, of total revenues.
In fiscal 1997, at the request of a specific carrier customer, the Company
designed, constructed and installed innerduct for such customer's own fiber
optic network. While the Company does not presently consider the provision of
such services to be part of its business strategy, it will consider such
opportunities as they arise. The Company expects that future revenues, if any,
from network construction services will not be a significant contributor to the
Company's overall revenues or results of operations.
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<PAGE> 46
OPERATING EXPENSES. The Company's principal operating expenses consist of
the cost of telecommunications services, selling, general and administrative
("SG&A") expenses, depreciation and amortization, and, in fiscal 1997, costs of
network construction services performed for a third party.
The cost of telecommunications services consists primarily of the cost of
leased line facilities and capacity, and operating costs in connection with its
owned facilities. Because the Company currently provides carrier's carrier and
end-user services principally over its own network, the cost of providing these
services includes a minor amount of leased space (in the form of physical
collocation at ILEC access tandems and IXC POPs) and leased line capacity (to
fill requirements of a customer contract which are otherwise substantially met
on the DTI network and typically where the Company plans to expand the DTI
network) and no ILEC access charges. However, leased space and maintenance costs
are expected to increase significantly as the Company intends to enter into
long-term IRUs to acquire certain routes in the planned DTI network. Further,
leased line capacity costs and access charges are expected to increase
significantly because the Company expects to obtain access to a greater number
of ILEC facilities through leased lines in order to reach end users and access
tandems that cannot be cost-effectively connected to the DTI network in a given
local market. Operating costs include, but are not limited to, costs of managing
DTI's network facilities, technical personnel salaries and benefits,
rights-of-way fees and locating installed fiber to minimize the risk of fiber
cuts.
SG&A expenses include the cost of salaries, benefits, occupancy costs,
sales and marketing expenses and administrative expenses. Selling expenses
include commissions for the Company's sales programs, which consist of a
percentage of a customer's initial billing, plus a residual percentage of
ongoing monthly revenues. The Company plans to add sales offices in selected
markets as additional segments of the DTI network become operational. The
Company began developing a sales staff late in fiscal 1997 to concentrate on
sales to end-user customers. However, DTI does not expect to begin to realize
the results of its increased sales efforts until fiscal 1999. Depreciation and
amortization are primarily related to fiber optic cable plant, electronic
terminal equipment and network buildings, and are expected to increase as the
Company incurs substantial capital expenditures to build and acquire the
components of the DTI network and begins to install its own switches. In
general, SG&A expenses have increased significantly as the Company has developed
and expanded the DTI network. The Company expects to incur significant increases
in SG&A expenses to realize the anticipated growth in revenue for carrier's
carrier services and end-user services. In addition, SG&A expenses will increase
as the Company continues to recruit experienced personnel to implement the
Company's business strategy. See "Risk Factors -- Expansion and Managing
Anticipated Rapid Growth" and "Business -- Sales and Marketing."
OPERATING LOSSES. As a result of development and operating expenses, the
Company has incurred significant operating and net losses to date. Losses from
operations in fiscal 1995, 1996 and 1997 and for the nine months ended March 31,
1998 were $277,000, $595,000, $1.1 million and $2.7 million, respectively. DTI
may incur significant and possibly increasing operating losses and expects to
generate negative net cash flows after capital expenditures during at least the
next two years of the Company's expansion of the DTI network. There can be no
assurance that the Company will achieve or sustain profitability or generate
sufficient positive cash flow to meet its debt service obligations and working
capital requirements. If the Company cannot achieve operating profitability or
positive cash flows from operating activities, it may not be able to service the
Notes or to meet its other debt service or working capital requirements, which
could have a material adverse effect on the Company.
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<PAGE> 47
RESULTS OF OPERATIONS
The table set forth below summarizes the Company's percentage of revenue by
source and operating expenses as a percentage of total revenues:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH 31,
----------------------------- -----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Carrier's carrier services..................... --% 27.8% 39.7% 56.2% 80.5%
End-user services.............................. 100.0 72.2 25.3 43.8 19.5
----- ----- ----- ----- -----
100.0 100.0 65.0 100.0 100.0
Other services................................. -- -- 35.0 -- --
----- ----- ----- ----- -----
Total revenue............................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Operating Expenses:
Telecommunications services.................... 83.1% 43.9% 41.7% 64.8% 48.3%
Other services................................. -- -- 17.9 -- --
Selling, general and administrative............ 120.5 81.0 55.0 97.2 114.9
Depreciation and amortization.................. 35.3 62.9 37.2 59.9 65.3
----- ----- ----- ----- -----
Total operating expenses.................... 238.9% 187.8% 151.8% 221.9% 228.5%
===== ===== ===== ===== =====
</TABLE>
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 principally due to increased revenue from carrier's carrier
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. Telecommunications 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 obtaining 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 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 Private 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
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<PAGE> 48
the Company 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.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUE. Revenue increased 200.5%, from $677,000 in 1996 to $2.0 million in
1997. This increase was due primarily to increased revenue from carrier's
carrier services, as well as significant income from other services. Revenue
from carrier's carrier services increased 328.5%, from $188,000 in 1996 to
$807,000 in 1997. This increase resulted principally from completion and
activation of additional route miles of the DTI network, which allowed the
Company to begin recognizing revenue under certain deferred agreements as assets
were placed in service for several IXCs and to sell additional capacity.
End-user services revenue increased 5.6%, from $488,000 in 1996 to $516,000 in
1997. Other services revenue of $711,000 in fiscal 1997 represented a single
contract for installation of innerduct for one of the Company's carrier
customers along the Company's right-of-way. The Company recorded $0 in other
service revenues in fiscal 1996, and other services are not expected to be a
recurring source of revenue for the Company in the future. However, the Company
will consider similar opportunities, should they become available in the future,
principally as a means of lowering the cost of expanding its network.
OPERATING EXPENSES. Operating expenses increased 142.9%, from $1.3 million
in 1996 to $3.1 million in 1997, due primarily to increases in
telecommunications services expenses, SG&A expenses, other services expenses,
and depreciation and amortization. Telecommunications services expenses
increased 185.3%, from $297,000 in 1996 to $847,000 in 1997 due to the expansion
of the network and increased revenues from carrier's carrier services. SG&A
expenses increased 103.9%, from $549,000 in 1996 to $1.1 million in 1997 to
support the Company's expansion. Other services expenses of $364,000 in 1997
represent the costs associated with a contract for the installation of innerduct
for one of the Company's carrier customers.
Depreciation and amortization increased 77.8%, from $426,000 in 1996 to
$757,000 in 1997 primarily due to additional plant and equipment being placed
into service. As of June 30, 1997, the Company had gross plant and equipment of
$35.2 million, of which $19.0 million (54%) consisted of construction in
progress that was not subject to depreciation. A substantial portion of this
construction in progress is expected to be placed in service in fiscal 1998. In
addition, the Company plans to construct and place in service significantly
greater amounts of plant and equipment in fiscal 1998 than in prior years. As a
result, depreciation and amortization expense is expected to increase
significantly.
INTEREST AND OTHER INCOME (EXPENSE). Net interest and other expenses
increased $606,000, from $192,000 in 1996 to $798,000 in 1997. This increase was
primarily attributable to loan commitment fees of $785,000 incurred in
connection with a bridge loan commitment made available to the Company but not
utilized as a result of KLT's investment in the Company. Interest income
decreased from $193,000 in 1996 to $102,000 in 1997 because the Company carried
smaller average cash balances. Interest expense decreased from $385,000 in 1996
to $153,000 in 1997, as the Company issued its Series A Preferred Stock to
finance, in part, its network construction. The Company reported equity in
earnings of a joint venture of $37,000 in 1997. This joint venture was formed
and its operations and assets were combined with the Company's during the year
ended June 30, 1997 in connection with the issuance of Series A Preferred Stock
to KLT.
INCOME TAXES. The Company incurred $0 of income taxes from July 1, 1994
through June 30, 1997 as a result of generating net operating losses for tax
purposes. An income tax benefit of $1.2 million was recorded in fiscal 1997, as
the Company believes that it is more likely than not that it will generate
taxable income sufficient to realize the tax benefits associated with future
deductible temporary differences and net operating loss carryforwards prior to
their expiration. This belief is based primarily upon changes in operations over
the last year which include the equity investment by KLT (see Note 5 to the
financial statements), which allowed the Company to significantly expand its
fiber optic network, deferred revenues of the Company which have been collected
under certain IRUs and end-user service agreements, future payments due under
existing contracts, and available tax-planning strategies.
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<PAGE> 49
NET LOSS. The Company's net loss decreased 18.9% from $786,000 in 1996 to
$637,000 in 1997.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
REVENUE. Total revenue increased 239.2%, from $200,000 in 1995 to $677,000
in 1996, due primarily to increased revenue from both carrier's carrier services
and end-user services. Revenue from carrier's carrier services amounted to
$188,000 in 1996 as a result of the completion of additional route miles of the
DTI network, which allowed it to begin recognizing revenue under certain
deferred agreements and to sell additional capacity to several IXCs. End user
services revenue increased 144.8%, from $200,000 in 1995 to $488,000 in 1996.
This increase was attributable to the expansion of the DTI network.
OPERATING EXPENSES. Operating expenses increased 166.7%, from $477,000 in
1995 to $1.3 million in 1996 due primarily to increases in telecommunications
services expenses, SG&A expenses and depreciation and amortization.
Telecommunications services expenses increased 79.2%, from $166,000 in 1995 to
$297,000 in 1996 due to the expansion of the DTI network and increased levels of
revenue from telecommunications services. SG&A expenses increased 128.1%, from
$241,000 in 1995 to $549,000 in 1996 in order to support the Company's
expansion. Depreciation and amortization increased 504.0%, from $71,000 in 1995
to $426,000 in 1996 due to significant additional amounts of plant and equipment
being placed into service as part of the DTI network's expansion.
INTEREST AND OTHER INCOME (EXPENSE). Net interest and other expenses
increased $182,000, from $10,000 in 1995 to $192,000 in 1996. This increase was
primarily attributable to interest expense incurred in connection with increased
levels of borrowing. Interest income increased 26.0%, from $153,000 in 1995 to
$193,000 in 1996 because the Company carried larger average cash balances.
Interest expense increased 136.4%, from $163,000 in 1995 to $385,000 in 1996 due
to higher average loan balances.
INCOME TAXES. The Company incurred $0 of income taxes from July 1, 1994
through June 30, 1996 as a result of generating net operating losses for tax
purposes.
NET LOSS. The Company's net loss increased 174.3%, from $287,000 in 1995 to
$786,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its 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,
private debt and equity financings and external borrowings. In addition to
utilizing the net proceeds of the Private Offering, DTI intends to finance its
capital expenditures, working capital requirements, operating losses and debt
service requirements through advance payments under existing and additional
agreements for IRUs or wholesale capacity and available cash flow from
operations, if any. In addition, the Company may seek borrowings under bank
credit facilities and additional debt or equity financings.
The net cash provided by operating activities for the years ended June 30,
1996 and 1997 totaled $300,000 and $7.7 million, respectively, and for the nine
months ended March 31, 1997 and 1998, net cash provided by operating activities
totaled $4.7 million and $5.1 million, respectively. During the year ended June
30, 1997, cash provided by operating activities came principally from increases
in accounts payable of $3.4 million, deferred revenues of $2.9 million and other
liabilities of $1.5 million. 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 IRUs 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 $21.4 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.
In January 1998, Digital Teleport 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
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<PAGE> 50
the lenders, to fund its working capital requirements until consummation of the
Private Offering. Certain covenants under the Credit Facility required that all
outstanding borrowings be repaid upon the consummation of the Private Offering
and effectively precluded any additional borrowings under the Credit Facility
after such amounts were so repaid. The Company has repaid all borrowings under
and has terminated the Credit Facility. The Company intends to pursue a new
long-term bank credit facility.
On February 23, 1998 the Company completed the issuance and sale of the
Private Notes, from which the Company received proceeds, net of underwriting
discounts and expenses, totaling approximately $264.8 million. Of such net
proceeds, approximately $19.0 million has been used to construct the DTI
network, $3.0 million was used to repay outstanding indebtedness of the Company
under the Credit Facility and $1.0 million has been used to fund the Company's
operating expenses to date. The Company currently intends to use the remaining
net proceeds (i) to fund additional capital expenditures required for the
completion of the DTI network, (ii) to expand its management, operations and
sales and marketing infrastructure and (iii) for additional working capital and
other general corporate purposes. The Company may incur significant and possibly
increasing operating losses and expects to generate negative net cash flows
after capital expenditures during at least the next two years as the Company
continues to invest substantial funds to complete the DTI network and develop
and expand its telecommunications services and customer base. Accordingly, if
the Company cannot achieve operating profitability or positive cash flows from
operating activities, it may not be able to service the Notes or to meet its
other debt service or working capital requirements, which would have a material
adverse effect on the Company. See "Risk Factors -- Substantial Capital
Requirements" and "Description of the Notes -- Certain Covenants."
At June 30, 1997 the Company had a working capital deficit of $1.7 million,
which represents an improvement of $4.8 million compared to the working capital
deficit of $6.5 million at June 30, 1996. This improvement is primarily
attributable to the receipt of cash payments from, and the retirement of
outstanding obligations to, KLT during fiscal 1997. See "Certain Relationships
and Related Transactions." The fiscal 1996 working capital deficit resulted
primarily from growth experienced by the Company and DTI's substantial
investment in network and equipment. At March 31, 1998, the Company had a
working capital surplus of $256.9 million, which primarily reflects the receipt
of cash proceeds from the Private Offering.
The Company's investing activities used cash of $1.1 million for the year
ended June 30, 1996 and $19.4 million for the year ended June 30, 1997. During
the year ended June 30, 1997, the Company invested $19.9 million in network and
equipment and reduced restricted cash by $460,000 to repay borrowings under
DTI's former credit facility. During the year ended June 30, 1996, the Company
invested $5.7 million in network and equipment and reduced restricted cash by
$4.5 million to repay borrowings under the Company's former credit facility.
During the first nine months of fiscal 1998, the Company's investing activities
used cash of $28.2 million compared to $10.1 million for the first nine months
of fiscal 1997. During the first nine months of fiscal 1998, the Company
invested $28.2 million in network and equipment. During the first nine months of
fiscal 1997, the Company invested $10.5 million in network and equipment and
reduced restricted cash by $460,000.
Cash provided by financing activities was $1.5 million for the year ended
June 30, 1996 and $15.3 million for the year ended June 30, 1997. During the
year ended June 30, 1997, the Company borrowed $8.0 million under a loan
agreement with KLT, 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 $10.5 million were received
pursuant to the KLT Agreement (as defined herein). Cash was used to make
principal payments on a bank loan of $500,000 and to repurchase common stock
warrants for $2.7 million granted to a customer (in connection with a bridge
financing provided by such customer to the Company, which bridge financing was
satisfied and terminated by the Company in April 1996). During the year ended
June 30, 1996, cash was provided by borrowings under notes payable in the amount
of $10.4 million and cash was used to repay notes payable in the amount of $8.9
million. During the first nine months of fiscal 1997 cash provided by financing
activities was $10.3 million compared to $282.0 million for the first nine
months of fiscal 1998. During the first three quarters of fiscal 1998, the
Company received $17.3 million in proceeds from the issuance of Series A
Preferred Stock to KLT and $275.2 million from the issuance and sale of the
Units in the Private Offering. During the first three quarters of fiscal 1997,
the Company borrowed $8.0 million under a
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loan agreement with KLT, bringing the Company's total borrowings from KLT to
$14.0 million. These borrowings were subsequently converted to Series A
Preferred Stock during the year ended June 30, 1997 and additional cash proceeds
in the amount of $5.0 million were received pursuant to a stock subscription
agreement. During the nine months ended March 31, 1999, cash was used to
repurchase common stock warrants granted to a customer in the amount of $2.7
million and to repay borrowings of $450,000 under a former bank credit facility,
which borrowings were collateralized by cash equivalents that were maintained at
the lender in the amount of such borrowings and that earned interest at the
lender's money market rate.
To achieve its business plan, DTI will need significant financing to fund
its capital expenditure, working capital and debt service requirements and its
anticipated future operating losses. The Company's estimated capital
requirements primarily include the estimated cost of (i) constructing
approximately half of the planned DTI network routes, (ii) purchasing, for cash,
fiber optic facilities pursuant to long-term IRUs for planned routes that the
Company will neither construct nor acquire through swaps with other
telecommunication carriers, and (iii) additional network expansion activities,
including the construction of additional local loops in secondary and tertiary
cities as network traffic volume increases. The Company estimates that total
capital expenditures necessary to complete the DTI network will be approximately
$780 million, of which the Company had expended approximately $80 million as of
June 30, 1998. The Company anticipates remaining total capital expenditures of
approximately $530 million in fiscal 1999. The Company has existing capital
commitments in the aggregate amount of approximately $150 million payable over
the next 15 months. The Company also may require additional capital in the
future to fund operating deficits and net losses and for potential strategic
alliances, joint ventures and acquisitions. These activities could require
significant additional capital not included in the foregoing estimated capital
requirements.
As of March 31, 1998, DTI had $263.2 million of cash and cash equivalents.
Such amount is expected to provide sufficient liquidity to meet the Company's
operating and capital requirements through approximately December 31, 1998.
Subsequent to such date, DTI's operating and capital requirements are expected
to be funded, in large part, out of additional debt or equity financings,
advance payments under IRUs and wholesale network capacity agreements, and
available cash flow from operations, if any. The Company is exploring the
possibility of an additional high yield debt offering, a commercial credit
facility and equity sales, but has no specific plans at this time. The Company
is in various stages of discussions with potential customers for IRUs 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 of, or obtaining IRUs for, planned routes, 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, the Company could modify, defer or abandon plans to
build or acquire certain portions of the DTI network. The failure of the
Company, however, to raise the substantial capital required to complete the DTI
network 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. See "Risk Factors --
Substantial Capital Requirements," "-- High Leverage; Ability to Service
Indebtedness; Restrictive Covenants," "-- Risks Related to Completing the DTI
Network and Increasing Traffic Volume; Non-Compliance with Construction
Schedules" and "-- Competition."
Subject to the Indenture provisions that limit restrictions on the ability
of any of the Company's Restricted Subsidiaries to pay dividends and make other
payments to the Company, 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 the Company. 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 Notes do not require cash interest payments until
September 1, 2003, at such time the Notes will have accreted to $506.0 million
in aggregate principal amount and will require annual cash interest payments of
$63.25 million. In addition, the Notes mature on March 1,
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2008. The Company currently expects that the earnings and cash flow, if any, of
Digital Teleport will be retained and used by such subsidiary in its operations,
including to service its own debt obligations. The Company does not anticipate
that it will receive any material distributions from Digital Teleport prior to
September 1, 2003. Even if the Company determined 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 the Company 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 make any loans,
advances or other payments of funds to the Company would have a material adverse
effect on the Company's ability to meet its obligations on the Notes. See "Risk
Factors -- Holding Company Structure; Ability to Create Liens" and "Description
of the Notes -- Certain Covenants -- Limitations on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries." Further, there can be no
assurance that the Company will have available, or will be able to acquire from
alternative sources of financing, funds sufficient to repurchase the Notes in
the event of a Change of Control. See "Description of the Notes -- Certain
Covenants -- Purchase of Notes Upon a Change of Control."
The Company has received notice from a customer that it intends to set off
against amounts payable to the Company $15,000 per month, which as of June 30,
1998 was approximately $90,000 (in addition to $400,000 previously set off
against other payments), as damages and penalties under the Company's contract
with that customer due to the failure by the Company to meet certain
construction deadlines and such customer reserved its rights to seek other
remedies under the contract. The Company believes that if such $90,000 setoff
were to be made, it would not be material to the Company's business, financial
position and results of operations. Upon completion and turn-up of services,
such customer is contractually required to pay the Company a lump sum of
approximately $4.2 million for the Company's telecommunications services over
its network. See "Risk Factors -- Risks Related to Completing the DTI Network
and Increasing Traffic Volume; Non-Compliance with Construction Schedules."
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 systems and software
applications are Year 2000 compliant, there can be no assurance until the year
2000 that all of the Company's systems and software applications then in place
will function adequately. The failure of the Company's systems or software
applications to accommodate the year 2000 could have a material adverse effect
on its business, financial condition and results of operations and its ability
to meet its obligations on the Notes. Further, if the systems or software
applications of telecommunications equipment suppliers, ILECs, IXCs or others on
whose services or products the Company depends or with whom the Company's
systems must interface are not Year 2000 compliant, it could have a material
adverse effect on the Company's business, financial condition and results of
operations and its ability to meet its obligations on the Notes. The Company
intends to continue to monitor the performance of its accounting, information
and processing systems and software applications and those of its third-party
constituents to identify and resolve any Year 2000 issues. To the extent
necessary, the Company may need to replace, upgrade or reprogram certain systems
to ensure that all interfacing applications will be Year 2000 compliant when
operating jointly. Based on current information, the Company does not expect
that the costs of such replacements, upgrades and reprogramming will be material
to its business, financial condition or results of operations. Most major
domestic carriers have announced that they expect to achieve Year 2000
compliance for their networks and support systems by mid-1999; however, other
domestic and international carriers and other third-party constituents may not
be Year 2000 compliant, and failures on their networks and systems could
adversely affect the operation of the Company's networks and support systems
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and have a material adverse effect on the Company's business, financial
condition and results of operations and its ability to meets its obligations on
the Notes.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." These statements, which are effective for fiscal years beginning
after December 15, 1997, expand or modify disclosures and, the Company believes,
will have no material impact on the Company's consolidated financial position,
results of operations or cash flows.
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INDUSTRY OVERVIEW
GENERAL
The Telecom Act and several state regulatory initiatives have substantially
increased the competitive nature of the telecommunications regulatory
environment in the United States. These developments have removed significant
legal barriers to entry by IXCs and other carriers into the local
telecommunications market and required the RBOCs to allow competing
telecommunications companies to connect their facilities with their network.
IXCs and other carriers have also been guaranteed access to and a right to
resell local telecommunications and network services on an unbundled basis. The
Telecom Act also has created the foundation for increased competition from ILECs
in the long distance telecommunications market. Due to these regulatory changes,
telecommunications companies are now permitted, upon regulatory approval, to
offer an array of interstate and intrastate telephone services, including long
distance and other private line services as well as local telephone service.
The telecommunications market consists of long distance and local services.
Long distance services include retail and wholesale services. Retail long
distance services include traditional switched and dedicated long distance,
"800" and "888" calling, calling card and operator services, ATM, frame relay
and high capacity broadband private line services, as well as Internet, Intranet
and Web page hosting and development services. The dominant national retail long
distance providers include AT&T, Sprint, MCI and WorldCom (the "Tier 1
carriers") and a number of regional retail long distance service providers.
Wholesale long distance and local access service is known as the "carrier's
carrier" business. This business encompasses providing line capacity and
switched services over proprietary network facilities to the carrier's carrier
target market and interconnection within those markets. The primary customers
for companies in the carrier's carrier business are the Tier 1 carriers and the
RBOCs, followed by regional long distance carriers, ISPs, CLECs and other
telecommunications providers.
Local services include switch-based and non-switch-based local exchange
services. Local service providers primarily consist of ILECs, which include the
RBOCs, and CLECs. CLECs can penetrate a local market by (i) reselling ILEC
services by entering into interconnection agreements with the ILECs with respect
to a particular target market or (ii) installing network infrastructure to
support local services in those markets.
LONG DISTANCE AND LOCAL CALL ROUTING
A typical local telephone call placed by an end user is routed to a central
office, which is generally less than three miles from the end user, where the
call is switched. The call is then sent to an access tandem which connects
several central offices. The call is then transmitted to the access tandem
serving the central office of the call recipient, then to the central office
serving the call recipient and on to the call recipient. A typical long distance
call follows the same routing as a local call, from the caller to the caller's
central office and then to the access tandem. However, a long distance call is
transmitted from the caller's access tandem to the POP of the caller's long
distance carrier. The long distance carrier then transmits the call to its POP
at the call recipient's location, then to the access tandem and central office
serving the call recipient and on to the call recipient.
The following diagram illustrates the general structure of an IXC long
distance network.
IXC Long Distance Network Chart
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MARKET OPPORTUNITY
The Company believes demand from IXCs and other communications entities and
from business and governmental end-users for advanced, high bandwidth voice,
data and video transmission capacity will increase over the next several years
due to regulatory and technological changes and other industry developments.
These anticipated changes and developments include: (i) continued growth in
demand for existing long distance and local exchange services, (ii) continued
growth in the capacity requirements of the Internet, data transmission and other
new technologies and applications, (iii) requirements of the Tier 1 carriers to
replace or augment portions of their older system and (iv) entry into long
distance and local exchange markets by new communications providers.
BASE GROWTH OF EXISTING PROVIDERS. Toll service revenues of long distance
carriers in the U.S. were approximately $89 billion in 1997, according to the
FCC. Based on FCC data, toll service revenues of long distance carriers grew at
a compound annual rate of approximately 8.7% during the period 1992 through
1997, while the toll service revenues of all non-Tier 1 long distance carriers,
many of which lease network capacity from facilities-based carriers such as the
Company, grew in the aggregate at a compound annual rate of over 26% during the
same period. The revenue increases were achieved against a backdrop of declining
unit prices for most telecommunications services, which suggests that the demand
for telecommunications bandwidth has increased at an even higher rate. The
Company believes that these growth trends generally will continue and that
non-facilities-based companies will need to either invest in network facilities
or lease high bandwidth network capacity in order to remain competitive.
According to the FCC, the 1997 aggregate revenues of all reporting LECs in
the U.S. approximated $103 billion. Based on FCC data, revenues of all reporting
LECs in the U.S. increased at a compound annual rate of approximately 3.5%
during the period 1992 through 1997. Until recently, there was virtually no
competition in local exchange markets. Several factors have served to promote
recent competition in the local market, including: (i) rapidly growing customer
demand for an alternative to the ILECs, spurred partly by the development of
competition in the long distance market; (ii) advances in the technology for
transmission of data and video, which require significant bandwidth capacity and
reliability; (iii) the development of fiber optics and digital electronic
technology, which reduced network construction costs while increasing
transmission speeds, bandwidth capacity and reliability as compared to
copper-based networks; (iv) the significant access charges IXCs are required to
pay to access the ILECs' networks; and (v) a willingness on the part of
legislators to enact, and regulators to enforce, legislation and regulations
permitting and promoting competition in the local exchange market. In
particular, the Telecom Act requires all major ILECs to "unbundle" their local
network offerings and allow other providers of telecommunications services to
interconnect with their facilities and equipment. Most significantly, ILECs are
required to complete local calls originated by a competitor's customers and
switched by the competitor and to deliver inbound local calls to the competitor
for termination to its customers, assuring customers of unimpaired local calling
capability.
ACCOMMODATION OF THE INTERNET AND OTHER NEW APPLICATIONS. The Company
believes additional network transmission capacity and faster response times will
be required to accommodate multimedia (voice, data and video) and other
potential high-bandwidth applications, such as increasing use of the Internet by
commercial enterprises, the deployment of corporate intranets and the use of
telecommunications infrastructure for providing cable television and other
entertainment services. The Company believes this growth will result in
increased demand for high-bandwidth dedicated circuits and other data
communications services the Company plans to offer (such as frame relay and
ATM).
AUGMENTATION OF OLDER SYSTEMS. Although AT&T, Sprint and MCI have begun to
upgrade their systems, the coast-to-coast fiber optic networks currently
operated by such carriers were constructed for the most part prior to 1990,
using asynchronous, non-SONET ring architecture. The Company believes that most
of these systems were buried directly in the ground without protective conduit.
The conversion of these older systems to the use of SONET ring architecture
requires more bandwidth over additional route miles. Accordingly, the Company
believes that the Tier 1 carriers will generally need to replace or augment
parts of their networks to add more capacity, route diversity and redundancy to
their systems and to lower their overall operating costs. The Company believes
that the older systems operated by certain of the Tier 1 carriers generally face
other
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disadvantages when compared to newer networks, such as those being constructed
by Qwest, IXC Communications and DTI, including: (i) lower transmission speeds,
lower overall capacity and shorter distances between regeneration/amplifier
facilities; (ii) more costly maintenance requirements; (iii) greater
susceptibility to system interruption from physical damage to the network
infrastructure; and (iv) greater difficulty in upgrading to higher quality
fiber.
CAPACITY REQUIRED BY NEW ENTRANTS. Competition and deregulation are
bringing new entrants into the long distance and local telecommunications
markets. The Company anticipates that this trend will accelerate as a result of
the Telecom Act. Upon meeting certain competitive conditions under the Telecom
Act, the RBOCs will be able to enter the long distance business and thus
position themselves as providers of single source service. The Telecom Act
similarly is eliminating barriers to entry in the local exchange market and also
enables other entities, including entities affiliated with power utilities and
ventures between ILECs and cable television companies, to provide an expanded
range of telecommunications services. As these entities emerge as long distance
and local exchange competitors, the Company believes they will need their own
facilities and additional high-bandwidth capacity to compete effectively with
facilities-based providers.
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BUSINESS
DTI is a facilities-based communications company that was formed in 1989
and, prior to July 1, 1996, was a development stage enterprise focusing on
developing its digital fiber optic telecommunications network and customer base.
DTI is creating an approximately 18,500 route mile digital fiber optic network
comprised of 19 regional rings interconnecting primary, secondary and tertiary
cities in 37 states and the District of Columbia. By providing high-capacity
voice and data transmission services to and from secondary and tertiary cities,
the Company intends to become a leading wholesale provider of regional
communications transport services to IXCs and other communications companies.
DTI currently provides carrier's carrier services under contracts with AT&T,
Sprint, MCI, WorldCom, Ameritech Cellular and IXC Communications. The Company
also provides private line services to targeted business and governmental
end-user customers. DTI is 50% owned by an affiliate of Kansas City Power &
Light Company, which has agreed to be acquired by Western Resources, Inc.
BUSINESS STRATEGY
The Company intends to:
LEVERAGE INTEGRATED LONG-HAUL ROUTES, REGIONAL RINGS AND LOCAL NETWORK
DESIGN. The Company believes that the strategic design of the DTI network will
allow it to offer reliable, high-capacity transmission services on a
region-by-region basis to carrier and end-user customers who seek a competitive
alternative to incumbent providers of such services. The regional and local
SONET rings in the DTI network will interconnect primary, secondary and tertiary
markets, major IXC POPs and ILEC access tandems and, in selected metropolitan
areas, potential end-user customers. This design will permit the Company to
provide its carrier customers with reliable transmission capacity between the
carrier's network and access tandems serving a significant number of end-users
in each region. Using a technologically advanced design, the DTI network will
provide rapid rerouting of calls in the event of a fiber cut and, in many cases,
will permit DTI's customers to allocate, manage and monitor the capacity they
lease from DTI from within the customer's own network operations center.
STRATEGICALLY LOCATE AND EXPAND ITS NETWORK THROUGH REGIONAL RINGS. The
Company is expanding the DTI network through the creation of additional regional
rings outside the 14-state region in the Midwest in which the Company had
previously focused its network buildout because it believes that substantial
demand for additional IXC capacity exists in secondary and tertiary markets
located around the country. DTI intends to construct or obtain IRUs for other
facilities to create regional rings and connect secondary and tertiary cities.
Completing the DTI network in this manner will help the Company to offer
reliable connectivity on a regional basis and high-capacity service
cost-effectively to secondary and tertiary markets.
DEVELOP A LOW-COST NETWORK. The Company will strive to develop a low-cost
network by (i) taking advantage of the potential cost efficiencies of the DTI
network design, (ii) continuing to deploy advanced fiber optic network
technology, which the Company believes lowers construction, operating and
maintenance costs, and (iii) realizing cost efficiencies through existing and
additional fiber optic long term IRU and swap agreements with other
telecommunications companies and rights-of-way agreements with governmental
authorities. The Company believes that its approach will allow it to offer
carrier customers regional transport on a more economical basis than is
currently available to such customers.
SELECTIVELY PURSUE LOCAL SWITCHED SERVICES OPPORTUNITIES. DTI believes its
network design will allow it to cost-effectively pursue local switched services
opportunities by creating regional and local fiber optic rings along its
long-haul routes and by leveraging the technical capabilities and high-bandwidth
capacity of the DTI network. The Company intends to provide local switched
service capacity to its carrier customers and to other facilities-based and
non-facilities-based telecommunications companies on a wholesale basis. The DTI
network's design will also provide the Company with sufficient long-haul
capacity to offer local switched services to targeted end-user customers in
primary, secondary and tertiary cities on the Company's regional rings.
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LEVERAGE EXPERIENCED MANAGEMENT TEAM. The Company's management team
includes individuals with significant experience in the deployment and marketing
of telecommunications services. Prior to founding DTI in 1989, Richard D.
Weinstein, President and Chief Executive Officer of DTI, owned and managed
Digital Teleresources, Inc., a firm which designed, engineered and installed
telecommunications systems for large telecommunications companies, including
SBC, and other Fortune 500 companies. H.P. Scott, the Company's Senior Vice
President, has over 35 years of telecommunications industry experience, having
spent eighteen years with MCI Telecommunications Corporation and IXC Carrier,
Inc., where he held positions of senior responsibility for the design and
construction of their coast-to-coast fiber optic telecommunications networks.
Prior to joining DTI as Chief Financial Officer, Gary W. Douglass was the
Executive Vice President and Chief Financial Officer of publicly held Roosevelt
Financial Group, Inc., which was acquired by Mercantile Bancorporation in 1997,
and had previously spent 23 years at Deloitte & Touche LLP. Jerry W. Murphy, the
Company's Vice President, Network Operations, spent 18 years with MCI, having
spent the last 11 years in senior positions in engineering, network
implementation and network operations positions. Jerome W. Sheehy, DTI's Vice
President, Regulatory-Industry Affairs, has over 42 years' experience in the
telecommunications industry, including 20 years at GTE.
THE DTI NETWORK
GENERAL. The DTI network is an exclusively fiber optic cable communications
system substantially all of which employs self-healing, SONET ring architecture
to minimize downtime in the event of a cut in a fiber ring. The Company has
installed its first switch on the DTI network and expects that it will be fully
operational by the end of 1998. DTI expects that more than 90% of the fiber in
the DTI network will be installed underground, typically 36 to 48 inches under
the surface, providing protection from weather and other environmental hazards
affecting reliability of communication connections. The Company expects to
construct approximately half of the DTI network, and to obtain indefeasible
rights to use fiber optic facilities of other carriers for the other half. On
routes which the Company constructs, and on most routes which it acquires from
other carriers, the Company will employ SMF-28A fiber optic cable composed of
Corning glass fiber. All routes in the DTI network constructed by DTI are
comprised of at least 48 strands. In addition, in St. Louis and Kansas City, DTI
is installing 216 and 288 fiber strands, respectively. On routes that the
Company does not build, the Company expects to obtain IRUs for between two and
12 optical fibers. On certain strategic routes which it constructs, the DTI
network will also include one or two empty innerducts for maintenance and future
growth purposes. As part of its design, the Company typically retains 50% or
more of the capacity on each DTI network route for its own use.
The Company currently has approximately 1,800 route miles of fiber optic
cable in place in Missouri and Arkansas, of which approximately 1,300 route
miles represent long-haul segments, and approximately 500 route miles represent
local loop networks in the St. Louis and Kansas City metropolitan areas, as well
as in Jefferson City, Columbia, Mexico and Fulton, Missouri. DTI currently
provides services over 750 route miles of its network.
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The following diagram illustrates how the DTI network connects to the
facilities of ILECs and IXCs, as well as to end-user customers.
DIAGRAM OF ILEC NETWORK
NETWORK ELECTRONICS. Long-haul routes on the DTI network will generally
utilize DWDM equipment. DWDM equipment provides individual wavelength-specific
circuits of OC-48 capacity optical windows. All DTI network DWDM equipment will
initially be equipped to enable the Company to provide the equivalent of eight
dedicated, ring redundant, optical windows. Such equipment will have the ability
to be expanded to offer additional optical windows as the need for capacity on
the DTI network increases. The DWDM equipment will permit the Company to offer
to its carrier customers optical windows on regional rings providing a
dedicated, virtual circuit that can interconnect any two points on that regional
ring. The DWDM equipment, with the accompanying optical add/drop multiplexing
("OADM") equipment, also will permit the Company to efficiently provide high
capacity telecommunications services to secondary and tertiary markets that the
Company believes are currently underserved. The Company's use of open
architecture, DWDM equipment conforming to SONET standards on its regional rings
and long-haul routes will also give the DTI network the ability to interoperate
with its carrier customers' existing fiber optic transmission systems, which
have a broad range of transmission speeds and signal formats, without the
addition of expensive conversion equipment by those carriers. The Company
believes that the network's current and planned system architecture, with minor
additions or modifications, will accommodate ATM and frame relay transmission
methods and emerging Internet Protocol technologies.
On all routes throughout the DTI network, whether constructed by DTI or
purchased, leased or swapped from another carrier, the Company will install
centrally controllable high-bit-rate transmission electronics. The Company
believes the use of such fiber optical terminal equipment will provide DTI's
customers the ability to monitor, in their own network control centers, the
optical windows on the regional rings that they utilize. This equipment should
also permit DTI's customers to utilize their own network control centers to add
and remove services on the optical windows serving that carrier. The DTI network
design will permit carriers to utilize the DTI network as a means to efficiently
expand their networks to areas not previously served, to provide redundancy to
their networks or to upgrade the technology in areas already served by such
networks. The DTI network will also be capable of providing services to carriers
and end-users in increments of less than a full OC-48 optical window, from
OC-12s to DS-3s.
The Company believes that the DTI network design standards give it
sufficient transmission capacity to meet anticipated future increases in call
volume and the development of more bandwidth-intensive voice, data
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and video telecommunication uses. The DTI network's capacity also will allow the
Company to deploy fewer high cost switches by facilitating the transport of
rural switched calls to and from distant centralized switching facilities. All
network operations are currently controlled from a single network control center
in suburban St. Louis, Missouri. The Company is currently constructing a second
control center in Kansas City, Missouri that can serve as a backup network
control center for the entire DTI network.
NETWORK DESIGN. The DTI network is designed to include high-capacity (i)
long-haul routes between large metropolitan areas, (ii) regional rings
connecting primary, secondary and tertiary metropolitan areas to one another and
(iii) local rings in selected metropolitan areas along the regional rings. The
long-haul route portions of the DTI network will generally be located to allow
the Company to more easily interconnect with major IXC POPs and ILEC access
tandems in a region. Any major ILEC access tandem along a regional ring not
physically interconnected through facilities owned or used pursuant to a
long-term IRU by DTI will be interconnected through leased lines until there are
sufficient customers to make construction of a DTI-owned route to these access
tandems economically feasible. Local network portions of the DTI network in
metropolitan areas are generally routed near major business telecommunications
users, metropolitan ILEC access tandems and major central offices. DTI believes
the different elements of the DTI network complement each other and will create
certain construction, operating and maintenance synergies. DTI also believes its
integrated long-haul route, regional ring and local ring design will allow the
Company to offer its carrier and end-user customers private line and local
switched services at a lower cost by reducing the Company's use of ILEC and IXC
facilities to provide services to its customers.
SWITCHING CAPACITY. The Company intends to install high-capacity switches
in strategically located, geographically diverse metropolitan areas to balance
the expected traffic throughout the DTI network. When coupled with its
integrated network design, this switch placement will give DTI the ability to
offer local switched service and long-haul service to many end-user customers
along its regional rings. By using the expected excess capacity on the DTI
network, calls from diverse geographic regions in the DTI network can be routed
long distances from the originating point to one of the Company's switches and
on to their destination, reducing the number of switches required and decreasing
the cost and complexity of constructing, operating and maintaining the DTI
network. In addition, the strategic deployment of switches is expected to enable
the Company to (i) allow the Company to offer switched services on a more
economical basis, (ii) offer custom calling features and billing enhancements to
all of its customers without involving the ILEC, and (iii) allow the Company to
sell its local switched service capacity to other carriers on a wholesale basis.
The Company's first switch has been installed in St. Louis, and the Company
expects that it will be fully operational by the end of 1998.
HIGHWAY AND UTILITY RIGHTS-OF-WAY. Much of the currently completed DTI
network is located in rights-of-way obtained by DTI through strategic
relationships with utilities, state transportation departments and other
governmental authorities. The Company currently has built or has rights-of-way
to build approximately 2,400 route miles of the 9,300 route miles that it plans
to construct on the DTI network and has preliminary or definitive agreements for
IRUs covering approximately 5,800 additional route miles. To build the long-haul
portions of the DTI network between population centers in Missouri, the Company
has generally used rights-of-way in the median of and along the interstate
highway system. The Company will seek to obtain the rights-of-way that it needs
for the expansion of its network in areas where it will construct network rather
than purchase, lease or swap fiber optic strands by entering into agreements
with other state highway departments, utilities or pipeline companies and it may
enter into joint ventures or other "in-kind" transfers in order to obtain such
rights. In addition, the Company believes that public rights-of-way for a
substantial portion of the remainder of the planned DTI network will be
available in the event that it is unable to obtain rights-of-way from third
parties.
BUILD-OUT PLAN. The Company plans to deploy a fiber optic network in 37
states and the District of Columbia that will consist of approximately 18,500
route miles of fiber optic cable, DWDM and other signal transmission equipment,
and high-capacity switches strategically located in larger metropolitan areas.
The Company expects to construct approximately half of such network and to
obtain indefeasible rights to use fiber optic facilities of other carriers for
the remainder of the network. The Company has construction projects underway in
Missouri, Arkansas and Kansas.
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In addition to routes that it will construct, the Company expects to (i)
purchase, for cash, indefeasible rights to use fiber optic facilities of other
telecommunications companies and (ii) exchange indefeasible rights to use the
Company's fiber optic facilities for the indefeasible right to use the fiber
optic facilities of other telecommunications companies. In this manner, the
Company believes that it would be able to establish telecommunications
facilities along the DTI network routes more quickly than by constructing all of
its own facilities. The Company also has recently entered into definitive
agreements for long-term IRUs for fiber optic strands and related facilities
along routes from Chicago to near Cleveland and from near Indianapolis to New
York City and preliminary agreements for long-term IRUs along routes from
Washington, D.C. to Texas, from Des Moines to Minneapolis and from Portland to
Salt Lake City to Los Angeles, which routes include an aggregate of
approximately 5,800 route miles, for aggregate cash consideration of up to
approximately $127 million, plus recurring maintenance and building space fees.
Further, in order to begin providing services more quickly prior to the
construction of, or the acquisition of long-term IRUs for, planned DTI network
routes, the Company may enter into short-term leases of fiber along certain
planned routes. The Company expects to complete the currently planned DTI
network by mid-2000; however, the successful and timely completion of the DTI
network will depend upon a number of factors, uncertainties and contingencies,
many of which are beyond the Company's control. See "Risk Factors -- Substantial
Capital Requirements," "--Risks Related to Completing the DTI Network and
Increasing Traffic Volume; Non-Compliance with Construction Schedules,"
"-- Competition," "-- Need to Obtain and Maintain Franchises, Permits and
Rights-of-Way," "-- Expansion and Managing Anticipated Rapid Growth" and
"-- Dependence on Single or Limited Source Suppliers."
The Company has entered into certain agreements that require it to
construct its network facilities. The MHTC Agreement requires the Company to
build approximately 1,200 miles of fiber optic network along Missouri's
interstate highway system by the end of 1998, certain portions of which must be
built prior to such time. The Company must also complete construction of an
additional 800 miles by the end of 1999 to maintain its rights to such
additional routes. Over 1,700 route miles of the entire 2,000-mile network have
been completed; however, the Company did not meet an intermediate construction
deadline for the construction of approximately 30 miles but has received from
MHTC a waiver of such construction delay and an extension of the 30-mile
completion date to October 1, 1998. The Company expects to complete such
construction prior to such date. The Company must complete construction on an
additional 800 miles by the end of 1999 to maintain its rights to such routes.
The Company may lose its exclusive rights under the MHTC Agreement only in the
event of its breach and failure to timely exercise its right to cure within 60
days of notice of any such breach, which would allow MHTC to terminate the MHTC
Agreement. An agreement between the Company and Union Electric requires it to
construct a fiber optic network linking Union Electric's 80-plus sites
throughout the states of Missouri and Illinois. As of June 30, 1998, the Company
had completed approximately 85% of the sites required for Union Electric and
expects to complete all such construction by the end of 1998. See "Risk Factors
- -- Risks Related to Completing the DTI Network and Increasing Traffic Volume;
Non-Compliance with Construction Schedules."
The Company estimates that total capital expenditures necessary to complete
the DTI network will be approximately $780 million, of which the Company had
expended approximately $80 million as of June 30, 1998. The Company anticipates
remaining total capital expenditures of approximately $530 million in fiscal
1999. The Company has existing capital commitments in the aggregate amount of
approximately $150 million payable over the next 15 months. The Company also may
require additional capital in the future to fund operating deficits and net
losses and for potential strategic alliances, joint ventures and acquisitions.
These activities could require significant additional capital not included in
the foregoing estimated capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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PRODUCTS AND SERVICES
CARRIER'S CARRIER SERVICES
"Carrier's carrier services" are generally the high capacity transmission
services used by IXCs, ILECs and CLECs to transmit telecommunications traffic.
Customers using carrier's carrier services include (i) facilities-based carriers
that require transmission capacity where they have geographic gaps in their
facilities, need additional capacity or require alternative routing and (ii)
non-facilities-based carriers requiring transmission capacity to carry their
customers' telecommunications traffic. Carrier's carrier service is a wholesale
pricing business characterized by net margins that are higher than the Company
could typically achieve through end-user services. This is primarily because
these services can be marketed more quickly and at a lower cost than is
generally necessary with end-user services. The Company currently provides
carrier's carrier services through IRUs and wholesale network capacity
agreements. The Company's present and planned carrier's carrier services are set
forth below.
Optical Windows. DTI plans to offer its carrier customers dedicated,
virtual circuits through the exclusive use of an OC-48 capacity, ring redundant
wavelength of light, or optical window, on the regional rings in the DTI
network. DTI intends to supply all fiber optic electronic equipment necessary to
transmit telecommunications traffic along the regional ring. The Company plans
to enter into agreements for the provision of optical windows for a term of
years with fixed monthly payments over the term of the agreement, regardless of
the level of usage. Uses of optical windows by an IXC can include
point-to-point, dedicated data and voice circuit communications connections, as
well as redundancy and overflow capacity for existing facilities of the IXC.
Possible uses of optical windows by ILECs include connection of its central
offices to other central offices or access tandems. An ILEC may also use such
agreements as a cost effective way to upgrade its network facilities. A CLEC may
use optical window agreements as a way of "filling out" its network.
The Company also will offer its carrier customers the use of an OC-48
optical window to create a high quality, ring redundant means to efficiently
deliver its calls to a significant number of end-users along these rings and
aggregate, for further long haul transport, the outgoing calls of that carrier's
customers along such rings to a single regional point of interconnection between
the carrier's network and DTI's network. DTI will be able to offer this service
because (i) its network will be physically interconnected with major IXC POPs in
a region, (ii) the DTI network will typically be interconnected through its own
or leased facilities to major ILEC access tandem in a region, and (iii) the DTI
network will integrate high capacity switches. Currently, IXCs have to provide
for the transport between each of their POPs and from each of those POPs to each
of the access tandems in the areas adjacent to such POPs, which can involve the
use of multiple networks and carriers. DTI believes that its method of
transporting an IXC's traffic directly to access tandems would be attractive to
an IXC because it should (i) reduce the administrative burden on the IXC of
terminating such calls, because the IXC will have to contract with only one
carrier to reach the ILEC access tandems, (ii) result in greater reliability,
because the calls are transported over a newer system, with fewer potential
points of failure and (iii) result in greater accountability, because fewer
telecommunications companies may be involved in the delivery of such traffic.
The Company expects that it would charge the IXC on a per-optical window,
per-mile basis.
Dedicated Bandwidth Services. Through its other wholesale network capacity
agreements, also referred to as dedicated bandwidth agreements, the Company
provides carriers with bandwidth capacity on the DTI network in increments of
less than a full OC-48 optical window, such as a DS-3. The carrier customer in a
dedicated bandwidth agreement does not have exclusive use of any particular
strand of fiber or wavelength, but instead has the right to transmit a certain
amount of bandwidth between two points along the DTI network. The carrier
customer provides a telecommunications signal to DTI, and DTI provides all fiber
and electronic equipment necessary to transmit the signal to the end point. This
capacity may or may not be along a DTI regional ring providing redundancy.
Dedicated bandwidth agreements typically have terms ranging from five to 20
years, require the customer to pay for such capacity regardless of the level of
usage, and require fixed monthly payments or a combination of advance payments
and subsequent monthly payments over the term of the agreement. DTI offers some
customers the right to switch their service from dedicated bandwidth
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agreements to IRUs. DTI customers with dedicated bandwidth agreements include
AT&T, MCI, WorldCom and Ameritech Cellular.
IRUs. Through IRUs, the Company provides carrier customers specified
strands of optical fiber (which are used exclusively by the carrier customer),
while the carrier customers are responsible for providing the electronic
equipment necessary to transmit communications along the fiber. IRUs, which are
accounted for as operating leases, typically have terms of 10 to 20 years and
require substantial advance payments and additional fixed annual maintenance
payments over the term of the agreement. Uses of IRUs by an IXC are the same as
those for optical windows or dedicated bandwidth agreements, but permit a
customer to use its own electronic equipment to light up the fibers at any level
of capacity it chooses. DTI's IRU customers include IXC Communications,
Sprint/United Telephone and MCI.
Other Wholesale Services. DTI offers its end-user services on a wholesale
basis to other carriers for resale. For example, a private line could be leased
to an IXC to transmit the traffic of its large business customers which are
located on or near the DTI network from the premises of such customers to the
IXC's POPs, using the DTI network exclusively. In addition, upon the
installation of its high-capacity switches at strategic points on the DTI
network, the Company in the future will have the capacity to provide wholesale
local switched services to its carrier customers.
END-USER SERVICES
End-user services are telecommunications services provided to business and
governmental end users. The Company currently provides private line services
connecting certain points on a given end user's private telecommunications
network and in the past has established connections between such private network
and the facilities of that end user's long distance service provider.
Private Line Services. A private line is an unswitched, generally
non-exclusive, lighted telecommunications transmission circuit used to transport
data, voice and video communications. The customer may use a private line for
communications between otherwise unconnected points on its internal network or
to connect its facilities to a switched IXC. Private line calls are generally
routed by a customer through the customer's Private Branch Exchange ("PBX")
facilities to a receiving terminal on DTI's network. DTI then transmits the
signals over the DTI network to the customer's terminal in the call recipient's
area or to the POP for the customer's long distance provider. For example, the
Company has established private line bypass services for a major hospital in the
St. Louis metropolitan area. The Company's current private line service
agreements have terms ranging from three to forty years and typically require a
one-time installation charge as well as fixed monthly payments throughout the
term of the agreement regardless of level of usage.
SALES AND MARKETING
The Company's sales and marketing staff is currently organized into two
groups: carrier's carrier services and end-user services. DTI currently has one
person focusing solely on carrier's carrier services and two direct sales and
marketing personnel pursuing sales of end-user services. Sales personnel are
compensated through a combination of salary and commissions. The Company plans
to significantly expand its sales and marketing activities. By mid-1999, DTI
intends to hire an additional seven persons to focus on sales to carrier and
end-user customers. The Company currently has a sales office in St. Louis and
Springfield, Missouri and expects to open sales locations in Kansas City and in
Illinois by mid-1999. DTI also plans to hire additional personnel (not including
additional carrier's carrier and end-user sales personnel) to form a separate
marketing force to implement its marketing strategies.
CARRIER'S CARRIER SERVICES. DTI's carrier's carrier services are marketed
and sold to facilities-based and nonfacilities-based carriers that require
capacity in the form of IRUs and wholesale network capacity agreements to
provide added capacity in markets they currently serve, bridge geographic gaps
in their facilities or require geographically different routing of their long
distance or local traffic. The Company relies on direct selling to other
carriers on a wholesale basis. DTI's sales efforts also emphasize providing
continued customer
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support services to its existing customers. The Company intends to distinguish
itself in the carrier's carrier market on the basis of pricing, quality,
availability of capacity and flexibility and range of services.
END-USER SERVICES. Through its direct sales personnel, DTI markets and
sells its end-user services to business and governmental end users that require
private line services among multiple office sites or data centers and between
the end user's private network and its long distance provider. End-user sales
generally are project-driven and typically involve sales cycles of two to six
months. For customers that are not located on the local rings of the DTI
network, the Company will consider leasing circuits from the local ILEC or other
telecommunications company or, if necessary, build out its network directly to
such customers. DTI does not currently anticipate offering switched long
distance services under a Company brand.
The Company intends to distinguish itself to end-users on the basis of
pricing, customer responsiveness and creative product implementation. In
addition to hiring additional personnel and opening two new sales offices, DTI
plans to organize its direct sales force by state and, as the DTI network and
the Company's addressable target market expand, by region. Senior sales
management intends to pursue large business customers as reference accounts in
each market served by the DTI network, often offering a deeper discount than
that available to smaller users. Once a reference account in a market is
established, the Company's sales staff will pursue other large and small
end-users, using the visible reference account to add credibility and generate
additional end-user sales.
COMPETITION
The telecommunications industry is highly competitive. The Company competes
and, as it expands its network within and outside the Midwest region, expects to
continue to compete with numerous established facilities-based IXCs, ILECs and
CLECs. Many of these competitors have substantially greater financial and
technical resources, long-standing relationships with their customers and the
potential to subsidize competitive services from less competitive service
revenues. DTI is aware that other facilities-based providers of local and long
distance telecommunications services are planning and constructing additional
networks that, if and when completed, could employ advanced fiber optic
technology similar to, or more advanced than, the DTI network. Such competing
networks may also have operating capability similar to, or more advanced than,
that of the DTI network and be positioned geographically to compete directly
with the DTI network for many of the same customers along a significant portion
of the same routes. Unlike certain of the Company's competitors, who are
constructing or have announced plans to construct nationwide fiber optic
networks, DTI is deploying a network design that it believes will allow it to
address secondary and tertiary markets located along the DTI network's regional
rings, which markets the Company believes are underserved by existing carriers
and are not expected to be the primary targets of such newly constructed long
distance networks.
The Company competes primarily on the basis of price, transmission quality,
reliability and customer service and support. Prices have been declining and are
expected to continue to do so. The Company's competitors in carrier's carrier
services include many large and small IXCs including AT&T, MCI, Sprint,
WorldCom, IXC Communications, Qwest and McLeod. The Company competes with both
LECs and IXCs in its end-user business. In the end-user private line services
market, the Company's principal competitors are SBC, GTE and Sprint/United
Telephone. In the local exchange market, the Company expects to face competition
from ILECs and other competitive providers, including non-facilities based
providers, and, as the local markets become opened to IXCs under the Telecom
Act, from long distance providers. See "--Regulatory Matters."
Some major long distance and local telecommunications service providers
have also recently indicated a willingness to consolidate their operations to
offer a joint long distance and local package of telecommunications services.
WorldCom, together with its wholly owned subsidiaries MFS and Brooks Fiber,
currently provides both local exchange and long distance telecommunications
services throughout the United States. Unlike WorldCom, however, DTI's network
is designed to reach secondary and tertiary markets, which are substantially
bypassed by WorldCom's long-haul and local exchange networks. WorldCom has also
announced its agreement to acquire MCI. In addition, AT&T announced its
agreement to acquire TCG, a
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facilities-based CLEC with networks in operation in 57 markets in the United
States, and SBC has announced agreements to acquire Ameritech, one of the
original seven RBOCs, and SNET. Further, Qwest, a communications provider
building a coast-to-coast fiber optic network in the United States, announced
its agreement to acquire LCI International Inc., a retail long distance
provider, which acquisition would create the nation's fifth largest long
distance company. The Company also believes that high initial network cost and
low marginal costs of carrying long distance traffic have led to a trend among
non-facilities-based carriers to consolidate in order to achieve economies of
scale. Such consolidation among significant telecommunications carriers could
result in larger, better capitalized competitors that can offer a "one-stop
shopping" combination of long distance and local switched services in many of
DTI's target markets.
Certain companies, such as Level 3, have recently announced efforts to use
Internet technologies to supply telecommunications services, potentially leading
to a lower cost of supplying these services and therefore increased pressure on
IXCs and other telecommunications companies to reduce their prices. There can be
no assurance that the Company's IXC and other carrier customers will not
experience substantial decreases in call volume or pricing due to competition
from Internet-based telecommunications, which could lead to a decreased need for
the Company's services, or a reduction in the amount these companies are willing
or able to pay for the Company's services. There can also be no assurance that
the Company will be able to offer its telecommunications services to end users
at a price that is competitive with the Internet-based telecommunications
services offered by these companies. The Company does not currently market to
ISPs and therefore may not realize any revenues from the Internet-based
telecommunications market. If the Company does commence marketing to ISPs, there
can be no assurance that it will be able to do so successfully, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.
In addition to IXCs and LECs, entities potentially capable of offering
local switched services in competition with the DTI network include cable
television companies, such as TCI, which is the second largest cable television
company in the United States and has agreed to be acquired by AT&T, electric
utilities, microwave carriers, wireless telephone system operators and large
subscribers who build private networks. Previous impediments to certain utility
companies entering telecommunications markets under the Public Utility Holding
Company Act of 1935 were also removed by the Telecom Act, at the same time
creating both a new competitive threat and a source of strategic business and
customer relationships for DTI.
In the future, the Company may be subject to more intense competition due
to the development of new technologies, an increased supply of transmission
capacity, the consolidation in the industry among local and long distance
service providers and the effects of deregulation resulting from the Telecom
Act. The telecommunications industry is experiencing a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite transmission capacity for services similar to
those provided by the Company. For instance, recent technological advances
permit substantial increases in transmission capacity of both new and existing
fiber, and certain companies have begun to deploy and use ATM network backbones
for both data and packetized voice transmission and announced plans to transport
interstate long distance calls via such voice-over-data technology. The
introduction of such new products or emergence of such new technologies may
reduce the cost or increase the supply of certain services similar to those
provided by the Company. The Company cannot predict which of many possible
future product and service offerings will be crucial to maintain its competitive
position or what expenditures will be required to profitably develop and provide
such products and services.
The Company believes its existing and planned rights-of-way along
interstate highway systems and public utility infrastructures have played and
could continue to play a significant role in achieving its business objectives.
However, there can be no assurance that competitors will not obtain rights to
use the same or similar rights-of-way for expansion of their communications
networks.
Many of the Company's competitors and potential competitors have financial,
personnel, marketing and other resources significantly greater than those of the
Company, as well as other competitive advantages. A continuing trend toward
business combinations and alliances in the telecommunications industry may
increase the resources available to DTI's competitors and create significant new
competitors. The ability of DTI to
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compete effectively will depend upon, among other things, its ability to deploy
the planned DTI network and to maintain high quality services at prices equal to
or below those charged by its competitors. There can be no assurance that the
Company will be able to compete successfully with existing competitors or new
entrants in the markets for carrier's carrier and end-user services and any of
the other services DTI plans to offer in the future. Failure of the Company to
do so would have a material adverse effect on the Company's business, financial
condition, results of operations and business prospects. See "Risk Factors --
Competition."
REGULATORY MATTERS
GENERAL REGULATORY ENVIRONMENT. The Company's operations are subject to
extensive Federal and state regulation. Carrier's carrier and end-user services
are subject to the provisions of the Communications Act of 1934, as amended,
including the Telecom Act, and the FCC regulations thereunder, as well as the
applicable laws and regulations of the various states, including regulation by
public utility commissions and other state agencies. Federal laws and FCC
regulations apply to interstate telecommunications, while state regulatory
authorities have jurisdiction over telecommunications both originating and
terminating within the state. The regulation of the telecommunications industry
is changing rapidly, and the regulatory environment varies substantially from
state to state. Moreover, as deregulation at the Federal level occurs, some
states are reassessing the level and scope of regulation that may be applicable
to telecommunications service providers, such as the Company. All of the
Company's operations are also subject to a variety of environmental, safety,
health and other governmental regulations. There can be no assurance that future
regulatory, judicial or legislative activities will not have a material adverse
effect on the Company, or that domestic regulators or third parties will not
raise material issues with regard to the Company's compliance or noncompliance
with applicable regulations.
A recent Federal legislative change, the Telecom Act, may have potentially
significant effects on the operations of the Company. The Telecom Act, among
other things, allows the RBOCs to enter the long distance business after meeting
certain competitive market conditions, and enables other entities, including
entities affiliated with power utilities and ventures between ILECs and cable
television companies, to provide an expanded range of telecommunications
services. The General Telephone Operating Companies may enter the long distance
markets without meeting these FCC criteria. Entry of such companies into the
long distance business would result in substantial competition for carrier's
carrier service customers, and may have a material adverse effect on the Company
and such customers. However, the Company believes the RBOCs' and other
companies' participation in the market will provide opportunities for the
Company to lease dark fiber or sell wholesale network capacity.
Under the Telecom Act, the RBOCs may immediately provide long distance
service outside those states in which they provide local exchange service
("out-of-region" service), and long distance service within the regions in which
they provide local exchange service ("in-region" service) upon meeting certain
conditions. The General Telephone Operating Companies may enter the long
distance market without regard to limitations by region. The Telecom Act does,
however, impose certain restrictions on, among others, the RBOCs and General
Telephone Operating Companies in connection with their provision of long
distance services. Out-of-region services by RBOCs are subject to receipt of any
necessary state and/or Federal regulatory approvals that are otherwise
applicable to the provision of intrastate and/or interstate long distance
service. In-region services by RBOCs are subject to specific FCC approval and
satisfaction of other conditions, including a checklist of pro-competitive
requirements. On December 31, 1997, the SBC Court, in the SBC Communications
Case, overturned as unconstitutional the provisions of the Telecom Act which
prohibited RBOCs from providing inter-LATA long distance services within their
own region without demonstrating that the local exchange market was opened to
local competition. The decision, however, affects only SBC Communications, Inc.
and U.S. West, Inc. Nonetheless, other RBOCs may use the decision to petition
courts in their operating regions to obtain similar rulings. On January 2, 1998,
AT&T, MCI and other intervenors in SBC Communications Case filed a petition for
stay with the SBC Court. On January 5, 1997, the FCC also filed a petition for
stay of the decision in the SBC Court. On February, 11, 1998, the SBC Court
temporarily stayed the decision in the SBC Communications Case, which places
those provisions of the
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Telecom Act which had been found unconstitutional back into effect and
forecloses, temporarily, the RBOCs from providing inter-LATA long distance
service within their own service regions without FCC approval.
On March 23, 1998, on reconsideration, the SBC Court upheld the FCC's
ruling which rejected the application of SBC Communications to offer
long-distance in-region service. The FCC also has rejected Ameritech's request
to provide long-distance in-region service in Michigan and BellSouth's requests
to provide long-distance in-region service in South Carolina and Louisiana.
BellSouth and U.S. West filed petitions for reconsideration of the FCC's
decision, which are still pending. In addition, in response to petitions of
mandamus filed by the Iowa Utilities Board and other petitioners, the U.S. Court
of Appeals for the 8th Circuit, on January 22, 1998, ordered the FCC to abide by
the SBC Court's mandate and refrain from subsequent attempts to apply either
directly or indirectly the FCC's vacated pricing policies and to confine its
consideration of whether a RBOC has complied with the pricing methodology and
rules adopted by state commission and in effect in the respective states in
which such RBOC seeks to provide in-region, interLATA services for Section 271
purposes. On July 9, 1998, BellSouth re-filed its request to provide long
distance in-region service in Louisiana, which request remains pending before
the FCC.
The RBOCs may provide in-region long distance services only through
separate subsidiaries with separate books and records, financing, management and
employees, and all affiliate transactions must be conducted on an arm's length
and nondiscriminatory basis. The RBOCs are also prohibited from jointly
marketing local and long distance services, equipment and certain information
services unless competitors are permitted to offer similar packages of local and
long distance services in their market. Further, the RBOCs must obtain in-region
long distance authority before jointly marketing local and long distance
services in a particular state. Additionally, AT&T and other major carriers
serving more than 5% of presubscribed long distance access lines in the United
States are also restricted from packaging other long distance services and local
services provided over RBOC facilities. The General Telephone Operating
Companies are subject to the provisions of the Telecom Act that impose
interconnection and other requirements on ILECs. General Telephone Operating
Companies providing long distance services must obtain regulatory approvals
otherwise applicable to the provision of long distance services.
FEDERAL REGULATION. The FCC classifies the Company as a non-dominant
carrier. Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges, practices or classifications of non-dominant
carriers. However, the FCC has the power to impose more stringent regulation
requirements on the Company and to change its regulatory classification. In the
current regulatory atmosphere, the Company believes the FCC is unlikely to do so
with respect to the Company's service offerings.
The FCC regulates many of the charges, practices and classifications of
dominant carriers to a greater degree than non-dominant carriers. Among domestic
carriers, large ILECs and the RBOCs are currently considered dominant carriers
for the provision of interstate access services, while all other interstate
service providers are considered non-dominant carriers. On April 18, 1997, the
FCC ordered that the RBOCs and independent CLECs offering domestic interstate
inter-LATA services, in-region or out-of-region, be regulated as non-dominant
carriers. However, such services offered in-region must be offered in compliance
with the structural separation requirements mentioned above. AT&T was classified
as a dominant carrier, but AT&T successfully petitioned the FCC for non-dominant
status in the domestic interstate interexchange market in October 1995 and in
the international market in May 1996. Therefore, certain pricing restrictions
that once applied to AT&T have been eliminated. A number of parties have,
however, sought the FCC's reconsideration of AT&T's status. The Company is
unable to predict the outcome of these proceedings on its operations.
As a non-dominant carrier, the Company may install and operate wireline
facilities for the transmission of domestic interstate communications without
prior FCC authorization, but must obtain all necessary authorizations from the
FCC for use of any radio frequencies. Non-dominant carriers are required to
obtain prior FCC authorization to provide international telecommunications;
however the Company currently does not and has no intent to provide
international services. The FCC also must provide prior approval of certain
transfers of control and assignments of operating authorizations. Non-dominant
carriers are required to file periodic reports with the FCC concerning their
interstate circuits and deployment of network facilities. The Company
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is required to offer its interstate services on a nondiscriminatory basis, at
just and reasonable rates, and is subject to FCC complaint procedures. While the
FCC generally has chosen not to exercise direct oversight over cost
justification or levels of charges for services of non-dominant carriers, the
FCC acts upon complaints against such carriers for failure to comply with
statutory obligations or with the FCC's rules, regulations and policies. The
Company could be subject to legal actions seeking damages, assessment of
monetary forfeitures and/or injunctive relief filed by any party claiming to
have been injured by the Company's practices. The Company cannot predict either
the likelihood of the filing of any such complaints or the results if filed.
Under existing regulations, non-dominant carriers are required to file with
the FCC tariffs listing the rates, terms and conditions of both interstate and
international services provided by the carrier. On October 29, 1996, the FCC
adopted an order in which it eliminated, as of September 1997, the requirement
that non-dominant interstate carriers such as the Company maintain tariffs on
file with the FCC for domestic interstate services, and in fact prohibited the
filing of such tariffs. Such carriers were given the option to cease filing
tariffs during a nine-month transition period that concluded on September 22,
1997. The FCC's order was issued pursuant to authority granted to the FCC in the
Telecom Act to "forbear" from regulating any telecommunications service provider
if the FCC determines that the public interest will be served. However, on
February 19, 1997, the United States Court of Appeals for the District of
Columbia Circuit (the "D.C. Circuit") suspended the FCC's order pending further
expedited judicial review and/or FCC reconsideration. In August 1997, the FCC
issued an order on reconsideration in which it affirmed its decision to impose
complete or mandatory detariffing, although it decided to allow optional or
permissive tariffing in certain limited circumstances (including interstate,
domestic, interexchange dial-around services, which end users access by dialing
a carrier's 10XXX access code). Several parties filed petitions for further
consideration and three parties have filed petitions for review of order on
reconsideration in the D.C. Circuit. This order also remains subject to the D.C.
Circuit's stay pending further judicial review. The Company cannot predict the
ultimate outcome of this or other proceedings on its service offerings or
operations.
On May 8, 1997, the FCC released an order intended to reform its system of
interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the Telecom Act. Access service is the
use of local exchange facilities for the origination and termination of
interexchange communications. The FCC's historic access charge rules were
formulated largely in anticipation of the 1984 divestiture of AT&T and the
emergence of long distance competition, and were designated to replace piecemeal
arrangements for compensating ILECs for use of their networks for access, to
ensure that all long distance companies would be able to originate and terminate
long distance traffic at just, reasonable, and non-discriminatory rates, and to
ensure that access charge revenues would be sufficient to provide certain levels
of subsidy to local exchange service. While there has been pressure on the FCC
historically to revisit its access pricing rules, the Telecom Act has made
access reform timely. The FCC's recent access reform order adopts various
changes to its rules and policies governing interstate access service pricing
designed to move access charges, over time, to more economically efficient
levels and rate structures. Among other things, the FCC modified rate structures
for certain non-traffic sensitive access rate elements, moving some costs from a
per-minute-of-use basis to flat-rate recovery, including one new flat rate
element; changed its structure for interstate transport services; and affirmed
that ISPs may not be assessed interstate access charges. In response to claims
that existing access charge levels are excessive, the FCC stated that it would
rely on market forces first to drive prices for interstate access to levels that
would be achieved through competition but that a "prescriptive" approach,
specifying the nature and timing of changes to existing access rate levels,
might be adopted in the absence of competition. Though the Company believes that
access reform through lowering and/or eliminating excessive access services
charges will have a positive effect on its services offerings and operations, it
cannot predict how or when such benefits may present themselves, or the outcome
of the pending judicial appeals or petitions for FCC reconsideration.
On August 1, 1996, the FCC adopted an order in which it attempted to adopt
a framework of minimum, national rules to enable the states and the FCC to
implement the local competition provisions of the Telecom Act. This order
included pricing rules that apply to state commissions when they are called on
to arbitrate rate disputes between ILECs and entities entering the local
telephone market. The order also included rules addressing the three paths of
entry into the local telephone market. Several parties filed appeals of the
order,
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which were consolidated in the U.S. Court of Appeals for the Eighth Circuit. On
October 15, 1996, the U.S. Court of Appeals for the Eighth Circuit issued a stay
of the implementation of certain of the FCC's rules and on July 18, 1997, the
Court issued its decision finding that the FCC lacked statutory authority under
the Telecom Act for certain of its rules. In particular, the Court found that
the FCC was not empowered to establish the pricing standards governing unbundled
local network elements or wholesale local services of the ILECs. The Court also
struck down other FCC rules, including one that would have enabled new entrants
to "pick and choose" from provisions of established interconnection agreements
between the ILECs and other carriers. The Court rejected certain other
objections to the FCC rules brought by the ILECs or the states, including
challenges to the FCC's definition of unbundled elements, and to the FCC's rules
allowing new competitors to create their own networks by combining ILEC network
elements together without adding additional facilities of their own. On October
14, 1997, the Eighth Circuit ruled in favor of those ILECs and substantially
modified its July 18, 1997 decision. The Eighth Circuit ruled that ILECs cannot
be compelled to "combine" two or more unbundled elements into "platforms" or
combinations, finding that IXCs must either combine the elements themselves, or
purchase entire retail services at the applicable wholesale discounts if they
wish to offer local services to their customers. The latter omission was the
subject of petitions for reconsideration filed with the Eighth Circuit by ILECs.
On August 10, 1998, the Eighth Circuit upheld the FCC's determination that ILECs
have the duty to provide unbundled access to "shared transport" as a network
element.
The overall impact of the Eighth Circuit's decisions is to materially
reduce the role of the FCC in fostering local competition, including its ability
to take enforcement action if the Telecom Act is violated, and increase the role
of state utility commissions. The Supreme Court recently announced that it would
review the Eighth Circuit's decision. Meanwhile, certain state commissions have
asserted that they will be active in promoting local telephone competition using
the authority they have under the ruling, lessening the significance of the
reduced FCC role. At this time the impact of the Eighth Circuit's decisions
cannot be evaluated, but there can be no assurance that the Eighth Circuit's
decisions and related developments will not have a material adverse effect on
the Company. Furthermore, other FCC rules related to local telephone competition
remain the subject of legal challenges, and there can be no assurance that
decisions affecting those rules will not be adverse to companies seeking to
enter the local telephone market.
The FCC also released a companion order on universal service reform on May
8, 1997. The universal availability of basic telecommunications service at
affordable prices has been a fundamental element of U.S. telecommunications
policy since enactment of the Communications Act of 1934. The current system of
universal service is based on the indirect subsidization of ILEC pricing, funded
as part of a system of direct charges on some ILEC customers, including
interstate telecommunications carriers such as the Company, and above-cost
charges for certain ILEC services such as local business rates and access
charges. In accordance with the Telecom Act, the FCC adopted plans to implement
the recommendations of a Federal-State Joint Board to preserve universal
service, including a definition of services to be supported, and defining
carriers eligible for contributing to and receiving from universal service
subsidies. The FCC ruled, among other things, that: contributions to universal
service funding be based on all interstate telecommunications carriers' gross
revenues from both interstate and international telecommunications services;
only common carriers providing a full complement of defined local services be
eligible for support; and up to $2.25 billion in new annual subsidies for
discounted telecommunications services used by schools, libraries, and rural
health care providers be funded by an assessment on total interstate and
intrastate revenues of all interstate telecommunications carriers. The FCC,
however, for the period January 1, 1998 through June 30, 1999, has placed a
$1.925 billion cap on funds to be collected and disbursed with no carryover of
unused funding authority to subsequent fiscal years. The FCC has initiated a
proceeding to obtain comments on the mechanism for continued support of
universal service in high cost areas in a subsequent proceeding. The Company is
unable to predict the outcome of these proceedings or of any judicial appeal or
petition for FCC reconsideration on its operations.
On April 11, 1997, the FCC released an order requiring that all carriers
transition from three-digit to four-digit Carrier Identification Codes ("CICs")
by January 1, 1998. CICs are the suffix of a carrier's Carrier Access Code
("CAC"), and the transition will expand CACs from five (10XXX) to seven digit
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(101XXXX). These codes permit customers to reach their carrier of choice from
any telephone. In response to petitions for reconsideration of this design,
arguing in part that this short transition (following the FCC's proposal for a
six year transition) does not permit carriers sufficient time to make necessary
hardware and software upgrades or to educate their customers regarding the need
to dial additional digits to reach their carrier of choice, on October 20, 1997,
the FCC modified its decision. The FCC created a "two step" end to the
transaction in which three and four digit Feature Group D CICs co-exist. By
January 1, 1998, all LECs that provide equal access must have completed switch
changes to recognize four digit CICs (First Phase). The second phase ended June
30, 1998 on which date only four digit CICs and seven digit CACs will be
recognized. The FCC, however, released a declaratory ruling on May 1, 1998 which
clarified that blocking of three-digit CICs must not begin until July 1, 1998
and granted all LECs a waiver to permit the phase-in of three-digit CICs over
two months beginning July 1, 1998 and ending September 1, 1998.
On October 25, 1994, Congress enacted the Communications Assistance for Law
Enforcement Act ("CALEA"), which requires telecommunications carriers to modify
their equipment, facilities and services to ensure that they are able to comply
with authorized electronic surveillance. On March 3, 1998, the Federal Bureau of
Investigation ("FBI") issued its Final Notice of Capacity. Actual carrier
capacity compliance is mandated as of October 25, 1998, with maximum carrier
capacity compliance is effective March 12, 2001. For wireline carriers, counties
have been selected as the appropriate geographic basis for expressing
interception capacity requirements for telecommunications carriers offering
local exchange service. Over 66 percent of all counties have an actual capacity
requirement of two, and a maximum capacity requirement of three, simultaneous
interceptions. Approximately 90 percent of all counties have an actual capacity
requirement of 12 or less, and a maximum capacity requirement of 16,
simultaneous interceptions or less. Telecommunications carriers may be
reimbursed by the government for certain reasonable costs directly associated
with achieving CALEA. The FCC has not taken final action in the CALEA proceeding
and the Company is unable to predict the outcome to the proceeding on its
operations.
The FCC also recently has commenced a proceeding to determine methods by
which Telecommunications Relay Services ("TRS") for persons with hearing and
speech disabilities may be improved. Currently, interstate common carriers are
required to contribute to the TRS fund for provision of services to hearing and
speech disabled persons. The FCC tentatively concluded that within two years of
the publications of the final rules in the proceeding, all common carriers
providing voice transmission services must ensure that speech-to-speech relay
services are available to callers with speech disabilities in their service
areas. The Company is unable to predict the outcome to the proceeding on its
operations.
As a facilities-based, switched LEC, the Company will be required to comply
with local number portability rules and regulations. Compliance may require
changes in the Company's business processes and support systems and may impact
its call processing.
STATE REGULATION. The Company is also subject to various state laws and
regulations. Most public utilities commissions require providers such as the
Company to obtain authority from the commission prior to the initiation of
service. In most states, the Company also is required to file tariffs setting
forth the terms, conditions and prices for services that are classified as
intrastate and, in some cases, interstate. The Company also is required to
update or amend its tariffs when it adjusts its rates or adds new products, and
is subject to various reporting and record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties will
not raise issues with regard to the Company's compliance with applicable laws or
regulations.
The Company has all necessary authority to offer local and interstate and
intrastate long-haul services in Missouri. The Company is authorized to provide
intrastate long-haul service in Illinois. The Company expects
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to receive the authority to offer local and interstate and intrastate long-haul
services in Arkansas and Kansas by September 1998. The Company will seek
authority in other states as and when needed as a result of its network
build-out.
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecom Act preempts the
ability of states to forbid local service competition, the Telecom Act preserves
the ability of states to impose reasonable terms and conditions of service and
other regulatory requirements. However, these statutes and related questions
arising from the Telecom Act will be elaborated through rules and policy
decisions made by PUCs in the process of addressing local service competition
issues.
The Company also will be heavily affected by state PUC decisions related to
the ILECs. For example, PUCs have significant responsibility under the Telecom
Act to oversee relationships between ILEC's and their new competitors with
respect to such competitors' use of the ILEC's network elements and wholesale
local services. PUCs arbitrate interconnection agreements between the ILECs and
new competitors such as the Company when necessary. PUCs are considering ILEC
pricing issues in major proceedings now underway. PUCs will also determine how
competitors can take advantage of the terms and conditions of interconnection
agreements that ILECs reach with other carriers. It is too early to evaluate how
these matters will be resolved, or their impact on the ability of the Company to
pursue its business plan.
States also regulate the intrastate carrier's carrier services of the
ILECs. The Company is required to pay such access charges to originate and
terminate its intrastate long distance traffic. The Company could be adversely
affected by high access charges, particularly to the extent that the ILECs do
not incur the same level of costs with respect to their own intrastate long
distance services. A related issue is use by certain ILECs, with the approval of
PUCs, of extended local area calling that converts otherwise competitive
intrastate toll service to local service. States also are or will be addressing
various intraLATA dialing parity issues that may affect competition. It is
unclear whether state utility commissions will adopt changes in their rules
governing intrastate access charges similar to those recently approved by the
FCC for interstate access or whether the outcome of currently pending litigation
will give PUCs the power to set such access charges. The Company's business
could be adversely affected by such changes.
The Company also will be affected by how states regulate the retail prices
of the ILECs with which it competes. The Company believes that, as the degree of
intrastate competition increases, the states will offer the ILECs increasing
pricing flexibility. This flexibility may present the ILECs with an opportunity
to subsidize services that compete with the Company's services with revenues
generated from non-competitive services, thereby allowing ILECs to offer
competitive services at lower prices than they otherwise could. The Company
cannot predict the extent to which this may occur or its impact on the Company's
business.
Those states that permit the offering of intrastate/intra-LATA service by
IXCs generally require that end users desiring to use such services dial special
access codes. Regulatory agencies in a number of states have issued decisions
that would permit the Company and other IXCs to provide intra-LATA calling on a
1 + basis. Further, the Telecom Act requires in most cases that the RBOCs
provide such dialing parity coincident to their providing in-region inter-LATA
services. The Company expects to benefit from the ability to offer 1 +
intra-LATA services in states that allow this type of dialing parity.
LOCAL REGULATION. The Company is occasionally required to obtain street use
and construction permits and licenses and/or franchises to install and expand
its fiber optic network using municipal rights-of-way. Termination of the
existing license agreements prior to their expiration dates or a failure to
renew the license agreements and a requirement that the Company remove its
facilities or abandon its network in place could have a material adverse effect
on the Company. In some municipalities where the Company has installed or
anticipates constructing networks, it will be required to pay license fees based
on a percentage of gross revenue or on a per linear foot basis. There can be no
assurance that, following the expiration of existing licenses, fees will remain
at their current levels. In addition, the Company could be at a competitive
disadvantage if its competitors do not pay the same level of fees as the
Company. However, the Telecom Act requires municipalities to manage public
rights-of-way in a competitively neutral and nondiscriminatory manner.
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PROPERTIES
The Company's network in progress and its fiber optic cable, transmission
equipment and other component assets are the principal properties owned by the
Company. The Company's installed fiber optic cable is laid under the various
rights-of-way held by the Company. Other fixed assets are located at various
leased locations in geographic areas served by the Company. The Company believes
that its existing properties are adequate to meet its anticipated needs in the
markets in which it has deployed or begun to deploy the DTI network and that
additional facilities are and will be available to meet its development and
expansion needs in existing and planned markets for the foreseeable future.
The Company's principal executive offices and its Network Operations Center
are located at 11111 Dorsett Road, St. Louis, Missouri 63043, and its telephone
number is (314) 253-6600. The Company leases this space from Mr. Weinstein at
market rates under an agreement that expires on December 31, 1998. See "Certain
Relationships and Related Transactions." The Company also leases network
operations facilities in Kansas City, Missouri. The Company has entered into a
lease agreement for additional facilities in St. Louis, Missouri and expects to
move its principal executive offices and its Network Operations Center to the
new location in the near term. The Company will continue to maintain network
operations facilities at its current location, including the switch currently
located at such location.
EMPLOYEES
At July 15, 1998, the Company had 22 full-time employees. None of the
Company's employees is represented by a union or covered by a collective
bargaining agreement. The Company believes its relations with its employees are
good. In connection with the construction and maintenance of its fiber optic
network, the Company uses third-party contractors, some of whose employees may
be represented by unions or covered by collective bargaining agreements.
LEGAL PROCEEDINGS
On June 20, 1995, the Company and Mr. Weinstein were named as defendants in
a suit brought in the Circuit Court of St. Louis County, Missouri, in a matter
styled Alfred H. Frank v. Richard D. Weinstein and Digital Teleport, Inc. The
plaintiff alleges that (i) he entered into an oral contract with the defendants
pursuant to which he was to receive 40% of the Common Stock, (ii) he provided
services to DTI, for which he 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, quantum meruit and
fraud and is seeking actual monetary damages, punitive damages and a percentage
of the common stock of the Company. The Company and Mr. Weinstein believe the
plaintiff's claims are without merit and intend to defend themselves vigorously.
It is not possible to determine what impact, if any, an unfavorable outcome
in the Frank litigation would have on the financial condition, results of
operations or cash flows of the Company. Mr. Weinstein has agreed personally to
indemnify DTI against any and all losses resulting from any judgments and awards
rendered against the Company in this litigation. Mr. Weinstein has also agreed
personally to indemnify KLT against any and all losses resulting from any
judgments and awards rendered against the Company in this litigation and has
pledged his Common Stock in the Company in favor of KLT to secure such
obligation. See "Certain Relationships and Related Transactions."
From time to time, the Company is named as a defendant in routine lawsuits
incidental to its business. Based on the information currently available, the
Company believes that none of such current proceedings, individually or in the
aggregate, will have a material adverse effect on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Richard D. Weinstein(1)........... 46 President, Chief Executive Officer and Secretary; Director
Gary W. Douglass.................. 47 Senior Vice President and Chief Financial Officer
H.P. Scott........................ 61 Senior Vice President
Jerry W. Murphy................... 40 Vice President, Network Operations
Jerome W. Sheehy.................. 66 Vice President, Regulatory -- Industry Affairs; Director
Ronald G. Wasson(1)............... 53 Director
Bernard J. Beaudoin............... 57 Director
James V. O'Donnell................ 47 Director
Kenneth V. Hager.................. 46 Director
</TABLE>
- -------------------------
(1) Member of Compensation Committee
RICHARD D. WEINSTEIN is President, Chief Executive Officer and Secretary of
the Company, which he founded in 1989. Prior to 1989, Mr. Weinstein owned and
managed Digital Teleresources, Inc., a firm which consulted, designed,
engineered and installed telecommunications systems. That company focused on
providing private microwave networks for ILEC bypass purposes to Fortune 500
companies such as General Dynamics, May Department Stores and Boatmen's
Bancshares (now NationsBank), as well as various cellular and health care firms.
In this capacity, Mr. Weinstein worked closely with SBC's deregulated marketing
subsidiary. Prior to 1984, Mr. Weinstein's consulting efforts were focused on
early wireless services, particularly paging and mobile telephone providers and
end users. Mr. Weinstein also owned and operated a distributor of Motorola
microwave equipment from 1986 to 1991.
GARY W. DOUGLASS became the Chief Financial Officer and Senior Vice
President of DTI in July 1998. From March 1995 to December 1997, Mr. Douglass
was Executive Vice President and Chief Financial Officer of Roosevelt Financial
Group, Inc., a banking corporation that merged with Mercantile Bancorporation
Inc. in July 1997. Prior to joining Roosevelt Financial, Mr. Douglass was a
partner with Deloitte & Touche LLP, a "Big Six" international accounting firm
where he was in charge of the accounting and auditing function and financial
institution practice of the firm's St. Louis office.
H.P. SCOTT joined the Company May 1998 as Senior Vice President. From May
1997 to May 1998, Mr. Scott was Vice President of Business Development of IXC
Carrier, Inc. ("IXC Carrier") of Austin, Texas. From May 1996 to May 1997, Mr.
Scott was Vice President of Engineering and Construction of IXC Carrier, from
January 1994 to October 1995, Mr. Scott was Vice President of Engineering and
Construction with MCImetro Access Transmission Services, Inc. ("MCImetro"), a
wholly owned subsidiary of MCI. From January 1990 to January 1994, Mr. Scott was
President of Western Union ATS, a wholly owned subsidiary of MCI. Prior to 1990,
Mr. Scott had spent over 11 years in positions of senior responsibility for the
design and construction of MCI's coast-to-coast fiber optic telecommunications
networks. Prior to joining MCI, Mr. Scott spent 20 years with Collins Radio and
Microwave Associates.
JERRY W. MURPHY became Vice President, Network Operations, in June 1998.
From October 1996 to December 1997, Mr. Murphy was the Director of Construction
Support of MCImetro. Mr. Murphy was MCImetro's Director of Engineering and
Construction from January 1994 to October 1996, and was Vice President of
Engineering and Construction of Advanced Transmissions Systems, Inc., a wholly
owned subsidiary of MCI, from January 1990 to January 1995. Prior to such time,
Mr. Murphy spent over 10 years with MCI in various engineering, network
implementation and network operations positions.
JEROME W. SHEEHY has been the Company's Vice President,
Regulatory -- Industry Affairs, since November 1997 and Vice President,
Inter-Carrier Support, from February 1997 to November 1997. Mr. Sheehy has also
been a director of DTI since September 1997. Prior to joining DTI, Mr. Sheehy
was
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employed in the telecommunications industry for 42 years, of which 20 years were
spent with GTE in many capacities including installation, sales, public
relations, manager of carrier markets support.
RONALD G. WASSON has been a director of DTI since March 1997. He is
currently President and Director of KLT Inc., a wholly owned subsidiary of
Kansas City Power & Light Company. He is also President of KLT Gas and KLT
Telecom Inc., and serves as director of KLT Power and KLT Energy Services, all
of which are subsidiaries of KLT Inc. Mr. Wasson joined KCPL in 1966 as Power
Sales Engineer and held various positions in marketing, engineering, corporate
planning and economic controls until 1977. After working briefly for R.W. Beck
and Associates as a Principal Engineer, he rejoined KCPL in 1979 in the
Operational Analysis and Development Department as a Management Analyst. In
1980, he was appointed Manager of Fossil Fuels, became Vice President of
Purchasing in 1983, Vice President of Administrative Services in 1986 and Senior
Vice President of Administration and Technical Services in 1991. Effective
January 1995, he transferred to KLT Inc. as Executive Vice President until he
was named to his current position as President in November 1996. Mr. Wasson also
serves on the Board of Directors of Junior Achievement of Mid-America and the
Board of Governors for the American Royal Association in Kansas City, Missouri.
BERNARD J. BEAUDOIN has been a director of DTI since October 1997. He is
currently the Executive Vice President and Chief Financial Officer of KCPL. KLT
is an indirect wholly owned subsidiary of KCPL. Mr. Beaudoin joined KCPL in 1980
as Manager of Corporate Planning. Previously he was with the New England
Electric System, where he was Director of Economic Planning. At KCPL, he was
named director of Corporate Planning and Finance in 1983 and promoted to Vice
President of Finance in 1984. He became Chief Financial Officer in 1989, Senior
Vice President in 1991 and Senior Vice President -- Finance and Business
Development in 1994. Effective January 1995, he transferred to full-time KLT
Inc. employment as President. He was named to his current position with KCPL in
1996. Mr. Beaudoin also serves as Chairman of the Board of Directors of
Carondelet Health, a holding company for a variety of health provider services.
JAMES V. O'DONNELL has been a director of DTI since November 1997. Since
1988, he has been the President of Bush-O'Donnell & Co., Inc., a funds
management and investment banking firm. Prior to 1988, Mr. O'Donnell served as a
Vice President of Goldman, Sachs & Co. Mr. O'Donnell serves as Chairman of the
Board of The Benjamin Ansehl Company of St. Louis and as President of National
Automobile and Casualty Insurance Company of Pasadena, California. He is also a
director of certain privately held companies and serves on the Board of Trustees
of Washington University in St. Louis.
KENNETH V. HAGER has been a director of DTI since November 1997. Mr. Hager
has been employed by DST Systems, Inc. since 1988 and is currently its Vice
President, Chief Financial Officer and Treasurer. DST Systems, Inc. is a
provider of information processing and computer software services and products,
primarily to mutual funds, insurance companies, banks and other financial
services organizations. Since 1980, Mr. Hager has been a member of the Board of
Directors of the American Cancer Society -- Kansas City Unit, and is the current
Chairman of the Society's Metropolitan Kansas City Coordinating Council. Mr.
Hager also serves on the Board of Directors of the Greater Kansas City Sports
Commission and is a member of the Accounting and Information Systems Advisory
Council for the University of Kansas School of Business.
Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors and executive
officers of the Company.
The Board of Directors has a Compensation Committee comprised of Messrs.
Wasson (Chairman) and Weinstein.
A Shareholders' Agreement among the Company, Mr. Weinstein and KLT (as
amended, the "Shareholders' Agreement"), provides for a Board of Directors
consisting of six directors, at least two of whom must not be affiliated with
either the Company or KLT. Pursuant to the Shareholders' Agreement, Mr.
Weinstein and KLT will each have the right to designate three directors. At the
present time there are no vacancies. Mr. Weinstein has served as a director
since the formation of the Company in June 1989. Messrs. Wasson and Sheehy have
served as directors since March 1997 and September, 1997, respectively. Mr.
Beaudoin has served as a director since October 1997. Messrs. O'Donnell and
Hager have served as directors since
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November 1997. The current directors have been elected to serve until the
expiration of the term to which they have been elected and until their
respective successors are elected and qualified or until the earlier of their
death, resignation or removal.
Pursuant to the Shareholders' Agreement, Messrs. O'Donnell and Hager, as
directors who are not affiliates (as defined in the Shareholders' Agreement and
as set forth in the Glossary included as Annex A hereto) of either Mr.
Weinstein, the Company or KLT are paid a $20,000 annual retainer fee payable in
quarterly installments. All directors are reimbursed for expenses incurred in
connection with attending Board and committee meetings. The Company has also
granted options to purchase 150,000 shares under the Plan to each of Messrs.
O'Donnell and Hager, its non-affiliated directors.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the fiscal
years ended June 30, 1997, 1996 and 1995 concerning the compensation earned by
the Chief Executive Officer during such fiscal years for services in all
capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION OTHER ANNUAL SECURITIES ALL OTHER
NAME AND -------------------- COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(#) ($)
------------------ ---- --------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. Weinstein,............ 1997 $69,231 -- -- -- --
President, Chief Executive 1996 -- -- -- -- --
Officer and Secretary 1995 -- -- -- -- --
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Weinstein Employment Agreement. As a condition of the KLT Investment, the
Company and Mr. Weinstein entered into an employment agreement (the "Weinstein
Employment Agreement"), which provides that Mr. Weinstein will serve as the
Company's President and Chief Executive Officer and in such other capacities as
the Board may determine through January 1, 2000. For the duration of the lease
of the Company's headquarters entered into as of December 31, 1996 by and among
Mr. Weinstein, his wife and the Company (as amended, the "Lease Agreement"), Mr.
Weinstein will be compensated at the rate of $150,000 per year (which is in
addition to payments made to Mr. Weinstein under the Lease Agreement), and
$200,000 per year after the termination of such Lease Agreement, in addition to
group health or other benefits generally provided to other Company employees.
The Weinstein Employment Agreement may be terminated in connection with the
disability of Mr. Weinstein, for "cause" as defined therein or by either party
upon 90 days prior written notice; provided that if the Weinstein Employment
Agreement is terminated by the Company upon 90 days notice to Mr. Weinstein, Mr.
Weinstein shall thereafter receive his annual base salary for the remainder of
the employment period (but no Company-paid medical or other benefits), offset by
any compensation received by Mr. Weinstein if and when he obtains subsequent
employment. During its term and for two years thereafter, the Weinstein
Employment Agreement restricts the ability of Mr. Weinstein to compete with the
Company as an employee of or investor in another company in a 14 state region in
the Midwest. The Weinstein Employment Agreement also imposes on Mr. Weinstein
certain non-solicitation restrictions with respect to Company employees,
customers and clients. Unless extended by mutual agreement of the parties
thereto, the Lease Agreement will terminate on December 31, 1998.
Douglass Employment Agreement. In July 1998, Digital Teleport and Mr.
Douglass entered into an employment agreement (the "Douglass Agreement"), which
provides that Mr. Douglass will serve in a full-time capacity as Senior Vice
President of Finance/Administration and Chief Financial Officer of both Digital
Teleport and the Company for a term of three years for a minimum base
compensation of $200,000 per year, in addition to group health or other benefits
generally provided to other Digital Teleport employees. Moreover, Mr. Douglass
will receive guaranteed incentive compensation of $66,666 for fiscal year 1999,
and is eligible for
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discretionary incentive compensation of up to one-third of his annual base
compensation for the following two fiscal years.
In addition to his cash compensation, before December 1998 the Company is
obligated to grant Mr. Douglass (i) 200,000 shares of restricted stock of the
Company's Common Stock (which restricted stock will not carry voting rights and
will vest in equal portions for each of the three years of the term of the
Douglass Agreement, subject to certain acceleration events) and (ii)
nonqualified options to purchase 200,000 shares of the Company's Common Stock at
$6.66 per share. The Company has a right to call the vested restricted nonvoting
shares in the event that Mr. Douglass is no longer employed by the Company for
any reason at a price equal to the greater of $1.00 per share or the per share
book value of the Company; provided that such call right lapses upon a "Change
of Control" (as defined in the Douglass Agreement) or the consummation of an
initial public offering of the Company's Common Stock. In the event that Mr.
Douglass is terminated for any reason other than for cause at any time following
a Change of Control, Mr. Douglass may put his shares to the Company at fair
market value (determined in accordance with the Douglass Agreement); provided
that such put right terminates upon consummation of an initial public offering
of the Company's Common Stock. The Company has agreed to make a three-year loan
at the applicable minimum federal interest rate to Mr. Douglass to enable him to
pay tax on income recognized as a result of the restricted stock grants. This
loan will be forgiven upon the earliest of the expiration of the three year
period, Mr. Douglass' termination without cause or a Change in Control, and the
Company will pay Mr. Douglass additional cash in an amount sufficient to pay
federal and state income taxes on the ordinary income recognized as a result of
such loan forgiveness.
The options include a put right similar to that attendant to the restricted
nonvoting shares, except that the price that the Company must pay is equal to
fair market value reduced by the exercise price and further that "fair market
value" for such purpose is no less than $12.16 per share. The stock option put
right terminates upon consummation of an initial public offering of the
Company's Common Stock; provided that the option put right does not terminate
unless the Company's Common Stock is listed on a national stock exchange or on
the Nasdaq National Market and has an average closing price of at least $12.16
for the 90 day period prior to the expiration of such lock-up period. In order
to allow Mr. Douglass to meet his tax obligations arising from the option
grants, the Company has agreed to pay him cash in such amounts as are sufficient
to pay federal and state income taxes on the ordinary income (up to a maximum of
$1.1 million of ordinary income) required to be recognized in the event of any
exercise of such options.
The Douglass Agreement restricts the ability of Mr. Douglass to compete
with Digital Teleport during the term thereof and for up to one year thereafter
as a principal, employee, partner, consultant, agent or otherwise in any region
in which Digital Teleport does business at such time. The Douglass agreement
also imposes on Mr. Douglass certain confidentiality obligations and proprietary
and non-solicitation restrictions with respect to Digital Teleport employees,
customers and clients.
Scott Consulting Agreement. In May 1998, the Company and Mr. H.P. Scott
entered into a consulting agreement (the "Scott Agreement"), which provides that
Mr. Scott will serve as a Senior Vice President of the Company for a term of one
year, providing such consulting services as the Company requests, in the areas
of carrier's carrier sales, fiber swaps and any other services as mutually
agreed. For the duration of the Scott Agreement, Mr. Scott will be compensated
at a rate of $800 per day for such consulting services, and currently the
Company and Mr. Scott expect that he will spend approximately 15 days per month
providing such services, though neither he nor the Company is obligated by such
expectation.
Mr. Scott also will receive, with respect to sales which were substantially
negotiated during the consulting term and with which Mr. Scott was substantively
involved, a commission equal to the following: (i) 1% of any cash payments
received for sales of dark fiber to telecommunications companies, which payments
are within five (5) years of the completion of the term of the Scott Agreement
(ii) $200 per route mile of dark fiber received by the Company pursuant to a
swap for dark fiber owned by the Company; (iii) 1% of any cash payments received
by the Company from sales of lighted bandwidth capacity at a rate of DS-3 or
above to telecommunications companies, which payments are within five (5) years
of the completion of such term; and (iv) 1% of the value of any bandwidth
received by the Company in exchange for bandwidth capacity at a rate
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<PAGE> 77
of DS-3 or above of the Company, which commission shall be paid for up to five
years following the completion of such term, reduced on a pro rata basis by any
cash paid by the Company pursuant to such exchange. Mr. Scott may elect, in his
sole discretion, to receive up to 50% of any such commission in the form of
Common Stock at fair market value. Upon execution of the Scott Agreement, the
Company paid Mr. Scott $100,000, and he is eligible for reimbursement of certain
expenses.
The Scott Agreement restricts the ability of Mr. Scott to compete with the
Company during the term thereof and for up to one year thereafter as a
principal, employee, partner or consultant in any region in which the Company
does business at such time. The Scott Agreement also imposes on Mr. Scott
certain confidentiality obligations and proprietary and non-solicitation
restrictions with respect to Company employees, customers and clients.
INCENTIVE AWARD PLAN
The Company's 1997 Long-Term Incentive Award Plan (the "Plan") was adopted
by the Company's Board of Directors in December 1997. A total of 3,000,000
shares of Common Stock of the Company have been reserved for issuance under the
Plan. The Company has granted or is obligated to grant options to purchase an
aggregate of 595,000 shares of Common Stock to certain of its key employees at
an exercise price equal to the fair market value of the Common Stock on the
applicable date of grant. The Company also has granted options to purchase
150,000 shares of Common Stock to each of the Company's non-affiliated directors
(i.e., Messrs. O'Donnell and Hager) at an exercise price equal to the fair
market value of the Common Stock on the date of grant. The Company is also
obligated to issue 200,000 shares of restricted stock to an employee under the
Plan. No other options or other awards are outstanding under the Plan. The Plan
will terminate in December 2007, unless sooner terminated by the Board of
Directors.
The Plan provides for grants of "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to
employees (including employee directors) and grants of nonqualified options to
employees and directors. The Plan also allows for the grant of stock
appreciation rights, restricted shares and performance shares to employees. The
Plan is administered by a committee designated by the Board of Directors.
Messrs. Wasson and Weinstein comprise the current committee. The exercise price
of incentive stock options granted under the Plan must not be less than the fair
market value of the Common Stock on the date of grant. With respect to any
optionee who owns stock representing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option must be equal to at least 110% of the fair market value
of the Common Stock on the date of grant, and the term of the option must not
exceed five years. The terms of all other options may not exceed ten years. To
the extent that the aggregate fair market value of Common Stock (determined as
of the date of the option grant) for options which would otherwise be incentive
stock options may for the first time become exercisable by any individual in any
calendar year exceeds $100,000, such options shall be non-qualified stock
options.
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<PAGE> 78
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1996, Mr. Weinstein, Mr. Weinstein's wife and the Company
formalized a lease with respect to the principal executive offices of the
Company (the "Lease Agreement"). The lease pertains to 10,000 of the 14,400
square feet available in such building and provides for monthly lease payments
of $6,250, terminating on December 31, 1998. The Company believes that the terms
of the current Lease Agreement are comparable to those which would be available
to an unaffiliated entity on the basis of an arm's-length negotiation. The
Shareholders' Agreement also requires that if Mr. Weinstein proposes to build or
obtain ownership of a new building to house the operations of the Company, Mr.
Weinstein will first offer to the Company the opportunity to build or own such
building. If the Company declines to exercise this right, then the rent the
Company would pay for occupying such building would be 80% of the market
appraised rate for such space.
Effective July 1996, the Company formed a joint venture with KLT to
develop, construct and operate a network in the Kansas City metropolitan area,
using in part the electrical duct system and certain other real estate owned by
KCPL and licensed to the joint venture. In March 1997, KLT became a strategic
investor in DTI when it entered into an agreement with DTI (the "KLT Agreement")
pursuant to which KLT committed to make an equity investment of up to $45.0
million in preferred stock of the Company. On March 12, 1997, pursuant to the
KLT Agreement, the Company issued 15,100 shares of Series A Preferred Stock to
KLT in exchange for the retirement of the then-outstanding indebtedness of the
Company to KLT, KLT's interest in the joint venture and cash, which
consideration was valued in the aggregate at approximately $21.9 million, net of
transactions costs. In June 1997, DTI issued an additional 3,400 shares of
Series A Preferred Stock to KLT for a cash payment of $5.1 million. In September
and October 1997, DTI issued the remaining 11,500 shares of Series A Preferred
Stock to KLT for aggregate cash payments of approximately $17.3 million. See
Note 13 of the notes to the consolidated financial statements and Note 7 of the
notes to the unaudited consolidated financial statements. Each share of Series A
Preferred Stock of the Company is entitled to the number of votes equal to the
number of shares into which such share of Series A Preferred Stock is
convertible with respect to any and all matters presented to the stockholders of
the Company for their action or consideration. Except for any amendments
affecting the rights and obligations of holders of Series A Preferred Stock,
with respect to which such holders vote separately as a class, or as otherwise
provided by law, holders of Series A Preferred Stock vote together with the
holders of the Common Stock as a single class. Pursuant to the KLT Agreement,
KLT has the right of first offer concerning energy services rights and contracts
involving DTI. In connection with the issuance of the Series A Preferred Stock,
Mr. Weinstein has guaranteed to KLT the performance by the Company of its
obligations under the KLT Agreement, including without limitation,
representations and warranties under such agreement. Mr. Weinstein has pledged
his Common Stock to secure such guarantee. Such obligations to KLT are
subordinated to Mr. Weinstein's obligations to hold the Company and KLT harmless
for any losses resulting from judgments and awards rendered against Digital
Teleport or the Company in the matter of Alfred H. Frank v. Richard D. Weinstein
and Digital Teleport, Inc. See "Business -- Legal Proceedings." Mr. Weinstein
has pledged his shares of Common Stock to KLT, which has agreed to reimburse the
Company and Digital Teleport for losses incurred by them in connection with the
Frank litigation to the extent of any proceeds KLT receives from Weinstein
pursuant to such pledge, less KLT's costs in pursuing such claim against
Weinstein. KLT has also agreed to bear one-half of any such losses. After such
claims related to the Frank litigation are resolved, KLT may exercise on the
pledge of Weinstein's shares to fulfill any amounts owing to KLT pursuant to
Weinstein's guarantee of the Company's obligations under the KLT Agreement. Mr.
Beaudoin is the Executive Vice President and Chief Financial Officer of KCPL.
Mr. Wasson is the President and a director of KLT Inc., a wholly owned
subsidiary of KCPL and parent corporation of KLT.
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<PAGE> 79
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Stock of DTI as of June 30, 1998 by each
person or entity who is known by the Company to beneficially own 5% or more of
the Common Stock, which includes the Company's President and Chief Executive
Officer, each of the Company's directors and all of the Company's directors and
executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
BENEFICIALLY COMMON STOCK
NAME OF BENEFICIAL OWNER OWNED OUTSTANDING(A)
------------------------ ---------------- --------------
<S> <C> <C>
Richard D. Weinstein........................................ 30,000,000 50.0%
11111 Dorsett Road
Maryland Heights, Missouri 63043
KLT Telecom Inc.(b)......................................... 30,000,000 50.0%
1201 Walnut Avenue
Kansas City, Missouri 64141
Ronald G. Wasson(b)......................................... 30,000,000 50.0%
Bernard J. Beaudoin(b)...................................... 30,000,000 50.0%
James V. O'Donnell.......................................... -- --
Jerome W. Sheehy............................................ -- --
Kenneth V. Hager............................................ -- --
Directors and executive officers as a group (8 persons)..... 60,000,000 100.0%
</TABLE>
- -------------------------
(a) Reflects Common Stock outstanding after giving effect to the conversion of
all outstanding shares of the Series A Preferred Stock into Common Stock.
KLT owns 30,000 shares of the Series A Preferred Stock, which constitutes
100% of such stock. Each such share of Series A Preferred Stock is
convertible into 1,000 shares of Common Stock of the Company.
(b) All of the shares shown as owned by each of Messrs. Wasson and Beaudoin are
the shares of Series A Preferred Stock owned by KLT. KLT is a wholly owned
subsidiary of KLT Inc., a wholly owned subsidiary of KCPL. Mr. Wasson is the
President of KLT Inc. and KLT. Mr. Beaudoin is the Executive Vice President
and Chief Financial Officer of KCPL. Each of Messrs. Wasson and Beaudoin
disclaims beneficial ownership of such shares held by KLT.
KLT owns 100% of the Series A Preferred Stock. Except for any amendment
affecting the rights and obligations of holders of Series A Preferred Stock or
as otherwise provided by law, holders of Series A Preferred Stock vote together
with the holders of Common Stock as a single class. The holders of the Series A
Preferred Stock vote separately as a class with respect to any amendment
affecting the rights and obligations of holders of Series A Preferred Stock and
as otherwise required by law.
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<PAGE> 80
DESCRIPTION OF THE NOTES
The Private Notes were, and the Exchange Notes will be, issued under the
Indenture dated as of February 23, 1998 between the Company, as issuer, and The
Bank of New York, as trustee (the "Trustee"). Upon the issuance of the Exchange
Notes, the Indenture will be subject to the Trust Indenture Act of 1939, as
amended (the "TIA"). The following summary of certain provisions of the Exchange
Notes and the Indenture does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Exchange Notes
and the Indenture, including the definitions of certain terms contained therein
and those terms made part of the Indenture through the incorporation by
reference of the TIA. The Indenture has been filed as an exhibit to the
Registration Statement, of which this Prospectus is a part, and copies of the
Indenture are available upon request from the Company or the Trustee. For
definitions of certain capitalized terms used in this summary, see "-- Certain
Definitions" below.
GENERAL
The Exchange Notes will be general unsecured obligations of the Company,
limited to $506,000,000 aggregate principal amount at maturity, and will mature
on March 1, 2008. The Exchange Notes will be issued only in fully registered
form, without coupons, in denominations of $1,000 principal amount at maturity
and integral multiples thereof. The issue price of the Private Notes (for
purposes of calculating Accreted Value) was $543.92 per $1,000 principal amount
at maturity of the Private Notes. Payments in respect of the Exchange Notes will
be made, and the Exchange Notes will be transferable, at the office or agency of
the Company in The City of New York maintained for such purposes (which
initially will be the office of the Trustee located at 101 Barclay Street, New
York, New York 10286). See "Book-Entry: Delivery and Form." No service charge
will be made for any transfer, exchange or redemption of Exchange Notes, except
in certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith. (Sections 202 and 305)
INTEREST
The Exchange Notes will be issued at a substantial discount from their
principal amount at maturity. Although for federal income tax purposes a
significant amount of original interest discount, taxable as ordinary income,
will be recognized by a holder as such discount accrues from the date of the
Indenture, no cash interest will accrue or be payable on the Exchange Notes
prior to March 1, 2003. Thereafter, cash interest on the Exchange Notes will
accrue at the rate of 12 1/2% per annum and will be payable in cash semiannually
in arrears on March 1 and September 1 of each year (each an "Interest Payment
Date"), commencing September 1, 2003, to holders of record of Exchange Notes on
the February 15 and August 15 immediately preceding such Interest Payment Date.
The cash interest payable on each Interest Payment Date will be calculated from
the most recent Interest Payment Date to which cash interest has been paid or
duly provided for or, if no cash interest has been paid or duly provided for,
from March 1, 2003. Based on the foregoing, the yield to maturity of each
Exchange Note will be 12 1/2% (computed on a semiannual bond equivalent basis,
without giving effect to any allocation of net proceeds of the Private Offering
to the Warrants). Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. If the Company defaults on any payment of
principal, whether at maturity, redemption or otherwise, interest will continue
to accrue and, to the extent permitted by law, cash interest will accrue on
overdue installments of interest at the rate of interest borne by the Notes.
(Sections 301, 307 and 310)
The circumstances under which the Company may be required to pay additional
interest in cash on the Private Notes are described above under "The Exchange
Offer -- Purpose and Effect of the Exchange Offer."
RANKING
The Indebtedness evidenced by the Exchange Notes will rank pari passu in
right of payment with all other future unsecured senior indebtedness of the
Company and senior in right of payment to all existing and future obligations of
the Company expressly subordinated in right of payment to the Exchange Notes. As
of March 31, 1998, the Company had approximately $268.9 million of indebtedness
outstanding, all of which was
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<PAGE> 81
represented by the Private Notes. Subject to certain limitations, the Company
and its Restricted Subsidiaries may incur additional Indebtedness in the future,
including secured Indebtedness. See "Risk Factors -- High Leverage; Ability to
Service Indebtedness; Restrictive Covenants" and "-- Holding Company Structure;
Priority of Secured Debt."
The Company is a holding company with no direct operations and no
significant assets other than the stock of Digital Teleport. The Company will be
dependent on the cash flow of Digital Teleport to meet its obligations,
including the payment of interest and principal on the Exchange Notes. Subject
to the Indenture provisions that limit restrictions on the ability of any of the
Company's Restricted Subsidiaries to pay dividends and make other payments to
the Company, 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 the
Company. 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. There can be no assurance that Digital Teleport will be able to
pay, or will generate sufficient earnings or cash flow to distribute, any cash
dividends or make any loans, advances or other payments of funds to the Company,
the failure of which would have a material adverse effect on the Company's
ability to meet its obligations on the Exchange Notes. See "-- Certain Covenants
- -- Limitations on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries."
Digital Teleport is a separate legal entity that has no obligation to pay
any amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. Because Digital Teleport will not
guarantee the payment of the principal or interest on the Exchange Notes, any
right of the Company to receive assets of Digital Teleport upon its liquidation
or reorganization (and the consequent right of holders of the Exchange Notes to
participate in the distribution or realize proceeds from those assets) will be
effectively subordinated to the claims of the creditors of Digital Teleport
(including trade creditors and holders of indebtedness of such subsidiary),
except if and to the extent the Company is itself a creditor of Digital
Teleport, in which case the claims of the Company would still be effectively
subordinated to any security interest in the assets of Digital Teleport held by
other creditors. As of March 31, 1998, Digital Teleport had aggregate
liabilities of approximately $21.1 million, including approximately $14.4
million of deferred revenues. Subject to certain limitations, the Company and
its Restricted Subsidiaries may incur additional Indebtedness in the future. For
a discussion of certain adverse consequences of the Company being a holding
company and of the terms and certain existing and potential future indebtedness
of the Company and its subsidiaries, see "Risk Factors -- Holding Company
Structure; Priority of Secured Debt."
SINKING FUND
The Exchange Notes will not be entitled to the benefit of any sinking fund.
REDEMPTION
The Exchange Notes will be redeemable, at the option of the Company, as a
whole or from time to time in part, at any time on or after March 1, 2003 on not
less than 30 nor more than 60 days' prior notice at the redemption prices
(expressed as percentages of principal amount at maturity) set forth below,
together with accrued interest, if any, to the redemption date, if redeemed
during the 12-month period beginning on March 1 of the years indicated below
(subject to the right of holders of record on relevant record dates to receive
interest due on a relevant Interest Payment Date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2003........................................................ 106.25%
2004........................................................ 104.17
2005........................................................ 102.08
2006 and thereafter......................................... 100.00
</TABLE>
(Sections 1101, 1102)
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At any time or from time to time on or prior to March 1, 2001 the Company
may redeem within 60 days of one or more Public Equity Offerings up to 33 1/3%
of the aggregate principal amount at maturity of the originally issued Notes
with the net proceeds of such offering at a redemption price equal to 112.5% of
the Accreted Value (determined at the redemption date); provided that
immediately after giving effect to any such redemption, at least 66 2/3% of the
aggregate principal amount at maturity of the originally issued Notes remains
outstanding. (Section 1102)
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date by
the Trustee by such method as the Trustee will deem fair and appropriate;
provided, however, that no such partial redemption will reduce the principal
amount at maturity of a Note not redeemed to less than $1,000. Notice of
redemption will be mailed, first-class postage prepaid, at least 30 but not more
than 60 days before the redemption date to each holder of Notes to be redeemed
at its registered address. On and after the redemption date, original issue
discount, on or prior to March 1, 2003, and cash interest, after March 1, 2003,
will cease to accrue on Notes or portions thereof called for redemption and
accepted for payment. (Sections 1103, 1104, 1106 and 1107)
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, incur any Indebtedness (including any Acquired
Indebtedness) other than Permitted Indebtedness; provided that the Company may
Incur Indebtedness if and at the time of such incurrence (i) the Consolidated
Indebtedness to Consolidated Operating Cash Flow Ratio would have been less than
or equal to 5.5 to 1.0, for Indebtedness incurred on or prior to December 31,
2000, or less than or equal to 5.0 to 1.0, for Indebtedness incurred thereafter
and (ii) no Default or Event of Default shall have occurred and be continuing or
occurs as a consequence of the actions set forth in this covenant. (Section
1008)
In making the foregoing calculation, (A) pro forma effect will be given to:
(i) the incurrence or repayment of any Indebtedness to be incurred or repaid on
the date of the incurrence of such Indebtedness and (ii) the acquisition
(whether by purchase, merger or otherwise) or disposition (whether by sale,
merger or otherwise) of any company, entity or business acquired or disposed of
by the Company or its Restricted Subsidiaries, as the case may be, since the
beginning of the Four Quarter Period (as defined under the "Consolidated
Indebtedness to Consolidated Operating Cash Flow Ratio" definition) through the
date of the incurrence of such Indebtedness (the "Reference Period"), as if it
had occurred on the first day of such Reference Period and (B) the aggregate
amount of Indebtedness outstanding as of the end of the Reference Period will be
deemed to include an amount of funds equal to the average daily balance of
Indebtedness outstanding during the Reference Period under any revolving credit
or similar facilities of the Company and its Restricted Subsidiaries. (Section
1008)
For the purposes of determining compliance with this covenant, in the event
that an item of Indebtedness or any portion thereof meets the criteria of more
than one of the types of Indebtedness the Company and the Restricted
Subsidiaries are permitted to incur, the Company will have the right, in its
sole discretion, to classify such item of Indebtedness or portion thereof at the
time of its incurrence and will only be required to include the amount and type
of such Indebtedness or portion thereof under the clause permitting the
Indebtedness as so classified.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of its Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire such shares of Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of its Capital Stock or any Capital
Stock of any of its Affiliates (other than Capital Stock of any Wholly
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<PAGE> 83
Owned Restricted Subsidiary) or any options, warrants or other rights to
acquire such shares of Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) make any Investment (other than any Permitted Investment); or
(v) declare or pay any dividend or distribution on any Capital Stock
of any Restricted Subsidiary to any Person (other than any of its Wholly
Owned Restricted Subsidiaries) other than pro rata dividends or
distributions on a class of Voting Stock of any Restricted Subsidiary, the
majority of which is owned by the Company or a Wholly Owned Restricted
Subsidiary; provided that no Restricted Subsidiary shall declare or pay
such pro rata dividends or distributions on its Voting Stock to any Person
(other than the Company or a Wholly Owned Restricted Subsidiary) at a time
when it has outstanding Indebtedness owed to the Company or another
Restricted Subsidiary;
(such payments or other actions described in (but not excluded from) clauses (i)
through (v) are collectively referred to as "Restricted Payments"), unless at
the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution), (1) no Default or Event of Default shall
have occurred and be continuing, (2) the Company could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Indebtedness" covenant and (3) the aggregate amount of all
Restricted Payments declared or made after the date of the Indenture shall not
exceed the sum of:
(A) the remainder of (x) cumulative Consolidated Operating Cash Flow
of the Company during the period (taken as a single accounting period)
beginning on the first day of the fiscal quarter of the Company beginning
after the date of the Indenture and ending on the last day of the last full
fiscal quarter immediately preceding the date of such Restricted Payment
for which quarterly or annual consolidated financial statements of the
Company are available minus (y) the product of 1.5 times cumulative
Consolidated Interest Expense of the Company during such period; plus
(B) the aggregate Net Cash Proceeds and fair market value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary the assets of which consist primarily of
Telecommunications Assets received by the Company after the date of the
Indenture as capital contributions or from the issuance or sale (other than
to any Subsidiary) of shares of Qualified Capital Stock of the Company
(including upon the exercise of options, warrants or rights) or warrants,
options or rights to purchase shares of Qualified Capital Stock of the
Company; plus
(C) the aggregate Net Cash Proceeds and fair market value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary the assets of which consist primarily of
Telecommunications Assets received by the Company after the date of the
Indenture from the issuance or sale (other than to any Subsidiary) of debt
securities or Redeemable Capital Stock that have been converted into or
exchanged for Qualified Capital Stock of the Company, together with the
aggregate Net Cash Proceeds and fair market value of Telecommunications
Assets or Voting Stock of a Person that becomes a Restricted Subsidiary the
assets of which consist primarily of Telecommunications Assets received by
the Company at the time of such conversion or exchange; plus
(D) to the extent not otherwise included in the Consolidated Operating
Cash Flow of the Company, an amount equal to the sum of (i) the net
reduction in Investments in any Person (other than Permitted Investments)
resulting from the payment in cash of dividends, repayments of loans or
advances or other transfers of assets, in each case to the Company or any
Restricted Subsidiary after the date of the Indenture from such Person and
(ii) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of any Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary; provided, however, that in the case of (i) or (ii)
above the foregoing sum shall not exceed the amount of Investments
previously made (and treated
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as a Restricted Payment) by the Company or any Restricted Subsidiary in
such Person or Unrestricted Subsidiary.
(b) Notwithstanding paragraph (a) above, the Company and any Restricted
Subsidiary may take the following actions so long as (with respect to clauses
(ii), (iii), (iv) and (v) below) no Default or Event of Default shall have
occurred and be continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such dividend would
have complied with the provisions of paragraph (a) above and such payment
will be deemed to have been paid on such date of declaration for purposes
of the calculation required by paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or
out of the Net Cash Proceeds of a substantially concurrent issuance and
sale (other than to a Restricted Subsidiary) of, shares of Qualified
Capital Stock of the Company;
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness in exchange for or
out of the Net Cash Proceeds of a substantially concurrent issuance and
sale (other than to a Restricted Subsidiary) of shares of Qualified Capital
Stock of the Company;
(iv) the purchase of any Subordinated Indebtedness at a purchase price
not greater than 101% of the principal amount thereof in the event of a
Change of Control in accordance with provisions similar to the "Purchase of
Notes upon a Change of Control" covenant; provided that prior to such
purchase the Company has made the Change of Control Offer as provided in
such covenant with respect to the Notes and has purchased all Notes validly
tendered for payment in connection with such Change of Control Offer;
(v) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness in exchange for, or out
of the net cash proceeds of a substantially concurrent incurrence (other
than to a Subsidiary) of, new Subordinated Indebtedness so long as (A) the
principal amount of such new Subordinated Indebtedness does not exceed the
principal amount (or, if such Subordinated Indebtedness being refinanced
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, such lesser amount as
of the date of determination) of the Subordinated Indebtedness being so
purchased, redeemed, defeased, acquired or retired, plus the amount of any
premium required to be paid in connection with such refinancing pursuant to
the terms of such Subordinated Indebtedness being refinanced or the amount
of any premium reasonably determined by the Company as necessary to
accomplish such refinancing, plus, in either case, the amount of expenses
of the Company incurred in connection with such refinancing; (B) such new
Subordinated Indebtedness is subordinated to the Notes to the same extent
as such Subordinated Indebtedness so purchased, redeemed, defeased,
acquired or retired; and (C) such new Subordinated Indebtedness has an
Average Life longer than the Average Life of the Notes and a final Stated
Maturity of principal later than the final Stated Maturity of principal of
the Notes; and
(vi) the payment of cash in lieu of fractional shares of Common Stock
pursuant to the Warrant Agreement.
The actions described in clauses (i), (ii), (iii), (iv) and (vi) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph (a)
and the actions described in clause (v) of this paragraph (b) shall be
Restricted Payments that shall be permitted to be taken in accordance with this
paragraph (b) and shall not reduce the amount that would otherwise be available
for Restricted Payments under clause (3) of paragraph (a) above. (Section 1009)
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, issue or sell any Capital Stock of a Restricted Subsidiary
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(other than to the Company or a Wholly Owned Restricted Subsidiary); provided,
however, that this covenant shall not prohibit (i) the ownership by directors of
director's qualifying shares or the ownership by foreign nationals of Capital
Stock of any Restricted Subsidiary, to the extent mandated by applicable law;
(ii) issuances or sales of Capital Stock of a Restricted Subsidiary, if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer be a Restricted Subsidiary and any Investment in such
Person remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant if
made on the date of such issuance and sale or (iii) the issuance and sale of
all, but not less than all, of the issued and outstanding Capital Stock of any
Restricted Subsidiary owned by the Company and the Restricted Subsidiaries in
compliance with the "Limitation on Sale of Assets" covenant. (Section 1010)
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, enter into or suffer to exist, directly
or indirectly, any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with, or for the benefit of, any Affiliate of the Company or any
Restricted Subsidiary unless (i) such transaction or series of related
transactions are on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's length transaction with unrelated third parties who are not
Affiliates, (ii) with respect to any transaction or series of related
transactions involving aggregate consideration equal to or greater than $5.0
million (or, to the extent not denominated in United States dollars, the United
States Dollar Equivalent thereof), the Company will deliver an officers'
certificate to the Trustee certifying that such transaction or series of related
transactions complies with clause (i) above and (iii) with respect to any
transaction or series of related transactions involving aggregate consideration
in excess of $10.0 million (or, to the extent not denominated in United States
dollars, the United States Dollar Equivalent thereof), the Company shall deliver
the officers' certificate described in clause (ii) above which shall also
certify that such transaction or series of related transactions has been
approved by a majority of the Disinterested Directors of the Board of Directors,
or that the Company has obtained a written opinion from a nationally recognized
U.S. investment banking firm certifying that such transaction or series of
related transactions is fair to the Company or such Restricted Subsidiary, as
the case may be, from a financial point of view; provided, however, that this
provision will not restrict (1) any transaction or series of related
transactions among the Company and Wholly Owned Restricted Subsidiaries or among
Wholly Owned Restricted Subsidiaries, (2) Investments in Qualified Capital Stock
of the Company by any Person, including an Affiliate of the Company, (3) the
Company from paying reasonable and customary regular compensation and fees to
directors of the Company or any Restricted Subsidiary who are not employees of
the Company or any Restricted Subsidiary, (4) the making of any Restricted
Payment not prohibited by the "Limitation on Restricted Payments" covenant or
(5) any transaction or series of transactions in an aggregate amount of up to
$1.5 million. (Section 1011)
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens) on or with respect to any
of its property or assets, including any shares of stock or Indebtedness of any
Restricted Subsidiary, whether owned at the date of the Indenture or thereafter
acquired, or any income, profits or proceeds therefrom, or assign or otherwise
convey any right to receive income thereon, unless (x) in the case of any Lien
securing Subordinated Indebtedness, the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Lien and (y) in
the case of any other Lien, the Notes are equally and ratably secured with the
obligation or liability secured by such Lien. (Section 1012)
Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries. (a) The Company will not permit any Restricted Subsidiary,
directly or indirectly, to guarantee, assume or in any other manner become
liable with respect to any Indebtedness of the Company (the "Guaranteed
Indebtedness") unless (i) such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture providing for the guarantee (a "Subsidiary
Guarantee") of payment of the Notes by such Restricted Subsidiary; provided that
this paragraph (a) shall not be applicable to (x) any guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not incurred in connection with or in contemplation of such
Person becoming a Restricted Subsidiary or (y) any guarantee of any Restricted
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Subsidiary of Indebtedness incurred pursuant to clause (j) under the "Permitted
Indebtedness" definition. If the Guaranteed Indebtedness is (A) pari passu in
right of payment with the Notes, then the guarantee of such Guaranteed
Indebtedness shall be pari passu in right of payment with, or subordinated in
right of payment to, the Subsidiary Guarantee or (B) subordinated in right of
payment to the Notes, then the guarantee of such Guaranteed Indebtedness shall
be subordinated in right of payment to the Subsidiary Guarantee at least to the
extent that the Guaranteed Indebtedness is subordinated in right of payment to
the Notes.
(b) Notwithstanding the foregoing, any Subsidiary Guarantee created
pursuant to the provisions described in the foregoing paragraph (a) will provide
by its terms that it will be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person who is not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release by
the holders of the Indebtedness of the Company described in the preceding
paragraph of their guarantee by such Restricted Subsidiary (including any deemed
release upon payment in full of all obligations under such Indebtedness, except
by or as a result of payment under such guarantee), at a time when (A) no other
Indebtedness of the Company has been guaranteed by such Restricted Subsidiary or
(B) the holders of all such other Indebtedness which is guaranteed by such
Restricted Subsidiary also release their guarantee by such Restricted Subsidiary
(including any deemed released upon payment in full of all obligations under
such Indebtedness). (Section 1013)
Purchase of Notes upon a Change of Control. If a Change of Control shall
occur at any time, then the Company shall offer to purchase (the "Change of
Control Offer") from each holder of Notes all of such holder's Notes, in whole
or in part and in integral multiples of $1,000, at a purchase price (the "Change
of Control Purchase Price") in cash in an amount equal to (a) 101% of the
Accreted Value of the Notes as of the date of purchase (the "Change of Control
Purchase Date"), if such date is on or before March 1, 2003, and (b) 101% of the
principal amount at maturity of the Notes, plus accrued and unpaid cash
interest, if any, to the Change of Control Purchase Date, if such date is after
March 1, 2003 pursuant to the procedures described below and the other
procedures set forth in the Indenture.
Within 15 days following any Change of Control, the Company shall notify
the Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at the address appearing
in the security register, stating, among other things, (i) the purchase price
and the purchase date, which shall be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act or any applicable
securities laws or regulations; (ii) that any Note not tendered will continue to
accrete original issue discount and/or accrue interest, as the case may be;
(iii) that, unless the Company defaults in the payment of the purchase price,
any Notes accepted for payment pursuant to the Change of Control Offer shall
cease to accrete original issue discount and/or accrue interest, as the case may
be, after the Change of Control Purchase Date; and (iv) certain other procedures
that a holder of Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The failure of the Company
to make or consummate the Change of Control Offer would result in an Event of
Default and would give the Trustee and the holders of the Notes the rights
described under "-- Events of Default."
One of the events which constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, in
the event holders of the Notes elect to require the Company to purchase the
Notes and the Company elects to contest such election, there can be no assurance
as to how a court interpreting New York law would interpret the phrase.
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The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require the Company to purchase such Notes in the event of a highly leveraged
transaction or certain transactions with Company's management or its Affiliates,
including a reorganization, restructuring, merger or similar transaction
involving the Company (including, in certain circumstances, an acquisition of
the Company by management or its Affiliates) that may adversely affect holders
of the Notes, if such transaction is not a transaction defined as a Change of
Control. See "-- Certain Definitions" for the definition of "Change of Control."
A transaction involving the Company's management or its Affiliates, or a
transaction involving a recapitalization of the Company, would result in a
Change of Control if it is the type of transaction specified by such definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Indebtedness as in effect on the date of the Indenture) that
would materially impair its ability to make a Change of Control Offer to
purchase the Notes or, if such Change of Control Offer is made, to pay for the
Notes tendered for purchase. (Section 1014)
Limitation on Sale of Assets. (a) The Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, engage in any Asset Sale
unless (i) the consideration received by the Company or such Restricted
Subsidiary for such Asset Sale is not less than the fair market value of the
shares or assets sold (as determined by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) and (ii)
the consideration received by the Company or the relevant Restricted Subsidiary
in respect of such Asset Sale consists of at least 75% cash or Cash Equivalents.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may use the Net Cash Proceeds thereof, within 12 months after such
Asset Sale, to (i) permanently repay or prepay any then outstanding senior
Indebtedness of the Company or Indebtedness of any Restricted Subsidiary or (ii)
invest (or enter into a legally binding agreement to invest) in properties and
assets to replace the properties and assets that were the subject of the Asset
Sale or in properties and assets that will be used in the businesses of the
Company or a Restricted Subsidiary, as the case may be, existing on the Original
Issue Date. If any such legally binding agreement to invest such Net Cash
Proceeds is terminated, then the Company may, within 60 days of such termination
or within 12 months of such Asset Sale, whichever is later, apply or invest such
Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the
parenthetical contained in such clause (ii)) above. The amount of such Net Cash
Proceeds not so used as set forth above in this paragraph (b) constitutes
"Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10.0 million (or,
to the extent not denominated in United States dollars, the United States Dollar
Equivalent thereof), the Company will, within 15 business days, make an offer to
purchase (an "Excess Proceeds Offer") from all holders of Notes, on a pro rata
basis, in accordance with the procedures set forth below, the maximum principal
amount at maturity of Notes (expressed as a multiple of $1,000) that may be
purchased with the Excess Proceeds. The offer price as to each Note (the "Excess
Proceeds Offer Price") will be payable in cash in an amount equal to (a) 100% of
the Accreted Value of the Notes as of the purchase date, if such purchase date
is on or before March 1, 2003, and (b) 100% of the principal amount at maturity
of the Note, plus accrued and unpaid cash interest, if any, to the date of
purchase, if such purchase date is after March 1, 2003. To the extent that the
aggregate Excess Proceeds Offer Price of Notes tendered pursuant to an Excess
Proceeds Offer is less than the Excess Proceeds, the Company may use such
deficiency for general corporate purposes. If the aggregate Excess Proceeds
Offer Price of Notes validly tendered and not withdrawn by holders thereof
exceeds the Excess Proceeds, Notes to be purchased will be selected on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset to zero. (Section 1015)
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Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise,
or make any other distributions on or in respect of its Capital Stock, (b) pay
any Indebtedness owed to the Company or any other Restricted Subsidiary, (c)
make Investments in the Company or any other Restricted Subsidiary, (d) transfer
any of its properties or assets to the Company or any other Restricted
Subsidiary or (e) guarantee any Indebtedness of the Company or any other
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reason of (i) any agreement in effect on the date of the Indenture,
(ii) applicable law, (iii) customary non-assignment provisions of any lease
governing a leasehold interest of the Company or any Restricted Subsidiary, (iv)
any agreement or other instrument of a Person acquired by the Company or any
Restricted Subsidiary in existence at the time of such acquisition (but not
created in contemplation thereof), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, (v) the
refinancing of Indebtedness incurred under agreements existing on the date of
the Indenture, so long as such encumbrances or restrictions are no less
favorable in any material respect to the Company or any Restricted Subsidiary
than those contained in the respective agreement as in effect on the date of the
Indenture, (vi) restrictions contained in any security agreement (including a
capital lease obligation) securing Indebtedness of the Company or a Restricted
Subsidiary otherwise permitted under the Indenture, (vii) customary
nonassignment provisions entered into in the ordinary course of business in
leases and other agreements, (viii) any restriction with respect to a Restricted
Subsidiary of the Company entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted Subsidiary
made in accordance with the "Limitation on Sales of Assets" covenant, (ix)
pursuant to the Indenture and the Notes or (x) any agreement or instrument
governing or relating to Indebtedness under any senior commercial bank facility
(each, a "Bank Facility") if such encumbrance or restriction applies only to (A)
amounts which at any point in time (other than during such periods as are
described in the following clause (B)) (1) exceed amounts due and payable (or
which are to become due and payable within 30 days) in respect of the Notes or
the Indenture for interest, premium and principal or (2) if paid, would result
in an event described in the following clause (B) of this sentence, or (B)
during the pendency of any event that causes, permits or, after notice or lapse
of time, would cause or permit the holder(s) of Indebtedness governed by such
Bank Facility to declare such Indebtedness to be immediately due and payable or
to require cash collateralization or cash cover for such Indebtedness for so
long as such cash collateralization or cash cover has not been provided.
(Section 1016)
Limitation on Investments in Unrestricted Subsidiaries. The Company will
not, and will not permit any of its Restricted Subsidiaries to, make any
Investments in Unrestricted Subsidiaries if, at the time of such Investment, the
aggregate amount of such Investments would exceed the amount of Restricted
Payments then permitted to be made pursuant to the "Limitation on Restricted
Payments" covenant. Any Investment in an Unrestricted Subsidiary permitted to be
made pursuant to this covenant (i) will be treated as a Restricted Payment in
calculating the amount of Restricted Payments made by the Company or any
Restricted Subsidiary, without duplication, under the provisions of clause (iv)
of paragraph (a) of the "Limitation on Restricted Payments" covenant and (ii)
may be made in cash or property (if made in property, the fair market value
thereof as determined by the Company, whose determination will be conclusive)
and will be deemed to be the amount of such Investment for the purpose of clause
(i) of this covenant. (Section 1017)
Limitation on Sale-Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any sale-leaseback
transaction involving any of its assets or properties whether now owned or
hereafter acquired, whereby the Company or a Restricted Subsidiary sells or
transfers such assets or properties and then or thereafter leases such assets or
properties or any part thereof or any other assets or properties which the
Company or such Restricted Subsidiary, as the case may be, intends to use for
substantially the same purpose or purposes as the assets or properties sold or
transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such
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Restricted Subsidiary, within 12 months after the sale or transfer of any assets
or properties is completed, applies an amount not less than the net proceeds
received from such sale in accordance with the "Limitation on Sale of Assets"
covenant. (Section 1018)
Business of the Company. The Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in any business activity other than (i)
the delivery of telephony or other telecommunications or data transmission
services in North America, (ii) telecommunications network construction services
and (iii) any business or activity reasonably related thereto, including,
without limitation, any business conducted by any Restricted Subsidiary on the
date of the Indenture and the acquisition, holding or exploitation of any
telecommunications licenses, permits, franchises or rights of way related to the
delivery of the services described in clause (i) above. (Section 1019)
Provision of Financial Statements and Reports. After the consummation of
this Exchange Offer or the effectiveness of a Shelf Registration Statement, the
Company will file on a timely basis with the Commission, to the extent such
filings are accepted by the Commission and whether or not the Company has a
class of securities registered under the Exchange Act, the annual reports,
quarterly reports and other documents that the Company would be required to file
if it were subject to Section 13 or 15(d) of the Exchange Act. The Company will
also be required (i) to file with the Trustee, copies of such reports and
documents within 15 days after the date on which such reports and documents are
filed with the Commission or the date on which the Company would be required to
file such reports and documents if the Company were so required, and (ii)
provide to each holder of Notes, without cost to such holder, copies of such
reports and documents within 15 days after the filing thereof with the Trustee.
(Section 1020)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not, in a single transaction or a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets substantially as an entirety to any other Person or
Persons or permit any Subsidiary to enter into any such transaction or series of
related transactions, if such transaction or series of related transactions, in
the aggregate, would result in the sale, assignment, conveyance, transfer, lease
or other disposition of all or substantially all of the properties and assets of
the Company and its Subsidiaries on a consolidated basis substantially as an
entirety to any Person or Persons, unless at the time and immediately after
giving effect thereto: (i) either (a) the Company will be the continuing
corporation or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company or such Subsidiary is merged or the
Person which acquires by sale, conveyance, transfer, lease or other disposition,
all or substantially all of the properties and assets of the Company and its
Subsidiaries on a consolidated basis substantially as an entirety, as the case
may be (the "Surviving Entity"), (1) will be a corporation organized and validly
existing under the laws of the United States of America, any state thereof or
the District of Columbia and (2) will expressly assume, by a supplemental
indenture to the Indenture in form satisfactory to the Trustee, the Company's
obligation pursuant to the Notes for the due and punctual payment of the
principal (including accretion of original issue discount) of, premium, if any,
on and interest on all the Notes and the performance and observance of every
covenant of the Indenture on the part of the Company to be performed or
observed; (ii) immediately before and after giving effect to such transaction or
series of transactions on a pro forma basis (and treating any obligation of the
Company or any Subsidiary incurred in connection with or as a result of such
transaction or series of transactions as having been incurred at the time of
such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction or series
of transactions on a pro forma basis (on the assumption that the transaction or
series of transactions occurred on the first day of the latest fiscal quarter
for which consolidated financial statements of the Company are available
immediately prior to the consummation of such transaction or series of
transactions with the appropriate adjustments with respect to the transaction or
series of transactions being included in such pro forma calculation), the
Company (or the Surviving Entity if the Company is not the continuing obligor
under the Indenture) could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under the provisions of the "Limitation on
Indebtedness" covenant; and (iv) if any of the property or assets of the Company
or any of its Subsidiaries would thereupon
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become subject to any Lien, the provisions of the "Limitation on Liens" covenant
are complied with. (Section 801)
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Company or the Surviving
Entity shall have delivered to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, conveyance,
transfer, lease or other disposition, and if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
comply with the requirements of the Indenture and that all conditions precedent
therein provided for relating to such transaction have been complied with.
(Section 801)
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all of substantially all of the properties and
assets of the Company in accordance with the immediately preceding paragraphs in
which the Company is not the continuing obligor under the Indenture, the
Surviving Entity shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor had been named as the Company therein. When a successor
assumes all the obligations of its predecessor under the Indenture, the
predecessor shall be released from those obligations; provided that in the case
of a transfer by lease, the predecessor shall not be released from the payment
of principal of, premium, if any, and interest on the Notes. (Section 802)
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of any interest on any Note when it becomes
due and payable and continuance of such default for a period of 30 days;
(ii) default in the payment of the principal of or premium, if any, on
any Note at its Maturity (upon acceleration, required purchase or
otherwise);
(iii) (A) default in the performance, or breach, of any covenant or
agreement of the Company contained in the Indenture (other than a default
in the performance, or breach, of a covenant or agreement which is
specifically dealt with in the immediately preceding clauses (i) and (ii)
or in clauses (B), (C) or (D) of this clause (iii)) and continuance of such
default or breach for a period of 30 days after written notice shall have
been given to the Company by the Trustee or to the Company and the Trustee
by the holders of at least 25% in aggregate principal amount at maturity of
the Notes then outstanding; (B) default in the performance or breach of the
provisions of the "Limitation on Sale of Assets" covenant; (C) default in
the performance or breach of the provisions of "-- Consolidation, Merger
and Sale of Assets"; and (D) failure to make or consummate a Change of
Control Offer in accordance with the provisions of the "Purchase of Notes
upon a Change of Control" covenant;
(iv) (A) one or more defaults in the payment of principal of or
premium, if any, or interest on Indebtedness of the Company or any
Significant Subsidiary aggregating $7.5 million or more (or, to the extent
not denominated in United States dollars, the United States Dollar
Equivalent thereof), when the same becomes due and payable at the stated
maturity thereof, and such default or defaults shall have continued after
any applicable grace period and shall not have been cured or waived or (B)
Indebtedness of the Company or any Significant Subsidiary aggregating $7.5
million or more (or, to the extent not denominated in United States
dollars, the United States Dollar Equivalent thereof) shall have been
accelerated or otherwise declared due and payable, or required to be
prepaid or repurchased (other than by regularly scheduled required
prepayment), prior to the Stated Maturity thereof;
(v) one or more final judgments, orders or decrees of any court or
regulatory agency shall be rendered against the Company or any Significant
Subsidiary or their respective properties for the payment of money, either
individually or in an aggregate amount, in excess of $7.5 million (or, to
the extent not denominated in United States dollars, the United States
Dollar Equivalent thereof) and either (A) an enforcement proceeding shall
have been commenced by any creditor upon such judgment or
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order or (B) there shall have been a period of 30 days during which a stay
of enforcement of such judgment or order, by reason of a pending appeal or
otherwise, was not in effect; or
(vi) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
If an Event of Default (other than an Event of Default arising from an
event of bankruptcy, insolvency or reorganization with respect to the Company or
any Significant Subsidiary) occurs and is continuing, the Trustee or the holders
of not less than 25% in aggregate principal amount at maturity of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such notice
is given by the holders), may, and the Trustee upon the written request of such
holders shall, declare the Accreted Value of, premium, if any, and accrued
interest on all outstanding Notes immediately due and payable, and upon any such
declaration all such amounts payable in respect of the Notes shall become
immediately due and payable. If an Event of Default specified in clause (vi)
above occurs and is continuing, then the Accreted Value of, premium, if any, and
accrued interest on all of the outstanding Notes will ipso facto become
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of Notes. (Section 502)
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount at Maturity
of the outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration and its consequences if (a) the Company has paid or
deposited with the Trustee a sum sufficient to pay (i) all overdue interest on
all outstanding Notes, (ii) the Accreted Value of and premium, if any, on any
outstanding Notes that have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, (iii) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the Notes, and (iv) all sums paid or
advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(b) all Events of Default, other than the non-payment of amounts of principal
of, premium, if any, or interest on the Notes that have become due solely by
such declaration of acceleration, have been cured or waived. No such rescission
shall affect any subsequent default or impair any right consequent thereon.
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the Notes because of an Event of Default specified in
subparagraph (iv)(A) or (iv)(B) above has occurred and is continuing, such Event
of Default and all consequences thereof (including, without limitation, any
acceleration or resulting payment default) will be automatically annulled,
waived and rescinded if the Indebtedness that is the subject of such Event of
Default has been discharged or the holders thereof have rescinded their
declaration of acceleration in respect of such Indebtedness or the default that
is the basis for such Event of Default has been cured and no other Event of
Default has occurred and has not been cured or waived.
The holders of not less than a majority in aggregate principal amount at
maturity of the outstanding Notes may, on behalf of the holders of all the
Notes, waive any past defaults under the Indenture, except a default in the
payment of the principal of, premium, if any, or interest on any Note or in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within 30 days after the occurrence thereof. Except
in the case of a Default or an Event of Default in payment of principal of, or
premium, if any, or interest on any Notes, the Trustee may withhold the notice
to the holders of the Notes if a committee of its trust officers in good faith
determines that withholding such notice is in the interests of the holders of
the Notes.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company of its obligations under the Indenture and as to
any default in such performance. The Company is also required to notify the
Trustee within five days of the occurrence of any Default.
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DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company upon the Notes discharged with respect to the
outstanding Notes ("defeasance"). Such defeasance means that the Company will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes and to have satisfied all of other obligations under the Notes
and the Indenture insofar as such Notes are concerned except for (i) the rights
of holders of outstanding Notes to receive payments in respect of the principal
of, premium, if any, and interest on the Notes when such payments are due, (ii)
the Company's obligations to issue temporary Notes, register the transfer or
exchange of any such Notes, replace mutilated, destroyed, lost or stolen Notes,
maintain an office or agency for payments in respect of such Notes and segregate
and hold such payments in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee and (iv) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants set forth
in the Indenture, and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes ("covenant
defeasance").
In order to exercise either defeasance or covenant defeasance: (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the Notes, cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants or a nationally recognized investment
banking firm, to pay and discharge the Accreted Value of, premium, if any, and
interest on the outstanding Notes on the Stated Maturity (or upon redemption, if
applicable); (ii) no Default or Event of Default with respect to the Notes will
have occurred and be continuing on the date of such deposit or, insofar as an
event of bankruptcy under clause (vi) of "-- Events of Default" above is
concerned, at any time during the period ending on the 91st day after the date
of such deposit; (iii) such defeasance or covenant defeasance will not result in
a breach or violation of, or constitute a default under, any material agreement
or instrument (other than the Indenture) to which the Company is a party or by
which it is bound; (iv) in the case of defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling, or since the date of the Private Offering Memorandum, there has been a
change in applicable federal income tax law, in either case to the effect that,
and based thereon such opinion shall confirm that, the holders of the
outstanding Notes will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance had not occurred; (v) in the case
of covenant defeasance, the Company shall have delivered to Trustee an Opinion
of Counsel to the effect that the holders of the Notes outstanding will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of such covenant defeasance and will be subject to U.S. federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred; and (vi) the Company
shall have delivered to the Trustee an officers' certificate and an Opinion of
Counsel, each stating that all conditions precedent provided for relating to
either the defeasance or the covenant defeasance, as the case may be, have been
complied with. (Sections 1301, 1302 and 1303)
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes as expressly
provided for in the Indenture), and the Trustee, at the expense of the Company,
will execute proper instruments acknowledging satisfaction and discharge of the
Indenture when (i) either (a) all the respective Notes theretofore authenticated
and delivered (other than destroyed, lost or stolen Notes which have been
replaced or paid) have been delivered to the Trustee for cancellation or (b) all
the Notes not theretofore delivered to the Trustee for cancellation (x) have
become due and payable, (y) will become due and payable at Stated Maturity
within one year or (z) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name, and at the expense, of the Company, and the Company
has irrevocably deposited or caused to be
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deposited with the Trustee trust funds in trust for such purpose an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for the Accreted Value
of, premium, if any, and interest on the Notes to the date of such deposit (in
the case of Notes which have become due and payable) or to the Stated Maturity
or redemption date, as the case may be; (ii) the Company has paid or caused to
be paid all other sums payable under the Indenture by the Company; and (iii) the
Company has delivered to the Trustee an officers' certificate and an Opinion of
Counsel, each stating that all conditions precedent provided in the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with. (Section 401)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by a supplemental
indenture entered into by the Company and the Trustee with the consent of the
holders of a majority in aggregate outstanding principal amount at maturity of
the Notes; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding Note affected thereby, (i)
change the Stated Maturity of the principal of, or any installment of interest
on, any Note or reduce the Accreted Value thereof or premium, if any, or the
rate of interest thereon, alter any redemption provision with respect to the
timing or amount of payment thereof, or change the coin or currency in which the
Accreted Value of any Note or any premium or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after the
redemption date); (ii) amend, change or modify the obligation of the Company to
make and consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the "Limitation on Sale of Assets" covenant or the obligation of
the Company to make and consummate a Change of Control Offer in the event of a
Change of Control in accordance with the "Purchase of Notes upon a Change of
Control" covenant, including, in each case, amending, changing or modifying any
definition relating thereto; (iii) reduce the percentage in principal amount at
maturity of outstanding Notes the consent of whose holders is required for any
waiver of compliance with certain provisions of the Indenture; (iv) modify any
of the provisions relating to supplemental indentures requiring the consent of
holders or relating to the waiver of past defaults or relating to the waiver of
certain covenants, except to increase the percentage of outstanding Notes
required for such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
Note affected thereby; or (v) except as otherwise permitted under "--
Consolidation, Merger and Sale of Assets," consent to the assignment or transfer
by the Company of any of their respective rights or obligations under the
Indenture. (Sections 901 and 902)
Notwithstanding the foregoing, without the consent of any holder of the
Notes the Company and the Trustee may modify or amend the Indenture: (a) to
evidence the succession of another Person to the Company or any other obligor on
the Notes, and the assumption by any such successor of the covenants of the
Company or such obligor in the Indenture and in the Notes in accordance with "--
Consolidation, Merger, Sale of Assets"; (b) to add to the covenants of the
Company or any other obligor upon the Notes for the benefit of the holders of
such Notes or to surrender any right or power conferred upon the Company or any
other obligor upon such Notes, as applicable, in the Indenture or in such Notes;
(c) to cure any ambiguity, or to correct or supplement any provision in the
Indenture or the Notes or make any other provisions with respect to matters or
questions arising under the Indenture or the Notes; provided that, in each case,
such provisions shall not adversely affect the interest of the holders of such
Notes; (d) to comply with the requirements of the Commission in order to effect
or maintain the qualification, if any, of the Indenture under the TIA; (e) to
evidence and provide the acceptance of the appointment of a successor Trustee
under the Indenture; or (f) to mortgage, pledge, hypothecate or grant a security
interest in favor of the Trustee for the benefit of the holders of the Notes as
additional security for the payment and performance of the Company's obligations
under the Indenture, in any property, or assets, including any of which are
required to be mortgaged, pledged or hypothecated, or in which a security
interest is required to be granted to the Trustee pursuant to the Indenture or
otherwise. (Section 901)
The holders of a majority in aggregate principal amount at maturity of the
Notes outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1021)
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THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. If an Event of Default has occurred and is continuing, the
Trustee will exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise as a prudent Person
would exercise under the circumstances in the conduct of such Person's own
affairs.
The Indenture and provisions of the TIA incorporated by reference therein
contain limitations on the rights of the Trustee thereunder should it become a
creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions;
provided, however, that if it acquires any conflicting interest (as defined) it
must eliminate such conflict or resign as Trustee.
GOVERNING LAW
The Indenture, the Notes and the Notes Registration Rights Agreement are
governed by, and construed in accordance with, the laws of the State of New
York.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Accreted Value" is defined to mean, for any specified date, the amount
calculated pursuant to clause (i), (ii), (iii) or (iv) below with respect to
each $1,000 principal amount at Maturity of Notes:
(i) if the specified date occurs on one or more of the following dates
(each a "Semiannual Accrual Date"), the Accreted Value will equal $543.92
on the Original Issue Date, and for any Semiannual Accrual Date thereafter,
the amount set forth below:
<TABLE>
<CAPTION>
ACCRETED
SEMIANNUAL ACCRUAL DATE VALUE
----------------------- ---------
<S> <C>
September 1, 1998........................................... $ 579.48
March 1, 1999............................................... $ 615.70
September 1, 1999........................................... $ 654.18
March 1, 2000............................................... $ 695.07
September 1, 2000........................................... $ 738.51
March 1, 2001............................................... $ 784.66
September 1, 2001........................................... $ 833.71
March 1, 2002............................................... $ 885.81
September 1, 2002........................................... $ 941.18
March 1, 2003............................................... $1,000.00
</TABLE>
(ii) if the specified date occurs before the first Semiannual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
and (b) an amount equal to the product of (1) the Accreted Value for the
first Semiannual Accrual Date less the original issue price multiplied by
(2) a fraction, the numerator of which is the number of days from the date
of the Indenture to the specified date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days elapsed
from the date of the Indenture to the first Semiannual Accrual Date, using
a 360-day year of twelve 30-day months;
(iii) if the specified date occurs between two Semiannual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semiannual Accrual Date immediately preceding such specified date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semiannual Accrual Date less the Accreted Value for
the immediately preceding Semiannual Accrual Date, and (2) a fraction, the
numerator of which equals the number of days from the
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immediately preceding Semiannual Accrual Date to the specified date, using
a 360-day year of twelve 30-day months, and the denominator of which is
180; or
(iv) if the specified date occurs on or after the last Semiannual
Accrual Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Subsidiary or such acquisition; provided that, for purposes of the
"Limitation on Indebtedness" covenant, such Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Restricted Subsidiary.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any other Person that
owns, directly or indirectly, 5% or more of such specified Person's Voting Stock
or any executive officer or director of any such specified Person or other
Person or, with respect to any natural Person, any Person having a relationship
with such Person by blood, marriage or adoption not more remote than first
cousin. For the purposes of this definition, "control," when used with respect
to any specified Person, means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary; (ii) all or substantially all of the properties and assets of
the Company or its Subsidiaries; or (iii) any other properties or assets of the
Company or any Subsidiary, other than in the ordinary course of business. For
the purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties or assets (A) that is governed by the provisions of the
Indenture described under "-- Consolidation, Merger, Sale of Assets," (B) of the
Company to any Restricted Subsidiary, or of any Restricted Subsidiary to the
Company or any Restricted Subsidiary in accordance with the terms of the
Indenture, (C) having a fair market value of less than $500,000 (or, to the
extent not denominated in United States dollars, the United States Dollar
Equivalent thereof) in any given fiscal year, (D) in any Permitted
Telecommunications Asset Sale, or (E) by the Company or a Restricted Subsidiary
to a Person who is not an Affiliate of the Company in exchange for
Telecommunications Assets (or not less than 66 2/3% of the outstanding Voting
Stock of a Person that becomes a Restricted Subsidiary the assets of which
consist primarily of Telecommunications Assets) or related telecommunications
services where in the good faith judgment of the Company the fair market value
of the Telecommunications Assets (or such Voting Stock) or services so received
is at least equal to the fair market value of the properties or assets disposed
of or, if less, the difference is received by the Company in cash in an amount
at least equal to such difference.
"Attributable Value" means, with respect to any lease at the time of
determination, the present value (discounted at the interest rate implicit in
the lease or, if not known, at the Company's incremental borrowing rate) of the
obligations of the lessee of the property subject to such lease for rental
payments during the remaining term of the lease included in such transaction,
including any period for which such lease has been extended or may, at the
option of the lessor, be extended, or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of penalty (in
which case the rental payments shall include such penalty), after excluding from
such rental payments all amounts required to be paid on account of maintenance
and repairs, insurance, taxes, assessments, water utilities and similar charges.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from the date of determination to the date or dates of
each successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness multiplied by (ii) the amount of
each such principal payment by (b) the sum of all such principal payments.
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<PAGE> 96
"Board of Directors" means the board of directors of the Company.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated and whether voting or non-voting) of such Person's capital
stock, and any rights (other than debt securities convertible into capital
stock), warrants or options exchangeable for or convertible into such capital
stock, whether now outstanding or issued after the date of the Indenture.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP and,
for the purposes of the Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (ii) certificates of deposit or acceptances with a maturity of 180
days or less of any financial institution that is a member of the Federal
Reserve System, in each case having combined capital and surplus and undivided
profits of not less than $500 million; (iii) commercial paper with a maturity of
180 days or less issued by a corporation that is not an Affiliate of the Company
and is organized under the laws of any state of the United States or the
District of Columbia and rated at least A-1 by S&P or at least P-l by Moody's;
and (iv) money market funds which invest substantially all of their assets in
securities of the type described in the preceding clauses (i) through (iii).
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total outstanding Voting Stock of the
Company; (b) the Company consolidates with, or merges with or into another
Person or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with
or merges with or into the Company, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction (i) where the outstanding Voting Stock of the Company is not
converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company) or is converted into
or exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (B) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation and cash, securities
and other property in an amount that could be paid by the Company as a
Restricted Payment as described under the "Limitation on Restricted Payments"
covenant and (ii) immediately after such transaction, no "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than
Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of the surviving or transferee corporation; (c) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors (together with any new directors whose
election to such Board of Directors, or whose nomination for election by the
stockholders of the Company, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors then in
office; (d) the Company is liquidated or dissolved or a special resolution is
passed by the shareholders of the Company approving the plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "-- Consolidation, Merger and Sales of Assets"; or (e) a
Permitted Holder holds (i) less than 15% of the outstanding Common Stock at any
time prior to an Initial Public Equity Offering or (ii) more than 65% of the
outstanding Common Stock at any time after an Initial Public Equity Offering.
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"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of the Company and all Restricted Subsidiaries for such
period as determined in accordance with GAAP, adjusted by excluding, without
duplication, (a) any net after-tax extraordinary gains or losses (less all fees
and expenses relating thereto), (b) any net after-tax gains or losses (less all
fees and expenses relating thereto) attributable to asset dispositions other
than in the ordinary course of business, (c) the portion of net income (or loss)
of any Person (other than the Company or a Restricted Subsidiary), including
Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has
an ownership interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any Restricted Subsidiary in cash
dividends or distributions during such period, (d) net income (but not loss) of
any Person combined with the Company or any Restricted Subsidiary on a "pooling
of interests" basis attributable to any period prior to the date of combination,
(e) the net income of any Restricted Subsidiary, to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary is not at the date of determination permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary or its stockholders and (f) any gain or
loss, net of taxes, realized upon the termination of any employee benefit plan.
"Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio"
means, at any date of determination, the ratio of (i) the aggregate amount of
Indebtedness of the Company and its Restricted Subsidiaries outstanding at the
date of determination as determined on a consolidated basis in accordance with
GAAP to (ii) the aggregate amount of Consolidated Operating Cash Flow for the
then most recent four full fiscal quarters for which consolidated financial
statements of the Company are available preceding the date of the transaction
giving rise to the need to calculate the Consolidated Indebtedness to
Consolidated Operating Cash Flow Ratio (such four fiscal quarter period being
referred to as the "Four Quarter Period").
"Consolidated Interest Expense" of the Company means, for any period,
without duplication, the sum of (a) the interest expense of the Company and its
Restricted Subsidiaries for such period, including, without limitation, (i)
amortization of debt discount, (ii) the net cost of Interest Rate Agreements
(including amortization of discounts), (iii) the interest portion of any
deferred payment obligation, (iv) accrued interest, (v) the consolidated amount
of any interest capitalized by the Company and (vi) amortization of debt
issuance costs, plus (b) the interest component of Capitalized Lease Obligations
of the Company and its Restricted Subsidiaries paid, accrued and/or scheduled to
be paid or accrued during such period, excluding, however, any amount of such
interest of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Consolidated Adjusted Net Income
pursuant to clause (e) of the definition thereof (but only in the same
proportion as the net income of such Restricted Subsidiary is excluded from the
calculation of Consolidated Adjusted Net Income pursuant to clause (e) of the
definition thereof); provided that the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a pro forma basis and
(A) bearing a floating interest rate shall be computed as if the rate in effect
on the date of computation had been the applicable rate for the entire period
and (B) which was not outstanding during the period for which the computation is
being made but which bears, at the option of the Company, a fixed or floating
rate of interest, shall be computed by applying, at the option of the Company,
either the fixed or the floating rate.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Adjusted Net Income for such period (a) increased by (to the extent
included in computing Consolidated Adjusted Net Income) the sum of (i) the
Consolidated Tax Expense for such period (other than taxes attributable to
extraordinary, unusual or non-recurring gains or losses); (ii) Consolidated
Interest Expense for such period; (iii) depreciation of the Company and the
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; (iv) amortization of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP; and (v) any other non-cash charges that were deducted in computing
Consolidated Adjusted Net Income (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period) of the Company and
its Restricted Subsidiaries for such period in accordance with GAAP and (b)
decreased by any non-cash gains that were included in computing Consolidated
Adjusted Net Income.
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"Consolidated Tax Expense" means, for any period, the provision for
federal, state, provincial, local and foreign income taxes of the Company and
all Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP.
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Company or any of its Restricted Subsidiaries
designed solely to protect against or manage exposure to fluctuations in
currency exchange rates.
"Default" means any event that after notice or passage of time or both
would be an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under the Indenture, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Subsidiaries" means Digital Teleport, Inc.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States on the date of the
Indenture.
"Guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Incur" or "incur" means, with respect to any Indebtedness, to create,
issue, assume, guarantee or in any manner become directly or indirectly liable
for the payment of, or otherwise incur such Indebtedness; provided that neither
the accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities, contingent or otherwise, of such Person: (i) for borrowed money
(including overdrafts), (ii) in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (iii) evidenced by bonds, notes, debentures or other
similar instruments, (iv) for the deferred purchase price of property or
services or created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person, or (v) for
Capitalized Lease Obligations; (b) all obligations of such Person under or in
respect of Interest Rate Agreements or Currency Agreements; (c) all indebtedness
referred to in (but not excluded from) the preceding clauses of other Persons
and all dividends of other Persons, the payment of which is secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or with respect to property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness (the amount of such obligation being deemed to be the
lesser of the value of such property or asset or the amount of the obligation so
secured); (d) all guarantees by such Person of Indebtedness referred to in this
definition of any other Person; and (e) all Redeemable Capital Stock of such
Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date (or, in
the case of a revolving credit or other similar facility, the total amount of
funds outstanding and/or available on the date of determination) of all
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation; provided that the amount outstanding at any time of any
Indebtedness issued with original issue discount equals the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount with respect to such Indebtedness at such time as determined in
conformity with
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GAAP. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock. Notwithstanding the
foregoing, trade accounts and accrued liabilities arising in the ordinary course
of business and any liability for federal, state or local taxes or other taxes
owed by such Person will not be considered Indebtedness for purposes of this
definition.
"Interest Rate Agreements" means any interest rate protection agreements
and other types of interest rate hedging agreements or arrangements (including,
without limitation, interest rate swaps, caps, floors, collars and other similar
agreements) designed solely to protect the Company or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of the Company
or any Restricted Subsidiary.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued or owned by, any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP. In addition, the fair market value of the net
assets of any Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary shall be deemed to be an "Investment" made by the
Company in such Unrestricted Subsidiary at such time. "Investments" shall
exclude extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices and any loans, advances or extensions of
credit to an employee of the Company or any Subsidiaries made in the ordinary
course of business; provided that such loans, advances or extensions of credit
shall not have an aggregate principal amount in excess of $1.0 million at any
one time outstanding.
"Original Issue Date" means the date of the Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as provided therein or in the Indenture,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of legal counsel and investment banks)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties which are the subject
of such Asset Sale, (iv) amounts required to be paid to any Person (other than
the Company or any Restricted Subsidiary) owning a beneficial interest in the
assets subject to the Asset Sale and (v) appropriate amounts to be provided by
the Company or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to
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environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an officers' certificate
delivered to the Trustee and (b) with respect to any issuance or sale of Capital
Stock or options, warrants or rights to purchase Capital Stock, or debt
securities or Redeemable Capital Stock that have been converted into or
exchanged for Qualified Capital Stock, as referred to under the "Limitation on
Restricted Payments" covenant, the proceeds of such issuance or sale in the form
of cash or Cash Equivalents, including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when disposed
for, cash or Cash Equivalents (except to the extent that such obligations are
financed or sold with recourse to the Company or any Subsidiary of the Company),
net of attorney's fees, accountant's fees and brokerage, consultation,
underwriting and other fees and expenses actually incurred in connection with
such issuance or sale and net of taxes paid or payable as a result thereof.
"Participant" is defined to mean, with respect to DTC, Persons who have
accounts with DTC.
"Permitted Holder" means either of (a) (i) collectively, Richard Weinstein,
his spouse, issues or other members of his immediate family (collectively, the
"Weinstein Family") (ii) trusts or other entities created for the benefit of any
member of the Weinstein Family, (iii) entities controlled by any of the
Weinstein Family and (iv) in the event of the death of any members of the
Weinstein Family, the heirs or testamentary legatees of such member of the
Weinstein Family, or (b) collectively, KLT and any of its controlled Affiliates
(as defined under Rules 13d-3 and 13d-5 under the Exchange Act).
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the Company pursuant to the Notes;
(b) Indebtedness of the Company owing to any Restricted Subsidiary
(but only so long as such Indebtedness is held by such Restricted
Subsidiary); provided that any Indebtedness of the Company owing to any
such Restricted Subsidiary is subordinated in right of payment from and
after such time as the Notes shall become due and payable (whether at
Stated Maturity, by acceleration or otherwise) to the payment and
performance of the Company's obligations under the Notes; provided further
that any transaction pursuant to which any Restricted Subsidiary to which
such Indebtedness is owed, ceases to be a Restricted Subsidiary shall be
deemed to be an incurrence of such Indebtedness by such Restricted
Subsidiary that is not permitted by this clause (b);
(c) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with one or more commercial bank facilities
permitted under clause (j) of the "Permitted Indebtedness" definition or in
connection with the acquisition of or disposition of assets, including,
without limitation, shares of Capital Stock;
(d) Indebtedness of the Company or any Restricted Subsidiary under
letter of credit facilities that are used to finance trade payables in the
ordinary course of business and under which recourse to the Company or any
Restricted Subsidiary is limited to the cash securing such letters of
credit;
(e) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements and Interest Rate Agreements entered into in the
ordinary course of business, provided that such agreements do not increase
the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest rates
or by reason of fees, indemnities and compensation payable thereunder;
(f) Indebtedness of the Company or any Restricted Subsidiary in
addition to that permitted to be incurred pursuant to clauses (a) through
(e) above in an aggregate principal amount not in excess of $25.0 million
(or, to the extent not denominated in United States dollars, the United
States Dollar Equivalent thereof) at any one time outstanding;
(g) Purchase Money Indebtedness;
(h) Indebtedness of any Restricted Subsidiary to the Company;
(i) Prior to December 31, 2000, Indebtedness of the Company or any
Restricted Subsidiary not to exceed, at any one time outstanding, two times
(A) the Net Cash Proceeds received by the Company
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after the date of the Indenture as a capital contribution or from the
issuance and sale of its Qualified Capital Stock to a Person that is not a
Subsidiary of the Company, to the extent such Net Cash Proceeds have not
been used pursuant to clause (a)(3)(B) or clauses (b)(ii) and (iii) of the
"Limitation on Restricted Payments" covenant to make a Restricted Payment
and (B) 80% of the fair market value of property (other than cash and Cash
Equivalents) received by the Company after the date of the Indenture as a
contribution of capital or from the sale of its Qualified Capital Stock to
a person that is not a Subsidiary of the Company, to the extent such
capital contribution or sale of Qualified Capital Stock has not been used
pursuant to clause (a)(3)(B) of the "Limitation on Restricted Payments"
covenant to make a Restricted Payment; provided that such Indebtedness does
not mature prior to the Stated Maturity of the Notes and has an Average
Life longer than the Notes;
(j) Indebtedness of the Company or any Restricted Subsidiary under one
or more commercial bank facilities outstanding at any time in an aggregate
principal amount not to exceed $70.0 million plus the greater of (x) 80% of
the accounts receivable of the Company or (y) $30.0 million; and
(k) any renewals, extensions, substitutions, refinancings or
replacements (each, for purpose of this clause, a "refinancing") of any
Indebtedness of the Company (including all or any part of the Notes) or any
Restricted Subsidiary by the Company, or any refinancing of any
Indebtedness of any Restricted Subsidiary by such Restricted Subsidiary,
other than Indebtedness incurred pursuant to clauses (b) through (f) and
(h) through (j) of this definition, including any successive refinancings,
so long as (i) any such new Indebtedness shall be in a principal amount
that does not exceed the principal amount (or, if such Indebtedness being
refinanced provides for an amount less than the principal amount thereof to
be due and payable upon a declaration of acceleration thereof, such lesser
amount as of the date of determination) so refinanced, plus the amount of
any premium reasonably determined as necessary to accomplish such
refinancing and the amount of expenses of the Company incurred in
connection with such refinancing, (ii) in the case of any refinancing of
Subordinated Indebtedness, such new Indebtedness is made subordinate to the
Notes at least to the same extent as the Indebtedness being refinanced,
(iii) in the case of any refinancing of Indebtedness that is pari passu in
right of payment with the Notes, such new Indebtedness is made pari passu
in right of payment with, or subordinate in right of payment to, the Notes
and (iv) (A) if such indebtedness being refinanced has an Average Life
longer than the Average Life of the Notes, such new Indebtedness has an
Average Life longer than the Average Life of the Notes and a final Stated
Maturity later than the final Stated Maturity of the Notes and (B) if such
Indebtedness being refinanced has an Average Life shorter than the Average
Life of the Notes, such Indebtedness has an Average Life longer than, and a
Final Stated Maturity Date later than, such Indebtedness being so
refinanced.
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents;
(b) Investments in the Company or any Restricted Subsidiary;
(c) Investments by the Company or any Restricted Subsidiary in another
Person, if as a result of such Investment (i) such other Person becomes a
Restricted Subsidiary and the Company or another Restricted Subsidiary owns
at least 66 2/3% of the outstanding Voting Stock of such other Person or
(ii) such other Person is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, the Company or a
Restricted Subsidiary;
(d) Investments by the Company or any Restricted Subsidiary in any
Person engaged in the delivery of telephony or other telecommunications or
data transmission services in North America, the sum of which does not
exceed $20.0 million at any one time outstanding; or
(e) Investments in existence on the date of the Indenture.
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"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date of the issuance of the Notes;
(b) Liens on any property or assets of a Subsidiary granted in favor
of the Company or any Restricted Subsidiary;
(c) Liens securing the Notes;
(d) any interest or title of a lessor under any Capitalized Lease
Obligation or of a seller under any Purchase Money Indebtedness permitted
by the Indenture;
(e) Liens securing Indebtedness incurred under clause (j) of the
definition of "Permitted Indebtedness";
(f) statutory Liens or landlord's and carrier's, warehouseman's,
mechanic's, supplier's, materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceeding,
if a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made therefor;
(g) Liens for taxes, assessments, government charges or claims that
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
(h) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance bonds and other obligations of a like
nature (including, without limitation, indefeasible rights to use) incurred
in the ordinary course of business (other than contracts for the payment of
money);
(i) easements, servitudes, rights-of-way, restrictions (including,
without limitation, zoning restrictions) and other similar charges or
encumbrances not interfering in any material respect with the business of
the Company or any Subsidiary incurred in the ordinary course of business;
(j) Liens arising by reason of any judgment, decree or order of any
court so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired;
(k) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by the Company or any Subsidiary; provided that such Lien does not extend
to any property or assets of the Company or any Subsidiary other than the
assets acquired in connection with the incurrence of such Acquired
Indebtedness;
(l) Liens securing Interest Rate Agreements or Currency Agreements
permitted to be incurred pursuant to clause (e) of the definition of
"Permitted Indebtedness" or any collateral for the Indebtedness to which
such Interest Rate Agreements or Currency Agreements relate;
(m) Liens arising from purchase money mortgages and purchase money
security interests; provided that (i) the related Indebtedness shall not be
secured by any property or assets of the Company or any Subsidiary other
than the property and assets so acquired and (ii) the Lien securing such
Indebtedness shall be created within 60 days of such acquisition;
(n) Liens with respect to assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or a Restricted Subsidiary to
secure Indebtedness owing to the Company or such Restricted Subsidiary;
(o) pledges and deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of statutory obligations; and
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(p) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a) through (o); provided that any
such extension, renewal or replacement shall be no more restrictive in any
material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets.
"Permitted Telecommunications Asset Sale" means any transfer, conveyance,
sale, lease or other disposition of a capital asset that is a Telecommunications
Asset, the proceeds of which are treated as revenues (including deferred
revenues) by the Company in accordance with GAAP.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the Original Issue Date, and including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiaries incurred at any time within 270 days of, and for the
purpose of financing all or any part of the cost of, the construction,
expansion, installation, acquisition or improvement by the Company or any
Restricted Subsidiary of the Company of any new Telecommunications Assets or not
less than 66 2/3 percent of the outstanding Voting Stock of a Person that
becomes a Restricted Subsidiary the assets of which consist primarily of
Telecommunications Assets constructed, expanded, installed, acquired or improved
after the date of the Indenture; provided that the proceeds of such Indebtedness
are expended for such purposes within such 270-day period; and provided,
further, that the Net Cash Proceeds from the issuance of such Indebtedness does
not exceed, as of the date of incurrence of such Indebtedness, 100% of the
lesser of cost or fair market value of such Telecommunication Assets.
"Public Equity Offering" means an underwritten public offering or flotation
of Common Stock of the Company which has been registered under the Securities
Act.
"Qualified Capital Stock" of any person means any and all Capital Stock of
such person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity, or is convertible into
or exchangeable for debt securities at any time prior to such final Stated
Maturity; provided that any Capital Stock that would not constitute Redeemable
Capital Stock but for provisions thereof giving holders thereof the right to
require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Redeemable Capital Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are no more favorable in any material respect to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants are to the holders of
the Notes, and such Capital Stock specifically provides that such Person will
not repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant to
the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of
Control" covenants.
"Restricted Subsidiary" means the Existing Subsidiaries and any Subsidiary
that is not designated an Unrestricted Subsidiary by the Board of Directors.
"S&P" means Standard and Poor's Ratings Services, a division of
McGraw-Hill, Inc., and its successors.
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"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its subsidiaries, (i) for the most
recent fiscal year of the Company accounted for more than 10% of the
consolidated revenues of the Company and the Restricted Subsidiaries, (ii) as of
the end of such fiscal year, was the owner of more than 10% of the consolidated
assets of the Company and the Restricted Subsidiaries, in each case as set forth
on the most recently available consolidated financial statements of the Company
and the Restricted Subsidiaries for such fiscal year, or (iii) owns one or more
licenses or concessions to provide telecommunications or data transmission
services in the United States.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company that is
expressly subordinated in right of payment to the Notes.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company or
by one or more other Subsidiaries or by the Company and one or more other
Subsidiaries.
"Tax" is defined to mean any tax, duty, levy, impost, assessment or other
governmental charge (including penalties, interest and any other liabilities
related thereto).
"Taxing Authority" is defined to mean any government or political
subdivision or territory or possession of any government or any authority or
agency therein or thereof having power to tax.
"Telecommunications Assets" means, with respect to any Person, all assets,
rights (contractual or otherwise) and properties, whether tangible or
intangible, used or intended for use in connection with a Telecommunications
Business; provided that such assets are accounted for as "property, plant and
equipment" on the Company's consolidated balance sheet in accordance with GAAP.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) constructing, creating, developing
or marketing communications related network equipment, software and other
devices for use in a telecommunications business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in clause (i) or (ii) above; provided that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the board of directors of the Company.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as
amended.
"U.S. Government Securities" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency of instrumentality of the United States of
America (x) the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America or (y) that are rated at
least "Aaa" (or the then equivalent grade) by Moody's or "AAA" (or the then
equivalent grade) by S&P.
"United States Dollar Equivalent" means, with respect to any monetary
amount in a currency other than the United States dollar, at any time for the
determination thereof, the amount of United States dollars obtained by
converting such foreign currency involved in such computation into United States
dollars at the spot rate for the purchase of United States dollars with the
applicable foreign currency as quoted by Reuters at approximately 11:00 a.m.
(New York City time) on the date not more than two business days prior to such
determination. For purposes of determining whether any Indebtedness can be
incurred (including Permitted Indebtedness), any Investment can be made and any
transaction described in the "Limitation on Transactions with Affiliates"
covenant can be undertaken (a "Tested Transaction"), the "United States Dollar
Equivalent" of such Indebtedness, Investment or transaction described in the
"Limitation on Transactions with Affiliates"
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covenant will be determined on the date incurred, made or undertaken and no
subsequent change in the United States Dollar Equivalent shall cause such Tested
Transaction to have been incurred, made or undertaken in violation of the
Indenture.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors, as provided below) and (b) any Subsidiary of an Unrestricted
Subsidiary. The Board of Directors may designate any Subsidiary (including any
newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so
long as (i) neither the Company nor any other Subsidiary is directly or
indirectly liable for or provides credit support for or guarantees any
Indebtedness of such Subsidiary, (ii) no default with respect to any
Indebtedness of such Subsidiary would permit (upon notice, lapse of time or
otherwise) any holder of any other Indebtedness of the Company or any other
Subsidiary to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity, (iii) any
Investment in such Subsidiary made as result of designating such Subsidiary an
Unrestricted Subsidiary will not violate the provisions of the "Limitation on
Investments in Unrestricted Subsidiaries" covenant, (iv) neither the Company nor
any other Subsidiary has a contract, agreement, arrangement, understanding or
obligation of any kind, whether written or oral, with such Subsidiary other than
those that might be obtained at the time from persons who are not Affiliates of
the Company and (v) neither the Company nor any other Subsidiary has any
obligation (1) to subscribe for additional shares of Capital Stock or other
equity interest in such Subsidiary or (2) to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing a board resolution with the Trustee
giving effect to such designation. The Board of Directors may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving
effect to such designation, there would be no Default or Event of Default under
the Indenture and the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the "Limitation on Indebtedness"
covenant. In no event shall the Existing Subsidiaries be designated as
Unrestricted Subsidiaries.
"Voting Stock" means, with respect to any Person, any class or classes of
Capital Stock pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not,
at the time, stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency).
"Wholly Owned" means, with respect to any Subsidiary, such Subsidiary if
all the outstanding Capital Stock of such Subsidiary (other than any directors'
qualifying shares) is owned directly by the Company or by the Company and one or
more Wholly Owned Restricted Subsidiaries.
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DESCRIPTION OF THE WARRANTS
In connection with the Private Offering, the Company issued Warrants to
purchase 3,926,560 shares of Common Stock. Upon the effectiveness of the
Registration Statement of which this Prospectus is a part, the Notes and the
Warrants will be separately transferable, in accordance with any applicable
restrictions on transferability thereof as provided by the respective terms
thereof. The following is a description of the Warrants.
GENERAL
The Warrants were issued under a Warrant Agreement dated as of February 23,
1998 (the "Warrant Agreement") between the Company, as issuer, and The Bank of
New York, as Warrant Agent (the "Warrant Agent"). The following summary of
certain provisions of the Warrants and the Warrant Agreement does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
all the provisions of the Warrants and the Warrant Agreement, including the
definitions of certain terms contained therein. The Warrant Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part, and copies of such Agreement are available upon request from the Company
or the Warrant Agent. For definitions of certain capitalized terms used in this
summary, see "-- Certain Definitions" below.
Each Warrant entitles the registered holder thereof, subject to and upon
compliance with the provisions thereof and of the Warrant Agreement, at such
holder's option, after the Exercisability Date and prior to 5:00 P.M., New York
City time, on March 1, 2008 (the "Expiration Date") to purchase from the Company
1.552 shares of Common Stock at an exercise price (the "Exercise Price") of
$0.01 per share of Common Stock issuable upon exercise of the Warrants (the
"Warrant Shares") (both the Exercise Price and securities issuable upon exercise
of the Warrants being subject to adjustments as provided in the Warrant
Agreement). Each Warrant may be exercised on any business day on or after the
Exercisability Date and on or prior to the Expiration Date. Any Warrant not
exercised before the close of business on the Expiration Date shall become void,
and all rights of the holder under the Warrant Certificate evidencing such
Warrant and under the Warrant Agreement shall cease.
EXERCISE
Warrants may be exercised by surrendering the Warrant Certificate
evidencing such Warrants with the form of election to purchase shares of Common
Stock set forth on the reverse side thereof duly completed and executed by the
holder thereof and by paying in full the Exercise Price for such Warrants at the
office or agency in The City of New York maintained for such purposes (which
will initially be the corporate trust office of the Warrant Agent located at 101
Barclay Street, New York, New York 10286).
Each Warrant may only be exercised in whole and the Exercise Price may be
paid in full, at the option of the holder (i) in cash or by certified or
official bank check, (ii) by a Cashless Exercise or (iii) by any combination of
(i) and (ii). For purposes of the Warrant Agreement, a "Cashless Exercise" will
mean an exercise of a Warrant in accordance with the immediately following two
sentences. To effect a Cashless Exercise, the holder may exercise a Warrant or
Warrants without payment of the Exercise Price in cash by surrendering such
Warrant or Warrants (represented by one or more Warrant Certificates) and, in
exchange therefor, receiving such number of shares of Common Stock equal to the
product of (1) the number of shares of Common Stock for which such Warrant or
Warrants are exercisable and which would be issuable in the event of an exercise
with payment in cash of the Exercise Price and (2) the Cashless Exercise Ratio
(as defined below). For purposes of the Warrant Agreement, the "Cashless
Exercise Ratio" will equal a fraction, the numerator of which is the excess of
the Current Market Value (calculated as set forth in the Warrant Agreement) per
share of Common Stock on the date of exercise over the Exercise Price per share
of Common Stock as of the date of exercise, and the denominator of which is the
Current Market Value per share of the Common Stock on the date of exercise. Upon
surrender of a Warrant Certificate representing more than one Warrant in
connection with a holder's option to elect a Cashless Exercise, such holder must
specify the number of Warrants for which such Warrant Certificate is to be
exercised (without giving effect to such Cashless Exercise). All provisions of
the Warrant Agreement shall be applicable with respect to a Cashless
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Exercise of a Warrant Certificate for less than the full number of Warrants
represented thereby. No payment or adjustment shall be made on account of any
dividends on the Common Stock issued upon exercise of a Warrant.
If the Company has not effected the registration under the Securities Act
of the offer and sale of the Warrant Shares by the Company to the holders of the
Warrants on or prior to the Exercise Date (as defined below), the Company may
elect to require that holders of the Warrants effect the exercise of the
Warrants solely pursuant to the Cashless Exercise option and may also amend the
Warrants to eliminate the requirement for payment of the Exercise Price with
respect to such Cashless Exercise option.
The Company will, as soon as practicable after the occurrence of an
Exercise Event (as defined below), send to each holder of Warrants and to each
beneficial owner of the Warrants to the extent that the Warrants are held of
record by a depository or other agent, by first-class mail, at the addresses
appearing on the Warrant Register, a notice of the Exercise Event which has
occurred, which notice shall describe the type of Exercise Event, the date of
the occurrence thereof and the date of expiration of the right to exercise the
Warrants prominently set forth on the face of such notice.
Subject to the terms of the Warrant Agreement, the Warrant Certificates
evidencing the Warrants may be surrendered for exercise or exchange, and the
transfer of Warrant Certificates will be registerable, at the office or agency
of the Company maintained for such purpose, which initially will be the
corporate trust office of the Warrant Agent in New York, New York. The Warrant
Certificates will be issued either in global form or in registered form as
definitive Warrant Certificates. No service charge will be made for any
exercise, exchange or registration of transfer of Warrant Certificates, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
DISTRIBUTION RIGHTS; ADJUSTMENT TO EXERCISE RATE; MERGER OR CONSOLIDATION
In general, holders of Warrants are not entitled, by virtue of being such
holders, to receive notice of any meetings of shareholders or otherwise have any
right of shareholders of the Company. However, if at any time after the
Exercisability Date, the Company grants, issues or sells options, convertible
securities, or rights to purchase stock, warrants or other securities pro rata
to the record holders of Common Stock ("Distribution Rights") or, without
duplication, makes any dividend or otherwise makes any distribution, including
(subject to applicable law) pursuant to any plan of liquidation
("Distribution"), on the Common Stock (whether in cash, property, evidences of
indebtedness or otherwise), then the Company shall grant, issue, sell or make to
each registered holder of Warrants then outstanding the aggregate Distribution
Rights or Distribution, as the case may be, which such holder would have
acquired if such holder had held the maximum number of shares of Common Stock
acquirable upon complete exercise of such holder's Warrants (regardless of
whether the Warrants are then exercisable and without giving effect to the
Cashless Exercise option) immediately before the record date for the grant,
issuance or sale of such Distribution Rights or Distribution, as the case may
be, or, if there is no such record date, the date as of which the record holders
of shares of Common Stock are to be determined for the grant, issue or sale of
such Distribution Rights or Distribution, as the case may be.
The number of Warrant Shares issuable upon exercise of a Warrant (the
"Exercise Rate") is subject to adjustment from time to time upon the occurrence
of certain events occurring after the Original Issue Date of the Notes,
including (a) certain dividends or distributions on shares of Common Stock
payable in shares of Common Stock or certain other Capital Stock of the Company,
(b) subdivisions, combinations or certain reclassifications of shares of Common
Stock and (c) sales by the Company of shares of Common Stock or of securities
convertible into or exchangeable or exercisable for shares of Common Stock to an
Affiliate (other than a wholly owned subsidiary) of the Company at a price below
the then Current Market Value (other than (1) pursuant to the exercise of the
Warrants, (2) pursuant to any security convertible into, or exchangeable or
exercisable for, shares of Common Stock outstanding as of the Original Issue
Date, (3) upon the conversion, exchange or exercise of any convertible,
exchangeable or exercisable security as to which the issuance thereof has
previously been the subject of any required adjustment pursuant to the Warrant
Agreement and (4) upon the conversion, exchange or exercise of convertible,
exchangeable or exercisable securities of the Company outstanding on the
Original Issue Date (to the extent in accordance with the terms of such
securities as in
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effect on such date)). Notwithstanding the foregoing, no adjustment in the
Exercise Rate will be required upon the conversion, exchange or exercise of
options to acquire shares of Common Stock by officers, directors or employees of
the Company; provided that the exercise price of such options, at the time of
issuance thereof, is at least equal to the then Current Market Value of the
Common Stock underlying such options.
If the Company, in a single transaction or through a series of related
transactions, consolidates with or merges with or into any other person or
sells, assigns, transfers, leases, conveys or otherwise disposes of all or
substantially all of its properties and assets to another person or group of
affiliated persons or is a party to a merger or binding share exchange which
reclassifies or changes its outstanding Common Stock (a "Fundamental
Transaction"), as a condition to consummating any such transaction the person
formed by or surviving any such consolidation or merger if other than the
Company or the person to whom such transfer has been made (the "Surviving
Person") shall enter into a supplemental warrant agreement. The supplemental
warrant agreement shall provide (a) that the holder of a Warrant then
outstanding may exercise it for the kind and amount of securities, cash or other
assets which such holder would have received immediately after the Fundamental
Transaction if such holder had exercised the Warrant immediately before the
effective date of the transaction (regardless of whether the Warrants were then
exercisable and without giving effect to the Cashless Exercise option), assuming
(to the extent applicable) that such holder (i) was not a constituent person or
an affiliate of a constituent person to such transaction, (ii) made no election
with respect thereto and (iii) was treated alike with the plurality of
non-electing holders, and (b) that the Surviving Person shall succeed to and be
substituted for every right and obligation of the Company in respect of the
Warrant Agreement and the Warrants. The Surviving Person shall mail to holders
of Warrants at the addresses appearing on the Warrant Register a notice briefly
describing the supplemental warrant agreement. If the issuer of securities
deliverable upon exercise of Warrants is an affiliate of the Surviving Person,
that issuer shall join in the supplemental warrant agreement.
Notwithstanding the foregoing, if the Company enters into a Fundamental
Transaction with another person (other than a subsidiary of the Company) and
consideration is payable to holders of the shares of Capital Stock (or other
securities or property) issuable or deliverable upon exercise of the Warrants
that are exercisable in exchange for such shares in connection with such
Fundamental Transaction which consists solely of cash, then the holders of
Warrants shall be entitled to receive distributions on the date of such event on
an equal basis with holders of such shares (or other securities issuable upon
exercise of the Warrants) as if the Warrants had been exercised immediately
prior to such event, less the Exercise Price therefor. Upon receipt of such
payment, if any, the rights of a holder of a Warrant shall terminate and cease
and such holder's Warrants shall expire.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment to the number of shares of Common Stock or other
consideration for which such a Warrant may be exercised, the holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend. See
"Certain Federal Income Tax Considerations."
Fractional shares of Common Stock are not required to be issued upon
exercise of Warrants, but in lieu thereof the Company will pay a cash
adjustment, except in limited circumstances.
The Warrant Agreement permits, with certain exceptions, the amendment
thereof and the terms of the Warrants and the modification of rights and
obligations of the Company and the rights of the holders of Warrant Certificates
under the Warrant Agreement at any time by the Company and the Warrant Agent
with the consent of the Requisite Warrant Holders (as defined below).
CERTAIN COVENANTS
The Company has agreed not to make an Initial Public Equity Offering of any
class of Capital Stock (other than the class of Capital Stock into which the
Warrants are exercisable) without adopting any amendments to the terms of the
Company's Articles of Incorporation that may be necessary to provide that the
Warrant Shares are convertible into such class of Capital Stock on a
share-for-share or other equitable basis and that the rights, conditions and
privileges attaching to such class of Capital Stock are not adverse to holders
of the Warrant Shares.
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The Company has also agreed to comply with all applicable laws, including
the Securities Act and any applicable state securities laws, in connection with
the offer and sale of Common Stock (and other securities and property
deliverable) upon exercise of the Warrants.
CERTAIN DEFINITIONS
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated and whether voting or non-voting) of, such person's capital
stock, and any rights (other than debt securities convertible into capital
stock), warrants or options exchangeable for or convertible into such capital
stock whether outstanding on the Original Issue Date or issued after the
Original Issue Date.
"Common Stock" is defined in the Warrant Agreement to include the Company's
Common Stock, par value $0.01 per share, and any other class or series of common
equity equivalent shares of the Company hereafter created.
"Convertible Preferred Stock" means any securities convertible or
exercisable or exchangeable into Common Stock, whether outstanding on the
Closing Date or thereafter issued.
"Current Market Value" per share of Common Stock or any other security at
any date means (i) if the security is not registered under the Exchange Act, (a)
the value of the security, determined in good faith by the Board of Directors of
the Company and certified in a board resolution, based on the most recently
completed arms-length transaction between the Company and a person other than an
Affiliate of the Company and the closing of which occurs on such date or shall
have occurred within the six-month period preceding such date, or (b) if no such
transaction shall have occurred on such date or within such six-month period,
the fair market value of the security as determined by a nationally or
regionally recognized independent financial expert (provided that, in the case
of the calculation of Current Market Value for determining the cash value of
fractional shares, any such determination within six months that is, in the good
faith judgment of the Board, a reasonable determination of value, may be
utilized) or (ii) (a) if the security is registered under the Exchange Act, the
average of the daily closing sales prices of the securities for the 20
consecutive trading days immediately preceding such date, or (b) if the security
has been registered under the Exchange Act for less than 20 consecutive trading
days before such date, then the average of the daily closing sales prices for
all of the trading days before such date for which closing sales prices are
available, in the case of each of (ii)(a) and (ii)(b), as certified to the
Warrant Agent by the President, any Vice President or the Chief Financial
Officer of the Company. The closing sales price for each such trading day shall
be: (A) in the case of a security listed or admitted to trading on any United
States national securities exchange or quotation system, the closing sales
price, regular way, on such day, or if no sale takes place on such day, the
average of the closing bid and asked prices on such day, (B) in the case of a
security not then listed or admitted to trading on any national securities
exchange or quotation system, the last reported sale price on such day, or if no
sale takes place on such day, the average of the closing bid and asked prices on
such day, as reported by a reputable quotation source designated by the Company,
(C) in the case of a security not then listed or admitted to trading on any
national securities exchange or quotation system and as to which no such
reported sale price or bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a reputable
quotation service, or a newspaper of general circulation in the Borough of
Manhattan, The City and State of New York, customarily published on each
business day, designated by the Company, or, if there shall be no bid and asked
prices on such day, the average of the high bid and low asked prices, as so
reported, on the most recent day (not more than 30 days prior to the date in
question) for which prices have been so reported and (D) if there are not bid
and asked prices reported during the 30 days prior to the date in question, the
Current Market Value shall be determined as if the securities were not
registered under the Exchange Act.
"Exercisability Date" is defined in the Warrant Agreement as the first day
on or after the Separability Date on which there shall have occurred an Exercise
Event.
"Exercise Date" means the date when the Warrant Certificate evidencing
Warrants to be exercised and payment in full of the aggregate Exercise Price are
received by the Warrant Agent at or prior to 11:00 a.m. (5:00 p.m. in the event
of exercise on the Expiration Date), New York City time, on a Business Day.
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"Exercise Event" means the date of the occurrence of the earliest of: (i)
the time immediately prior to the occurrence of a Change of Control (as defined
in the Indenture; see "Description of the Notes -- Certain Definitions"),
(ii)(a) the 180th day (or such earlier date as determined by the Company in its
sole discretion) following, the closing of an Initial Public Equity Offering (as
defined) or (b) upon the closing 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 Warrant Shares pursuant to their respective registration rights,
(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 Exchange Act, or (iv) September
1, 1999.
"Initial Public Equity Offering" means a primary public offering (whether
or not underwritten, but excluding any offering pursuant to Form S-8 under the
Securities Act or any other publicly registered offering pursuant to the
Securities Act pertaining to an issuance of Common Stock or securities
exercisable therefor under any benefit plan, employee compensation plan, or
employee or director stock purchase plan) of Common Stock pursuant to an
effective registration statement under the Securities Act.
"Registrable Securities" means any of (i) the Common Stock issued and
issuable upon exercise of the Warrants and (ii) any other securities issued or
issuable with respect to the Warrants or Warrant Shares by way of stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise. As to any particular
Registrable Securities, such securities shall cease to be Registrable Securities
when (a) a registration statement with respect to the offering of such
securities by the holder thereof shall have been declared effective under the
Securities Act and such securities shall have been disposed of by such holder
pursuant to such registration statement, (b) such securities have been sold to
the public pursuant to, or are eligible for sale to the public without volume or
manner of sale restrictions under, Rule 144(k) (or any similar provision then in
force, but not Rule 144A) promulgated under the Securities Act, (c) such
securities shall have been otherwise transferred and new certificates for such
securities not bearing a legend restricting further transfer shall have been
delivered by the Company or its transfer agent and subsequent disposition of
such securities shall not require registration or qualification under the
Securities Act or any similar state law then in force, or (d) such securities
shall have ceased to be outstanding.
"Requisite Warrant Holders" means (i) in the case of any amendment,
modification, supplement or waiver affecting only Warrant Holders as such,
holders of a majority in number of the outstanding Warrants, voting separately
as a class, or (ii) in the case of any amendment, modification, supplement or
waiver affecting Warrant Holders, a majority in number of Warrant Shares
represented by the Warrants that would be issuable assuming exercise thereof at
the time such amendment, modification, supplement or waiver is voted upon.
"Triggering Date" means the date of the consummation of a bona fide
underwritten public offering of Common Stock, as a result of which at least 20%
of the outstanding shares of Common Stock are listed on a United States national
securities exchange or the Nasdaq National Market.
REGISTRATION AND OTHER RIGHTS RELATING TO THE WARRANT SHARES
The Company, the Initial Purchasers and, to the limited extent set forth
therein, the Permitted Holders entered into the Warrant Registration Rights
Agreement, which provides that the holders of Warrants and Registrable
Securities have registration rights and other rights and obligations with
respect to the Warrants and Registrable Securities. The following summary of the
material provisions of the Warrant Registration Rights Agreement does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Warrant Registration Rights
Agreement. The Warrant Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part, and
copies of such Agreement are available upon request from the Company or the
Warrant Agent.
Registration Rights. After the occurrence of an Exercise Event, the
holders of a number of Warrants, Warrant Shares and Registrable Securities (the
"Subject Equity") equivalent to at least a majority of the outstanding Subject
Equity will be entitled to require the Company to effect two registrations
(each, a "Demand Registration") under the Securities Act of the Subject Equity,
subject to certain limitations. Within 20 days after the receipt of such demand,
the Company will (a) notify the holders of all Subject Equity that a
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demand registration has been requested, (b) prepare, file and use its best
efforts to cause to become effective under the Securities Act within 150 days of
such demand a registration statement in respect of all of the Subject Equity
which holders request, no later than 30 days after the date of such notice, to
have included therein (the "Included Securities"); provided that if such demand
occurs during the "lock up" or "black out" period (not to exceed 180 days)
imposed on the Company pursuant to or in connection with any underwriting or
purchase agreement relating to an underwritten Rule 144A or registered public
offering of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, the Company shall not be required to so notify
holders of Subject Equity and file such demand registration statement prior to
the end of such "lock up" or "black out" period, in which event the Company will
use its best efforts to cause such Demand Registration statement to become
effective no later than the later of (i) 150 days after such demand or (ii) 30
days after the end of such "lock up" or "black out" period, and (c) keep such
registration statement continuously effective for the shorter of (i) 60 days
(the "Effectiveness Period") and (ii) such period of time as all of the Subject
Equity included in such registration statement shall have been sold thereunder;
provided further that the Company may postpone the filing of, or suspend the
effectiveness of, any registration statement or amendment thereto, suspend the
use of any prospectus and shall not be required to amend or supplement the
registration statement, any related prospectus or any document incorporated
therein by reference (other than an effective registration statement being used
for an underwritten offering) in the event that and for a period (a "Suspension
Period") not to exceed an aggregate of 90 days with respect to any Demand
Registration if (i) an event or circumstance occurs and is continuing as a
result of which the registration statement, any related prospectus or any
document incorporated therein by reference as then amended or supplemented or
proposed to be filed would, in the Company's good faith judgement, contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, and (ii)(A) the Company determines in its
good faith judgement that the disclosure of such an event at such time would
have a material adverse effect on the business, operations or prospects of the
Company or (B) the disclosure otherwise relates to a material business
transaction which has not yet been publicly disclosed; provided further that if,
after a Demand Registration has become effective, the offering of Subject Equity
pursuant thereto is or becomes the subject of any stop order, injunction or
other order or requirement of the Commission or similar governmental, judicial
or administrative order or requirement, and such Demand Registration has not
become effective within a reasonable time period thereafter, such Demand
Registration will be deemed not to have been effected; provided further that the
Effectiveness Period shall be extended by the number of days in any Suspension
Period. In the event of any "lock up" or "black out" period in any underwriting
or purchase agreement, the Company will so notify the holders of Registrable
Securities. Under the Warrant Registration Rights Agreement, a Warrant holder is
obligated to keep confidential the existence of a Suspension Period or any
confidential information communicated by the Company to the Warrant holder with
respect thereto. Notwithstanding the foregoing, in lieu of filing and causing to
become effective a Demand Registration, the Company may satisfy its obligation
with respect to such Demand Registration by making and consummating (or having
its designee make and consummate) an offer to purchase all Subject Equity at a
price at least equal to Current Market Value (as defined in the Warrant
Agreement, but without the inclusion of clause (i)(a) thereof) less any
applicable Exercise Price.
Holders of Registrable Securities also have the right to include such
Registrable Securities in any registration statement under the Securities Act
filed by the Company for its own account or for the account of any of its
securityholders covering the sale of Common Stock (other than (a) a registration
statement on Form S-4 or S-8 or (b) a registration statement filed in connection
with an offer of securities solely to existing securityholders or (c) a Demand
Registration) for sale on the same terms and conditions as the securities of the
Company or any other selling securityholder included therein (a "Piggy-Back
Registration"). In the case of a Piggy-Back Registration, the number of
Registrable Securities requested to be included therein is subject to pro rata
reduction to the extent that the Company is advised by the managing underwriter,
if any, therefor that the total number or type of Registrable Securities and
other securities proposed to be included therein pursuant to similar piggyback
registration rights of other holders is such as to materially and adversely
affect the success of the offering; provided that securities included pursuant
to other holders' demand registration rights are not to be included in any such
reduction. The provisions in the preceding paragraph relating to the
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effect of a Suspension Period and the imposition of any "lock-up" or "black-out"
period on a related registration statement will also apply to such holder upon
exercise of Piggy-Back Registration Rights.
If the Company has complied with all its obligations under the Warrant
Registration Rights Agreement with respect to a Demand Registration or a
Piggy-Back Registration relating to an underwritten public offering, all holders
of Warrants and Registrable Securities, upon request of the lead managing
underwriter with respect to such underwritten public offering, will be required
to not sell or otherwise dispose of any Warrant or Registrable Security owned by
them for a period not to exceed 30 days prior to or 180 days after the
consummation of such underwritten public offering.
The Warrant Registration Rights Agreement includes customary covenants on
the part of the Company and will provide that the Company will indemnify the
holders of Registrable Securities included in any registration statement and any
underwriter with respect thereto against certain liabilities, including
liabilities under the Securities Act.
Each holder of Warrants that sells such Warrants or Registrable Securities
pursuant to a Demand Registration generally may be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
the purchaser, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
certain provisions of the Warrant Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations). In
addition, each holder of Warrants will be required to deliver information to be
used in connection with any such registration in order to have its Warrants or
Registrable Securities included in such registration.
Tag-Along Rights. Prior to the Triggering Date, each of the holders of
Subject Equity shall have the right (the "Tag-Along Right") to require the
proposed purchaser (as defined below) to purchase from each of them all Subject
Equity owned by such holder in the event of any proposed direct or indirect sale
or other disposition (collectively, a "Transfer") of Common Stock or Convertible
Preferred Stock (whether now or hereafter issued) to any person or persons (such
other person or persons being hereinafter referred to as the "proposed
purchaser") by any Permitted Holders or any of their Affiliates in any
transaction or a series of related transactions resulting in a Change of
Control. Any Subject Equity purchased from the holders pursuant to such
provisions shall be paid for in the same type of consideration and at the same
price per share of Common Stock and upon the same terms and conditions of such
proposed transfer of Common Stock by any Permitted Holders or any of their
Affiliates; except that the price per Warrant to be paid by the proposed
purchaser shall be less the exercise price of such Warrant per share. If the
Subject Equity to be purchased includes securities or property other than Common
Stock, the price to be paid for such securities or property shall be the same
price per share or other denomination paid by the proposed purchaser for like
securities purchased from any Permitted Holder or any of its Affiliates or, if
like securities are not purchased from any Permitted Holder or any of its
Affiliates, the fair market value of such securities determined by a nationally
or regionally recognized investment banking firm selected by the Company.
Each Permitted Holder shall notify, or cause to be notified, each holder of
Subject Equity and in writing of each such proposed Transfer at least 30 days
prior to the date thereof. Such notice shall set forth: (a) the name and address
of the proposed purchaser and the number of shares of Common Stock and other
securities, if any, proposed to be transferred, (b) the proposed amount of
consideration and terms and conditions of payment offered by such proposed
purchaser (if the proposed consideration is not cash, the notice shall describe
the terms of the proposed consideration) and (c) that either the proposed
purchaser has been informed of the Tag-Along Right and has agreed to purchase
Subject Equity in accordance with the terms of the Warrant Registration Rights
Agreement or that the Permitted Holder or any of its Affiliates will make such
purchase. The Tag-Along Right may be exercised by any holder of Subject Equity
by delivery of a written notice to the Company (the "Tag-Along Notice"), within
10 days following such holder's receipt of the notice specified in the preceding
sentence. The Tag-Along Notice shall state the amount of Subject Equity that
such holder proposes to include in such transfer to the proposed purchaser
determined as aforesaid. Failure to provide a Tag-Along Notice within the 10 day
notice period shall be deemed to constitute an election by such holder not to
exercise its Tag-Along Rights.
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In the event that the proposed purchaser does not purchase Subject Equity
entitled to be transferred as described above on the same terms and conditions
as purchased from the Permitted Holders or any of their Affiliates, then the
Permitted Holders or their Affiliates shall purchase such Subject Equity if the
Transfer occurs. If any Subject Equity is being sold by a Warrant Holder
pursuant to the Tag-Along Right under the Warrant Registration Rights Agreement,
upon the occurrence of a Change of Control triggered by the sale of Common Stock
by a Permitted Holder, the other Permitted Holder will have the right to
purchase up to 50% of such Subject Equity.
Drag-Along Rights. If at any time prior to an Initial Public Equity
Offering, any Permitted Holders or any of their respective Affiliates determines
to sell all of the Capital Stock of the Company owned by them to a person other
than a Permitted Holder or its Affiliate in a transaction resulting in a Change
of Control, the transferring Permitted Holder (whether directly or through an
Affiliate) shall have the right (the "Drag-Along Right") to require the holders
of Subject Equity to sell such Subject Equity to such transferee; provided that
(a) the consideration to be received by the holders of Subject Equity shall be
the same type of consideration received by the Permitted Holders and their
Affiliates and, in any event, shall be cash or freely transferable marketable
securities, and (b) after giving effect to such transaction, the Permitted
Holder making the transfers and its Affiliates shall not own, directly or
indirectly, any capital stock or rights to purchase capital stock of the
Company. Any Warrants and/or Registrable Securities purchased from the holders
thereof pursuant to such provision shall be paid for at the same price per share
of Common Stock and upon the same terms and conditions of such proposed transfer
of Common Stock by the Permitted Holders and their Affiliates. The price per
Warrant to be paid by the proposed purchaser shall be less the exercise price of
such Warrant per share. If the Subject Equity to be purchased includes
securities other than Common Stock, the price to be paid for such securities
shall be the same price per share or other denomination paid by the proposed
purchaser for like securities purchased from the Permitted Holders and their
Affiliates or, if like securities are not purchased from the Permitted Holders
and their Affiliates, the fair market value of such securities determined by a
nationally or regionally recognized investment banking firm selected by the
Company.
If any Subject Equity is being sold by a Warrant Holder pursuant to the
Drag-Along Right under the Warrant Registration Rights Agreement, upon the
occurrence of a Change of Control triggered by the sale of Common Stock by a
Permitted Holder, the other Permitted Holder will have the right to purchase up
to 50% of such Subject Equity.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form without interest coupons. Exchange Notes issued in exchange for
Private Notes sold in offshore transactions in reliance on Regulation S under
the Securities Act will be represented by one or more global Notes in
definitive, fully registered form without interest coupons (each a "Regulation S
Global Note").
Exchange Notes issued in exchange for Private Notes sold in reliance on
Rule 144A will be represented by one or more permanent global Notes (each a
"Registered Global Note" and, together with the Regulation S Global Note, the
"Global Notes") in definitive, fully registered form and, without interest
coupons and will be deposited with the Trustee or as custodian for The
Depository Trust Company (the "Depositary"), and registered in the name of the
Depositary or of a nominee of the Depositary.
Upon issuance of the Global Note, the Depositary will credit, on its
internal system, the respective amounts of the individual beneficial interests
in the Global Note as applicable, to persons who have accounts with the
Depositary ("Participants"). Such accounts initially will be designated by or on
behalf of the Initial Purchasers. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of such beneficial interests will
be effected only through, records maintained by the Depositary or its nominee
(with respect to interests of Participants) and the records of Participants
(with respect to interests of persons other than Participants). Qualified
Institutional Buyers may hold their interests in the Global Note directly
through the Depositary if they are Participants, or indirectly through
organizations which are Participants.
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Investors may hold their interests in a Regulation S Global Note directly
through Cedel Bank or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such system. Investors
may also hold such interests through organizations other than Cedel Bank or
Euroclear that are participants in the DTC system. Cedel Bank and Euroclear will
hold interests in the Regulation S Global Note on behalf of their participants
through DTC.
So long as the Depositary, or its nominee, is the registered owner or
holder of the Global Note, the Depositary or such nominee, as the case may be,
will be considered the sole owner and holder of the Notes represented by such
Global Note for all purposes under the Indenture and the Notes. Accordingly,
beneficial owners of an interest in the Global Note must rely on the procedures
of the Depositary and, if such person is not a Participant, on the procedures of
the Participant through which such person owns its interest, to exercise any
rights and fulfill any obligations of a holder under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer such
interest except in accordance with the Depositary's procedures, in addition to
those provided for under the Indenture.
Payments of the principal of or premium, if any, and interest on the Global
Notes will be made to the Depositary or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee, or any paying agent
under the Indenture will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of the principal of, premium and interest on (or additional interest in
respect of) the Global Note will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount at maturity of such Global Note as shown on the records of the Depositary
or its nominee. The Company also expects that payments by Participants to owners
of beneficial interests in the Global Note held through such Participants will
be governed by standing instructions and customary practice as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
Participants.
Transfers between Participants in the Depositary will be effected in the
ordinary way through the Depositary's same-day funds system in accordance with
the Depositary rules and will be settled in federal funds. Transfers between
participants in Euroclear and Cedel Bank will be effected in the ordinary way in
accordance with their respective rules and operating procedures. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell Notes to persons in states which require physical delivery of the Notes
or to pledge such securities, such holder must transfer its interest in the
Global Note in accordance with the normal procedures of the Depositary and with
the procedures set forth in the Indenture.
The Depositary has advised the Company that the Depositary will take any
action permitted to be taken by a holder of Notes (including the presentation of
Notes for exchange as described below) only at the direction of one or more
Participants to whose account the Depositary interests in the applicable Global
Securities are credited and only in respect of such portion of the aggregate
principal amount at maturity of Notes as to which such Participant or
Participants has or have given such direction. However, if there is an Event of
Default under the Indenture, the Depositary will exchange the Global
Certificates for the applicable Certificated Securities, which it will
distribute to its Participants.
The Depositary has advised the Company as follows: the Depositary is a
limited purpose trust company organized under the laws of the State of New York,
a "banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depositary was created to
hold securities for its Participants and facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers,
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dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Although DTC and its Participants have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Global Note among
Participants and participants of Euroclear and Cedel Bank, they are under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company nor the Trustee, or any paying agent will have
any responsibility for the performance by the Depositary, Euroclear or Cedel
Bank or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Except as set forth below, each of the Exchange Notes will be issued in the
form of one or more Global Notes. Owners of beneficial interests in the Global
Note will be entitled to receive Notes in definitive form ("Definitive Notes")
if the Depositary is at any time unwilling or unable to continue as, or ceases
to be, a "Clearing Agency" registered under Section 17A of the Exchange Act, and
a successor to the Depositary registered as a "Clearing Agency" under Section
17A of the Exchange Act is not appointed by the Company within 90 days. Any
Definitive Notes issued in exchange for beneficial interests in the Global Note
will be registered in such name or names as the Depositary shall instruct the
Trustee. It is expected that such instructions will be based upon directions
received by the Depositary from Participants with respect to ownership of
beneficial interests in the Global Note.
In addition to the foregoing, on or after the occurrence of an Event of
Default under the Indenture, owners of beneficial interests in the Global Note
will be entitled to request and receive Definitive Notes. Such Definitive Notes
will be registered in such name or names as the Depositary shall instruct the
Trustee.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Bryan Cave LLP, special counsel to the Company, has advised the Company
that the following discussion as to legal matters is its opinion as to the
material United States federal income tax consequences of an exchange of Private
Notes for Exchange Notes and the ownership of Private Notes, as well as certain
potential federal income tax consequences to the Company with respect to the
Notes. This opinion is based on current provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), applicable final, temporary and proposed
Treasury Regulations ("Treasury Regulations"), judicial authority, and current
administrative rulings and pronouncements of the Internal Revenue Service (the
"Service") and upon the facts concerning the Company as of the date hereof.
There can be no assurance that the Service will not take a contrary view, and no
ruling from the Service has been or will be sought by the Company. Legislative,
judicial, or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conclusions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders.
This opinion does not purport to deal with all aspects of taxation that may
be relevant to particular holders of the Notes in light of their personal
investment or tax circumstances, or to certain types of investors (including
individual retirement accounts and other tax deferred accounts, insurance
companies, financial institutions, broker-dealers or tax-exempt organizations)
subject to special treatment under the U.S. federal income tax laws. This
opinion does not deal with special tax situations, such as the holding of the
Notes as part of a straddle with other investments, or situations in which the
functional currency of a holder is not the U.S. dollar. In addition, this
opinion deals only with Notes held by initial purchasers that hold such Notes as
capital assets within the meaning of Section 1221 of the Code.
For purposes of the following discussion, the term "U.S. Holder" means a
citizen or resident of the U.S., a corporation, limited liability company or
partnership created or organized in the U.S. or under the law of the U.S. or any
state thereof (including the District of Columbia), an estate the income of
which is includible in gross income for U.S. federal income tax purposes
regardless of its source, or a trust if a court within the U.S. is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust (or, under certain circumstances, a trust the
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income of which is includible in gross income for U.S. federal income tax
purposes regardless of its source). The term "Non-U.S. Holder" means any person
other than a U.S. Holder.
THE TAX TREATMENT MAY VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE OF PRIVATE NOTES
There will be no federal income tax consequences to holders exchanging
Private Notes for Exchange Notes pursuant to the Exchange Offer since the
Exchange Offer will be by operation of the original terms of the Private Notes,
pursuant to a unilateral act by the Company, and will not result in any material
alteration in the terms of the Private Notes. Each exchanging holder will have
the same adjusted tax basis and holding period in the Exchange Notes as it had
in the Private Notes immediately before the exchange.
THE NOTES
Under applicable authorities, the Notes should be treated as indebtedness
for U.S. federal income tax purposes. In the unlikely event the Notes are
treated as equity, the amount of any actual or constructive distributions on any
such Note would first be taxable to the holder as dividend income to the extent
of the issuer's current and accumulated earnings and profits, and next would be
treated as a return of capital to the extent of the holder's tax basis in the
Note, with any remaining amount treated as gain from the sale of a Note.
Further, payments on the Notes treated as equity to Non-U.S. Holders would not
be eligible for the portfolio interest exception from U.S. withholding tax, and
dividends thereon would be subject to U.S. withholding tax at a flat rate of 30%
(or lower applicable treaty rate) and gain from their sale or other taxable
disposition might also be subject to U.S. tax. See "-- Non-U.S. Holders." In
addition, in the event of equity treatment, the Company would not be entitled to
deduct interest on the Notes for U.S. federal income tax purposes. Finally, the
liability of the Company for corporate income tax, if the Notes were treated as
equity, could affect the cash flow of the Company and, thus, its ability to meet
its obligations on the Notes. The remainder of this discussion assumes that the
Notes will constitute indebtedness of the Company for such tax purposes.
ORIGINAL ISSUE DISCOUNT
General. The Notes will be issued with original issue discount ("OID"), and
each U.S. Holder will be required to include in income (regardless of whether
such U.S. Holder is a cash or accrual basis taxpayer) in each taxable year, in
advance of the receipt of corresponding cash payments on such Notes, that
portion of the OID, computed on a constant yield basis, attributable to each day
during such year on which the U.S. Holder held the Notes. See " -- Taxation of
Original Issue Discount," below.
The amount of OID with respect to each Note will be equal to the excess of
(i) its "stated redemption price at maturity" over (ii) its issue price. Under
the OID Regulations, the "stated redemption price at maturity" of each Note will
include all payments to be made in respect thereof, including any stated
interest payments, other than "qualified stated interest." Payments of qualified
stated interest are payments of interest which are unconditionally payable in
cash or property (other than debt instruments of the issuer) at least annually
at a qualifying rate, including a single fixed rate. Since no actual cash
payments will be made in respect of the Notes until September 1, 2003, no
interest payments on the Notes will constitute "qualified stated interest."
Taxation of Original Issue Discount. A U.S. Holder of a debt instrument
issued with OID is required to include in gross income for U.S. federal income
tax purposes an amount equal to the sum of the "daily portions" of such OID for
all days during the taxable year on which the holder holds the debt instrument.
The daily portions of OID required to be included in a holder's gross income in
a taxable year will be determined upon a constant-yield basis by allocating to
each day during the taxable year on which the holder holds the debt instrument a
pro-rata portion of the OID on such debt instrument which is attributable to the
"accrual
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period" in which such day is included. Accrual periods with respect to a Note
may be of any length and may vary in length over the term of the Note as long as
(i) no accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the Note occurs on either the final or first day of an
accrual period. The amount of the OID attributable to each "accrual period" will
be the product of the "adjusted issue price" at the beginning of such accrual
period and the "yield to maturity" of the debt instrument (stated in a manner
appropriately taking into account the length of the accrual period). The "yield
to maturity" is the discount rate that, when used in computing the present value
of all payments to be made under the Notes, produces an amount equal to the
issue price of the Notes. The "adjusted issue price" of a debt instrument at the
beginning of an accrual period is defined generally as the issue price of the
debt instrument plus the aggregate amount of OID that accrued in all prior
accrual periods, less any cash payments on the debt instrument. Accordingly, a
U.S. Holder of a Note will be required to include OID in gross income for U.S.
federal income tax purposes in advance of the receipt of cash in respect of such
income. The amount of OID allocable to an initial short accrual period may be
computed using any reasonable method if all other accrual periods, other than a
final short accrual period, are of equal length. The amount of OID allocable to
the final accrual period at maturity of the Note is the difference between (x)
the amount payable at the maturity of the Note, and (y) the Note's adjusted
issue price as of the beginning of the final accrual period.
Effect of Mandatory and Optional Redemptions on OID. In the event of a
Change of Control, the Company will be required to offer to redeem all of the
Notes at redemption prices specified elsewhere herein. In the event that the
Company receives net proceeds from one or more Equity Offerings, the Company
may, at any time prior to March 1, 2001, use all or a portion of such net
proceeds to redeem the Notes in amounts and at redemption prices specified
elsewhere herein. Under the OID Regulations, computation of yield and maturity
of the Notes is not affected by such redemption rights and obligations if, based
on all the facts and circumstances as of the issue date, the potential
occurrence of such contingencies is remote. The Company has determined that,
based on all of the facts and circumstances that are expected to exist as of the
issue date, the possibility that a Change of Control or an optional redemption
by the Company will occur is remote and, as a result, the stated payment
schedule of the Notes must not be adjusted for such contingencies.
The Company may redeem the Notes, in whole or in part, at any time on or
after March 1, 2003, at redemption prices specified elsewhere herein, plus
accrued and unpaid interest to the date of redemption. The OID Regulations
contain rules for determining the "maturity date" and the stated redemption
price at maturity of an instrument that may be redeemed prior to its stated
maturity date at the option of the issuer. Under the OID Regulations, solely for
purposes of the accrual of OID, it is assumed that the issuer will exercise any
option to redeem a debt instrument if such exercise will lower the
yield-to-maturity of the debt instrument. The Company anticipates that it will
not be presumed to redeem the Notes prior to their stated maturity under the
foregoing rules because the exercise of such option would not lower the
yield-to-maturity of the Notes.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
The Notes are "applicable high yield discount obligations" ("AHYDOs"), as
defined in the Code, and the following rules will apply. Under the rules
applicable to AHYDOs, a portion of the OID that accrues on the Notes will not be
deductible by the Company at any time. The non-deductible portion of the OID
will be an amount that bears the same ratio to such OID as (i) the excess of the
yield to maturity of the Notes over the applicable federal rate in effect under
Section 1274(d) of the Code plus six percentage points bears to (ii) the yield
to maturity of the Notes. To the extent that the non-deductible portion of OID
would have been treated as a dividend if it had been distributed with respect to
the Company's stock, it will be treated as a dividend to holders of the Notes
for purposes of the rules relating to the dividends received deduction for
corporate holders. Any remaining OID on the Notes will not be deductible by the
Company until such OID is paid.
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MARKET DISCOUNT, ACQUISITION PREMIUM
If a U.S. Holder acquires a Note for an amount that is less than its
revised issue price (generally, adjusted issue price at the time of
acquisition), the amount of the difference will be treated as "market discount,"
unless such difference is less than a specified de minimis amount. Under the
market discount rules of the Code, a U.S. Holder will be required to treat any
principal payment on, or any gain on the sale, exchange, retirement or other
disposition (including a gift) of, a Note as ordinary income to the extent of
any accrued market discount that has not previously been included in income.
Market discount generally accrues on a straight-line basis over the remaining
term of the Note, unless the U.S. Holder elects to accrue market discount on a
constant interest method. A U.S. Holder may not be allowed to deduct immediately
all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or to carry such Note.
A U.S. Holder may elect to include market discount in income currently as
it accrues (either on a straight-line basis or, if the U.S. Holder so elects, on
a constant-yield basis), in which case the interest deferral rule set forth in
the preceding paragraph will not apply. Such an election will apply to all bonds
acquired by the U.S. Holder on or after the first day of the first taxable year
to which such election applies and may be revoked only with the consent of the
Service.
A U.S. Holder that acquires a Note for an amount that is greater than the
adjusted issue price of such Note but equal to or less than the sum of all
amounts payable on such Note after the purchase date will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules of the Code and the OID Regulations, the daily portion of OID which such
holder must include in its gross income with respect to such Note for any
taxable year will be reduced by an amount equal to the OID multiplied by a
fraction, the numerator of which is the amount of such acquisition premium and
the denominator of which is the OID remaining from the date the Note was
purchased to its maturity date.
SALE OR OTHER DISPOSITION
In general, upon the sale, exchange or redemption of a Note, a U.S. Holder
will recognize taxable gain or loss equal to the difference between (i) the
amount of cash proceeds and the fair market value of any property received on
the sale, exchange or redemption (not including any amount attributable to
accrued but unpaid interest) and (ii) the U.S. Holder's adjusted tax basis in
the Note. A U.S. Holder's adjusted tax basis in a Note generally will be equal
to the portion of the Unit purchase price allocable to such Note, increased by
the amount of any market discount or OID previously taken into income by the
U.S. Holder and reduced by the amount of any principal received by the U.S.
Holder.
Subject to the discussion of market discount above, gain or loss realized
on the sale, exchange or redemption of a Note will be capital gain or loss.
Under recently enacted legislation, in general, long-term capital gains
recognized by an individual U.S. Holder will be subject to a maximum rate of 20%
in respect of property held for more than one year, effective for taxable years
ending after December 31, 1997). The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitations with respect to the deductibility of capital losses.
An exchange of Notes pursuant to the Exchange Offer and the associated
redemption of the Notes by the Company in exchange for the Exchange Notes will
not be considered a taxable event.
NON-U.S. HOLDERS
In general, subject to the discussion below concerning backup withholding:
(a) payments of principal or interest (including OID) on the Notes by the
Company or any paying agent to a beneficial owner of a Note that is a Non-U.S.
Holder will not be subject to U.S. withholding tax, provided that, in the case
of interest or accrued OID, (i) such Non-U.S. Holder does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
stock of the Company entitled to vote, within the meaning of Section 871(h)(3)
of the Code, (ii) such Non-U.S. Holder is not a "controlled foreign corporation"
(within the meaning of the Code) that is related, directly or indirectly, to the
Company through stock ownership, or (iii) such Non-U.S. Holder is not a bank
receiving interest described in
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Section 881(c)(3)(A) of the Code, and (iv) the certification requirements under
Section 871(h) or Section 881(c) of the Code and Treasury Regulations thereunder
(summarized below) are satisfied;
(b) A Non-U.S. Holder of a Note will not be subject to U.S. income tax on
gains realized on the sale, exchange or other disposition of such Note, unless
(i) such Non-U.S. Holder is an individual who is present in the U.S. for 183
days or more in the taxable year of sale, exchange or other disposition, and
certain other conditions are met, (ii) such gain is effectively connected with
the conduct by the Non-U.S. Holder of a trade or business in the U.S. and, if
certain tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder, or (iii) the Non-U.S. Holder is subject to
Code provisions applicable to certain U.S. expatriates; and
(c) a Note held by an individual who is not a citizen or resident of the
U.S. at the time of his death will not be subject to U.S. estate tax as a result
of such individual's death, provided that, at the time of such individual's
death, the individual does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of stock of the Company entitled
to vote and payments with respect to such Note would not have been effectively
connected with the conduct by such individual of a trade or business in the U.S.
To satisfy the certification requirements referred to in (a)(iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a Note
must certify, under penalties of perjury, to the Company or its paying agent, as
the case may be, that such owner is a Non-U.S. Holder and must provide such
owner's name and address, and U.S. taxpayer identification number ("TIN"), if
any, or (ii) a securities clearing organization, bank or other financial
institution that holds customers securities in the ordinary course of its trade
or business (a "Financial Institution") and holds the Note on behalf of the
beneficial owner thereof must certify, under penalties of perjury, to the
Company or its paying agent, as the case may be, that such certificate has been
received from the beneficial owner and must furnish the payor with a copy
thereof. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying Non-U.S. Holder after
delivery of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. Under temporary Treasury Regulations,
such requirement will be fulfilled if the beneficial owner of a Note certifies
on IRS Form W-8, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address, and any Financial Institution holding the Note on
behalf of the beneficial owner files a statement with the withholding agent to
the effect that it has received such a statement from the beneficial owner (and
furnishes the withholding agent with a copy thereof).
Treasury Regulations released on October 6, 1997, as modified by Notice
98-16 dated March 27, 1998 (the "New Regulations") and effective for payments
made after December 31, 1999, subject to certain transition rules, provide
alternative methods for satisfying the certification requirements described
above. The New Regulations require, in the case of Notes held by a foreign
partnership, that (i) the certification be provided by the partners rather than
by the foreign partnership and (ii) the partnership provide certain information,
including a U.S. taxpayer identification number. A look-through rule would apply
in the case of tiered partnerships.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
U.S. and if interest (including OID) on the Note, or gain realized on the sale,
exchange or other disposition of the Note, is effectively connected with the
conduct of such trade or business and, if certain tax treaties apply, is
attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder
in the U.S., the Non-U.S. Holder, although exempt from U.S. withholding tax
(provided that the certification requirements discussed in the next sentence are
met), will generally be subject to regular U.S. income tax on such interest or
gain in the same manner as if it were a U.S. Holder. In lieu of the certificate
described above, such a Non-U.S. Holder will be required, under currently
effective Treasury Regulations, to provide the Company with a properly executed
IRS Form 4224 in order to claim an exemption from withholding tax. In addition,
if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% (or such lower rate provided by an applicable treaty)
of its effectively connected earnings and profits for the taxable year, subject
to certain adjustments. For purposes of the branch profits tax, interest
(including OID) on a Note and any gain
118
<PAGE> 120
recognized on the sale, exchange or other disposition of a Note will be included
in the earnings and profits of such Non-U.S. Holder if such interest or gain is
effectively connected with the conduct by a Non-U.S. Holder of a trade or
business in the U.S. The New Regulations alter certain of the withholding
reporting and certification requirements described above, effective for payments
made after December 31, 1999, subject to certain transition rules. In general,
for payments made after December 31, 1999, a Non-U.S. Holder with effectively
connected income must provide to the Company, either directly or through an
intermediary, a valid IRS Form W-8 to claim an exemption from withholding.
Dividends, if any, paid on Common Stock to a Non-U.S. Holder generally will
be subject to a 30% United States federal withholding tax, subject to reduction
for Non-U.S. Holders eligible for the benefits of certain income tax treaties,
or that qualify as being engaged in a trade or business in the U.S. and if any
dividends received are effectively connected with such trade or business (as
discussed above in connection with the treatment of a Non-U.S. Holder's receipt
of interest on the Notes). For purposes of determining whether tax is to be
withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, the Company ordinarily will presume that dividends paid to an address in
a foreign country are paid to a resident of such country absent knowledge that
such presumption is not warranted. For dividend payments after December 31,
1999, under the New Treasury Regulations, Non-U.S. Holders are required to
provide a valid Form W-8 to the Company in order to receive the benefit of a
reduced treaty rate. Common Stock owned or treated as owned by an individual who
is not a citizen or resident of the U.S. (as specially defined for United States
federal estate tax purposes) will be included in such individual's estate for
U.S. federal estate tax purposes unless an applicable estate tax treaty
otherwise applies.
In the unlikely event the Notes were treated as equity, the periodic
distributions received by a Non-U.S. Holder on the Notes would not qualify for
the portfolio interest exemption from United States federal income tax and would
instead be treated as dividends as described above.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments made in respect of a Note to a holder that is not an "exempt recipient"
and that fails to provide certain identifying information (such as the holder's
TIN) in the manner required. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities are exempt recipients. Payments
made in respect of a Note must be reported to the Service, unless the holder is
an exempt recipient or otherwise establishes an exemption.
In the case of payments of interest on a Note to a Non-U.S. Holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established (provided that
neither the Company nor a paying agent has actual knowledge that the holder is a
U.S. Holder or that the conditions of any other exemption are not in fact
satisfied).
Payments of the proceeds of the sale of a Note to or through a foreign
office of a broker that is a U.S. person, a "controlled foreign corporation"
(within the meaning of the Code), or a foreign person, 50% or more of whose
gross income from all sources for the three-year period ending with the close of
its taxable year preceding the payment was effectively connected with the
conduct of a trade or business within the U.S., or (pursuant to the New
Regulations, for payments made after December 31, 1999) a foreign partnership
with certain U.S. connections, are currently subject to certain information
reporting requirements, unless the payee is an exempt recipient or such broker
has evidence in its records that the payee is a Non-U.S. Holder and has no
actual knowledge that such evidence is false and certain other conditions are
met. Temporary Treasury Regulations indicate that such payments are not
currently subject to backup withholding. Under current Treasury Regulations,
payments of the proceeds of a sale of a Note to or through the U.S. office of a
broker will be subject to information reporting and backup withholding unless
the payee certifies under penalties of perjury as to his or her status as a
Non-U.S. Holder and satisfies certain other qualifications (and no agent or
119
<PAGE> 121
broker who is responsible for receiving or reviewing such statement has actual
knowledge that it is incorrect) and provides his or her name and address or the
payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a Note generally will be allowed as a refund or credit against such
holder's U.S. federal income tax, provided that the required information is
timely furnished to the Service.
In general, the New Regulations do not significantly alter the current
substantive withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the New
Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. A holder of a Note should consult with its tax
advisor regarding the application of the backup withholding rules to its
particular situation, the availability of an exemption therefrom, the procedure
for obtaining such an exemption, if available, and the impact of the New
Regulations on payments made with respect to Notes after December 31, 1999.
THE FOREGOING DISCUSSION DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES
FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN UNITED STATES OR OTHER TAX LAWS.
120
<PAGE> 122
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Private
Notes may be offered for resale, resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such Exchange Notes. Accordingly, any Holder
using the Exchange Offer to participate in a distribution of the Exchange Notes
will not be able to rely on such no-action letters. Notwithstanding the
foregoing, each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with any resale of Exchange Notes received in
exchange for Private Notes where such Private Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 120 days from the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver, and by delivering, a prospectus as required, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 120 days from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company will pay all the expenses incident to
the Exchange Offer (which shall not include the expenses of any Holder in
connection with resales of the Exchange Notes). The Company has agreed to
indemnify the Initial Purchasers and any broker-dealers participating in the
Exchange Offer against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Bryan Cave LLP, St. Louis, Missouri.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1996
and 1997 and for each of the three years in the period ended June 30, 1997
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
121
<PAGE> 123
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DTI HOLDINGS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997.... F-3
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997.............................. F-4
Consolidated Statements of Stockholders' Deficit for the
years ended
June 30, 1995, 1996 and 1997.............................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1996 and 1997.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheet as of March 31, 1998
(unaudited)............................................... F-19
Consolidated Statements of Operations for the nine months
ended March 31, 1997 and 1998 (unaudited)................. F-20
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1997 and 1998 (unaudited)................. F-21
Notes to Unaudited Consolidated Financial Statements........ F-22
</TABLE>
F-1
<PAGE> 124
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of DTI Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of DTI
Holdings, Inc., and subsidiary (the "Company") as of June 30, 1996 and 1997 and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of June 30, 1996
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
St. Louis, Missouri
September 10, 1997
(July 31, 1998
as to Notes 13 and 14)
F-2
<PAGE> 125
DTI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 817,391 $ 4,366,906
Restricted cash (Note 4).................................. 459,522 --
Accounts receivable, less allowance for doubtful accounts
of $-0- and $48,000.................................... 77,990 159,268
Prepayment of suppliers................................... 554,261 --
Prepaid and other current assets.......................... 25,725 23,764
----------- -----------
Total current assets................................. 1,934,889 4,549,938
Network and equipment, at cost less accumulated depreciation
of $479,467 and $1,235,640 (Note 3)....................... 13,064,169 34,000,634
Deferred tax asset.......................................... -- 1,214,331
Other assets................................................ 26,700 84,233
----------- -----------
Total................................................ $15,025,758 $39,849,136
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,658,836 $ 5,086,830
Notes payable (Note 4).................................... 6,500,000 --
Deferred revenues -- current portion (Note 7)............. 138,780 259,680
Interest payable (Note 4)................................. 118,796 --
Taxes payable (other than income taxes)................... -- 923,104
----------- -----------
Total current liabilities............................ 8,416,412 6,269,614
Deferred revenues (Note 7).................................. 6,595,948 9,420,224
----------- -----------
Total liabilities.................................... 15,012,360 15,689,838
Commitments and contingencies (Notes 10, 11, 12 and 13)
Redeemable Convertible Series A Preferred Stock -- $0.01 par
value, 30,000 shares authorized, 0 and 18,500 shares
issued and outstanding (Notes 5, 8, 13 and 14)............ -- 28,889,165
Common stock warrants (Note 4).............................. 1,114,101 --
Stockholders' deficit:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, no shares issued and outstanding (Notes 5
and 14)................................................ -- --
Common stock, $0.01 par value, 50,000,000 and 100,000,000
shares authorized, 30,000,000 shares issued and
outstanding (Notes 6, 13 and 14)....................... 300,000 300,000
Common stock warrants (Note 6)............................ 450,000
Accumulated deficit....................................... (1,400,703) (5,479,867)
----------- -----------
Total stockholders' deficit.......................... (1,100,703) (4,729,867)
----------- -----------
Total....................................................... $15,025,758 $39,849,136
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 126
DTI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Telecommunications services
Carrier's carrier services............................. -- $ 188,424 $ 807,347
End-user services...................................... $ 199,537 488,377 515,637
--------- ---------- -----------
199,537 676,801 1,322,984
Other services........................................... -- -- 711,006
--------- ---------- -----------
Total revenues...................................... 199,537 676,801 2,033,990
--------- ---------- -----------
OPERATING EXPENSES:
Telecommunications services............................ 165,723 296,912 847,190
Other services......................................... -- -- 364,495
Selling, general and administrative.................... 240,530 548,613 1,118,809
Depreciation and amortization.......................... 70,500 425,841 757,173
--------- ---------- -----------
Total operating expenses............................ 476,753 1,271,366 3,087,667
--------- ---------- -----------
Loss from operations................................ (277,216) (594,565) (1,053,677)
OTHER INCOME (EXPENSES):
Interest income........................................ 153,261 193,049 101,914
Interest expense....................................... (162,777) (384,859) (152,937)
Loan commitment fees (Note 6).......................... -- -- (784,500)
Equity in earnings of joint venture (Note 8)........... -- -- 37,436
--------- ---------- -----------
Loss before income tax benefit...................... (286,732) (786,375) (1,851,764)
--------- ---------- -----------
INCOME TAX BENEFIT (Note 9).............................. -- -- 1,214,331
--------- ---------- -----------
NET LOSS................................................. $(286,732) $ (786,375) $ (637,433)
========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 127
DTI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL COMMON EARNINGS/ STOCKHOLDERS'
PREFERRED COMMON PAID-IN STOCK (ACCUMULATED EQUITY
STOCK STOCK CAPITAL WARRANTS DEFICIT) (DEFICIT)
--------- ------ ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1994....... $ -- $ -- $ -- $ -- $ 19,094 $ 19,094
Capital contribution (Note
6)..................... -- -- 30,000 -- 30,000
Net loss for the year..... -- -- -- -- (286,732) (286,732)
-------- -------- -------- -------- ----------- -----------
BALANCE, JUNE 30, 1995...... -- -- 30,000 -- (267,638) (237,638)
Issuance of common stock
(Notes 6 and 13)....... -- 300,000 (30,000) -- (269,970) 30
Accretion to put value of
common stock warrants
(Note 4)............... -- -- -- -- (76,720) (76,720)
Net loss for the year..... -- -- -- -- (786,375) (786,375)
-------- -------- -------- -------- ----------- -----------
BALANCE, JUNE 30, 1996...... -- 300,000 -- -- (1,400,703) (1,100,703)
Accretion/repurchase of
common stock warrants
(Note 4)............... -- -- -- -- (1,585,899) (1,585,899)
Accretion of redeemable
convertible preferred
stock to redemption
price (Notes 5, 13 and
14).................... -- -- -- -- (1,855,832) (1,855,832)
Common stock warrants
(Note 6)............... -- -- -- 450,000 -- 450,000
Net loss for the year..... -- -- -- -- (637,433) (637,433)
-------- -------- -------- -------- ----------- -----------
BALANCE, JUNE 30, 1997...... $ -- $300,000 $ -- $450,000 $(5,479,867) $(4,729,867)
======== ======== ======== ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 128
DTI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (286,732) $ (786,375) $ (637,433)
Adjustments to reconcile net loss to cash provided
by operating activities
Depreciation and amortization................ 70,500 425,841 757,173
Deferred income taxes........................ -- -- (1,214,331)
Loan commitment fees related to common stock
warrants.................................. -- -- 450,000
Changes in assets and liabilities:
Accounts receivable....................... (17,250) (60,740) (81,278)
Prepayments to suppliers.................. (554,261) 554,261
Other assets.............................. (46,019) (15,980) (56,572)
Accounts payable.......................... 2,174,887 (516,051) 3,427,994
Other liabilities......................... 18,285 100,511 1,529,282
Deferred revenues......................... 4,990,213 1,706,765 2,945,176
------------ ----------- ------------
Net cash flows provided by operating activities..... 6,903,884 299,710 7,674,272
------------ ----------- ------------
Cash flows from investing activities:
Increase in network and equipment................. (6,804,176) (5,663,047) (19,876,595)
Change in restricted cash......................... (5,000,000) 4,540,478 459,522
------------ ----------- ------------
Net cash used in investing activities.......... (11,804,176) (1,122,569) (19,417,073)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible
preferred stock; including cash from
contributed joint venture of $2,253,045........ -- -- 10,492,316
Proceeds from borrowings under notes payable...... 5,000,000 10,403,305 8,000,000
Principal payments on notes payable............... -- (8,903,305) (500,000)
Repurchase of common stock warrants granted to a
customer....................................... -- -- (2,700,000)
Proceeds from issuance of common stock............ -- 30 --
Capital contribution.............................. 30,000 -- --
------------ ----------- ------------
Net cash provided by financing activities...... 5,030,000 1,500,030 15,292,316
------------ ----------- ------------
Net increase in cash and cash equivalents........... 129,708 677,171 3,549,515
Cash and cash equivalents, beginning of period...... 10,512 140,220 817,391
------------ ----------- ------------
Cash and cash equivalents, end of period............ $ 140,220 $ 817,391 $ 4,366,906
============ =========== ============
Supplemental cash flow disclosures:
Cash paid for interest, net of amounts
capitalized.................................... $ 135,076 $ 474,017 $ 271,732
============ =========== ============
Supplemental disclosure of significant non-cash
activities:
Consideration for issuance of redeemable
convertible preferred stock (Notes 5 and 8):
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
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 129
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1. DESCRIPTION OF BUSINESS
DTI Holdings, Inc. (the "Company" or "DTI") was incorporated in December
1997 as part of the reorganization of Digital Teleport, Inc., a wholly owned
subsidiary of DTI ("Digital Teleport"). See Note 14. Digital Teleport was
incorporated in June 1989, and was certified as a telecommunications company in
Missouri by the Missouri Public Service Commission in 1992. DTI commenced
construction of its long-haul network in fiscal year 1995, following an
agreement with the Missouri Highway and Transportation Commission ("MHTC"),
which granted to DTI the exclusive right to build in the interstate highway
systems in Missouri. DTI is a facilities-based provider of non-switched
interexchange and local network telecommunications services to interexchange
carriers ("IXCs"), and business and governmental end users in Missouri. DTI's
network is designed to include high-capacity (i) interexchange long-haul routes
between the larger metropolitan areas in the region, (ii) local networks in such
larger metropolitan areas, and (iii) local networks in secondary and tertiary
markets located along the long-haul routes.
Prior to July 1, 1996, the Company was considered to be a development stage
enterprise focusing on developing its digital optic telecommunications network
and customer base. All of the Company's operations are subject to extensive
federal and state regulation.
At June 30, 1997, activities were primarily located in the State of
Missouri providing interexchange end-user and carrier's carrier services.
Carrier's carrier services are provided through wholesale network capacity
agreements ("WNCAs") and IRU agreements. Wholesale network capacity agreements
provide carriers with virtual circuits or bandwidth capacity on DTI's network
for terms specified in the agreements and ranging from 5 to 20 years. The
carrier customer in a WNCA does not have exclusive use of any particular strand
of fiber, but instead has the right to transmit along a virtual circuit or a
certain amount of bandwidth along DTI's network. These agreements require the
customer to pay for such capacity regardless of the level of usage, and
generally require fixed monthly payments over the term of the agreement. In an
IRU agreement the Company grants indefeasable rights to use specified strands of
optical fiber (which are used exclusively by the carrier customer), while the
carrier customer is responsible for providing the electronic equipment necessary
to transmit communications along the fiber. IRUs generally require substantial
advance payments and additional fixed annual maintenance payments over the terms
of the agreements, which range from 14 to 40 years. End-user services are
telecommunications services provided to business and governmental end-users and
typically require a combination of advanced payments and fixed monthly payments
throughout the term of the agreement regardless of the level of usage. In all
cases, title to the optical fiber is retained by the Company and the Company is
generally obligated for all costs of ongoing maintenance and repairs, unless
such repairs are necessitated by acts or omissions of the customer. The terms of
these agreements are such that there are no stated obligations to return any of
the advanced payments. Generally, the agreements may be terminated upon the
mutual written consent of both parties; however, certain of the agreements may
be terminated by the customer subject to acceleration of all payments due
thereunder.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements as of
and for the year ended June 30, 1997 include the accounts of DTI and its wholly
owned subsidiary, Digital Teleport. In addition, the financial statements
include an entity acquired during the year ended June 30, 1997. The Company
previously held a 50% interest in this entity which was accounted for under the
equity method. The acquisition of the remaining 50% interest was accounted for
as a purchase. Accordingly, the purchase consideration was allocated to the
assets and liabilities acquired based on their fair values as of the date of
acquisition. All significant intercompany transactions and balances have been
eliminated.
CONCENTRATIONS OF RISK -- The Company currently operates in the
telecommunications industry within the State of Missouri. See Note 7 regarding
concentration of credit risk associated with deferred revenues and
F-7
<PAGE> 130
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenues. Additionally, the Company is dependent upon single or limited source
suppliers for its source of fiber optic cable for a number of components and
parts used in its network.
MANAGEMENT ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires that
management make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. The reported amounts of
revenues and expenses during the reporting period may also be affected by the
estimates and assumptions management is required to make. Actual results may
differ from those estimates.
REVENUES -- The Company recognizes revenue under its various agreements as
follows:
WHOLESALE NETWORK CAPACITY AGREEMENTS -- All revenues are deferred by
the Company until related route segments are ready for service. Advance
payments and fixed monthly service payments are then recognized on a
straight-line basis over the terms of the agreements which represent the
periods during which services are provided. One-time installation fees are
recognized upon completion of the installation if non-refundable or, if
refundable, as the performance requirements are met.
IRU AGREEMENTS -- These agreements are accounted for as operating
leases. All revenues are deferred until specified route segments are
completed and accepted by the customer. Advance payments are then
recognized on a straight-line basis over the terms of the agreements, as
the Company has continuing obligations to guarantee the performance of the
fibers under such agreements. These costs are potentially significant, and
the Company cannot reasonably estimate such costs over the terms of the IRU
agreements due principally to the limited history of operations of the
Company to date, the long-term nature of the agreements and the various
possible causes of service disruption that the Company must remedy pursuant
to the agreements. Fixed periodic maintenance payments are also recognized
on a straight-line basis over the terms of the agreements as ongoing
maintenance services are provided.
END USER SERVICE AGREEMENTS -- All revenues are deferred until related
route segments are available for service. Advance payments and fixed
monthly payments are then recognized on a straight-line basis over the
terms of the agreements which represent the periods during which services
are provided.
OTHER SERVICES REVENUE -- This category consists of work related to
the design and installation of inner-duct for a customer who was
constructing fiber optic cable facilities. For this agreement, revenue was
recognized upon completion of the facilities under the completed contract
method of accounting. Title to the fiber optic cable under this agreement
was retained by the customer.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
NETWORK AND EQUIPMENT -- Network and equipment are stated at cost. Costs of
construction are capitalized, including interest costs on funds borrowed to
finance the construction. Maintenance and repairs are charged to operations as
incurred. Fiber optic cable plant includes primarily costs of cable, inner duct
and related installation charges. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Fiber optical cable plant................................... 25 years
Fiber optic network buildings............................... 15 years
Leasehold improvements...................................... 15 years
Fiber optic terminal equipment.............................. 8 years
Furniture, office equipment and other....................... 5 years
</TABLE>
F-8
<PAGE> 131
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying value of long-lived assets is periodically evaluated by
management for impairment. Upon indication of an impairment, the Company will
record a loss on its long-lived assets if the discounted cash flows estimated to
be generated by those assets are less than the related carrying amount of the
assets.
NEW ACCOUNTING STANDARDS -- In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." These statements, which are effective
for fiscal years beginning after December 15, 1997, expand or modify disclosures
and, the Company believes, will have no impact on the Company's consolidated
financial position, results of operations or cash flows.
INCOME TAXES -- The Company accounts for income taxes utilizing the
asset/liability method, and deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax bases
of assets and liabilities given the provisions of the enacted tax laws.
3. NETWORK AND EQUIPMENT
Network and equipment consists of the following as of June 30:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Fiber optic cable plant............................. $11,058,172 $28,498,465
Fiber optic terminal equipment...................... 2,115,177 5,757,270
Fiber optic network buildings....................... 289,557 757,680
Leasehold improvements.............................. 5,651 131,611
Furniture, office equipment and other............... 75,079 91,248
----------- -----------
13,543,636 35,236,274
Less -- accumulated depreciation.................... 479,467 1,235,640
----------- -----------
$13,064,169 $34,000,634
=========== ===========
</TABLE>
At June 30, 1996 and 1997, fiber optic cable plant, fiber optic terminal
equipment and fiber optic network buildings include $6,421,234 and $19,027,585
of construction in progress, respectively, that was not in service and,
accordingly, has not been depreciated. Also, during the years ended June 30,
1995, 1996 and 1997 $9,516, $1,227,149 and $562,750 of interest costs were
capitalized.
4. BORROWING ARRANGEMENTS
Effective April 30, 1996, and as subsequently amended, the Company entered
into a loan agreement with KLT Telecom Inc. ("KLT"), a wholly-owned subsidiary
of Kansas City Power and Light Company ("KCPL"), to provide borrowings for the
expansion of the Company's network not to exceed $14,000,000 bearing interest at
3% above the prime interest rate (the "KLT Loan"). At June 30, 1996, a total of
$6,000,000 had been borrowed under this facility. During 1997, an additional
$8,000,000 was borrowed, bringing the total amount of the KLT Loan to
$14,000,000. The outstanding principal of the KLT Loan, plus accrued interest,
was contributed as consideration under the Stock Purchase Agreement referred to
in Note 5.
In connection with the issuance of a $3,200,000 note payable to a major
customer effective February 20, 1996, approximately $1,037,000 of the proceeds
was allocated to a warrant which was also granted to the customer. The warrant
represented the right to purchase 5% of the common stock of the Company for a
nominal amount. The Company also received an amendment to the contract with the
major customer to provide an additional $1,200,000 in telecommunication services
and modify certain completion dates in the original contract. The note was paid
in full in April 1996. The carrying amount of the warrants was being accreted
from the date of issuance until February 1997, the initial date at which the
Company could have been
F-9
<PAGE> 132
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
required to repurchase the warrants for $1,250,000. In February 1997, the
Company repurchased the warrant from the holder for the amount of $2,700,000
which was stipulated in a repurchase right included in the customer contract and
available to the Company for the period from note issuance through February 19,
1997.
During 1995, the Company entered into a Commercial Loan Revolving
Promissory Note Agreement (the "Agreement") with a lender to provide financing
for the acquisition and construction of fiber optic network, the purchase of
equipment related to the construction and operation of the network, and working
capital. At June 30, 1996, the Company had borrowings of $500,000 under the
Agreement which accrued interest at the lender's prime rate. The note was paid
in full in May 1997. Borrowings under this Agreement were collateralized by cash
equivalents that were maintained at the lender ("restricted cash") in the amount
of such borrowings and that earned interest at the lender's money market rate.
5. REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
During 1997, the Company amended its Articles of Incorporation to provide
for 50,000 authorized shares of preferred stock, $0.01 par value. On December
31, 1996, the Company entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") with KLT to sell 30,000 shares of redeemable convertible
preferred stock (designated "Series A Preferred Stock") for $45,000,000. At the
closing date of the Stock Purchase Agreement on March 12, 1997, 15,100 shares of
Series A Preferred Stock were issued to KLT with the remaining 14,900 shares of
Series A Preferred Stock to be issued as additional capital as required by the
Company upon twenty days notice by DTI to KLT and verification by DTI as to the
use of the monies pursuant to the terms of the Stock Purchase Agreement. The
consideration for the 15,100 shares of Series A Preferred Stock was calculated
as follows:
<TABLE>
<S> <C>
Outstanding principal of KLT Loan........................... $14,000,000
Accrued interest on the KLT Loan at March 11, 1997.......... 794,062
KLT investment in KCDT LLC (Note 8)......................... 4,000,000
Cash........................................................ 3,855,938
-----------
Total consideration for 15,100 shares of Series A
preferred stock...................................... 22,650,000
Less: transaction costs..................................... 716,667
-----------
Net consideration for 15,100 shares of Series A
preferred stock...................................... $21,933,333
===========
</TABLE>
Series A Preferred Stock shareholders are entitled to one common vote for
each share of common stock that would be issuable upon conversion of the Series
A Preferred Stock. Each share of Series A Preferred Stock is convertible into
one-thousand shares (after giving effect to the stock splits discussed in Note
13 and the Reorganization discussed in Note 14) of common stock (the "Conversion
Shares") under the terms of the Stock Purchase Agreement and is entitled to the
number of votes equal to the number of Conversion Shares into which such share
of Series A Preferred Stock is convertible with respect to any and all matters
presented to the shareholders of the Company for their action or consideration.
The Series A Preferred Stock shares will automatically convert into common stock
upon the sale of shares of common stock or debt securities of the Company in a
"qualified public offering" within the meaning of the Company's Articles of
Incorporation and subject to the satisfaction of certain net proceed dollar
thresholds. See also note 13. Series A Preferred Stock shareholders rank senior
to common shareholders in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company. Series A Preferred Stock shareholders
are entitled to receive such dividends as would be declared and paid on each
share of common stock. Each additional share of Series A Preferred Stock issued
will result in $150,000 of contributed capital.
Additionally, under the terms of the Certificate of Designation
establishing and governing the Series A Preferred Stock there are two different
redemption features. The first feature provides that commencing July 1, 1999, if
the Company has not met certain financial ratios, the Series A Preferred Stock
shareholders will have the option to require the Company to redeem all of the
shares of Series A Preferred Stock outstanding at the redemption price which is
calculated as a 25% internal rate of return on all amounts paid for
F-10
<PAGE> 133
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Series A Preferred Stock. Accordingly, the Series A Preferred Stock is being
accreted to its redemption price. The second feature provides that from and
after April 1, 1999, the Company will have the option to require the Series A
Preferred Stock shareholders to sell to the Company all of the shares of Series
A Preferred Stock outstanding at the redemption price as calculated above.
On June 27, 1997, an additional 3,400 shares of Series A Preferred Stock
were issued for a cash payment of $5,100,000. At June 30, 1997, Series A
Preferred Stock issued and outstanding was as follows:
<TABLE>
<S> <C>
Series A Preferred Stock, $0.01 par value, 30,000 shares
designated, 18,500 shares issued and outstanding.......... $ 185
Additional paid-in capital.................................. 27,033,148
Accumulated accretion to redemption price................... 1,855,832
-----------
Total carrying value................................... $28,889,165
===========
</TABLE>
In conjunction with the Stock Purchase Agreement, the Company entered into
a Shareholders' Agreement whereby the Series A Preferred Stock shareholders will
designate two of the four directors of the Company's Board of Directors.
See also Notes 13 and 14.
6. EQUITY TRANSACTIONS
As of June 30, 1995, the Company had authorized 30,000,000 shares of common
stock, par value $1.00 per share, and obtained contributed capital of $30,000.
In April 1996, the Company authorized 20,000,000 additional shares of common
stock, and changed the par value of the common stock to $.01 par value per
share. At such time the Company made its initial share issuance of 30,000,000
shares of common stock as "founder's shares" to the founder, President and Chief
Executive Officer of the Company. These shares were attributable to the initial
contributed services of the founder for services performed from the inception of
the Company through June 30, 1995 and his capital contribution of $30,000 in
1995. In February 1997, the Company authorized 50,000,000 additional shares of
common stock.
In connection with a loan commitment from a strategic third party lender
which became effective December 24, 1996, the Company agreed to issue a warrant
representing the right to purchase 1% of the common stock of the Company for
$0.01 per share. Effective December 31, 1996, the Company reached an agreement
with respect to the sale of its Series A Preferred Stock (see Note 5), and, as a
result, the commitment from the strategic third party lender was terminated in
January 1997. Although the warrant had not been issued as of June 30, 1997, the
consolidated financial statements reflect the terms as determined by the
Company. Accordingly, the Company has recorded the fair value of this warrant as
an equity instrument and the related loan commitment fee as an expense. The fair
value of the warrant was determined based upon an independent valuation
utilizing the Black-Scholes method. The warrant is exercisable at the option of
the holder and expires in the year 2007. Also in connection with this
transaction, cash expenses consisting of legal and other fees of $334,500 were
incurred by the Company.
See also Note 13.
7. CUSTOMER CONTRACTS
The Company enters into agreements with unrelated third parties whereby the
Company will provide indefeasible rights-to-use ("IRUs") in multiple fibers
along certain routes, WNCAs or end user service agreements for a minimum
purchase price paid in advance or over the life of the contract. These amounts
are then recognized over the terms of the related agreements which range from 3
to 40 years on a straight-line basis. The Company has various contracts related
to IRUs that provide for advanced payments, which are detailed below, with no
monthly payments. The Company also has various WNCA and end user contracts that
provide for a combination of advance payments, which are detailed below, and
monthly payments. The
F-11
<PAGE> 134
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
following schedule details the advanced payments received or to be received
under IRU, WNCA and end user service agreements and the components of deferred
revenue at June 30:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
END USER
IRUS WNCAS SERVICES TOTALS
---- ----- -------- ------
<S> <C> <C> <C> <C>
Total contract amounts.................... $24,078,380 $ 39,750 $11,445,250 $35,563,380
Less: future payments due under
contracts............................... 20,075,205 -- 5,390,000 25,465,205
----------- ----------- ----------- -----------
Total amounts collected to date........... 4,003,175 39,750 6,055,250 10,098,175
Less: total amounts recognized as revenues
to date................................. 141,914 -- 276,357 418,271
----------- ----------- ----------- -----------
Deferred revenue.......................... 3,861,261 39,750 5,778,893 9,679,904
Less: amounts to be recognized within 12
months.................................. 77,796 -- 181,884 259,680
----------- ----------- ----------- -----------
$ 3,783,465 $ 39,750 $ 5,597,009 $ 9,440,224
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
END USER
IRUS WNCAS SERVICES TOTALS
---- ----- -------- ------
<S> <C> <C> <C> <C>
Total contract amounts.................... $ 5,000,000 $ -- $11,445,250 $16,445,250
Less: future payments due under
contracts............................... 3,400,000 -- 6,200,000 9,600,000
----------- ----------- ----------- -----------
Total amounts collected to date........... 1,600,000 -- 5,245,250 6,845,250
Less: total amounts recognized as revenues
to date................................. -- -- 110,522 110,522
----------- ----------- ----------- -----------
Deferred revenue.......................... 1,600,000 -- 5,134,728 6,734,728
Less: amounts to be recognized within 12
months.................................. -- -- 138,780 138,780
----------- ----------- ----------- -----------
$ 1,600,000 $ -- $ 4,995,948 $ 6,595,948
=========== =========== =========== ===========
</TABLE>
Future minimum rentals due over the next five years under the IRU
agreements accounted for as operating leases are generally payable upon
completion of related routes and are approximately as follows as of June 30,
1997:
<TABLE>
<S> <C>
1998............................................ $ 5,096,000
1999............................................ 2,662,000
2000............................................ 3,030,000
2001............................................ 3,030,000
2002............................................ 3,030,000
Thereafter...................................... 3,227,000
-----------
Total........................................... $20,075,000
===========
</TABLE>
F-12
<PAGE> 135
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total costs of fiber optic cable plant for the route segments completed
to date are allocated to property subject to lease under IRU agreements based on
the percentage of fiber strands under lease to total fiber count in the related
route segments and amount to approximately $3,150,000 at June 30, 1997.
Additional route segments related to the IRU agreements are in process or
planned for construction under timelines established in the IRU agreements. The
IRU agreements also provide for periodic maintenance payments which are
recognized on a straight-line basis over the periods covered by the agreement.
The Company has substantial business relationships with several large
customers. Four customers accounted for 59%, 21%, 17% and 2% of deferred
revenues at June 30, 1997. Additionally, these four customers accounted for 21%,
10%, 13% and 56%, respectively, of amounts to be received per the customer
contracts.
During fiscal year 1997, the Company's three largest customers accounted
for 18%, 18% and 16% of telecommunications services revenue. During fiscal year
1996, the Company's three largest customers accounted for 47%, 21% and 10% of
telecommunications services revenue. During fiscal year 1995, one customer
accounted for 99% of end-user services revenue. The Company's contracts provide
for reduced payments and varying penalties for late delivery of route segments,
and allow the customers, after expiration of grace periods, to delete such
non-delivered segment from the system route to be delivered. A significant
reduction in the level of services the Company provides for any of these
customers could have a material adverse effect on the Company's results of
operations or financial condition. In addition, the Company's business plan
assumes increased revenue from its carrier's carrier services operations to fund
the expansion of the DTI network. Many of the Company's customer arrangements
are subject to termination and do not provide the Company with guarantees that
service quantities will be maintained at current levels. The Company is aware
that certain interexchange carriers are constructing or considering new
networks. Accordingly, there can be no assurance that any of the Company's
carrier's carrier services customers will increase their use of the Company's
services, or will not reduce or cease their use of the Company's services,
either of which could have a material adverse effect on the Company's ability to
fund the expansion of the DTI network.
8. INVESTMENT IN JOINT VENTURE
Effective July 1996, the Company entered into an agreement with KLT to form
KCDT LLC ("KCDT") as a limited liability company for the purpose of financing,
establishing, constructing and maintaining a fiber-optic network communications
system ("System") within the Kansas City, Missouri metropolitan area. The
Company received a 50% interest in KCDT for its contribution of an indefeasible
right to use (IRU) the signal transmission capacity of certain optic fiber
strands within the System. KLT received a 50% interest in KCDT for its
contribution of access rights of utility right-of-ways in Kansas City and a
capital contribution not to exceed $5,000,000 in cash, as needed, for the
construction of the System or operations of KCDT.
As part of the Stock Purchase Agreement, which closed March 12, 1997 (Note
5), KLT contributed to the Company its ownership interest in KCDT which amounted
to $4,000,000. Assets and liabilities of the joint venture at the date of
contribution consisted of $2,253,045 in cash, $1,816,043 in network and
equipment and $69,088 in other liabilities, all of which assets and liabilities
were determined to approximate fair market value. This transaction was accounted
for as a purchase by the Company. Additionally, as of March 12, 1997, KCDT had
no operations in service. The only income earned by KCDT consisted of interest
income earned on bank deposits.
Prior to receipt of KLT's interest in KCDT, the Company accounted for its
investment in KCDT using the equity method. Equity in earnings of joint venture
represents the Company's 50% interest in the operations of KCDT under the equity
method. Upon receipt of KLT's interest in KCDT, operations of KCDT have been
consolidated with the Company's operations.
F-13
<PAGE> 136
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The actual income tax expense for the years ended June 30, 1997, 1996 and
1995 differs from the "expected" income tax expense, computed by applying the
U.S. Federal corporate tax rate of 35% to income before income taxes as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit.................... $ 100,356 $ 275,231 $ 648,117
Change in valuation allowance............................. (103,368) (321,596) 424,964
Other -- net.............................................. 3,012 46,365 141,250
---------- --------- ----------
Income tax benefit................................... $ -- $ -- $1,214,331
========== ========= ==========
</TABLE>
Temporary differences which give rise to long-term deferred taxes as
reported on the balance sheet are as follows at June 30:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred revenues......................................... $ 346,672 $ 571,711
Net operating loss carryforward........................... 326,139 1,175,712
---------- ----------
Total deferred tax assets.............................. 672,811 1,747,423
Deferred tax liabilities -- accelerated depreciation........ (247,847) (533,092)
Valuation allowance......................................... (424,964)
---------- ----------
Net deferred tax assets................................ $ -- $1,214,331
========== ==========
</TABLE>
Even though the Company has incurred tax losses, management believes that
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. This belief is
based primarily upon changes in operations over the last year which include the
equity investment by KLT (see Note 5), which allowed the Company to
significantly expand its fiber optic network, deferred revenues of the Company
which have been collected under certain IRUs and end user service agreements,
future payments due under existing contracts, and available tax planning
strategies. As a result, the Company reversed into income its valuation
allowance of $424,964 which was recorded at June 30, 1996. Tax net operating
losses of approximately $3 million expire in years 2010-2012 if not utilized in
future income tax returns. The availability of the loss carryforwards may be
limited in the event of a significant change in the ownership of the Company or
its subsidiary.
10. OPERATING LEASES
The Company has operating leases for equipment and for office space. The
Company's headquarters is leased from the Company's President and Chief
Executive Officer in an amount of $75,000 per year for the term January 1, 1997
to December 31, 1997. Rent expense related to the headquarters for fiscal years
1995, 1996 and 1997 was $33,400, $15,405 and $49,897, respectively.
Additionally, equipment space is leased from
F-14
<PAGE> 137
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
various office buildings throughout the Company's service areas. Minimum rental
commitments under the above leases, some of which contain renewal options and
escalation clauses, are as follows:
<TABLE>
<S> <C>
Year ending June 30:
1998...................................................... $51,629
1999...................................................... 6,436
2000...................................................... 1,629
-------
Total................................................ $59,694
=======
</TABLE>
11. COMMITMENTS
HIGHWAY AND UTILITY RIGHTS-OF-WAY -- In July 1994, the Company entered into
an agreement with MHTC to install and maintain a buried fiber optic network
within the cable corridor along the federal interstate highway system in
Missouri. Under the terms of this agreement, MHTC will receive certain dedicated
dark and lighted fiber optic strands in the statewide system and the necessary
connections thereto and the Company, in turn, receives exclusive easements
within certain of MHTC's airspace for a forty year period. Pursuant to this
contract DTI is obligated to complete by December 31, 1998 construction of 1,200
miles of fiber cable along the Missouri interstate and state highway systems.
DTI anticipates meeting this obligation and completing substantially all of its
currently planned network in Missouri by such date. The Company must complete
construction on an additional 800 miles by the end of 1999 to maintain its
exclusive rights to such routes. Additionally, the Company was required to post
a $250,000 performance and payment bond under the terms of this Agreement. In
August 1994, the sole stockholder of the Company entered into a letter of credit
with a lender in the amount of $250,000 in connection with this Agreement. The
Company's May 1997 agreement with the Department of Transportation of the State
of Arkansas grants to DTI, in exchange for certain dedicated dark fiber optic
strands located in the State of Arkansas, the right, without obligation, to
install its network along 250 miles of the interstate and state highway systems
in Arkansas, as well as the right to expand its network onto additional routes
in the future. DTI has submitted a proposal to the Department of Transportation
of the State of Kansas to enter into an agreement providing for rights-of-way
throughout the highway system in metropolitan Kansas City in exchange for fiber.
DTI also has a license from KCPL granting it the right to use conduits, poles,
ducts, manholes and rights-of-way owned by KCPL to construct the DTI network in
the Kansas City metropolitan area. The Company will seek to obtain the
rights-of-way that it needs for the expansion of its network in areas where it
will construct network rather than purchase or swap fiber optic strands by
entering into agreements with other state highway departments and other
governmental authorities, utilities or pipeline companies and it may enter into
joint ventures or other "in-kind" transfers in order to obtain such rights. In
addition, DTI may use available public rights-of-way.
LICENSING AGREEMENTS -- The Company has entered into various licensing
agreements with municipalities throughout Missouri. Under the terms of these
agreements, the Company maintains certain performance bonds, totaling $350,000
in the aggregate, and minimum insurance levels. Such agreements generally have
terms from 10 to 15 years and grant to the Company a non-exclusive license to
construct, operate, maintain and replace communications transmission lines for
its fiber optic cable system and other necessary appurtenances on public roads,
rights-of-way and easements within the municipality. In exchange for such
licenses, the Company generally provides to the municipality in-kind rights and
services (such as the right to use certain dedicated strands of optic fiber in
the DTI network within the municipality, interconnection services to the DTI
network within the municipality, and maintenance of the municipality's fibers),
or, less frequently, a nominal percentage of the gross revenues of the Company
for services provided within the municipality. In one instance, the Company is
obligated to make nominal annual cash payments for such rights based on linear
footage.
F-15
<PAGE> 138
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NONRECOURSE NOTE TO CUSTOMER -- The Company's performance under one IRU
agreement is secured by a nonrecourse note in the amount of $250,000.
EMPLOYMENT AGREEMENTS -- DTI has employment agreements entered into during
fiscal year 1997 with certain senior management personnel. These agreements are
effective for various periods through December 31, 1999, unless terminated
earlier by the executive or DTI, and provide for annual salaries, cost-of-living
adjustments, additional compensation in the form of bonuses based on performance
of the executive, and participation in the various benefit plans of DTI. The
agreements contain certain benefits to the executive if DTI terminates the
executive's employment without cause or if the executive terminates his
employment as a result of change in ownership of DTI. DTI's remaining aggregate
commitments for salaries under such agreements at June 30, 1997 is approximately
$819,000. See also Note 13 regarding the Company's Long-Term Incentive Award
Plan and additional employment agreements.
SUPPLIER AGREEMENTS -- DTI's supplier agreements are with its major network
construction contractor and an equipment supplier.
PURCHASE COMMITMENTS -- DTI's remaining aggregate purchase commitment for
construction and equipment at June 30, 1997 is approximately $7,220,000.
12. CONTINGENCIES
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 and damages 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 damages, and has pledged his stock ownership in the Company to secure such
obligation.
The Company is involved in a dispute with a customer related to delays in
providing telecommunications services to the customer. In February 1998, the
Company received notice from a customer that it intends to setoff against
amounts payable to the Company approximately $400,000 as damages and penalties.
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.
From time to time the Company is named as a defendant in routine lawsuits
incidental to its business. The Company believes that none of such 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.
13. SUBSEQUENT EVENTS
During the nine months ended March 31, 1998, an additional 11,500 shares of
Series A Preferred Stock were issued for cash payments of $17,250,000.
F-16
<PAGE> 139
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 22, 1997 and on February 17, 1998, the Company approved stock
splits in the form of stock dividends of 99 shares and 999 shares, respectively,
of common stock for each one share of common stock outstanding. Effective
October 17, 1997 and February 18, 1998, the Company's Articles of Incorporation
were amended to increase the number of authorized shares of common stock to
100,000 and 100,000,000, respectively, and the stock dividends were issued to
the Company's stockholders. All share information included in the accompanying
financial statements has been retroactively adjusted to give effect to the stock
splits. In order to effect the 999 for 1 stock split on February 17, 1998,
$269,970 was charged to accumulated deficit. The Company will record 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.
On August 22, 1997, the Company adopted a Long-Term Incentive Award Plan
(the "Plan"). A total of 3,000,000 shares of common stock of the Company have
been reserved for issuance under the Plan. As of July 31, 1998 the Company has
granted or is obligated to grant to certain employees and directors of the
Company options to purchase an aggregate of 945,000 shares of common stock under
the Plan. The employees' options vest 100% after three to five years from the
date of grant, subject to certain acceleration events. The directors' options
vest 25% per year beginning one year from the date of grant. The exercise prices
per share of such options are based on fair market value as determined in good
faith by the Board of Directors. The Board reviewed a combination of detailed
financial analyses, as well as information derived from discussions with outside
financial advisors. The exercise prices per share range from $2.60 to $6.66.
As of July 20, 1998 in conjunction with an officers employment agreement
the Company is obligated to grant 200,000 shares of restricted stock. These
shares do not carry voting rights and will vest over the three year term of the
agreement.
On September 23, 1997, DTI's Board of Directors and stockholders approved
the merger of KCDT with and into the Company, which merger became effective on
October 17, 1997.
In January 1998, Digital Teleport 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. Borrowings under the Credit
Facility bear interest at an adjustable rate based on (i) a base rate (either
the prime rate adopted by TD (Texas) or an adjusted Federal Funds rate) plus
1.75% or LIBOR plus 3.50% when the borrowing base ratio (total debt to property,
plant and equipment) is less than 30% and (ii) the base rate plus 1.20% or LIBOR
plus 3.00% when the borrowing base ratio is greater than 30%. At February 23,
1998, Digital Teleport had drawn $3.0 million principal amount under the Credit
Facility which was repaid with the net proceeds of the Senior Discount Notes due
2008 discussed below.
On February 13, 1998, in connection the Company's offering of Senior
Discount Notes, 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 redeemable. The Series A Preferred Stock, as a result of such
amendment, will be classified with stockholders' equity subsequent to such date.
On February 23, 1998, the Company completed the issuance and sale of
506,000 Units consisting of $506.0 million aggregate principal amount at
maturity of Senior Discount Notes due 2008 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. Of the
$275.2 million gross proceeds from the issuance of the Units, $265.3 million was
allocated to the initial accreted value of the Senior Discount Notes and $10.0
million was allocated to warrants included in stockholders' equity, based on the
fair market value of the warrants as determined by the Company and the initial
purchasers of the Units utilizing the Black-Scholes method. The Senior Discount
Notes are senior unsecured obligations of the Company and may be redeemed at the
option of the Company, in whole or in part, on or after March 1, 2003 at a
premium declining to zero in
F-17
<PAGE> 140
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2006. At any time and from time to time on or prior to March 1, 2001, the
Company may redeem an aggregate of up to 33 1/3% of the aggregate principal
amount at maturity of the originally issued Senior Discount Notes within 60 days
of one or more public equity offerings with the net proceeds of such offering,
at a redemption price of 112.5% of the accreted value (determined at the
redemption date). In the event of a "Change of Control" (as defined in the
Indenture pursuant to which the Senior Discount Notes were issued), holders of
the Senior Discount Notes may require the Company to offer to repurchase all
outstanding Senior Discount Notes at a price equal to 101% of the accreted value
thereof, plus accrued interest, if any, to the date of redemption. The Senior
Discount Notes also contain certain covenants that restrict the ability of the
Company and its Restricted Subsidiaries (as defined in the Indenture) to incur
certain indebtedness, pay dividends and make certain other restricted payments,
create liens, permit other restrictions on dividends and other payments by
Restricted Subsidiaries, issue and sell capital stock of its Restricted
Subsidiaries, guarantee certain indebtedness, sell assets, enter into
transactions with affiliates, merge, consolidate or transfer substantially all
of the assets of the Company and make any investments in any Unrestricted
Subsidiary (as defined in the Indenture). The issuance of the Senior Discount
Notes does not constitute a "qualified public offering" within the meaning of
the Company's Articles of Incorporation and, therefore, will not effect the
conversion of the Series A Preferred Stock into common stock.
On April 14, 1998, the Company filed a Registration Statement on Form S-4
(subsequently amended) relating to an offer to exchange the Company's Series B
Senior Discount Notes due 2008 for its outstanding Senior Discount Notes (the
"Exchange Offer"). The Exchange Offer does not constitute a "qualified public
offering" within the meaning of the Company's Articles of Incorporation and,
therefore, will not effect the conversion of the Series A Preferred Stock into
common stock.
On July 12, 1998, the Company entered into an agreement with the Department
of Transportation of the State of Kansas providing for rights-of-way throughout
the highway system in metropolitan Kansas City, Kansas, in exchange for fiber
and other telecommunications services.
In June and July 1998, the Company entered into preliminary and definitive
agreements to purchase for cash IRUs for fiber optic strands (fiber usage
rights). The IRU agreements have 20-year terms and require cash payments
totaling approximately $127 million, with each agreement providing for an
initial payment and subsequent payments over a period of less than one year.
These fiber usage rights will be recorded at cost as a separate component of
property, plant and equipment.
14. REORGANIZATION
On December 23, 1997, the Company completed a corporate reorganization (the
"Reorganization"), pursuant to which DTI was formed as the parent holding
company of Digital Teleport, Inc., which became a wholly-owned subsidiary of
DTI. Pursuant to the Reorganization, the outstanding shares of common and
preferred stock of Digital Teleport were exchanged for the number of shares of
common and preferred stock of DTI having the same relative rights and
preferences as such exchanged shares. The Reorganization was required in
connection with the establishment of the Credit Facility. The business
operations, name, charter, by-laws and board of directors of the Company are
identical in all material respects to those of Digital Teleport, which did not
change as a result of the Reorganization. Accordingly, the consolidated
financial statements have been presented as if Digital Teleport had always been
a wholly owned subsidiary of DTI. DTI is a holding company and, as such, has no
operations other than its ownership interest in Digital Teleport, its wholly
owned subsidiary, and maintains only nominal other assets ($100 in
organizational costs).
* * * * * *
F-18
<PAGE> 141
DTI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $263,231,384
Accounts receivable, less allowance for doubtful accounts
of $167,000............................................ 708,477
Prepaid and other current assets.......................... 34,769
------------
Total current assets................................. 263,974,630
Network and equipment, at cost less accumulated depreciation
of $2,620,640 (Note 2).................................... 60,824,950
Deferred financing costs, net of amortization of $106,110... 10,390,287
Deferred tax asset.......................................... 3,234,331
Other assets................................................ 43,665
------------
Total................................................ $338,467,861
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,555,642
Deferred revenues -- current portion...................... 366,000
Taxes payable (other than income taxes)................... 2,115,358
------------
Total current liabilities............................ 7,037,000
Deferred revenues........................................... 14,037,528
Senior discount notes, net (Note 7)......................... 268,856,985
------------
Total liabilities.................................... 289,931,513
------------
Commitments and contingencies (Notes 5, 6 and 7)............ --
Stockholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares
authorized, no shares issued and outstanding........... --
Convertible series A preferred stock, $.01 par value,
30,000 shares authorized, issued and outstanding....... 300
Common stock, $.01 par value, 100,000,000 shares
authorized, 30,000,000 shares issued and outstanding
(Notes 4 and 7)........................................ 300,000
Additional paid-in capital................................ 44,013,063
Common stock warrant...................................... 10,421,336
Accumulated deficit....................................... (6,198,351)
------------
Total stockholders' equity........................... 48,536,348
------------
Total....................................................... $338,467,861
============
</TABLE>
See notes to unaudited consolidated financial statements.
F-19
<PAGE> 142
DTI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
TELECOMMUNICATIONS SERVICES REVENUES:
Carrier's carrier services................................ $ 488,931 $ 1,707,914
End-user services......................................... 380,914 414,660
----------- -----------
Total revenues....................................... 869,845 2,122,574
----------- -----------
OPERATING EXPENSES:
Telecommunications services............................... 563,791 1,024,578
Selling, general and administrative....................... 845,684 2,437,825
Depreciation and amortization............................. 521,049 1,385,750
----------- -----------
Total operating expenses............................. 1,930,524 4,848,153
Loss from operations................................. (1,060,679) (2,725,579)
OTHER INCOME (EXPENSES):
Interest income........................................... 58,403 1,558,898
Interest expense.......................................... (152,937) (3,697,605)
Loan commitment fees...................................... (784,500) --
Equity in earnings of joint venture....................... 37,436 --
----------- -----------
Loss before income tax benefit....................... (1,902,277) (4,864,286)
Income tax benefit.......................................... 1,042,000 2,020,000
----------- -----------
Net loss.................................................... $ (860,277) $(2,844,286)
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
F-20
<PAGE> 143
DTI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (860,277) $ (2,844,286)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization.......................... 521,049 1,491,860
Accretion of discount on senior discount notes......... -- 3,604,801
Deferred income taxes.................................. (1,042,000) (2,020,000)
Loan commitment fees related to common stock
warrants............................................. 450,000 --
Changes in assets and liabilities:
Accounts receivable.................................. (1,491,397) (549,209)
Prepaid and other current assets..................... 543,300 (11,003)
Other assets......................................... (36,945) 40,568
Accounts payable..................................... 1,872,548 (531,188)
Other liabilities.................................... 606,178
Taxes payable (other than income taxes).............. 543,000 1,192,254
Deferred revenues.................................... 3,589,343 4,723,624
------------ ------------
Net cash flows provided by operating activities... 4,694,799 5,097,421
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in network and equipment......................... (10,518,316) (28,210,066)
Change in restricted cash................................. 459,522 --
------------ ------------
Net cash used in investing activities............. (10,058,794) (28,210,066)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior discount notes and
attached warrants...................................... -- 275,233,520
Proceeds from issuance of redeemable convertible preferred
stock including cash from contributed joint venture of
$0 and $2,253,045...................................... 5,464,313 17,250,000
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......... 10,314,313 281,987,123
------------ ------------
Net increase in cash and cash equivalents................... 4,950,318 258,864,478
Cash and cash equivalents, beginning of period.............. 817,391 4,366,906
------------ ------------
Cash and cash equivalents, end of period.................... $ 5,767,709 $263,231,384
============ ============
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 --
</TABLE>
See notes to unaudited consolidated financial statements.
F-21
<PAGE> 144
DTI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
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, the interim financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements.
In the opinion of the management of DTI Holdings, Inc. (the "Company" or
"DTI") the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the 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
consolidated financial statements and notes thereto for the year ended June 30,
1997 included elsewhere in this document. The accounting policies used in
preparing these financial statements are the same as those described in the June
30, 1997 consolidated financial statements. Accordingly, footnote disclosures
which would substantially duplicate the disclosures in the audited financial
statements have been omitted.
On September 23, 1997, DTI's Board of Directors and stockholders approved
the merger of KCDT with and into the Company, which merger became effective on
October 17, 1997.
On December 23, 1997, the Company completed a corporate reorganization (the
"Reorganization"), pursuant to which DTI was formed as the parent holding
company of Digital Teleport, Inc., which became a wholly-owned subsidiary of
DTI. Pursuant to the Reorganization, the outstanding shares of common and
preferred stock of Digital Teleport were exchanged for the number of shares of
common and preferred stock of DTI having the same relative rights and
preferences as such shares. The Reorganization was required in connection with
the establishment of the Credit Facility. The business operations, name,
charter, by-laws and board of directors of the Company are identical in all
material respects to those of Digital Teleport, which did not change as a result
of the Reorganization. Accordingly, the consolidated financial statements have
been presented as if Digital Teleport had always been a wholly owned subsidiary
of DTI.
2. NETWORK AND EQUIPMENT
Network and equipment consists of the following as of March 31, 1998:
<TABLE>
<S> <C>
Fiber optic cable plant..................................... $49,141,905
Fiber optic terminal equipment.............................. 11,646,390
Fiber optic network buildings............................... 2,050,973
Leasehold improvements...................................... 292,951
Furniture, office equipment and other....................... 313,371
-----------
63,445,590
Less -- accumulated depreciation............................ 2,620,640
-----------
$60,824,950
===========
</TABLE>
F-22
<PAGE> 145
At March 31, 1998, fiber optic cable plant, fiber optic terminal equipment
and fiber optic network buildings include $19,581,920 of construction in
progress that was not in service and, accordingly, has not been depreciated.
Also, during the nine months ended March 31, 1998, $182,000 of interest costs
were capitalized.
3. SERIES A PREFERRED STOCK
During the nine months ended March 31, 1998, an additional 11,500 shares of
Series A Preferred Stock were issued for cash payments of $17,250,000. The
accretion towards redemption value of Series A Preferred Stock for the period
ending February 13, 1998 amounted to $6,398,388 which was recorded as a charge
to accumulated deficit. 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 redeemable. The Series A Preferred
Stock, as a result of such an amendment made in conjunction with the offering of
Senior Discount Notes by the Company, has been classified with stockholders'
equity subsequent to such date.
4. STOCKHOLDERS' DEFICIT
On August 22, 1997 and on February 17, 1998, the Company approved stock
splits in the form of stock dividends of 99 shares and 999 shares, respectively,
of common stock for each one share of common stock outstanding. Effective
October 17, 1997 and February 18, 1998, the Company's Restated Articles of
Incorporation were amended to increase the number of authorized shares of common
stock of DTI to 100,000 and 100,000,000, respectively, and the stock dividends
were issued to the Company's stockholders. All share information included in the
accompanying financial statements has been retroactively adjusted to give effect
to the stock splits. In order to effect the 1,000 for 1 stock split of February
17, 1998, $269,970 was charged to accumulated deficit. The Company recorded an
entry in the third quarter of fiscal 1998 to reclassify this amount from
additional paid-in capital recorded in conjunction with the reclassification of
Series A Preferred Stock on February 13, 1998 as discussed in Note 7.
5. COMMITMENTS
INCENTIVE PLAN -- On August 22, 1997, the Company adopted a Long-Term
Incentive Award Plan (the "Plan"). A total of 3,000,000 shares of common stock
of the Company have been reserved for issuance under the Plan. As of July 31,
1998, the Company has granted or is obligated to grant to certain employees and
directors of the Company options to purchase an aggregate of 945,000 shares of
common stock under the Plan. The employees' options vest 100% after three to
five years from the date of grant or subject to certain acceleration events. The
directors' options vest 25% per year beginning one year from the date of grant.
The exercise prices per share of such options are based on fair market value as
determined in good faith by the Board of Directors. The Board reviewed a
combination of detailed financial analyses, as well as information derived from
discussions with outside financial advisors. The exercise prices per share range
from $2.60 to $6.66. No compensation expense is required to be recorded with
respect to such options.
The Company accounts for its incentive plan in accordance with the
provisions of Accounting Principles Board (APB) Option No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has also adopted SFAS
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 allows entities to apply
the provisions of APB Opinion No. 25 and provide pro forma net income for
employee stock option grants made in 1996 and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has
elected to apply the provisions of APB Opinion No. 25.
PURCHASE COMMITMENTS -- DTI's remaining aggregate commitments for
construction and equipment under these agreements at March 31, 1998 is
approximately $20.1 million.
F-23
<PAGE> 146
6. CONTINGENCIES
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 and damages 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 damages, and has pledged his stock ownership in the Company to secure such
obligation.
The Company is involved in a dispute with a customer related to delays in
providing telecommunication services to the customer. In February 1998, the
Company received notice from a customer that it intends to setoff against
amounts payable to the Company approximately $400,000 as damages and penalties.
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.
From time to time the Company is named as a defendant in routine lawsuits
incidental to its business. The Company believes that none of such 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.
7. FINANCING ARRANGEMENTS
In January 1998, Digital Teleport 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. Borrowings under the Credit
Facility bear interest at an adjustable rate based on (i) a base rate (either
the prime rate adopted by TD (Texas) or an adjusted Federal Funds rate) plus
1.75% or LIBOR plus 3.50% when the borrowing base ratio (total debt to property,
plant and equipment) is less than 30% and (ii) the base rate plus 1.20% or LIBOR
plus 3.00% when the borrowing base ratio is greater than 30%. In January 1998,
$3.0 million was borrowed under the Credit Facility. All amounts borrowed were
repaid in February 1998 using the proceeds of the Senior Discount Notes due 2008
discussed below. The Credit Facility was then cancelled.
On February 23, 1998, the Company completed the issuance and sale of the
506,000 Units consisting of $506.0 million aggregate principal amount at
maturity of Senior Discount Notes due 2008 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. The issuance of the Senior Discount Notes does
not constitute a "qualified public offering" within the meaning of the Company's
Articles of Incorporation and, therefore, will not effect the conversion of the
Series A Preferred Stock into common stock.
8. SUBSEQUENT EVENTS
Subsequent to March 31, 1998, the Company filed a Registration Statement on
Form S-4 and subsequent amendments relating to an offer to exchange the
Company's Series B Senior Discount Notes due 2008 for its outstanding Senior
Discount Notes (the "Exchange Offer"). The Exchange Offer does not constitute a
"qualified" offering within the meaning of the Company's Articles of
Incorporation and, therefore, will not effect the conversion of the Series A
Preferred Stock into common stock.
F-24
<PAGE> 147
On July 12, 1998, the Company entered into an agreement with the Department
of Transportation of the State of Kansas providing for rights-of-way throughout
the highway system in metropolitan Kansas City, Kansas, in exchange for fiber
and other telecommunications services.
In June and July 1998, the Company entered into preliminary and definitive
agreements to purchase for cash IRUs for fiber optic strands (fiber usage
rights). The IRU agreements have 20-year terms and require cash payments
totaling approximately $127 million, with each agreement providing for an
initial payment and subsequent payments over a period of less than one year.
These fiber usage rights will be recorded at cost as a separate component of
property, plant and equipment.
As of July 20, 1998 in conjunction with an officer's employment agreement
the Company is obligated to grant 200,000 shares of restricted stock. These
shares do not carry voting rights and will vest over the three year term of the
Agreement.
F-25
<PAGE> 148
ANNEX A
GLOSSARY
Access charges..........The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on the
LECs' local networks.
Access tandem...........An interconnection point on an ILEC local network where
calls from central offices are aggregated for
transmission to other central offices and IXC
facilities.
Affiliate...............As defined in and for purposes of the Shareholders'
Agreement, an "affiliate" of KLT or the Company means
any person that directly, or indirectly though one or
more intermediaries, controls, or is controlled by, or
is under common control with KLT or the Company, as the
case may be, including without limitation, any director,
officer or employee of KLT or the Company, as the case
may be, and an "affiliate" of Mr. Weinstein means (i)
any director, officer, shareholder, member, partner,
trustee or owner of any corporation, organization or
other entity of which Mr. Weinstein is, directly or
indirectly, the beneficial owner of 5% or more of any
class of equity securities; and (ii) Mr. Weinstein's
spouse, parents, children, siblings, mothers and
fathers-in-law, sons and daughters-in-law, and brothers
and sisters-in-law.
ATM (Asynchronous
Transfer Mode)..........An information transfer standard that is one of a
general class of packet technologies that relay traffic
by way of an address contained within the first five
bytes of a standard fifty-three-byte-long packet or
cell. The ATM format can be used by many different
information systems, including area networks, to deliver
traffic at varying rates, permitting a mix of voice,
data and video (multimedia).
AT&T....................AT&T Corp.
Bandwidth...............The relative range of analog frequencies or digital
signals that can be passed through a transmission
medium, such as glass fibers, without distortion. The
greater the bandwidth, the greater the information
carrying capacity. Bandwidth is measured in Hertz
(analog) or Bits Per Second (digital).
Broadband...............Data streams of at least 1.544 megabits per second.
Broadband communications systems can transmit large
quantities of voice, data and video by way of digital or
analog signals. Examples of broadband communications
systems include DS-3 systems, which can transmit 672
simultaneous voice conversations, or a broadcast
television station signal that transmits high resolution
audio and video signals into the home. Broadband
connectivity is an essential element for interactive
multimedia applications.
Capacity................Refers to transmission.
Carrier.................A provider of communications transmission services by
fiber, wire or radio.
Central offices.........The switching centers or central switching facilities of
the ILECs.
Centrex.................Centrex is a service that offers features similar to
those of a Private Branch Exchange (PBX), except the
equipment is located at the carrier's premises and not
at the premises of the customer. These features include
direct dialing within a given phone system, direct
dialing of incoming calls, and automatic identification
of outbound calls. This is a value-added service that
carriers can
A-1
<PAGE> 149
provide to a wide range of customers who don't have the
size or the funds to support their own on-site PBX.
CLEC (Competitive Local
Exchange Carrier).......A company that competes with ILECs in local services
markets.
Collocation.............The ability of a CLEC such as the Company to connect its
network to the ILEC's central offices. Physical
collocation occurs when a CLEC places its network
connection equipment inside the ILEC's central offices.
Virtual collocation is an alternative to physical
collocation pursuant to which the ILEC permits a CLEC to
connect its network to the ILEC's central offices on
comparable terms, even though the CLEC's network
connection equipment is not physically located inside
the central offices.
Common carrier..........A government-defined group of private companies offering
telecommunications services or facilities to the general
public on a non-discriminatory basis.
Conduit.................A pipe, usually made of metal, ceramic or plastic, that
protects buried cables.
Customer drop routes....Fiber optic facilities that connect a network to
end-user customer sites.
Data transmission
services................Services involving the nonvoice transmission of facts,
concepts or information in a formalized manner, suitable
for communication, interpretation or processing.
Dark fiber..............Fiber that lacks the requisite electronic and optronic
equipment necessary to use the fiber for transmission.
Dialing parity..........One of the changes, required by the Telecom Act,
intended to level the competitive playing field. Dialing
parity when implemented will enable customers to dial
only 1 or 0 for service no matter which local or long
distance carrier they choose.
Digital.................Describes a method of storing, processing and
transmitting information through the use of distinct
electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission/switching
technologies employ a sequence of discrete, distinct
pulses to represent information, as opposed to the
continuously variable analog signal.
Dense wavelength
division multiplexing...A technique for transmitting eight or more different
light wave frequencies on a single fiber to increase the
information carrying capacity.
DS-0, DS-1, DS-3........Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the
number of binary digits 0 and 1) transmitted per
second). DS-0 service has a bit rate of 64 kilobits per
second and typically transmits only the equivalent of
one voice conversation at a time. DS-1 service has a bit
rate of 1.544 megabits per second and typically
transmits the equivalent of 24 simultaneous voice
conversations. DS-3 service has a bit rate of 45
megabits per second and typically transmits the
equivalent of 672 simultaneous voice conversations.
End-user................The occupant of the premises who uses and pays for the
telephone service received and does not resell it to
others.
Equal access............The basis upon which customers of interexchange carriers
are able to obtain access to their Primary Interexchange
Carriers' (PIC) long distance telephone
A-2
<PAGE> 150
network by dialing "1", thus eliminating the need to
dial additional digits and an authorization code to
obtain such access.
Facilities-based
provider................A carrier that owns, obtains an indefensible right to
use in or, under some circumstances, leases its
international network facilities (including undersea
fiber optic cables and switching facilities) rather than
reselling private lines or minutes of telecommunications
service provided by another facilities based provider.
FCC.....................Federal Communications Commission.
Fiber optics............A technology in which light is used to transport
information from one point to another. Fiber optic
cables are thin filaments of glass through which light
beams are transmitted over long distances carrying large
amounts of data.
Frame relay.............A high-speed, data-packet switching service used to
transmit data between computers. Frame Relay supports
data units of variable lengths at access speeds ranging
from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area
networks, but is not presently well suited for voice and
video applications due to the variable delays which can
occur. Frame Relay was designed to operate at high
speeds on modern fiber optic networks.
Fujitsu.................Fujitsu Network Transmission Systems, Inc.
General Telephone
Operating Companies.....Telecommunications carriers that provide local exchange
services but are not RBOCs or affiliates of RBOCs.
GTE.....................GTE Corp.
ILEC (Incumbent Local
Exchange Carrier).......The incumbent carrier providing local exchange services,
typically an RBOC created by the divestiture of AT&T.
Innerduct...............Normally a 1 1/4" or 1" pipe through which fiber optic
cable is installed and housed; usually placed in groups
of 2 or 3 inside a larger duct or conduit.
ISP (Internet Service
Provider)...............A company that provides businesses and consumers with
access to the Internet.
10XXX service...........The ability for a user to access any carrier's long
distance network by dialing the carrier's Carrier
Identification Code (CIC) which is a 1 plus 0 plus three
specifically assigned digits, thereby bypassing the
user's primary interexchange carrier.
Interconnection.........Connection of a telecommunications device or service to
the public switched telephone network.
IXC (Interexchange
Carrier)................A company providing inter-LATA or long distance services
between LATAs on an intrastate or interstate basis.
IXC Communications......IXC Communications, Inc.
KCPL....................Kansas City Power and Light Company
KLT.....................KLT Telecom Inc.
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<PAGE> 151
LATAs (Local Access and
Transport Areas)........The approximately 200 geographic areas that define the
areas between which the RBOCs currently are prohibited
from providing long distance services.
Lit or lighted fiber....Fiber activated or equipped with the requisite
electronic and optronic equipment necessary to use the
fiber for transmission.
LEC (local exchange
carrier)................A company providing local switched services, including
ILECs and CLECs.
Local exchange
services................Local exchange services generally refers to all services
provided by an ILEC or CLEC including local dial tone,
Centrex and long distance access services. Sometimes
also referred to as local switched telephone services
and local telecommunications services.
Local loop..............A circuit that connects an end user to the ILEC central
office within a LATA.
Local switched
services................Services provided where the computer telephony system is
directly connected to the switch, generally providing
better integration than connections than take place over
a network.
Long-haul circuit.......A dedicated telecommunications circuit generally between
locations in different LATAs.
MCI.....................MCI Communications, Inc.
MFS Communications......MFS Communications Company, Inc., a wholly owned
subsidiary of WorldCom.
MHTC....................Missouri Highway and Transportation Commission
Multiplexing............An electronic or optical process that combines a large
number of lower speed transmission lines into one high
speed line by splitting the total available bandwidth
into narrower bands (frequency division), or by
allotting a common channel to several different
transmitting devices, one at a time in sequence (time
division).
Non-facilities based
provider................A LEC that does not own and operate its own network and
equipment.
Nortel..................Northern Telecom Inc.
OC-3, OC-12, OC-48 and
OC-192..................Standard telecommunications industry measurements for
optical transmission capacity distinguishable by bit
rate transmitted per second and the number of voice or
data transmissions that can be simultaneously
transmitted through fiber optic cable. An OC-3 is
generally equivalent to three DS-3s and has a bit rate
of 155.52 megabits per second and can transmit 2,016
simultaneous voice or data transmissions. An OC-12 has a
bit rate of 622.08 megabits per second and can transmit
8,064 simultaneous voice or data transmissions. An OC-48
has a bit rate of 2,488.32 megabits per second and can
transmit 32,256 simultaneous voice or data
transmissions. An OC-192 has a bit rate of 9,953.28
megabits per second and can transmit 129,024
simultaneous voice or data transmissions.
Optical window..........A band of wavelengths at which an optical fiber is
sufficiently transparent for practical use in
communications applications.
A-4
<PAGE> 152
PBX (Private Branch
Exchange)...............A PBX is a switching system within an office building
which allows calls from outside to be routed directly to
the individual instead of through a central number. This
PBX also allows for calling within an office by way of
four-digit extensions. Centrex is a service which can
simulate this service from an outside switching source,
thereby eliminating the need for a large capital
expenditure required for a PBX.
Pirelli.................Pirelli Cable Corporation
POPs
(Points of Presence)....Locations where a long distance carrier has installed
transmission equipment in a service area that serves as,
or relays calls to, a network switching center of that
long distance carrier.
Private line............A private, dedicated telecommunications line connecting
different end user locations or end-user facilities to
LEC or IXC facilities.
PUC (Public Utility
Commission).............A state regulatory body, established in most states,
which regulates utilities, including telephone companies
providing intrastate services.
RBOCs (Regional Bell
Operating Companies)....The seven local telephone companies (formerly part of
AT&T) established as a result of the AT&T Divestiture
Decree.
Regeneration/amplifier...
Devices which automatically re-transmit or boost signals
on an outbound circuit.
Reseller................A carrier that does not own transmission facilities, but
obtains communications services from another carrier for
resale to the public.
Route miles.............The number of miles of the telecommunications path in
which fiber optic cables are installed as it would
appear on a network map.
SBC.....................SBC Communications, Inc.
Siecor..................Siecor Corporation
Single-mode fiber.......A fiber optic wave guide with a slender core that
confines light to a single path; a fiber that allows the
transmission of only one light beam or lightwave
channel.
SMF-28A.................One of several types of standard fiber optic strands
used by carriers.
SONET (Synchronous
Optical Network
Technology).............An electronics and network architecture for
variable-bandwidth products which enables transmission
of voice, data and video (multimedia) at very high
speeds.
SONET ring..............A network architecture which provides for instantaneous
restoration of service in the event of a fiber cut by
automatically rerouting traffic the other direction
around the ring. This occurs so rapidly (in 50
milliseconds) it is virtually undetectable to the user.
Sprint..................Sprint Corporation
Sprint/United
Telephone...............United Telephone Company of Missouri, a wholly owned
subsidiary of Sprint.
A-5
<PAGE> 153
Switch..................A device that selects the paths or circuits to be used
for transmission of information and a connection.
Switching is the process of interconnecting circuits to
form a transmission path between users and it also
captures information for billing purposes.
Telecom Act.............The Telecommunications Act of 1996.
Terminal................The point at which a telephone line ends or is connected
to other circuits of a network.
Tier 1 carriers.........AT&T, MCI, Sprint and WorldCom
Union Electric..........Ameren Corporation, formerly known as Union Electric
Company.
Virtual circuit.........A communication link that appears to an end-user to be a
dedicated point-to-point circuit. Virtual circuits are
usually set up on a per-call basis and disconnected when
the call is ended.
WorldCom................WorldCom, Inc.
A-6
<PAGE> 154
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER
TO SELL TO, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OTHER THAN
THE EXCHANGE NOTES OFFERED HEREBY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Notice to Investors.................... 3
Available Information.................. 4
Summary................................ 6
Risk Factors........................... 17
The Exchange Offer..................... 31
Use of Proceeds........................ 40
Capitalization......................... 40
Selected Consolidated Financial and
Operating Data....................... 41
Management's Discussion and
Analysis of Financial Condition and
Results of Operations................ 43
Industry Overview...................... 53
Business............................... 56
Management............................. 72
Certain Relationships and Related
Transactions......................... 77
Principal Stockholders................. 78
Description of the Notes............... 79
Description of the Warrants............ 105
Book-Entry; Delivery and Form.......... 112
United States Federal Income Tax
Considerations....................... 114
Plan of Distribution................... 121
Legal Matters.......................... 121
Experts................................ 121
Index to Consolidated Financial
Statements........................... F-1
Glossary............................... A-1
</TABLE>
Until November 16, 1998, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
DTI DIGITAL TELEPORT LOGO
DTI HOLDINGS, INC.
OFFER TO EXCHANGE
12 1/2% SERIES B SENIOR DISCOUNT NOTES
DUE 2008
FOR ALL OUTSTANDING 12 1/2% SENIOR
DISCOUNT NOTES DUE 2008
AUGUST 14, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 155
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 351.355(1) and (2) of The General and Business Corporation Law of
the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful, except that, in the case of an action or suit by or in the right
of the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation,
unless and only to the extent that the court in which the action or suit was
brought determines upon application that such person is fairly and reasonably
entitled to indemnity for proper expenses. Section 351.355(3) provides that, to
the extent that a director, officer, employee or agent of the corporation has
been successful in the defense of any such action, suit or proceeding or any
claim, issue or matter therein, he shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred in connection with
such action, suit or proceeding. Section 351.355(7) provides that a corporation
may provide additional indemnification to any person indemnifiable under
subsection (1) or (2), provided such additional indemnification is authorized by
the corporation's articles of incorporation or an amendment thereto or by a
shareholder-approved bylaw or agreement, and provided further that no person
shall thereby be indemnified against conduct which was finally adjudged to have
been knowingly fraudulent, deliberately dishonest or willful misconduct or which
involved an accounting for profits pursuant to Section 16(b) of the Securities
Exchange Act of 1934.
Section 6.5 of the Company's Bylaws provides that the Company shall
indemnify to the full extent authorized by law any person made or threatened to
be made a party to any action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he, his testator or
intestate is or was a director or officer of the Company or any predecessor of
the Company or serves or served any other enterprise as a director, officer or
employee at the request of the Company or any predecessor of the Company.
Section 6.5 of the Bylaws also provides that the Company may, in the sole
discretion of the Board of Directors, indemnify to the full extent authorized by
law any person made or threatened to be made a party to any action, suit or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he, his testator or intestate is or was an employee of the
Company or any predecessor of the Company.
The Company has entered into an indemnification agreement with each
Director pursuant to which the Company agreed to indemnify the Director and hold
him harmless to the full extent authorized or permitted by Missouri law subject
to limitations based on the Director's conduct. The indemnification agreements
provide that the Company shall make advances as reasonably necessary to pay
expenses of the Director incurred in defending an action against the Director in
such capacity.
The directors and officers of the Company are insured under a policy of
directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to Exhibits.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
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<PAGE> 156
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) under the Act if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this
section do not apply if the registration statement is on Form S-3, Form S-8
or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Act, may be permitted to
directors, officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
Prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the Registration Statement through the date of responding to the
request.
(d) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 157
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized, in the City
of St. Louis, State of Missouri on August 12, 1998.
DTI HOLDINGS, INC.
By: /s/ RICHARD D. WEINSTEIN
------------------------------------
Richard D. Weinstein
President, Chief Executive Officer
and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities indicated on August 12, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ RICHARD D. WEINSTEIN President, Chief Executive Officer Secretary
- --------------------------------------------- and Director (Principal Executive Officer)
Richard D. Weinstein
/s/ GARY W. DOUGLASS Senior Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial and Accounting
Gary W. Douglass Officer)
/s/ JEROME W. SHEEHY* Vice President -- Regulatory Affairs and
- --------------------------------------------- Director
Jerome W. Sheehy
/s/ R. G. WASSON* Director
- ---------------------------------------------
Ronald G. Wasson
/s/ B. J. BEAUDOIN* Director
- ---------------------------------------------
Bernard J. Beaudoin
/s/ JAMES V. O'DONNELL* Director
- ---------------------------------------------
James V. O'Donnell
/s/ KENNETH V. HAGER* Director
- ---------------------------------------------
Kenneth V. Hager
*By: /s/ RICHARD D. WEINSTEIN
- ---------------------------------------------
Attorney- in-Fact
</TABLE>
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<PAGE> 158
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
*2.1 Stock Purchase Agreement by and between KLT Telecom Inc. and
Digital Teleport, Inc., dated December 31, 1996.
*2.2 Amendment No. 1 to Stock Purchase Agreement between KLT
Telecom Inc. and Digital Teleport, Inc. dated February 12,
1998.
*3.1 Restated Articles of Incorporation of the Registrant.
*3.2 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 Notes 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).
*4.2 Note Registration Rights Agreement by and among the
Registrant and the Initial Purchasers named therein, dated
as of February 23, 1998.
*4.3 Warrant Agreement by and between the Registrant and The Bank
of New York, as Warrant Agent, dated February 23, 1998.
*4.4 Warrant Registration Rights Agreement by and among the
Registrant and the Initial Purchasers named therein, dated
February 23, 1998.
*4.5 Digital Teleport, Inc. Shareholders' Agreement between
Richard D. Weinstein and KLT Telecom Inc., dated March 12,
1997.
*4.6 Amendment No. 1 to the Digital Teleport, Inc. Shareholders'
Agreement, dated November 7, 1997.
*4.7 Amendment No. 2 to the Digital Teleport, Inc. Shareholders'
Agreement, dated December 18, 1997.
*4.8 Amendment No. 3 to the Digital Teleport, Inc. Shareholders'
Agreement, dated February 12, 1998.
*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.
*4.10 Amendment No. 1 to Stock Pledge Agreement between Richard D.
Weinstein and KLT Telecom Inc., dated December 18, 1997.
*4.11 Amendment No. 2 to Stock Pledge Agreement between Richard D.
Weinstein and KLT Telecom Inc., dated February 12, 1998.
*4.12 Subordination Agreement, by and among the Registrant,
Digital Teleport, Inc., KLT Telecom Inc. and Richard D.
Weinstein, dated February 12, 1998.
5.1 Legal Opinion of Bryan Cave LLP (Missouri).
*8.1 Tax Opinion of Bryan Cave LLP (Missouri) (included in its
opinion filed as Exhibit 5.1 hereto).
*10.1 Employment Agreement between Digital Teleport, Inc. and
Richard D. Weinstein, dated December 31, 1996.
*10.2 Director Indemnification Agreement between the Registrant
and Richard D. Weinstein, dated December 23, 1997.
*10.3 Director Indemnification Agreement between the Registrant
and Jerome W. Sheehy, dated December 23, 1997.
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Previously filed.
</TABLE>
<PAGE> 159
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
*10.4 Director Indemnification Agreement between the Registrant
and Bernard J. Beaudoin, dated December 23, 1997.
*10.5 Director Indemnification Agreement between the Registrant
and Ronald G. Wasson, dated December 23, 1997.
*10.6 Director Indemnification Agreement between the Registrant
and James V. O'Donnell, dated December 23, 1997.
*10.7 Director Indemnification Agreement between the Registrant
and Kenneth V. Hager, dated December 23, 1997.
*10.8 1997 Long-Term Incentive Award Plan of the Registrant.
*10.9 Employment Agreement between Digital Teleport, Inc. and
Robert F. McCormick, dated September 9, 1997.
*10.10 Amendment No. 1 to the Employment Agreement between Digital
Teleport, Inc. and Robert F. McCormick, dated January 28,
1998.
*10.11 Amendment No. 2 to the Employment Agreement between Digital
Teleport, Inc. and Robert F. McCormick, dated January 28,
1998.
*++10.12 Product Attachment -- Carrier Networks Products Agreement
between Digital Teleport, Inc. and Northern Telecom, Inc.,
effective October 23, 1997.
*10.13 Agreement re: Fiber Optic Cable on Freeways in Missouri,
between the Missouri Highway and Transportation Commission
and Digital Teleport, Inc., effective July 29, 1994.
*10.14 First Amendment to Agreement re: Fiber Optic Cable on
Freeways in Missouri, between the Missouri Highway and
Transportation Commission and Digital Teleport, Inc.,
effective September 22, 1994.
*10.15 Second 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.
*10.16 Third 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.
*10.17 Contract 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.
*10.18 Fiber Optic Cable Agreement, between the Arkansas State
Highway and Transportation Department and Digital Teleport,
Inc., dated May 29, 1997.
*10.19 Missouri Interconnection Agreement between Southwestern Bell
Telephone Company and Digital Teleport, Inc., executed July
1, 1997.
*10.20 Arkansas Interconnection Agreement between Southwestern Bell
Telephone Company and Digital Teleport, Inc., executed
August 21, 1997.
*10.21 Kansas Interconnection Agreement between Southwestern Bell
Telephone Company and Digital Teleport, Inc., executed
August 21, 1997.
*10.22 Oklahoma Interconnection Agreement between Southwestern Bell
Telephone Company and Digital Teleport, Inc., executed
August 21, 1997.
*10.23 Missouri Interconnection, Resale and Unbundling Agreement
between GTE Midwest Incorporated, GTE Arkansas Incorporated
and Digital Teleport, Inc. executed November 7, 1997.
</TABLE>
- -------------------------
* Previously filed.
++ Confidential treatment has been requested with respect to certain portions of
this Exhibit.
<PAGE> 160
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
*10.24 Arkansas Interconnection, Resale and Unbundling Agreement
between GTE Southwest Incorporated, GTE Midwest
Incorporated, GTE Arkansas Incorporated and Digital
Teleport, Inc., executed November 7, 1997.
*10.25 Oklahoma Interconnection, Resale and Unbundling Agreement
between GTE Southwest Incorporated, GTE Arkansas
Incorporated, GTE Midwest and Digital Teleport, Inc.,
executed November 7, 1997.
*10.26 Texas Interconnection, Resale and Unbundling Agreement
between GTE Southwest Incorporated and Digital Teleport,
Inc., executed November 18, 1997.
*10.27 Kansas Master Resale Agreement between United Telephone
Company of Kansas (Sprint) and Digital Teleport, Inc., dated
September 30, 1997.
*10.28 Commercial Lease between Richard D. Weinstein and Digital
Teleport, Inc., dated December 31, 1996.
*10.29 Commercial Lease Extension Agreement between Richard D.
Weinstein and Digital Teleport, Inc., dated December 31,
1997.
*10.30 Purchase Agreement by and between the Registrant and the
Initial Purchasers named therein, dated as of February 13,
1998.
*++10.31 IRU and Maintenance Agreement between Digital Teleport, Inc.
and IXC Communications Services, Inc., executed July 30,
1998 (Greenwood, Indiana to New York City, New York).
*++10.32 IRU and Maintenance Agreement between Digital Teleport, Inc.
and IXC Communications Services, Inc., executed July 30,
1998 (Chicago, Illinois to Hudson, Ohio).
*10.33 Consulting Agreement between Digital Teleport, Inc. and H.P.
Scott, dated May 4, 1998.
*10.34 Employment Agreement between Digital Teleport, Inc. and Gary
W. Douglass, dated July 20, 1998.
++10.35 Agreement for Purchase and Sale of Equipment between Digital
Teleport, Inc. and Pirelli Cables and Systems LLC, dated as
of June 26, 1998.
*12.1 Statement re Computation of Ratio of Earnings to Fixed
Charges.
*21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Bryan Cave LLP (Missouri) (included in its
opinion filed as Exhibit 5.1 hereto).
*24.1 Power of Attorney.
*25.1 Statement of Eligibility and Qualification on Form T-1 under
the Trust Indenture Act of 1939 of The Bank of New York, as
Trustee under the Indenture.
*27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
*99.4 Form of Letter to Clients.
*99.5 Guidelines for Certification of Taxpayer Identification
Number on Form W-9 (included in the Form of Letter of
Transmittal filed as Exhibit 99.1 herein).
99.6 Form of Exchange Agent Agreement.
</TABLE>
- -------------------------
* Previously filed.
++ Confidential treatment has been requested with respect to certain portions of
this Exhibit.
<PAGE> 1
[BRYAN CAVE LLP LETTERHEAD]
EXHIBIT 5.1
August 12, 1998
Board of Directors
DTI Holdings, Inc.
11111 Dorsett Road
St. Louis, Missouri 63043
Gentlemen:
We are acting as special counsel for DTI Holdings, Inc., a
Missouri corporation (the "Company"), in connection with various legal matters
relating to the filing with the Securities and Exchange Commission of a
Registration Statement on Form S-4 (as amended, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Act"), covering an offer to
exchange (the "Exchange Offer") $1,000 principal amount of the Company's 12
1/2% Series B Senior Discount Notes due 2008 (the "Exchange Notes") for each
$1,000 principal amount of its outstanding 12 1/2% Senior Discount Notes due
2008 (the "Private Notes"), of which $506,000,000 aggregate principal amount is
outstanding on the date hereof. The Exchange Notes are to be issued pursuant to
an Indenture, dated as of February 23, 1998 (the "Indenture"), between the
Company and The Bank of New York, as Trustee, which is filed as an exhibit to
the Registration Statement.
In connection herewith, we have examined and relied without
independent investigation as to matters of fact upon such certificates of public
officials, such statements and certificates of officers of the Company and
originals or copies certified to our satisfaction of the Registration Statement,
the Indenture, the Notes Registration Rights Agreement, dated as of February 23,
1998, between the Company and the Initial Purchasers named therein, the Restated
Articles of Incorporation and By-laws of the Company, proceedings of the Board
of Directors of the Company and such other corporate records, documents,
certificates and instruments as we have deemed necessary or appropriate in order
to enable us to render the opinions expressed below. In rendering this opinion,
we have assumed the genuineness of all signatures on all documents examined by
us, the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to authentic originals of all
documents submitted to us as certified or photostatted copies.
We express no opinion as to the applicability or effect of (i)
any bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, or (ii) general principles
of equity, including, without limitation, concepts of reasonableness,
materiality, good faith and fair dealing and the possible unavailability of
specific performance, injunctive relief or other equitable remedies, regardless
of whether enforceability is considered in a proceeding in equity or at law.
Based upon the foregoing and in reliance thereon and subject
to the qualifications and limitations stated herein, we are of the opinion that:
(1) The Company is a corporation validly existing in good standing
under the laws of the State of Missouri; and
<PAGE> 2
DTI Holdings, Inc.
August 12, 1998
Page 2
(2) When,
(i) the Registration Statement, including any amendments
thereto, shall have become effective under the Act;
(ii) the Indenture has been duly qualified under the Trust
Indenture Act of 1939, as amended; and
(iii) the Exchange Notes shall have been duly executed and
authenticated in accordance with the provisions of
the Indenture and duly delivered to the holders thereof
in exchange for the Private Notes;
then the Exchange Notes will be valid and binding obligations
of the Company.
In addition, based on the assumptions and subject to the qualifications set
forth therein, our opinion as to the material tax consequences of the Exchange
Offer is set forth in the Prospectus under the caption "United States Federal
Income Tax Considerations" and we hereby confirm such opinion as set forth
therein. Such opinion is limited to the material United States federal income
tax consequences of the Exchange Offer, and it does not purport to discuss all
possible federal income tax consequences or any state, local or foreign tax
consequences, of the exchange of the Private Notes.
In rendering the opinion expressed in the immediately preceding
paragraph, we have considered the applicable provisions of the Internal
Revenue Code, as amended (the "Code"), Treasury Regulations promulgated
thereunder by the Treasury Department (the "Regulations"), pertinent judicial
authorities, rulings of the Internal Revenue Service and such other authorities
as we have considered relevant. It should be noted that such laws, Code,
Regulations, judicial decisions and administrative interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. We
have also assumed that the Registration Statement reflects all of the material
facts, and our opinion is expressly conditioned on, among other things, the
accuracy as of the date hereof, and the continuing accuracy, of all such facts,
information, covenants, statements and representations through and as of the
effective date of the Exchange Offer. Any variation or difference in the facts
referred to, set forth or assumed herein or in the Registration Statement or in
any of the authorities upon which our opinion is based could affect our
opinion.
This opinion is not rendered with respect to any laws other
than the laws of the State of New York, the general corporate laws of the State
of Missouri and the federal laws of the United States.
We hereby consent to (i) the filing of this opinion as an exhibit
to the Registration Statement (ii) the description of our opinion under
the caption "United States Federal Income Tax Considerations" and (iii) the
reference to our firm in the Prospectus summary and under the captions "United
States Federal Income Tax Considerations" and "Legal Matters" in the Prospectus
included as a part thereof. We also consent to your filing copies of this
opinion as an exhibit to the Registration Statement with agencies of such
states as you deem necessary in the course of complying with the laws of such
states regarding the Exchange Offer. In giving this consent, we do not admit
that we are in the category of persons whose consent is required under Section
7 of the Act or the rules and regulations of the Securities and Exchange
Commission thereunder.
<PAGE> 3
DTI Holdings
August 12, 1998
Page 3
Very truly yours,
/s/ Bryan Cave LLP
Bryan Cave LLP
<PAGE> 1
EXHIBIT 10.35
AGREEMENT FOR PURCHASE AND SALE OF EQUIPMENT
BETWEEN
PIRELLI CABLES AND SYSTEMS LLC ("PIRELLI")
700 Industrial Drive
Lexington, SC 29072
- and -
DIGITAL TELEPORT, INC. ("DIGITAL TELEPORT")
11111 Dorsett Rd.
St. Louis, MO 63043
THIS AGREEMENT ("Agreement"), dated as of the 26th of June, 1998, is by
and among Pirelli and DIGITAL TELEPORT. (DIGITAL TELEPORT is sometimes
hereinafter referred to as "Purchaser".)
WHEREAS, Purchaser desires to purchase from Pirelli and Pirelli desires
to sell to Purchaser certain Equipment (as hereinafter defined), subject to the
terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the mutual
covenants and promises hereinafter set forth, the parties hereby agree as
follows:
1. Term. The term of this Agreement (the "Term") shall be for a period of
two (2) years, commencing on the date hereof and expiring on the second
anniversary date hereof, unless earlier terminated pursuant to the
terms hereof. Assuming that there are no existing defaults on the part
of Purchaser at the time of renewal, Purchaser may renew the Term of
this Agreement year to year ("Renewal Term") by giving written
notification of renewal to Pirelli. Purchases during such Renewal Term
shall be made at a price agreed to by Pirelli prior to the commencement
of the Renewal Term and pursuant to the other provisions of Section 3.1
of this Agreement. Such notice of renewal shall be given not more than
one hundred and twenty (120) calendar days nor less than sixty (60)
calendar days prior to the end of the initial Term and subsequent
renewal Terms hereof.
2. Purchase of Equipment.
2.1. Agreement to Purchase and Sell. Throughout the Term and any
Renewal Term of Agreement, Pirelli agrees to sell to
Purchaser and Purchaser agrees to purchase from Pirelli
outside plant cable set forth in Schedule A
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 2
manufactured by Pirelli containing fiber manufactured by
Corning of the types set forth on Schedule B attached hereto
and incorporated herein by reference (the "Equipment"),
subject to the terms and conditions set forth herein. All
Equipment furnished by Pirelli shall be in conformance with
the technical specifications set forth in Schedule B,
attached hereto and incorporated herein by reference.
Purchaser may at its option purchase from time to time and
Pirelli agrees to sell to Purchaser fiber optic cable
accessories of the types and at the prices set forth on
Schedule E attached hereto and incorporated by reference.
2.2. Exclusive Supplier. Except as set forth in Section 3.1 below,
Purchaser agrees that, so long as Pirelli is not in default
under the terms and conditions of this Agreement, Purchaser
shall purchase all of its Equipment requirements from Pirelli
during the Initial Term and any Renewal Term of this
Agreement. Failure to comply with this provision shall be a
material breach of this Agreement.
3. Prices
3.1. Prices. The initial prices to be paid by Purchaser for
Equipment ordered under this Agreement are set forth in
Schedule A hereto. The unit prices listed in Schedule A are
shown in U.S. dollars, FOB Destination (in the continental
United States), and do not include applicable sales and use
taxes. The prices stated in Schedule A shall not be increased
during the first twelve (12) months of the Term of this
Agreement. Notwithstanding any other provision herein, in the
event that during the Initial Term or any Renewal Term the
prevailing market prices of Equipment shall decrease to a
price 10% less than the prices stated in Schedule A, under
like terms and conditions as this Agreement, and Purchaser
gives notice to Pirelli of such decrease, the terms of
Section 2.2 above shall continue to apply after such notice
only if Pirelli agrees to amend Schedule A to decrease the
prices set forth therein to prices equal to such prevailing
market prices, under like terms and conditions so long as
such prices prevail in the market place.
4. Orders and Payment.
4.1. Orders. Purchaser will, from time to time during the Term and
any Renewal Term, order Equipment from Pirelli pursuant to
this Agreement by executing and delivering a Purchaser's
Purchase Order ("Purchase Order"). Purchase Orders may be sent
by facsimile or EDI as may be agreed to by the parties. In the
event of a conflict or inconsistency between the terms and
conditions of a Purchase Order and this Agreement, the terms
and provisions of this Agreement shall control to the extent
of the conflict or inconsistency.
2
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 3
4.2. Invoicing. Pirelli shall invoice all shipments within ten
(10) days after shipment. Purchaser shall promptly notify
Pirelli in writing or electronically of any disputed amounts
shown on an invoice. Pirelli and Purchaser shall work
diligently to resolve any disputes. Shipping and billing
tolerance hereunder shall be-0% + 2 %.
4.3. Payment. Payment to Pirelli on all invoices shall be due
within thirty (30) days from date of invoice. A one percent
(1%) discount shall be granted by Pirelli for payment within
ten (10) days of the invoice date. Any payments not received
by Pirelli within such thirty-day (30) period shall accrue
interest from the date of invoice to the date of receipt of
payment at the rate of one percent (1%) per month, computed
for the actual number of days outstanding, based upon a
thirty-day (30) month.
5. Delivery.
5.1. Delivery Schedule. Upon receipt of a Purchase Order, Pirelli
will provide to Purchaser an acknowledgment of such receipt
within 3 business days which will contain a delivery date for
such order which will be within four (4) weeks of the date of
receipt of such Purchase Order. Pirelli will ship Equipment
ex-factory within two to four (2 to 4) weeks of its receipt
and acknowledgment of a Purchase Order, provided that
Purchaser's aggregate orders for the month in which delivery
is required by Pirelli does not exceed Purchaser's forecast
for that month under Section 8 hereof by more than 50%. If an
order causes the aggregate amount for that month to exceed
the forecast for that month, Pirelli shall use its best
efforts to deliver the Equipment ordered as promptly as
possible, and shall inform Purchaser of an expected delivery
date. Purchaser may from time to time request that Pirelli
make delivery within a shorter period, and Pirelli will
exercise its best efforts to meet any such request. Pirelli
will review and confirm on a monthly basis each delivery
schedule established to meet Purchaser's requirements.
5.2. Shipping and Delivery Arrangements. The unit prices listed in
Schedule A are shown in U.S. dollars, FOB Destination,
indicated by Purchaser within the continental United States
and shipped via standard ground transportation. Pirelli shall
be responsible for all shipping arrangements. Any expedited
shipping charges shall be the responsibility of the
Purchaser. Purchaser shall be responsible for all off-loading
activities at delivery sites and any expenses incurred due to
delay in such off-loading. Pirelli shall notify Purchaser as
soon as practicable if for any reason Pirelli believes it
will be unable to meet a scheduled delivery date.
3
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 4
6. Reels. Pirelli shall deliver all Equipment on non-returnable wooden
lagged reels. Purchaser and Pirelli agree to negotiate in good faith to
migrate during the initial Term to the use of returnable steel reels
for the delivery of Equipment in accordance with Pirelli's Returnable
Steel Reel Policy, set forth on Schedule C, attached and incorporated
herein.
7. Training. Pirelli shall provide training, training materials, and
support to Purchaser to enable Purchaser to train Purchaser's training
instructors or other designated persons. Purchaser shall be entitled to
10 days of training per quarter; additional training may be purchased
pursuant to the then current price list. Purchaser shall have the right
to reproduce training material for the sole purpose of training
Purchaser's employees. Such rights shall include photographic, video,
and audio recordings of any training or training material provided that
all copies in any media shall clearly indicate such as copy-righted
material of Pirelli. These restrictions apply equally to any outside
consultants or training service to be used by Purchaser.
8. Supply of Equipment. Purchaser agrees to provide Pirelli with an
estimate of its annual requirements for Equipment over the Term and any
Renewal Term of this Agreement, and shall also provide to Pirelli each
month during the Term and any Renewal Term a forecast of its Equipment
requirements for the twelve (12) weeks following the date of such
forecast. This information will be used by Pirelli to plan and allocate
its inventory and production capacity to ensure that Equipment is
manufactured and delivered when required. This information shall not be
considered an order and shall not obligate the Purchaser to buy any
particular amount of Equipment. Purchaser shall provide to Pirelli its
first such forecast of its Equipment requirements no later than thirty
(30) days after the date of this Agreement.
9. Force Majeure. Any delay or failure of either party to perform its
obligations under this Agreement shall be excused if, and to the extent
that, the delay or failure is caused by an event or circumstance beyond
the reasonable control of such party and without its fault or
negligence such as, by way of example and not by way of limitation,
acts of God, action by any governmental authority, fires, floods,
windstorms, explosions, riots, natural disasters, wars, sabotage, labor
problems (including lock-outs, strikes and slow-downs), inability to
obtain power, material, labor, transportation or court injunction or
order ("Force Majeure). Written notice of delay (including the
anticipated duration of the delay) shall be given by the affected party
to the other party within ten (10) calendar days of the occurrence of
the said event or circumstance. Notwithstanding any other provision
herein, if an event constituting a Force Majeure shall remain
unresolved for a period of more than sixty (60) days, then the party
not claiming excuse from delay or failure to perform its obligations
due to such Force Majeure may terminate this Agreement upon written
notice to the other party, provided, however, that in the event that a
Force Majeure continues for a period of more than thirty (30) days
4
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 5
then Purchaser may purchase Equipment from a third party
notwithstanding Section 2.2 herein.
10. Representations and Warranties.
10.1. Product Warranty. Pirelli warrants that all goods sold
hereunder shall meet the product specifications and will be
free from defects in material and workmanship for the period
ending on the first to occur of (i) thirty-six (36) months
after the date of installation of such goods, or (ii)
forty-two (42) months after the date on which such goods have
been declared by Pirelli to be ready for shipment to
Purchaser. Provided written notice of failure to meet the
specifications or of any such defect in materials or
workmanship is given to Pirelli by Purchaser within the above
stated warranty period and Pirelli determines such failure or
defect exists, Pirelli's sole responsibility under the above
warranty will be limited to the replenishment of such goods
as do not substantially conform to specifications therefore,
or which are defective as to materials or workmanship. All
replenishments by Pirelli pursuant to the foregoing sentences
shall be made free of charge, F.O.B. Destination called for
in the original contract
10.2. No Infringement. Pirelli represents and warrants that neither
the Equipment nor its use by Purchaser in the manner intended
infringes on the intellectual property rights of any third
party. Pirelli will defend or settle at its own expense any
action brought against Purchaser to the extent that it is
based on a claim that any Equipment supplied by Pirelli
infringes on the intellectual property rights of any third
party, and will pay any costs and damages finally awarded.
10.3. LIMITATION OF LIABILITY. THE WARRANTIES SET FORTH ABOVE ARE
IN LIEU OF, AND PIRELLI DISCLAIMS ANY AND ALL OTHER
WARRANTIES, WRITTEN OR ORAL, STATUTORY OR AT COMMON LAW,
EXPRESS OR IMPLIED, INCLUDING SPECIFICALLY BUT WITHOUT
LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF
FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING
CONTAINED HEREIN TO THE CONTRARY, PIRELLI SHALL BE LIABLE
UNDER THE ABOVE STATED WARRANTIES ONLY FOR REPLENISHMENT OF
PRODUCT, AND THE REASONABLE LABOR COSTS FOR REMOVING AND/OR
FOR REINSTALLATION OF THE SAME, AND SHALL NOT IN ANY EVENT BE
LIABLE FOR ANY OTHER REMOVAL OR REINSTALLATION COSTS OF
PRODUCT. UNDER NO CIRCUMSTANCES WHATSOEVER SHALL PIRELLI BE
LIABLE FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR INDIRECT
DAMAGES INCURRED BY
5
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 6
PURCHASER, ITS CUSTOMERS, OR ANYONE CLAIMING THROUGH
PURCHASER (INCLUDING BUT NOT LIMITED TO LOSS OF PROFIT, USE,
PRODUCTION, RAW MATERIALS OR END PRODUCTS) OR FOR ANY OTHER
CLAIM FOR DAMAGES ARISING OUT OF THE PURCHASE, DELIVERY,
INSTALLATION, REMOVAL OR USE OF EQUIPMENT, WHETHER CLAIMED IN
CONTRACT, WARRANTY, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE.
11. Technological Change. During the Term and any Renewal Term of this
Agreement, Pirelli agrees to keep Purchaser apprised of new technical
developments, or improvements available with respect to the Equipment,
and to make these new developments or improvements available to
Purchaser in a timely manner. Any required change in prices will be
mutually agreed upon before technical changes or improvements are
implemented in the Equipment being supplied to Purchaser.
12. Confidential Information/Non-Disclosure Agreement.
The parties acknowledge their mutual obligations of confidentiality
pursuant to the Confidentiality Agreement between the parties dated
June 24, 1998, and hereby incorporate herein the terms of such
Confidentiality Agreement, a copy of which is attached hereto as
Schedule D.
13. Termination.
13.1. Right to Terminate. Subject to the provisions of Section 9
hereof, either party shall have the right to terminate this
Agreement at any time by notice in writing to the other in
the event of any of the following:
13.1.1. a material breach by a non-terminating party of any
of its representations, warranties, covenants or
agreements contained herein, and
13.1.1.1. the breaching party fails, where
remedy is possible within fifteen (15) days,
to remedy the breach (i) in the case of a
late delivery, within fifteen (15) days of
the required time for delivery, or (ii) in
the case of any other breach, within fifteen
(15) days of being requested to do so in
writing by the non-breaching party; or
13.1.1.2. the breaching party fails, where
remedy is not reasonably possible within
fifteen (15) days, to propose a plan no
later than the end of such fifteen (15) day
period, which plan is reasonably capable of
providing a cure of the
6
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 7
breach within fifteen (15) days of the
proposal's being made, or fails diligently
and continuously to execute the plan to
remedy the breach; or
13.1.1.3. the breach is not capable of being
remedied either at all or within thirty (30)
days of the non-breaching party's demand for
remedy; OR
13.1.1.4. the making by a party of a general
assignment for the benefit of its creditors,
the filing of a voluntary petition in
bankruptcy or the filing of a petition in
bankruptcy or other insolvency protection
against that party which is not dismissed
within ninety (90) days thereafter, or the
filing by a party of any petition or answer
seeking, consenting to, or acquiescing in
reorganization, arrangement, adjustment,
composition, liquidation, dissolution, or
similar relief, or the issuance of an order,
all appeals of which order have been
exhausted or the time for appeal of which
order has passed without the filing of such
appeal, or the passing by the governing body
of a party of a resolution for the
winding-up of that party's business.
13.1.2. In addition to the right to terminate this
Agreement pursuant to Sections 13.1.1.1 or 13.1.1.2
for the non-delivery by Pirelli of Equipment
pursuant to a Purchase Order, Purchaser shall have
the right to purchase such Equipment from a third
party without regard to the provisions of Section
2.2 for the period during which such breach shall
remain uncured.
13.1.3. If Equipment is delivered by Pirelli within the
required time for delivery hereunder (without
reference to the cure periods contained in Section
13.1.1) for less than 96% of the deliveries during
any six (6) month period, Pirelli and Purchaser
shall meet to discuss the problem and ways to
improve delivery. If Equipment is delivered by
Pirelli within the required time for delivery
hereunder (without reference to the cure periods
contained in Section 13.1.1) for less than 92% of
the deliveries during any six (6) month period,
Purchaser may terminate this Agreement under this
Section 13.1.
13.2. Survival of Rights and Obligations. Termination of this
Agreement shall not prejudice any rights of either party
hereto against the other which may have accrued up to the
date of termination. In addition, all covenants respecting
indemnification, confidentiality, termination and continuing
liability for amounts payable hereunder shall survive the
termination of this Agreement as expressly set forth
elsewhere herein.
7
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 8
13.3. Continued Entitlement to Payment. In the event this Agreement
expires or is terminated by either party hereto, Pirelli
shall be entitled to payment for Equipment delivered by
Pirelli up to the date of termination or expiration. If this
Agreement is terminated by Purchaser, Pirelli shall be also
entitled to payment for Equipment ordered by Purchaser, but
not yet delivered on the date of termination. In all cases,
Pirelli's entitlement to payment for such delivered, or
ordered but not yet delivered, Equipment shall remain subject
to the terms and conditions of this Agreement, which shall
continue to apply to such Equipment. In the event and to the
extent that at the time of termination or expiration of this
Agreement, Pirelli shall have received payment in excess of
the amount to which it is entitled under this Agreement,
Pirelli shall refund to Purchaser, such excess within thirty
(30) days after the date of termination or expiration.
14. Title to Equipment. Pirelli covenants, represents and warrants that
upon acceptance of Equipment by Purchaser, title to the Equipment shall
vest in Purchaser, free and clear of all liens, claims and encumbrances
of any kind, other than the purchase money security interest of Pirelli
or any successors or assignees of such purchase money security interest
and related receivable. Upon payment in full for the Equipment, title
to the Equipment shall be free and clear of all liens, claims and
encumbrances of any kind including any purchase money security interest
of Pirelli or any successors or assignees of such purchase money
security interest and related receivable.
15. Notices. Unless stated otherwise herein, all notices required by or
relating to this Agreement shall be in writing and shall be sent to the
parties to this Agreement at their addresses set forth below unless
changed from time to time by notice complying with this Section 15. All
such notices shall be hand-carried, or sent by certified or registered
mail return receipt requested and postage prepaid, or sent by
facsimile, or delivered by courier, directed to the other party at
address set forth below, as changed from time to time in accordance
with the provisions of this section:
If to Pirelli: Pirelli Cables and Systems LLC
700 Industrial Drive
Lexington, SC 29072
Attention: Sr. Vice President & General Manager
Facsimile Number: (803) 951-4898
If to Purchaser: DIGITAL TELEPORT, INC.
11111 Dorsett Rd.
St. Louis, MO 63043
Attention: Mr. Richard Weinstein
Facsimile: (314) 253-6699
8
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Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 9
with a copy to: DIGITAL TELEPORT, INC.
11111 Dorsett Rd.
St. Louis, MO 63043
Attention: Vice President-Legal
Facsimile: (314) 253-6699
All such notices shall be deemed to have been given at the time of
actual receipt thereof. Facsimile notices shall be deemed received at
the time of an electronic confirmation of successful transmission.
16. General Terms.
16.1. Binding and Benefit. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto, their
respective successors and permitted assigns.
16.2. Amendments, etc. No waiver, alteration, modification or
cancellation of any of the provisions of this Agreement shall
be binding unless made in writing and signed by all parties.
16.3. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of
Missouri.
16.4. No Waiver. The delay or failure of either party at any time
or times to require performance of any provision hereof shall
in no manner affect or constitute a waiver of such party's
right at a later time to enforce such provision. No delay or
failure of either party in exercising any right hereunder
shall constitute a waiver of such right or any other rights
hereunder.
16.5. Limitation on Actions. No action, regardless of form, arising
out of this Agreement may be brought: (i) for warranty claims
more than one year after such party has actual knowledge of
the cause of action but no later than one (1) year after the
warranty period has expired, or (ii) for all other claims
more than one (1) year after the cause of the action has
accrued.
16.6. Severability. In the event that one or more of the provisions
contained in this Agreement shall for any reason be held to
be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect
any other provisions contained in this Agreement.
16.7. Headings. The headings used throughout this Agreement are
solely for convenience of reference and are not to be used as
an aid in the interpretation of this Agreement.
9
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 10
16.8. Complete Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter
hereof, and supersedes all prior oral and written agreements
and understandings relating thereto. No representation,
condition, understanding, statement of intent or agreement of
any kind, oral or written, shall be binding upon the parties
unless set forth or specifically incorporated herein.
16.9. Remedies Cumulative. No remedy referred to in this Agreement
is intended to be exclusive, but each shall be cumulative and
in addition to any other remedy referred to herein or
otherwise available at law or in equity.
17. Filings. Pirelli may, at its option and expense, file with the proper
authorities, whatever financing statements, other security agreements,
or other such documents as may be necessary under the Uniform
Commercial Code (UCC) and applicable state law, including but not
limited to, UCC Section 9-312(3) regarding purchase money security
interest to perfect and secure its or its assignee's interest in the
Equipment and any payments for the Equipment by Purchaser prior to
payment by Purchaser to Pirelli, and Purchaser agrees to cooperate
fully with any such filings and take whatever reasonable actions are
necessary to protect such interest, including but not limited to any
required financial statements, filings or other such documents. Pirelli
will promptly remove any such lien or evidence of security interest
upon payment by Purchaser to Pirelli for such Equipment.
IN WITNESS WHEREOF, the parties have executed and delivered the within Agreement
as of the date first written above.
PIRELLI CABLES AND SYSTEMS LLC DIGITAL TELEPORT, INC.
By: /s/ Walter Alessandrini By: /s/ Richard D. Weinstein
---------------------------- ----------------------------
(Authorized Signature) (Authorized Signature)
Name: Name:
-------------------------- --------------------------
Title: Title:
-------------------------- --------------------------
Date: Date:
-------------------------- --------------------------
10
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 11
SCHEDULE "A"
COMPOSITE
SINGLE ARMOR/SINGLE JACKET
KLEENCORE(TM) CABLE
Mixed Fiber, Loose Tube Cable,
Dielectric CSM, Single Armor, 1 MDPE Jacket,
Water Swellable Material, Tensile 600#, Outer Strength Members,
Containing Singlemode Fibers @ .40/.30 dB/Km @ 1310/1550 nm
and Lambda Shifted Fibers @ .25 dB/Km @ 1550 nm
<TABLE>
<CAPTION>
PURCHASE VOLUME DISCOUNTS BASED ON FKM
50,000 to 150,000 to
Fiber Count Product # Unit Price 149,999 249,999 250,000 to > 400,000
per foot FKM FKM 399,999 FKM FKM
<S> <C> <C> <C> <C> <C> <C>
72 (48S - 24L) 0072XXS1LAKEAJA *** *** *** *** ***
96 (48S - 48L) 0096XXS1LAKEAJA *** *** *** *** ***
</TABLE>
SINGLE ARMOR/SINGLE JACKET
KLEENCORE(TM) CABLE
Singlemode Fiber, Loose Tube, Dielectric CSM
Single Armor, 1 MDPE Jacket, Water Swellable Material
Outer Strength Members, 600# Tensile
< .40/.30 dB/Km at 1310/1550nm
-
<TABLE>
<CAPTION>
PURCHASE VOLUME DISCOUNTS BASED ON FKM
50,000 to 150,000 to
Fiber Count Product # Unit Price 149,999 249,999 250,000 to > 400,000
per foot FKM FKM 399,999 FKM FKM
<S> <C> <C> <C> <C> <C> <C>
6 0006SCS1LAKEAJA *** *** *** *** ***
8 0008SCS1LAKEAJA *** *** *** *** ***
12 0012SCS1LAKEAJA *** *** *** *** ***
18 0018SCS1LAKEAJA *** *** *** *** ***
24 0024SCS1LAKEAJA *** *** *** *** ***
30 0030SCS1LAKEAJA *** *** *** *** ***
36 0036SCS1LAKEAJA *** *** *** *** ***
48 0048SCS1LAKEAJA *** *** *** *** ***
54 0054SCS1LAKEAJA *** *** *** *** ***
60 0060SCS1LAKEAJA *** *** *** *** ***
72 0072SCS1LAKEAJA *** *** *** *** ***
84 0084SCS1LAKEAJA *** *** *** *** ***
96 0096SCS1LAKEAJA *** *** *** *** ***
108 0108SCS1LAKEAJA *** *** *** *** ***
120 0120SCS1LAKEAJA *** *** *** *** ***
132 0132SCS1LAKEAJA *** *** *** *** ***
144 0144SCS1LAKEAJA *** *** *** *** ***
156 0156SCS1LAKEAJA *** *** *** *** ***
168 0168SCS1LAKEAJA *** *** *** *** ***
180 0180SCS1LAKEAJA *** *** *** *** ***
192 0192SCS1LAKEAJA *** *** *** *** ***
204 0204SCS1LAKEAJA *** *** *** *** ***
216 0216SCS1LAKEAJA *** *** *** *** ***
</TABLE>
11
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 12
SCHEDULE "B"
TO
AGREEMENT FOR PURCHASE AND SALE OF EQUIPMENT
BETWEEN
PIRELLI CABLES AND SYSTEMS LLC
AND
DIGITAL TELEPORT, INC.
TECHNICAL SPECIFICATIONS
Fiber optic cable supplied under this Agreement shall be in compliance with
Pirelli Specification, PS-3000, Issue 3, September 1, 1995 which reflects
current industry standard specification for cable with loose buffer tube, all
dielectric, 600 lb. tensile strength.
The optical fiber supplied under this Agreement shall be as indicated in the
Corning Fiber Datasheets attached hereto:
PI1036 Corning(R) SMF-28(TM) CPC6
PI1050 Corning(R) SMF-LS(TM) CPC6
PI1107 Corning(R) LEAF(TM) CPC6
PI360 Corning(R) 62.5/125 CPC6
Specific attenuation values shall be supplied at time of order.
12
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 13
SCHEDULE "C"
PIRELLI CABLES AND SYSTEMS LLC
RETURNABLE STEEL REEL POLICY
1. All Pirelli reels are painted orange and bear a unique serial number
for ease of identification and tracking.
2. Pirelli's steel reel sizes are listed in the attached reel chart. It is
our objective to primarily supply the "Pirelli Standard" sizes only,
limiting the total number of reel sizes to six. NOTE: Pirelli standard
reels are built to NEMA specifications and appended to match the
existing wooden reel sizes presently supplied.
3. Pirelli will not assess any charge for reels for a period of 270 days
after shipment. If the reel has not been returned after 270 days,
Pirelli will bill the customer in accordance with the schedule below.
If the customer returns the reel within 365 days of the original ship
date, eighty percent of the billing amount shall be credited to the
customer. All reels shall be returned empty of excess cable.
Refurbishment costs for reels requiring significant repair shall be
billed to the customer.
PIRELLI STEEL REEL SIZE PIRELLI COST 80% OF COST
36" To 48" Reel $ 360 $ 288
54" To 66" Reel $ 425 $ 340
72" To 78" Reel $ 570 $ 456
84" To 96" Reel $ 800 $ 640
4. The return freight charges from collection center to Pirelli and/or
Pirelli agent shall be the responsibility of the Pirelli. The customer
should contact the supplier's representative with information regarding
the reel shipment (e.g., routing, carrier, number of reels, expected
arrival date, etc).
5. Emergency Service Proviso: Ability to ship on non-returnable wooden
reels, with prior notification, in the event steel reels are not
available for service interval required by customer.
13
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 14
SCHEDULE "D"
( NDA)
14
PROPRIETARY - FOR THE USE OF DIGITAL TELEPORT AND PIRELLI ONLY
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 15
CONFIDENTIALITY AGREEMENT
THIS AGREEMENT is made this 24th day of June, 1998, by and between Pirelli
Cables and Systems LLC, a Delaware limited liability company, and Digital
Teleport, Inc., a Missouri corporation. "Disclosing Party" is defined as the
party hereto disclosing confidential information to the other party in
connection with the potential transaction between the parties hereto, and the
"Recipient" is defined as the party hereto receiving the confidential
information from such Disclosing Party in connection with the potential
transaction between the parties hereto.
RECITALS
A. Each Disclosing Party possesses certain confidential and proprietary
information as described below (the "Proprietary Information"), which derives
independent economic value, actual or potential, to Disclosing Party from not
being generally known to, and not being readily ascertainable by proper means
by, other persons who can obtain economic value from its disclosure or use.
B. In connection with a possible purchasing relationship between
Recipient and Disclosing Party, Disclosing Party is willing to provide certain
of its Proprietary Information to the Recipient. It is a condition to the
Disclosing Party providing such Proprietary Information to the Recipient, that
the Recipient enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and of other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
Section 1. "PROPRIETARY INFORMATION" DEFINED
(a) For purposes of this Agreement, the term "Proprietary
Information" shall mean all information and materials disclosed to the
Recipient by the Disclosing Party or any other information that the
Disclosing Party treats or maintains as confidential, proprietary,
restricted or otherwise as not to be disclosed generally, whether
received by the Recipient prior or subsequent to the signing of this
Agreement. Proprietary Information includes, but is not limited to, the
fact of a possible transaction between the Recipient and the Disclosing
Party and any and all information and materials concerning the Disclosing
Party's current, future or proposed products and services, including
without limitation any and all information and materials relating to the
Disclosing Party's business, including, without limitation, financial,
accounting, statistical and numerical information, contracts with
customers and vendors, technical specifications, plans for business
development, organizational data, and marketing plans and strategies,
sales data, unpublished promotional material, cost and pricing
information, and customer lists, in whatever form, manner or medium
recorded (if recorded), including any and all copies thereof.
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 16
as have been or may be provided to the Recipient by or on behalf of
the Disclosing Party, any of its affiliates, officers, directors,
shareholders, employees, agents or representatives or from any other
source.
(b) All information or materials disclosed to the Recipient
by the Disclosing Party shall be considered Proprietary Information
hereunder unless the Recipient shall be able to establish that such
information and/or materials (a) were known to the public at the
time of disclosure to the Recipient; (b) became known to the public
after disclosure to the Recipient through no fault of the Recipient or
its affiliates, officers, directors, shareholders, employees, agents
or representatives; (c) were rightfully in the Recipient's possession
prior to disclosure to the Recipient; (d) were rightfully acquired by
the Recipient from a third party who was lawfully in possession of the
information and was under no obligation to the Disclosing Party or any
other party to maintain the confidentiality thereof; (e) were
independently developed by the Recipient without the benefit or use of
any Proprietary Information; or (f) are required to be disclosed by
the Recipient by regulation or court order; if an event described in
(f) arises, then the Recipient agrees to use reasonable efforts to
provide the Disclosing Party with written notice of such potential
disclosure, prevent such disclosure, and provide the Disclosing Party
with a reasonable opportunity to secure the confidential protection
thereof.
Section 2. OBLIGATION OF CONFIDENTIALITY
(a) Recipient shall initially disclose Proprietary
Information only to those directors, officers, employees, agents,
attorneys, accountants, advisors, affiliates, and other representatives
(collectively, the "Representatives") set forth on Schedule A hereto,
which may be amended by the parties from time to time in writing upon
mutual agreement. Nothing in this Section 4 shall supercede the
additional obligations with respect to the disclosure of Proprietary
Information to Representatives set forth in Section 3 hereof. At
such time as Disclosing Party shall agree in a writing which
specifically references this Agreement. Recipient may issue a press
release, in a form specifically approved by Disclosing Party, regarding
such portions of the Proprietary Information specified in such
writing.
(b) All Proprietary Information (including all copies
thereof) shall remain the exclusive property of the Disclosing Party,
and shall be returned to the Disclosing Party on the earlier of
(i) written demand therefor sent by the Disclosing Party to the
Recipient; or (ii) after Recipient's need for it, consistent with the
performance, or termination of discussions regarding, of the
potential transaction between the parties, has expired.
(c) Recipient hereby acknowledges that all Proprietary
Information is
2
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 17
considered confidential by, and is considered exclusively proprietary to
and a valuable trade secret of the Disclosing Party, and derives
independent economic value, actual or potential, to the Disclosing
Party from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use. As between Recipient and the
Disclosing Party, all proprietary rights (including but not limited to
copyrights and trade secrets) in and to the Proprietary Information
shall remain the property of the Disclosing Party.
Section 3. INJUNCTION
The Recipient hereby acknowledges and agrees that any Proprietary
Information disclosed to the Recipient is considered by the Disclosing Party to
be of a special, unique and proprietary character, and that any breach or
threatened breach of any provision of this Agreement may cause the Disclosing
Party irreparable harm for which monetary damages may be inadequate. The
Recipient agrees, therefore, on behalf of itself and its affiliates, officers,
directors, shareholders, employees, agents and representatives that the
Disclosing Party shall be entitled to injunctive relief to prevent or restrain
any such breach or any threatened or continued breach of this Agreement, or any
part hereof, and to secure the enforcement of this Agreement. Such injunctive
relief shall be in addition to and without limitation of all other remedies at
law or in equity available to the Disclosing Party.
Section 4. NO RIGHTS GRANTED
The Recipient understands and agrees that this Agreement does not
constitute a grant by the Disclosing Party or an intention or commitment on the
part of the Disclosing Party to enter into any transaction or to grant any
right, title or interest in the Proprietary Information to the Recipient, or
any affiliate, officer, director, shareholder, employee, agent or representative
thereof.
Section 5. NO AGENCY
This Agreement does not create any agency, partnership or joint venture
relationship between the parties.
Section 6. NO WAIVER
No waiver by any party of any right or of a breach of any provision of
this Agreement shall constitute a waiver of any other right or breach of any
other provision, nor shall it be deemed to be a general waiver of such
provision by such party or to sanction any subsequent breach thereof by any
other party.
3
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 18
Section 7. NO OBLIGATION TO PROVIDE PROPRIETARY INFORMATION
Nothing in this Agreement shall be construed to require the Disclosing
Party to provide, or to entitle Recipient to obtain, any Proprietary
Information.
Section 8. ENTIRE AGREEMENT
This Agreement sets forth the entire agreement among the parties as to the
subject matter hereof, and none of the terms of this Agreement shall be amended
or modified except in writing signed by the parties.
Section 9. SEVERABILITY
If any provision or provisions of the Agreement shall be found to be
illegal or unenforceable for any reason, such provision or provisions shall be
modified or deleted in such a manner to make this Agreement enforceable, and
the balance of the Agreement shall be construed as severable, independent, and
separately enforceable.
Section 10. GOVERNING LAW
This Agreement shall be governed by and construed under the laws of the
State of Missouri, without giving effect to the principles thereof regarding
the choice of law or conflicts of laws.
Section 11. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and permitted assigns.
Section 12. TERM
This Confidentiality Agreement shall terminate on the earlier of (a)
thirty-six (36) months from the earlier of the date of this Agreement, or (b)
at such earlier time as both parties may mutually agree upon.
4
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PIRELLI CABLES AND SYSTEMS LLC
By:/s/ Dennis G. Vaughn, III
-------------------------------------
Name: Dennis G. Vaughn, III
-----------------------------------
Title: Vice President, Sales & Marketing
----------------------------------
DIGITAL TELEPORT, INC.
By: /s/ Richard D. Weinstein
-------------------------------------
Name: Richard D. Weinstein
Title: President and Chief Executive
Officer
5
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 20
SCHEDULE A
PIRELLI CABLES NORTH AMERICA AUTHORIZED RECIPIENT REPRESENTATIVES
Peter McGuire
Susan Hamlin
Dennis Vaughn III
Ray Robinson
Walter Alessendrini
Glen Hesir
Jim Brown
Bryan Hall
Charlie Carson
Jon Henson
Holly Bennett
Meredith Moody
John Bournazous
Sebastiano Caruso
DIGITAL TELEPORT, INC. AUTHORIZED RECIPIENT REPRESENTATIVES
Richard D. Weinstein
H.P. Scott
James V. O'Donnell
Daniel A. Davis
Jerry Murphy
J. Mark Klamer
6
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 21
SCHEDULE E
PIRELLI CABLES & SYSTEMS
DIGITAL TELEPORT INC. PRICING
FIRSTLINK(TM)
Singlemode Fiber, Loose Tube
Dielectric CSM, Indoor/Outdoor Riser Rated - FirstLink(TM)
1 PVC Jacket, Outer Strength Members, 600# Tensile
Water Blocked, Meets UL 1666
<.40/.30 dB/Km at 1310/1550nm
-
FIBER COUNT PRODUCT # PRICE/FT
----------- --------------- --------
12 0012SCS1LAKERJA $ ***
24 0024SCS1LAKERJA $ ***
36 0036SCS1LAKERJA $ ***
48 0048SCS1LAKERJA $ ***
60 0060SCS1LAKERJA $ ***
72 0072SCS1LAKERJA $ ***
96 0096SCS1LAKERJA $ ***
144 0144SCS1LAKERJA $ ***
RISER RATED PREMISE CABLE
Singlemode Fiber, 900 micron Tight Buffered
1 yellow PVC Jacket, Outer Strength Members, Riser Rated
<.7/.7 dB/Km at 1310/1550nm
-
FIBER COUNT PRODUCT # PRICE/FT
----------- --------------- --------
6 0006SEXXTATNRNR $ ***
12 0012SEXXTATNRNR $ ***
RISER RATED DISTRIBUTION CABLE
Singlemode Fiber, 900 micron Tight Buffered
1 Yellow PVC Jacket, Dielectric CSM, Tensile 300#,
Riser Rated .7/.7 dB/Km at 1310/1550nm
FIBER COUNT PRODUCT # PRICE/FT
----------- --------------- --------
24 0024SESXTATERNP $ ***
36 0036SESXTATERNP $ ***
48 0048SESXTATERNP $ ***
Minimum order quantity to manufacture is 3,280ft.
CONFIDENTIAL
FOR THE USE OF PIRELLI AND DIGITAL TELEPORT AUTHORIZED PERSONNEL ONLY.
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 22
SCHEDULE E
PIRELLI CABLES & SYSTEMS
DIGITAL TELEPORT INC. PRICING
PLENUM RATED PREMISE CABLE
Singlemode Fiber, 900um Tight Buffered
1 yellow PVC Jacket, Outer Strength Members, Plenum Rated
<.7/.7 dB/Km at 1310/1550nm
-
FIBER COUNT PRODUCT # PRICE/FT.
- ----------- --------------- ---------
6 0006SEXXTATNPND $ ***
12 0012SEXXTATNPND $ ***
PLENUM RATED DISTRIBUTION CABLE
Singlemode Fiber, 900 micron Tight Buffered,
1 Yellow PVC Jacket, Dielectric CSM, Tensile 150#,
Plenum Rated .7/.7 dB/Km at 1310/1550nm
FIBER COUNT PRODUCT # PRICE/FT.
- ----------- --------------- ---------
24 0024SESXTATEPNR $ ***
36 0036SESXTATEPNR $ ***
48 0048SESXTATEPNR $ ***
Minimum order quantity to manufacture is 3,280ft.
CONFIDENTIAL
FOR THE USE OF PIRELLI AND DIGITAL TELEPORT AUTHORIZED PERSONNEL ONLY.
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to the Registration Statement
No. 333-50049 of DTI Holdings, Inc. on Form S-4 of our report dated September
10, 1997 (July 31, 1998 as to Notes 13 and 14) appearing in the Prospectus,
which is a part of such Registration Statement.
We also consent to the reference to us under the headings "Summary Consolidated
Financial and Operating Data", "Selected Consolidated Financial and Operating
Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
August 14, 1998
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
DTI HOLDINGS, INC.
OFFER TO EXCHANGE ITS 12 1/2% SERIES B SENIOR DISCOUNT NOTES
DUE 2008 ("EXCHANGE NOTES") FOR ALL OF ITS OUTSTANDING
12 1/2% SENIOR DISCOUNT NOTES DUE 2008 ("PRIVATE NOTES")
PURSUANT TO ITS PROSPECTUS DATED _______________, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON _____________, 1998,
UNLESS EXTENDED BY THE COMPANY (THE "EXPIRATION DATE"). TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- ----------------------------------------------------------------------------------------------------------------------------------
Delivery To: The Bank of New York, Exchange Agent
By Overnight Courier or Hand: By Facsimile:
By Mail The Bank of New York (for Eligible Institutions
The Bank of New York 101 Barclay St., Floor 7E only)
101 Barclay St., Floor 7E Corporate Trust & Agency Services Window Chris Davis,
New York, New York 10286 New York, New York 10286 The Bank of New York
Attention: Chris Davis, Attention: Chris Davis, (212) 815-6339
Reorganization Section Reorganization Section Confirm by Telephone
(212) 815-4997
List below the Private Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate numbers and
principal amount of Private Notes should be listed on a separate signed schedule
affixed hereto.
----------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF PRIVATE NOTES 1 2 3
----------------------------------------------------------------------------------------------------------------------------------
Aggregate
Principal
Certificate Amount of Principal
Name(s) and Address(es) of Registered Holder(s) Number(s)* Private Amount
(Please fill in, if blank) Total Note(s) Tendered**
----------------------------------------------------------------------------------------------------------------------------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
--------------- -------------- ---------------
Total
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed if Private Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have
tendered ALL of the Private Notes represented by the Private Notes indicated
in column 2. See Instruction 2. Private Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof. See Instruction 1.
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE
EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE
FOLLOWING:
Name of Tendering Institution________________________________________
Account Number_________________________ Transaction Code Number_______
[ ] CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s)______________________________________
Window Ticket Number (if any)________________________________________
Date of Execution of Notice of Guaranteed Delivery___________________
Name of Institution which guaranteed delivery _______________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE
THE FOLLOWING:
Account Number________________________ Transaction Code Number_______
<PAGE> 2
Name of Institution which guaranteed delivery_________________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number_________________ Transaction Code Number____________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO HOLDS PRIVATE NOTES ACQUIRED
FOR YOUR OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES AND WISH TO RECEIVE COPIES OF THE PROSPECTUS AND COPIES OF
ANY AMENDMENTS OR SUPPLEMENTS THERETO FOR USE IN CONNECTION WITH
RESALES OF EXCHANGE NOTES RECEIVED FOR YOUR OWN ACCOUNT IN EXCHANGE FOR
SUCH PRIVATE NOTES.
Name:_____________________________________________________
Address:___________________________________________________
Aggregate Principal Amount of Private Notes so held: $______________
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its sole discretion, in which event the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended. The Company shall notify the holders of the Private Notes of
any extension by means of a press release or other public announcement prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter of Transmittal is to be completed by a holder of Private
Notes if certificates are to be forwarded herewith. If a tender of certificates
for Private Notes, if available, is to be made by book-entry transfer to the
account maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in "The
Exchange Offer--Book-Entry Transfer" section of the Prospectus, such tender
shall be made by transmission of an Agent's Message via the Automated Tender
Offer Program ("ATOP") system to the Exchange Agent. Holders of Private
Notes whose certificates are not immediately available, or who are unable to
deliver their certificates or confirmation of the book-entry tender of their
Private Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility (a "Book-Entry Confirmation") and all other documents required by this
Letter to the Exchange Agent on or prior to the Expiration Date, must tender
their Private Notes according to the guaranteed delivery procedures set forth in
"The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus.
See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Exchange Agent.
2
<PAGE> 3
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to DTI Holdings, Inc., a Missouri
corporation (the "Company"), the aggregate principal amount of Private Notes
indicated in this Letter of Transmittal, upon the terms and subject to the
conditions set forth in the Company's Prospectus dated ______________, 1998 (the
"Prospectus"), receipt of which is hereby acknowledged, and in this Letter of
Transmittal, which together constitute the Company's offer (the "Exchange
Offer") to exchange $1,000 principal amount at maturity of its 12 1/2% Series B
Senior Discount Notes due _____________ 2008, which have been registered under
the Securities Act of 1933, as amended (the "Exchange Notes"), for each $1,000
principal amount at maturity of its issued and outstanding 12 1/2% Senior
Discount Notes due 2008, of which $506,000,000 aggregate principal amount at
maturity was outstanding on the date of the Prospectus (the "Private Notes" and,
together with the Exchange Notes, the "Notes"). The capitalized terms which are
not defined herein are used herein as defined in the Prospectus.
Subject to, and effective upon, the acceptance for exchange of the
Private Notes tendered hereby, the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to such Private Notes as are being tendered hereby and hereby irrevocably
constitutes and appoints the Exchange Agent as attorney-in-fact of the
undersigned with respect to such Private Notes, with full power of substitution
(such power of attorney being an irrevocable power coupled with an interest),
to:
(a) deliver such Private Notes in registered certificated form, or
transfer ownership of such Private Notes through book-entry transfer at
the Book-Entry Transfer Facility, to or upon the order of the Company,
upon receipt by the Exchange Agent, as the undersigned's agent, of the
same aggregate principal amount at maturity of Exchange Notes; and
(b) receive, for the account of the Company, all benefits and otherwise
exercise, for the account of the Company, all rights of beneficial
ownership of the Private Notes tendered hereby in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Private Notes
tendered hereby and that the Company will acquire good, marketable and
unencumbered title thereto, free and clear of all security interests, liens,
restrictions, charges, encumbrances, conditional sale agreements or other
obligations relating to their sale or transfer, and not subject to any adverse
claim when the same are accepted by the Company. The undersigned hereby further
represents that any Exchange Notes acquired in exchange for Private Notes
tendered hereby will have been acquired in the ordinary course of business of
the person receiving such Exchange Notes, whether or not such person is the
undersigned, that neither the holder of such Private Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such Exchange Notes and that neither the holder of such Private
Notes nor any such other person is an "affiliate," as defined in Rule 405 under
the Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned has read and agrees to all of the terms of the Exchange Offer.
The undersigned also acknowledges that this Exchange Offer is being
made in reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the Exchange Notes issued in exchange for the Private Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, the Company does not intend to request the SEC to consider, and
the SEC has not considered, the Exchange Offer in the context of a no-action
letter, and there can be no assurance that the staff of the SEC would make a
similar determination with respect to the Exchange Offer as in other
circumstances. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes and has no arrangement or understanding to
participate in a distribution of Exchange Notes. If any holder is an affiliate
of the Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is a broker-dealer
that will receive Exchange Notes for its own account in exchange for Private
Notes acquired as a result of market-making or other trading activities (a
"Participating Broker-Dealer"), it represents that the Private Notes to be
exchanged for the Exchange Notes were acquired by it as a result of
market-making or other trading activities and acknowledges that it will deliver
a prospectus in connection with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus, such Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Company has agreed that, subject to the provisions of the Notes
Registration Rights Agreement, the Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received in exchange for Private Notes
which were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities, for a period ending 120
days after the Expiration Date or, if earlier, when all such Exchange Notes have
been disposed of by such Participating Broker-Dealer. In that regard, each
Participating Broker-Dealer by tendering such Private Notes and executing this
Letter of Transmittal, agrees that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in the Prospectus untrue in any
material respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
therein, in light of the circumstances under which they were made, not
misleading, such Participating Broker-Dealer will suspend the sale of Exchange
Notes pursuant to the Prospectus until the Company has amended or supplemented
the Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to the Participating Broker-Dealer or
the Company has given notice that the sale of the Exchange Notes may be resumed,
as the case may be. If the Company gives such notice to suspend the sale of the
Exchange Notes, it shall extend the 120-day period referred to above during
which Participating Broker-Dealers are entitled to use the Prospectus in
connection with the resale of Exchange Notes by the number of days during the
period from and including the date of the giving of such notice to and including
the date when Participating Broker-Dealers shall have received copies of the
supplemented or amended Prospectus necessary to permit resales of the Exchange
Notes or to and including the date on which the Company has given notice that
the sale of Exchange Notes may be resumed, as the case may be.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Private Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter of Transmittal and
every obligation of the undersigned hereunder shall be binding upon the
successors,
3
<PAGE> 4
assigns, heirs, executors, administrators, trustees in bankruptcy
and legal representatives of the undersigned and shall not be affected by, and
shall survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer--Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Private Notes for any Private Notes not
exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Private Notes, please credit the account indicated above maintained
at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under
the box entitled "Special Delivery Instructions" below, please send the Exchange
Notes (and, if applicable, substitute certificates representing Private Notes
for any Private Notes not exchanged) to the undersigned at the address shown
above in the box entitled "Description of Private Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF PRIVATE
NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE
TENDERED THE PRIVATE NOTES AS SET FORTH IN SUCH BOX ABOVE.
4
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4) (SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Private Notes not To be completed ONLY if certificates for Private
exchanged and/or Exchange Notes are to be issued in the Notes not exchanged and/or Exhcange Notes are to
name of and sent to someone other than the person or persons be sent to someone other than the person or
whose signature(s) appear(s) below on this Letter of Transmittal, persons whose signature(s) appear(s) below on
or if Private Notes delivered by book-entry transfer which are this Letter of Transmittal or to such person or
not accepted for exchange are to be returned by credit to an persons at an address other than shown above in
account maintained at the Book-Entry Transfer Facility other the box entitled "Description of Private Notes"
than the account indicated above. on this Letter of Transmittal.
Issue: Exchange Notes and/or Private Notes to:
Name(s) .....................................................
(PLEASE TYPE OR PRINT) Mail: Exchange Notes and/or Private Notes to:
.............................................................
(PLEASE TYPE OR PRINT) Name(s) ....................................................
Address ..................................................... (PLEASE TYPE OR PRINT)
.............................................................
(ZIP CODE) ............................................................
(PLEASE TYPE OR PRINT)
[ ] Credit unexchanged Private Notes delivered by
book-entry transfer to the Book-Entry Transfer Facility
account set forth below. Address ....................................................
- ----------------------------------------------------------------
(Book-Entry Transfer Facility ............................................................
Account Number, if applicable) (ZIP CODE)
- ---------------------------------------------------------------- -------------------------------------------------------------
IMPORTANT: A BOOK-ENTRY CONFIRMATION OR THIS LETTER OF TRANSMITTAL OR A FACSIMILE
HEREOF (TOGETHER WITH THE CERTIFICATES FOR PRIVATE NOTES OR AND ALL OTHER REQUIRED
DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE
AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETION.
- ------------------------------------------------------------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9 on reverse side)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signature(s) of Owner Date
Area Code and Telephone Number ..............................................................
If a holder is tendering any Private Notes, this Letter of Transmittal
must be signed by the registered holder(s) as the name(s) appear(s) on the
certificate(s) for the Private Notes or on a securities position listing or by
any person(s) authorized to become registered holder(s) by endorsements and
documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, please set forth full title.
See Instruction 3.
Name(s): .......................................................................................................................
.................................................................................................................................
(Please Type or Print)
Capacity: ......................................................................................................................
Address: .......................................................................................................................
.................................................................................................................................
(Including Zip Code)
SIGNATURE GUARANTEE
(If required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution: .......................................................................................................
(Authorized Signature)
.................................................................................................................................
(Title)
.................................................................................................................................
(Name and Firm)
Dated: ..................................................................................................................., 1998
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE
OFFER OF DTI HOLDINGS, INC. TO EXCHANGE ITS 12 1/2%
SERIES B SENIOR DISCOUNT NOTES DUE 2008 FOR ALL OF
ITS
OUTSTANDING 12 1/2% SENIOR DISCOUNT NOTES DUE 2008
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES; GUARANTEED DELIVERY
PROCEDURES.
This Letter of Transmittal is to be completed by holders of
Private Notes if certificates are to be forwarded herewith. If tenders are to be
made pursuant to the procedures for delivery by book-entry transfer set forth in
"The Exchange Offer--Book-Entry Transfer" section of the Prospectus, such tender
shall be made by transmission of an Agent's Message through the ATOP system to
the Exchange Agent. Certificates for all physically tendered Private Notes, or
Book-Entry Confirmation, as the case may be, as well as a properly completed and
duly executed Letter of Transmittal (or manually signed facsimile hereof) and
any other documents required by this Letter of Transmittal, must be received by
the Exchange Agent at the address set forth herein on or prior to the Expiration
Date, or the tendering holder must comply with the guaranteed delivery
procedures set forth below. Private Notes tendered hereby must be in
denominations of principal amount at maturity of $1,000 and any integral
multiple thereof.
Holders of Private Notes whose certificates for Private Notes
are not immediately available or who cannot deliver their certificates and all
other required documents to the Exchange Agent on or prior to the Expiration
Date, or who cannot complete the procedure for book-entry transfer on a timely
basis, may tender their Private Notes pursuant to the guaranteed delivery
procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures"
section of the Prospectus. Pursuant to such procedures, (i) such tender must be
made through an Eligible Institution (as defined below), (ii) prior to the
Expiration Date, the Exchange Agent must receive from such Eligible Institution
a properly completed and duly executed Letter of Transmittal (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by telegram, telex, facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of Private Notes and
the amount of Private Notes tendered, stating that the tender is being made
thereby and guaranteeing that within three New York Stock Exchange ("NYSE")
trading days after the Expiration Date, the certificates for all physically
tendered Private Notes, or a Book-Entry Confirmation, and any other documents
required by this Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Private Notes, in proper form for transfer, or Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter of Transmittal, are received by the Exchange Agent within three NYSE
trading days after the Expiration Date.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE
PRIVATE NOTES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE TENDERING HOLDERS, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY
INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE. DO NOT SEND THIS LETTER OF TRANSMITTAL OR ANY PRIVATE NOTES TO THE
COMPANY.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF PRIVATE NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER); WITHDRAWAL RIGHTS
Tenders of Private Notes will be accepted only in the
principal amount at maturity of $1,000 and integral multiples thereof. If less
than all of the Private Notes evidenced by a submitted certificate are to be
tendered, the tendering holder(s) should fill in the aggregate principal amount
at maturity of Private Notes to be tendered in the box above entitled
"Description of Private Notes--Principal Amount Tendered." A reissued
certificate representing the balance of nontendered Private Notes will be sent
to such tendering holder, unless otherwise provided in the appropriate box on
this Letter of Transmittal, promptly after the Expiration Date. ALL OF THE
PRIVATE NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN
TENDERED UNLESS OTHERWISE INDICATED.
Except as otherwise provided herein, tenders of Private Notes
may be withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth above on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Private Notes to be withdrawn, the aggregate
principal amount of Private Notes to be withdrawn and (if certificates for such
Private Notes have been tendered) the name of the registered holder of the
Private Notes as set forth on the certificate for the Private Notes, if
different from that of the person who tendered such Private Notes. If
certificates for the Private Notes have been delivered or otherwise identified
to the Exchange Agent, then prior to the physical release of such certificates
for the Private Notes, the tendering holder must submit the serial numbers shown
on the particular certificates for the Private Notes to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Private Notes tendered for the account of an
Eligible Institution. If Private Notes have been tendered pursuant to the
procedures for book-entry transfer set forth in "The Exchange Offer--Book-Entry
Transfer" section of the Prospectus, the notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawal of Private Notes, in which case a notice of
withdrawal will be effective if delivered to the Exchange Agent by written,
telegraphic, telex or facsimile transmission. Withdrawals of tenders of Private
Notes may not be rescinded. Private Notes properly withdrawn will not be deemed
to have been validly tendered for purposes of the Exchange Offer, and no
Exchange Notes will be issued with respect thereto unless the Private Notes so
withdrawn are validly retendered. Properly withdrawn Private Notes may be
retendered at any subsequent time on or prior to the Expiration Date by
following the procedures described in the Prospectus under "The Exchange
Offer--Procedures for Tendering."
All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices will be determined by the
Company, in its sole discretion, whose determination shall be final and binding
on all parties. Neither the Company, any employees, agents, affiliates or
assigns of the Company, the Exchange Agent nor any other person shall be under
any duty to give any notification of any irregularities in any notice of
withdrawal or incur any liability for failure to give such notification. Any
Private Notes which have been tendered but which are withdrawn will be returned
to the holder thereof without cost to such holder as promptly as practicable
after withdrawal.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES
If this Letter of Transmittal is signed by the registered
holder of the Private Notes tendered hereby, the signature
6
<PAGE> 7
must correspond exactly with the name as written on the face of the certificates
or on a securities position listing without any change whatsoever.
If any tendered Private Notes are owned of record by two or
more joint owners, all of such owners must sign this Letter of Transmittal.
If any tendered Private Notes are registered in different
names on several certificates or securities positions listings, it will be
necessary to complete, sign and submit as many separate copies of this Letter of
Transmittal as there are different registrations.
When this Letter of Transmittal is signed by the registered
holder or holders of the Private Notes specified herein and tendered hereby, no
endorsements of certificates or separate bond powers are required. If, however,
the Exchange Notes are to be issued, or any untendered Private Notes are to be
reissued, to a person other than the registered holder, then endorsements of any
certificates transmitted hereby or separate bond powers are required. Signatures
on such certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than
the registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s), and the signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
ENDORSEMENTS ON CERTIFICATES FOR PRIVATE NOTES OR SIGNATURES
ON BOND POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH
IS A MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN
"ELIGIBLE INSTITUTION").
SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE
GUARANTEED BY AN ELIGIBLE INSTITUTION, PROVIDED THE PRIVATE NOTES ARE TENDERED:
(I) BY A REGISTERED HOLDER OF PRIVATE NOTES (WHICH TERM, FOR PURPOSES OF THE
EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY
SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDERS OF SUCH
PRIVATE NOTES) WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE
INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON THIS LETTER OF TRANSMITTAL
OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Private Notes should indicate in the
applicable box the name and address to which Exchange Notes issued pursuant to
the Exchange Offer and/or substitute certificates evidencing Private Notes not
exchanged are to be issued or sent, if different from the name or address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the employer identification or social security number of the
person named must also be indicated. A holder of Private Notes tendering Private
Notes by book-entry transfer may request that Private Notes not exchanged be
credited to such account maintained at the Book-Entry Transfer Facility as such
holder may designate hereon. If no such instructions are given, such Private
Notes not exchanged will be returned to the name or address of the person
signing this Letter of Transmittal.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering
holder whose Private Notes are accepted for exchange must provide the Company
(as payor) with such holder's correct Taxpayer Identification Number ("TIN") on
Substitute Form W-9 below, which, in the case of a tendering holder who is an
individual, is his or her social security number. If the Company is not provided
with the current TIN or an adequate basis for an exemption, such tendering
holder may be subject to a $50 penalty imposed by the Internal Revenue Service.
In addition, delivery to such tendering holder of Exchange Notes may be subject
to backup withholding in an amount equal to 31% of all reportable payments made
after the exchange. If withholding results in an overpayment of taxes, a refund
may be obtained.
Exempt holders of Private Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed Guidelines of
Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9
Guidelines") for additional instructions.
To prevent backup withholding, each tendering holder of
Private Notes must provide its correct TIN by completing the Substitute Form W-9
set forth below, certifying that the TIN provided is correct (or that such
holder is awaiting a TIN) and that (i) the holder is exempt from backup
withholding, (ii) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of a
failure to report all interest or dividends or (iii) the Internal Revenue
Service has notified the holder that such holder is no longer subject to backup
withholding. If the tendering holder of Private Notes is a nonresident alien or
foreign entity not subject to backup withholding, such holder must give the
Company a completed Form W-8, Certificate of Foreign Status. These forms may be
obtained from the Exchange Agent. If the Private Notes are in more than one name
or are not in the name of the actual owner, such holder should consult the W-9
Guidelines for information on which TIN to report. If such holder does not have
a TIN, such holder should consult the W-9 Guidelines for instructions on
applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write
"applied for" on the form in lieu of its TIN. Note: Checking this box and
writing "applied for" on the form means that such holder has already applied for
a TIN or that such holder intends to apply for one in the near future. If such
holder does not provide its TIN to the Company within 60 days, backup
withholding will begin and continue until such holder furnishes its TIN to the
Company.
7
<PAGE> 8
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to
the transfer of Private Notes to it or its order pursuant to the Exchange Offer.
If, however, Exchange Notes and/or substitute Private Notes not exchanged are to
be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Private Notes tendered hereby, or if
tendered Private Notes are registered in the name of any person other than the
person signing this Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the transfer of Private Notes to the Company or its order
pursuant to the Exchange Offer, the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted herewith, the amount of such transfer taxes will be
billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE
NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE PRIVATE NOTES SPECIFIED
IN THIS LETTER OF TRANSMITTAL.
7. DETERMINATION OF VALIDITY.
The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Private Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for which, may, in the view
of counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Prospectus under the caption "The Exchange
Offer--Conditions" or any conditions or irregularity in any tender of Private
Notes of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of
the Exchange Offer (including this Letter of Transmittal and the instructions
hereto) will be final and binding. No tender of Private Notes will be deemed to
have been validly made until all irregularities with respect to such tender have
been cured or waived. Although the Company intends to notify holders of defects
or irregularities with respect to tenders of Private Notes, neither the Company,
any employees, agents, affiliates or assigns of the Company, the Exchange Agent,
nor any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders
will be accepted. All tendering holders of Private Notes, by execution of this
Letter of Transmittal, shall waive any right to receive notice of the acceptance
of their Private Notes for exchange.
9. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES.
Any holder whose Private Notes have been mutilated, lost,
stolen or destroyed should contact the Exchange Agent at the address indicated
above for further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as
requests for additional copies of the Prospectus and this Letter of Transmittal,
may be directed to the Exchange Agent, at the address and telephone number
indicated above.
8
<PAGE> 9
<TABLE>
<CAPTION>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: THE BANK OF NEW YORK
====================================================================================================================================
<S> <C> <C>
SUBSTITUTE
FORM W-9
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR
TAXPAYER
IDENTIFICATION NUMBER TIN:____________________________
("TIN") AND PART 1-PLEASE PROVIDE YOUR TIN IN THE BOX AT SOCIAL SECURITY NUMBER OR
CERTIFICATION RIGHT AND CERTIFY BY SIGNING AND DATING BELOW EMPLOYER IDENTIFICATION NUMBER
==========================================================================================
PART 2--TIN APPLIED FOR [ ]
==========================================================================================
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form
is my correct Taxpayer
Identification Number (or I
am waiting for a number to be
issued to me).
(2) I am not subject to backup
withholding either because:
(a) I am exempt from backup
withholding, or (b) I have
not been notified by the
Internal Revenue Service (the
"IRS") that I am subject to
backup withholding as a
result of a failure to report
all interest or dividends, or
(c) the IRS has notified me
that I am no longer subject
to backup withholding, and
(3) any other information provided on
this form is true and correct.
SIGNATURE____________________________________ DATE___________
====================================================================================================================================
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup
withholding because of underreporting of interest or dividends on your tax
return and you have not been notified by the IRS that you are no longer subject
to backup withholding.
====================================================================================================================================
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
====================================================================================================================================
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange, 31 percent
of all reportable payments made to me thereafter will be withheld until I
provide a number.
- --------------------------------------------- ---------------------
SIGNATURE DATE
====================================================================================================================================
</TABLE>
9
<PAGE> 1
EXHIBIT 99.6
___________________, 1998
EXCHANGE AGENT AGREEMENT
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street - 21st Floor
New York, New York 10286
Ladies and Gentlemen:
DTI Holdings, Inc., a Missouri corporation (the "Company"), proposes to
make an offer (the "Exchange Offer") to exchange up to $506,000,000 aggregate
principal amount at maturity of its 12 1/2% Series B Senior Discount Notes due
2008 (the "Exchange Notes"), for a like principal amount of its
outstanding 12 1/2% Senior Discount Notes due 2008 (the "Private
Notes"). The terms and conditions of the Exchange Offer are set forth in a
prospectus (the "Prospectus") included in the Company's registration statement
on Form S-4 (File No. 333-50049), as amended (the "Registration Statement"),
filed with the Securities and Exchange Commission (the "SEC"), proposed to be
distributed to all record holders of the Private Notes. The Private Notes and
the Exchange Notes are collectively referred to herein as the "Notes."
Capitalized terms used and not defined herein shall have the respective meanings
ascribed to them in the Prospectus.
The Company hereby appoints The Bank of New York to act as exchange
agent (the "Exchange Agent") in connection with the Exchange Offer. References
hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company on or
about _______________, 1998. The Letter of Transmittal accompanying the
Prospectus (or, in the case of book-entry securities the Automated Tender Offer
Program system) is to be used by the holders of the Private Notes to
accept the Exchange Offer and contains instructions with respect to the delivery
of certificates for Private Notes tendered in connection therewith and any other
documents required therein.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on
________ , 1998, or on such later date or time to which the Company may extend
the Exchange Offer (the "Expiration Date"). Subject to the terms and conditions
set forth in the Prospectus, the Company expressly reserves the right to extend
the Exchange Offer from time to time and may extend the Exchange Offer by giving
oral (confirmed in writing) or written notice to you before 9:00 A.M., New York
City time, on the business day following the previously scheduled Expiration
Date.
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The Company expressly reserves the right, in its sole and absolute
discretion, to amend or terminate the Exchange Offer, and not to accept for
exchange any Private Notes not theretofore accepted for exchange, upon the
occurrence of any of the conditions of the Exchange Offer specified in the
Prospectus under the caption "The Exchange Offer - Conditions." The Company will
give oral (confirmed in writing) or written notice of any amendment, termination
or nonacceptance to you as promptly as practicable.
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following instructions:
1. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The Exchange
Offer" or as specifically set forth herein; provided, however, that in no way
will your general duty to act in good faith and without gross negligence or
willful misconduct be limited by the foregoing.
2. You will establish an account with respect to the Private Notes at
The Depository Trust Company (the "Book-Entry Transfer Facility") for purposes
of the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Private Notes by causing
the Book-Entry Transfer Facility to transfer such Private Notes into your
account in accordance with the Book-Entry Transfer Facility's procedures for
such transfer.
3. You are to examine each of the Letters of Transmittal and
certificates for Private Notes (or confirmation of book-entry transfers of
Private Notes into your account at the Book-Entry Transfer Facility) and any
other documents delivered or mailed to you by or for holders of the Private
Notes, to ascertain whether: (i) the Letters of Transmittal, certificates and
any such other documents are duly executed and properly completed in accordance
with instructions set forth therein and that such book-entry confirmations are
in due and proper form and contain the information required to be set forth
therein, and (ii) the Private Notes have otherwise been properly tendered. In
each case where the Letter of Transmittal or any other document has been
improperly completed or executed, or where book-entry confirmations are not in
due and proper form or omit certain information, or any of the certificates for
Private Notes are not in proper form for transfer or some other irregularity in
connection with the acceptance of the Exchange Offer exists, you will endeavor
to inform the presenters of the need for fulfillment of all requirements and to
take any other action as may be necessary or advisable to cause such
irregularity to be corrected.
4. With the approval of the Chief Executive Officer, President, Chief
Financial Officer or any Executive Vice President of the Company (such
approval, if given orally, to be confirmed in writing) or any other party
designated by such officer in writing, you are authorized to waive any
irregularities in connection with any tender of Private Notes pursuant to the
Exchange Offer.
5. Tenders of Private Notes may be made only as set forth in the Letter
of Transmittal and in the section of the Prospectus captioned "The Exchange
Offer-Procedures for Tendering," and Private Notes shall be considered properly
tendered to you only when tendered in accordance with the procedures set forth
therein. Notwithstanding the provisions of this paragraph 5, Private Notes which
the Chief Executive Officer, President, Chief Financial Officer or any Executive
Vice President of the Company or any other
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designated officer of the Company shall approve as having been properly
tendered shall be considered to be properly tendered (such approval, if given
orally, shall be confirmed in writing).
6. You shall advise the Company with respect to any Private Notes
received subsequent to the Expiration Date and accept its instructions with
respect to disposition of such Private Notes.
7. You shall accept tenders:
(a) in cases where the Private Notes are registered in
two or more names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the
Letter of Transmittal) is acting in a fiduciary or a representative capacity
only when proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Private
Notes provided that customary transfer requirements, including any applicable
transfer taxes, are fulfilled.
You shall accept partial tenders of Private Notes when so indicated and
as permitted in the Letter of Transmittal and deliver certificates for Private
Notes to the transfer agent for split-up and return any untendered Private Notes
to the holder (or such other person as may be designated in the Letter of
Transmittal) as promptly as practicable after expiration or termination of the
Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice if given orally, to be confirmed
in writing) of its acceptance, promptly after the Expiration Date, of all
Private Notes properly tendered and you, on behalf of the Company, will exchange
such Private Notes for Exchange Notes and cause such Private Notes to be
canceled. Delivery of Exchange Notes will be made on behalf of the Company by
you at the rate of $1,000 principal amount at maturity of Exchange Notes for
each $1,000 principal amount at maturity of the Private Notes tendered promptly
after notice (such notice if given orally, to be confirmed in writing) of
acceptance of said Private Notes by the Company; provided, however, that in all
cases, Private Notes tendered pursuant to the Exchange Offer will be exchanged
only after timely receipt by you of certificates for such Private Notes (or
confirmation of book-entry transfer into your account at the Book-Entry Transfer
Facility), a properly completed and, except as described in the section of the
Prospectus captioned "The Exchange Offer - Procedures for Tendering," duly
executed Letter of Transmittal (or facsimile thereof) with any required
signature guarantees and any other required documents. Unless otherwise
instructed by the Company, you shall issue Exchange Notes only in denominations
of $1,000 principal amount at maturity or any integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and the
Letter of Transmittal, Private
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Notes tendered pursuant to the Exchange Offer may be withdrawn at any time on
or prior to the Expiration Date in accordance with the terms of the Exchange
Offer.
10. The Company shall not be required to exchange any Private Notes
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Private Notes tendered
shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Private Notes tendered because of an invalid tender,
the occurrence of certain other events set forth in the Prospectus under the
caption "The Exchange Offer - Conditions" or otherwise, you shall as soon as
practicable after the expiration or termination of the Exchange Offer return
those certificates for unaccepted Private Notes (or effect appropriate
book-entry transfer), together with any related required documents and the
Letters of Transmittal relating thereto that are in your possession, to the
persons who deposited them (or effected such book-entry transfer).
12. All certificates for reissued Private Notes, unaccepted Private
Notes or for Exchange Notes (other than those effected by book-entry transfer)
shall be forwarded by (a) first-class certified mail, return receipt requested,
under a blanket surety bond obtained by you protecting you and the Company from
loss or liability arising out of the nonreceipt or nondelivery of such
certificates or (b) by registered mail insured by you separately for the
replacement value of each of such certificates.
13. You are not authorized to pay or offer to pay any concessions,
commissions or other solicitation fees to any broker, dealer, commercial bank,
trust company or other nominee or to engage or use any person to solicit
tenders.
14. As Exchange Agent hereunder, you:
(a) shall have no duties or obligations other than those
specifically set forth in the Prospectus, the Letter of Transmittal or herein or
as may be subsequently agreed to in writing by you and the Company;
(b) will be regarded as making no representations and having
no responsibilities as to the validity, sufficiency, value or genuineness of any
of the certificates for the Private Notes deposited with you pursuant to the
Exchange Offer, and will not be required to and will make no representation as
to the validity, value or genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder
which might in your reasonable judgment involve any expense or liability, unless
you shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting
in reliance upon any certificate, instrument, opinion, notice, letter, telegram
or other document or security
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delivered to you and reasonably believed by you to be genuine and to have been
signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request,
comment, agreement or other instrument whatsoever not only as to its due
execution and validity and effectiveness of its provisions, but also as to the
truth and accuracy of any information contained therein, which you shall in good
faith believe to be genuine or to have been signed or represented by a proper
person or persons;
(f) may rely on and shall be protected in acting upon written
or oral instructions from any officer of the Company;
(g) may consult with your counsel with respect to any
questions relating to your duties and responsibilities, and the written opinion
of such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by you hereunder in
good faith and in accordance with the written opinion of such counsel; and
(h) shall not advise any person tendering Private Notes
pursuant to the Exchange Offer as to whether to tender or refrain from tendering
all or any portion of Private Notes or as to the market value of the Private
Notes or as to any decrease or appreciation in market value of any Private Notes
that may or may not occur as a result of the Exchange Offer or as to the market
value of the Exchange Notes;
provided, however, that in no way will your general duty to act in good faith
and without gross negligence or willful misconduct be limited by the foregoing.
15. You shall take such action as may from time to time be requested by
the Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the
Notice of Guaranteed Delivery or such other forms as may be approved from time
to time by the Company, to all persons requesting such documents and to accept
and comply with telephone requests for information relating to the Exchange
Offer, provided such information shall relate only to the procedures for
accepting (or withdrawing from) the Exchange Offer. The Company will furnish you
with copies of such documents at your request. All other requests for
information relating to the Exchange Offer shall be directed to the Company,
Attention: Chief Financial Officer.
16. You shall advise by facsimile transmission or telephone, and
promptly thereafter confirm in writing to, Gary W. Douglass, Senior Vice
President and Chief Financial Officer of the Company, and such other person
or persons as the Company may request, daily (and more frequently during the
week immediately preceding the Expiration Date and if otherwise requested) up
to and including the Expiration Date, as to the aggregate principal amount of
Private Notes which have been duly tendered pursuant to the Exchange Offer and
the items received by you pursuant to the Exchange Offer and this Agreement,
separately reporting and giving cumulative totals as to items properly received
and items improperly received. In addition, you will also inform, and cooperate
in making available to, the Company or any such other person or persons upon
oral request made from time to time prior to the Expiration Date of
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such other information as it or he or she reasonably requests. Such
cooperation shall include, without limitation, the granting by you to the
Company and such person as the Company may request of access to those persons on
your staff who are responsible for receiving tenders, in order to ensure that
immediately prior to the Expiration Date the Company shall have received
information in sufficient detail to enable it to decide whether to extend the
Exchange Offer. You shall prepare a final list of all persons whose tenders were
accepted, the aggregate principal amount of Private Notes tendered, the
aggregate principal amount of Private Notes accepted and the identity of any
Participating Broker-Dealers and the aggregate principal amount of Exchange
Notes delivered to each, and deliver said list to the Company.
17. Letters of Transmittal, book-entry confirmations and Notices of
Guaranteed Delivery received by you shall be preserved by you for a period of
time at least equal to the period of time you preserve other records pertaining
to the transfer of securities, or one year, whichever is longer, and thereafter
shall be delivered by you to the Company. You shall dispose of unused Letters of
Transmittal and other surplus materials as instructed by the Company.
18. You hereby expressly waive any lien, encumbrance or right of
set-off whatsoever that you may have with respect to funds deposited with you
for the payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as Exchange Agent,
which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless
in your capacity as Exchange Agent hereunder against any loss, liability, cost
or expense, including attorneys' fees and expenses arising out of or in
connection with any act, omission, delay or refusal made by you in reliance upon
any signature, endorsement, assignment, certificate, order, request, notice,
instruction or other instrument or document reasonably believed by you to be
valid, genuine and sufficient and in accepting any tender or effecting any
transfer of Private Notes reasonably believed by you in good faith to be
authorized, and in delaying or refusing in good faith to accept any tenders or
effect any transfer of Private Notes; provided, however, that anything in this
Agreement to the contrary notwithstanding, the Company shall not be liable for
indemnification or otherwise for any loss, liability, cost or expense to the
extent arising out of your gross negligence or willful misconduct. In no case
shall the Company be liable under this indemnity with respect to any claim
against you unless the Company shall be notified by you, by letter or cable or
by facsimile which is confirmed by letter, of the written assertion of a claim
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against you or of any other action commenced against you, promptly after you
shall have received any such written assertion or notice of commencement of
action. The Company shall be entitled to participate, at its own expense, in the
defense of any such claim or other action, and, if the Company so elects, the
Company may assume the defense of any pending or threatened action against you
in respect of which indemnification may be sought hereunder, in which case the
Company shall not thereafter be responsible for the subsequently-incurred fees
and disbursements of legal counsel for you under this paragraph so long as the
Company shall retain counsel reasonably satisfactory to you to defend such suit;
provided, that the Company shall not be entitled to assume the defense of any
such action if the named parties to such action include both you and the Company
and representation of both parties by the same legal counsel would, in the
written opinion of your counsel, be inappropriate due to actual or potential
conflicting interests between you and the Company. You understand and agree that
the Company shall not be liable under this paragraph for the fees and expenses
of more than one legal counsel for you.
22. You shall arrange to comply with all requirements under the tax
laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service. The Company understands that you are required, in certain
instances, to deduct thirty-one percent (31%) with respect to interest paid on
the Exchange Notes and proceeds from the sale, exchange, redemption or
retirement of the Exchange Notes from holders who have not supplied their
correct Taxpayer Identification Number or required certification. Such funds
will be turned over to the Internal Revenue Service in accordance with
applicable regulations.
23. You shall notify the Company of the amount of any transfer taxes
payable in respect of the exchange of Private Notes and, upon receipt of a
written approval from the Company, shall deliver or cause to be delivered, in a
timely manner to each governmental authority to which any transfer taxes are
payable in respect of the exchange of Private Notes, your check in the amount of
all transfer taxes so payable, and the Company shall reimburse you for the
amount of any and all transfer taxes payable in respect of the exchange of
Private Notes; provided, however, that you shall reimburse the Company for
amounts refunded to you in respect of your payment of any such transfer taxes,
at such time as such refund is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder
shall be construed and enforced in accordance with the laws of the State of New
York applicable to agreements made and to be performed entirely within such
state, and without regard to conflicts of law principles.
25. This Agreement shall be binding upon and inure solely to the
benefit of each party hereto and nothing in this Agreement, express or implied,
is intended to or shall confer upon any other person any right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement. Without
limitation of the foregoing, the parties hereto expressly agree that no holder
of Private Notes or Exchange Notes shall have any right, benefit or remedy of
any nature whatsoever under, or by reason of, this Agreement.
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26. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, and all of which taken together shall
constitute one and the same agreement.
27. In case any provision of this Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
28. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.
29. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given to such party, addressed to it, at its
address or telecopy number set forth below:
If to the Company:
DTI Holdings, Inc.
11111 Dorsett Road
St. Louis, MO 63043
Facsimile: (314) 253-6699
Attention: Richard D. Weinstein, President and
Chief Executive Officer
With a copy to:
Bryan Cave LLP
211 North Broadway, Suite 3600
St. Louis, Missouri 63102-2750
Facsimile: (314) 259-2020
Attention: J. Mark Klamer
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile: (212) 815-5915
Attention: Corporate Trust Trustee Administration
30. Unless terminated earlier by the parties hereto, this Agreement
shall terminate 90 days following the Expiration Date. Notwithstanding the
foregoing, paragraphs 17, 19, 21 and 23 shall survive the termination of this
Agreement. Upon any termination of this Agreement,
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you shall promptly deliver to the Company any certificates for Notes, funds or
property then held by you as Exchange Agent under this Agreement.
31. This Agreement shall be binding and effective as of the date
hereof.
Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
DTI HOLDINGS, INC.
By:___________________________
Name: Gary W. Douglass
Title: Senior Vice President and
Chief Financial Officer
Accepted as the date first above written:
THE BANK OF NEW YORK, as
Exchange Agent
By:___________________________
Name:
Title:
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SCHEDULE I
FEE SCHEDULE FOR
EXCHANGE AGENT SERVICES
I. ACCEPTANCE FEE Waived
Our Acceptance Fee includes review of all relevant documentation,
closing of transaction, setting up of records and opening accounts.
II. ADMINISTRATIVE FEE
Our administrative fee covers all duties of the Exchange Agent
including distributing exchange offer documents to the Book-Entry
Transfer Facility, receipt and examination of required exchange offer
documentation, reporting to company, calculation of and delivery to
participants and the Book-Entry Transfer for Facility. Fees shall be
billed upon closing.
III. OUT-OF-POCKET EXPENSES
All out-of-pocket expenses including but not limited to postage,
express mail, telecopier, long distance telephone, wire transfer
charges, courier expenses, or other expense incurred by the Bank during
its acceptance and administration shall be billed at cost as incurred.
IV. EXTRAORDINARY SERVICES
Charges for the performance of any service not of a routine
administrative nature or not contemplated at closing and specifically
covered elsewhere in this schedule of fees will be determined by
appraisal in amounts commensurate with the service rendered.
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