UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Form 10-K
[ x ] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 333-50049
DTI HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1828147
State of incorporation) (I.R.S. Employer Identification No.)
8112 Maryland Ave, 4th Floor
St. Louis, Missouri 63105
(Address of principal executive offices)
(314) 880-1000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
No non-affiliates of the registrant own common stock of the
registrant.
Documents Incorporated By Reference
None
<PAGE>
DTI HOLDINGS, INC.
FORM 10-K
Year Ended June 30, 1999
TABLE OF CONTENTS
PART I
Item 1. Business 4
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management 45
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 47
Signatures
Exhibit Index
2
<PAGE>
FORWARD-LOOKING STATEMENTS
We have included "forward-looking statements" throughout this document. These
statements describe our attempt to predict future events. We use the words
"believe," "anticipate," "expect," and similar expressions to identify
forward-looking statements. You should be aware that these forward-looking
statements are subject to a number of risks, assumptions, and uncertainties,
such as:
- - Risks associated with our capital requirements and existing debt;
- - Risks associated with increasing competition in the telecommunications
industry, including industry over-capacity and declining prices;
- - Changes in laws and regulations that govern the telecommunications
industry;
- - Risks related to continuing our network expansion without delays, including
the need to obtain permits and rights-of-way;
- - Risks related to our ability to prepare our information technology systems
for Year 2000; and
- - Other risks discussed below under "Risk Factors."
This list is only an example of some of the risks that may affect our
forward-looking statements. If any of these risks or uncertainties materialize
(or if they fail to materialize), or if the underlying assumptions are
incorrect, then our results may differ materially from those we have projected
in the forward-looking statements. We have no obligation to revise these
statements to reflect future events or circumstances.
3
<PAGE>
PART I
Item 1. Business
In this Annual Report on Form 10-K, we will refer to DTI Holdings, Inc., a
Missouri Corporation, as "DTI Holdings", the "Company", "we", "us", and "our".
We will refer to Digital Teleport, Inc., our wholly-owned operating subsidiary,
as "Digital Teleport."
Introduction
We are a facilities-based communications company that is creating an
approximately 20,000 route mile digital fiber optic network comprised of
approximately 23 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,
we intend to become a leading wholesale provider of regional communications
transport services to interexchange carriers ("IXCs") and other communications
companies ("carrier's carrier services"). We are offering our carrier customers
dedicated, virtual circuits through the exclusive use of high capacity,
ring-redundant optical windows from dense wavelength division multiplexing
("DWDM") equipment on the regional rings throughout our network. We will use the
optical windows to offer our carrier customers a high quality, ring-redundant
means to efficiently deliver their calls and data to a significant number of
end-users along these rings. Our regional rings will also offer carriers a means
to aggregate, for further long haul transport, the outgoing call of that
carrier's customers along such rings to regional points of interconnection
between the carrier's network and our network for further transport by the
carrier. We also offer our carrier customers point-to-point non-ring protected
transport services on our facilities.
Customers of our carrier's carrier services include AT&T Corporation
("AT&T"), Sprint Corporation ("Sprint"), MCI WorldCom, Inc. ("MCI WorldCom"),
Ameritech Cellular Corporation ("Ameritech"), IXC Communications, Inc. ("IXC
Communications") and other telecommunication companies. We also provide private
line services to targeted business and governmental end-user customers
("end-user services").
We are 50% owned by an affiliate of Kansas City Power & Light Company
("KCP&L"), which has agreed to be acquired by Western Resources, Inc., with the
remaining 50% owned by Richard D. Weinstein, our President and Chief Executive
Officer. Our principal business office is located at 8112 Maryland Avenue - 4th
Floor, St. Louis Missouri 63105, United States, and our telephone number is
(314) 880-1000.
4
<PAGE>
Business Strategy
We intend to:
Leverage Integrated Long-Haul Routes, Regional Rings and Local Network Design
We believe that the strategic design of our network will allow us 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 our network,
which provide instantaneous restoration of service in the event of a fiber cut,
will interconnect primary, secondary and tertiary markets, major IXCs points of
presence ("POPs") and incumbent local exchange carrier ("ILEC") access tandems
and, in selected metropolitan areas, potential end-user customers. This design
will permit us to provide our 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, our
ringed network will provide rapid rerouting of calls in the event of a fiber cut
and, in many cases, will permit our customers to allocate, manage and monitor
the capacity they lease from us from within the customer's own network
operations center.
Develop a Low-Cost Network
We are striving to develop a low-cost network by (i) taking advantage of
the potential cost efficiencies of our network design, (ii) continuing to deploy
advanced fiber optic network technology, which we believe lowers construction,
operating and maintenance costs, and (iii) realizing cost efficiencies through
existing and additional fiber optic long-term indefeasible rights to use
("IRUs") and swap agreements with other telecommunications companies and
rights-of-way agreements with governmental authorities. We believe that our
approach will allow us to offer carrier customers regional transport on a more
economical basis than is currently available to such customers.
Selectively Pursue Local Switched Services Opportunities
We believe our network design will allow us to selectively and
cost-effectively pursue local switched service opportunities by creating
regional and local fiber optic rings along our long-haul routes and by
leveraging the technical capabilities and high-bandwidth capacity of our
network. We intend to provide local switched service capacity to our carrier
customers and to other facilities-based and non-facilities-based
telecommunications companies on a wholesale basis. Our network's design will
also provide us with sufficient long-haul capacity to offer local switched
services to targeted end-user customers in primary, secondary and tertiary
cities on our regional rings.
Leverage Experienced Management Team
Our management team includes individuals with significant experience in the
deployment and marketing of telecommunications services. Prior to founding
Digital Teleport in 1989, Richard D. Weinstein, President and Chief Executive
Officer, owned and managed Digital Teleresources, Inc., a firm which designed,
engineered and installed telecommunications systems for large telecommunications
companies, including SBC Communications, Inc. ("SBC"), and other Fortune 500
companies. H.P. Scott, the Company's Senior Vice President, has over 36 years of
telecommunications industry experience, having spent 18 years with MCI
Communications, Inc. ("MCI") and IXC Communications, where he held positions of
senior responsibility for the design and construction of their coast-to-coast
fiber optic telecommunications networks. Prior to joining us as Senior Vice
President, Finance and Administration and 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, our President - DTI Network Services and Chief Technology
Officer, spent 18 years with MCI, having spent the last 11 years in senior
positions in engineering, network implementation and network operations
positions.
5
<PAGE>
Our Business
The Network
General. Our 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. We expect that more
than 90% of the fiber in our 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. We
expect to construct approximately one-third of our network, and to obtain IRUs
for fiber optic facilities for the remainder. On routes which we construct, and
on most routes which we acquire from other carriers, we employ SMF-28 fiber
optic cable composed of Corning glass fiber. In June 1998, we entered into a
two-year agreement with Pirelli Cable and Systems LLC ("Pirelli") pursuant to
which we agreed to purchase all of our fiber optic cable from Pirelli. All
routes in our network constructed by us are comprised of at least 48 fiber
strands. In addition, in St. Louis we have installed 216 fiber strands, along
primary routes, and in Kansas City we installed 288 fiber strands, along primary
routes. On routes where we obtain IRUs we will generally acquire between six and
24 fiber strands. On certain strategic routes which we construct, our network
will also include one or two empty innerducts for maintenance and future growth
purposes. As part of our design, we typically retain 60% or more of the capacity
on each network route we construct for our own use.
We currently have approximately 11,000 route miles of fiber optic cable in
place or under construction throughout the United States consisting of long-haul
segments and local loop networks in the St. Louis and Kansas City metropolitan
areas, as well other smaller markets. We currently offer services over
approximately 2,000 route miles of our network.
Network Electronics. Long-haul routes on our network will generally utilize
DWDM equipment. DWDM equipment provides individual wavelength-specific circuits
of OC-48 capacity optical windows. In September 1998, we entered into a
three-year agreement with Pirelli pursuant to which we agreed to purchase from
Pirelli at least 80% of our needs for certain DWDM equipment. All our network
DWDM equipment is initially equipped to enable us to provide the equivalent of
eight dedicated, ring redundant, optical windows. Such equipment has the ability
to be expanded to offer additional optical windows as the need for capacity on
our network increases. The DWDM equipment will permit us to offer to our 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 us to efficiently provide high capacity
telecommunications services to secondary and tertiary markets that we believe
are currently underserved. Our use of open architecture, DWDM equipment
conforming to SONET standards on our regional rings and long-haul routes will
also give our network the ability to inter operate with our 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. We believe that the network's current
and planned system architecture, with minor additions or modifications, will
accommodate asynchronous transfer mode ("ATM") and frame relay transmission
methods and emerging Internet Protocol technologies.
On all routes throughout our network, whether constructed by us or
purchased, leased or swapped from another carrier, we will install centrally
controllable high-bit-rate transmission electronics. We believe the use of such
fiber optical terminal equipment will provide our 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 our
customers to utilize their own network control centers to add and remove
services on the optical windows serving that carrier. Our network design will
permit carriers to utilize our 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. Our
network will also be capable of providing services to carriers and end-users in
increments of less than a full OC-48 optical window (a standard measure of
optical transmission capacity), from OC-12s to DS-3s.
6
<PAGE>
We believe that our network design standards give us sufficient
transmission capacity to meet anticipated future increases in call volume and
the development of more bandwidth-intensive voice, data and video
telecommunication uses. Our network's capacity also will allow us 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. We have nearly completed a second control center in Kansas City,
Missouri that can serve as a backup network control center for our entire
network.
Network Design. Our 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 our network will generally be located to allow us 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
us may be interconnected through leased lines until there are sufficient
customers to make construction of our own route to these access tandems
economically feasible. Local network portions of our network in metropolitan
areas are generally routed near major business telecommunications users,
metropolitan ILEC access tandems and major ILEC central offices. We believe the
different elements of our network complement each other and will create certain
construction, operating and maintenance synergies. We also believe our
integrated long-haul routes, regional ring and local ring design will allow us
to offer our carrier and end-user customers private line and local switched
services at a lower cost by reducing our use of ILEC and IXC facilities to
provide services to our customers.
Switching Capacity. We intend to install high-capacity switches in
strategically located, geographically diverse metropolitan areas to balance the
expected traffic throughout our network. When coupled with our integrated
network design, this switch placement will give us the ability to offer local
switched service and long-haul service to many end-user customers along our
regional rings. By using the expected excess capacity on our network, calls from
diverse geographic regions in our network can be routed long distances from the
originating point to one of our switches and on to their destination, reducing
the number of switches required and decreasing the cost and complexity of
constructing, operating and maintaining our network. In addition, the strategic
deployment of switches is expected to enable us to (i) offer switched services
on a more economical basis, (ii) offer custom calling features and billing
enhancements to all of our customers without involving the ILEC, and (iii) allow
us to sell our local switched service capacity to other carriers on a wholesale
basis.
Highway and Utility Rights-Of-Way. Much of the currently completed
network is located in rights-of-way obtained by us through strategic
relationships with utilities, state transportation departments and other
governmental authorities. To build the long-haul portions of our network between
population centers in Arkansas, Kansas, Missouri and Oklahoma we have generally
used rights-of-way in the median of and along the interstate highway system. We
will seek to obtain the rights-of-way that we need for the expansion of our
network in areas where we 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 we may enter into joint
ventures or other "in-kind" transfers in order to obtain such rights. In
addition, we believe that public rights-of-way for a substantial portion of the
remainder of the planned network will be available in the event that we are
unable to obtain rights-of-way from third parties.
Build-Out Plan. We currently plan to deploy a fiber optic network in 37
states and the District of Columbia that will consist of approximately 20,000
route miles of fiber optic cable, DWDM and other signal transmission equipment,
and high-capacity switches strategically located in larger metropolitan areas.
We expect to construct approximately one-third of such network and to obtain
IRUs for fiber optic facilities of other carriers for the remainder of the
network. We have construction projects currently underway in Arkansas, Colorado,
Illinois, Iowa, Kansas, Missouri, Oklahoma, Nebraska and Tennessee.
In addition to routes that we will construct, we expect to (i) purchase,
for cash, IRUs for fiber optic facilities of other telecommunications companies
and (ii) exchange IRUs to use our fiber optic facilities for IRUs to use the
fiber optic facilities of other telecommunications companies. In this manner, we
believe that we will be able to establish telecommunications facilities along
7
<PAGE>
our network routes more quickly than by constructing all of our own facilities.
We have entered into long-term IRUs for our use of fiber optic strands and
related facilities along the following routes which have all been accepted as of
September 24, 1999:
Approximate
Route Route Miles
----- ----------
Washington D.C. to Dallas, TX 2,115
Portland, OR to Salt Lake City, UT to
Los Angeles, CA 1,715
Indianapolis, IN to New York City, NY 1,100
Des Moines, IA to Minneapolis, MN 250
Other 170
------
Total route miles accepted 5,350
=====
We have also entered into long-term IRUs for our use of fiber optic strands
and related facilities along the following routes that are scheduled to be
accepted over the next year:
Denver, CO to Houston, TX 1,530
Denver, CO to Salt Lake City, UT 610
Chicago, IL to Cleveland, OH 450
Chicago, IL to St. Paul, MN 450
Other 210
------
Total route miles to be accepted 3,250
=====
Additionally, we have a short-term lease agreement along routes from Los
Angeles, CA to Dallas, TX to Joplin, MO, from St. Louis, MO to Indianapolis, IN
and from Indianapolis, IN to Chicago, IL totaling approximately 2,800 route
miles. This short-term lease of fiber was executed in order to provide
facilities prior to a long-term solution for this route through the construction
of, or the execution of long-term IRUs for, this route.
These listed routes, excluding the 2,800 route miles related to the
short-term lease, include an aggregate of approximately 8,600 route miles, for
an aggregate cash consideration to be paid by DTI of approximately $131.9
million, of which $50.9 million remains to be paid at June 30, 1999, plus
recurring maintenance, electrical and building space fees. In addition to the
$50.9 million remaining to be paid by DTI, the agreements in certain cases
provide for consideration to be paid to DTI in the form of cash, fiber strands
or inner-duct.
We will also receive approximately 480 miles of inner-duct from Atlanta to
Louisville in fiscal 2000 plus an additional $6.0 million in cash as part of a
swap agreement. We further agreed to provide IRU's to two other carrier
customers on over 4,000 miles of our network for between $29.5 million and $44.5
million, depending on the number of optional routes exercised by the parties.
We have entered into certain agreements that require us to construct
our network facilities. An agreement with the Missouri Highway and
Transportation Commission ("MHTC Agreement") required us to build approximately
1,200 miles of fiber optic network along Missouri's interstate highway system,
substantially all of which has been completed. We have the option of
constructing an additional 800 miles by the end of 1999 of which approximately
570 miles have already been completed. Over 1,700 route miles of the entire
2,000-mile network have been completed. We may lose our exclusive rights under
the MHTC Agreement if we are in breach of the agreement and do not cure such
breach within 60 days of notice of any such breach. An agreement between
AmerenUE and ourselves requires us to construct a fiber optic network linking
AmerenUE's 80-plus sites throughout the states of Missouri and Illinois. As of
June 30, 1999, we had completed approximately 60% of the sites required for
AmerenUE and expect to complete all such construction by the end of fiscal 2000.
During the balance of calendar 1999 and all of calendar 2000, we anticipate
our build-out plan priorities will be focused principally on expanding from our
existing Missouri/Arkansas base by building additional regional rings adjacent
to existing rings where one side already exists. In addition, we intend to light
those portions of routes that close regional rings that adjoin existing rings
8
<PAGE>
and those that initiate new rings in areas in which strong carrier interest has
been expressed. We anticipate that our existing financial resources will be
adequate to fund the above-mentioned priorities and our existing capital
commitments, principally payments required under existing preliminary and
definitive IRU and short-term lease agreements, totaling $50.9 million which are
payable in varying installments over the period through December 31, 1999. In
addition, we have a commitment as of June 30, 1999 for eight telecommunications
switches totaling $15.0 million, which is cancelable upon the payment of a
cancellation fee of $42,000 for each of the remaining eight unpurchased
switches.
Monitoring and Maintenance. From our network management center in St.
Louis, we monitor our equipment and facilities and provide technical assistance
and support 24 hours a day, year-round. Various quality measures are monitored
on an ongoing basis, with the aim of identifying problems at an early stage
before they affect the customer. Through the use of sophisticated network
management equipment, we are able to effectively control bandwidth and provide
diagnostic services. We use an internal staff of technicians both to install and
repair electronics and to provide service to customers.
Network Resilience. Our network infrastructure is designed to provide
resilience through back-up power systems, automatic traffic re-routing and
computerized automatic network monitoring. If our network experiences a failure
of one of its links, the routing intelligence of the equipment is designed to
enable the call to be transferred to the next choice route, thus ensuring call
delivery without affecting the customer.
Products and Services
Carrier's Carrier Services
General. "Carrier's carrier services" are generally the high capacity
transmission services used by IXCs, ILECs and competitive local exchange
carriers ("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. We currently provide carrier's carrier
services through IRUs and wholesale network capacity agreements. Our two largest
customers are AT&T, which accounted for 60% of our revenues, and MCI WorldCom
which contributed 18% of revenues during fiscal 1999. Our present and planned
carrier's carrier services are set forth below.
Optical Windows. We are offering our carrier customers through wholesale
network capacity agreements 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 our network. We supply all fiber optic electronic
equipment necessary to transmit telecommunications traffic along the regional
ring. We offer 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.
We are offering our 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 regional points of interconnection between the carrier's network and
our network. We are able to offer this service because (i) our network is and
will be physically interconnected with major IXC POPs in a region, (ii) our
network will typically be interconnected through our own or leased facilities to
major ILEC access tandems in a region, and (iii) our network will integrate high
capacity switches. Currently, IXCs have to provide for the transport between
9
<PAGE>
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. We believe that our 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. We are offering lease services on a
per-optical window, per-mile basis.
Dedicated Bandwidth Services. Through our other wholesale network capacity
agreements, also referred to as dedicated bandwidth agreements, we provide
carriers with bandwidth capacity on our 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 our network. The carrier customer provides a
telecommunications signal to us, and we provide all fiber and electronic
equipment necessary to transmit the signal to the end point. This capacity may
or may not be along a regional ring providing redundancy. Dedicated bandwidth
agreements typically have terms ranging from one to five 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.
IRUs. Through IRUs, we provide 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 20 or more 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.
Other Wholesale Services. We offer our 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 our network from the premises of such customers to the IXC's
POPs, using our network exclusively. In addition, upon the installation of our
high-capacity switches at strategic points on our network, in the future we will
have the capacity to provide wholesale local switched services to our carrier
customers.
End-User Services
General. End-user services are telecommunications services provided to
business and governmental end-users. We currently provide private line services
connecting certain points on a given end-user's private telecommunications
network and in the past have 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 our network. We then transmit the signals
over our network to the customer's terminal in the call recipient's area or to
the POP for the customer's long distance provider. Our current private line
service agreements have terms ranging from three to 40 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.
10
<PAGE>
Sales and Marketing
General. Our sales and marketing staff is currently organized into two
groups: carrier's carrier services and end-user services. We currently have four
employees focusing solely on carrier's carrier services. Sales personnel are
compensated through a combination of salary and commissions. We plan to
significantly expand our sales and marketing activities. We currently have sales
offices in St. Louis and Kansas City.
Carrier's Carrier Services. Our 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. We rely on direct selling to other carriers on a wholesale basis.
Our sales efforts also emphasize providing continued customer support services
to our existing customers. We intend to distinguish ourselves 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 our direct sales efforts, we market and sell our
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 our network, we
will consider leasing circuits from the local ILEC or other telecommunications
company or, if necessary, build-out our network directly to such customers. We
do not currently anticipate offering switched long distance services under a DTI
brand. We intend to distinguish ourselves to end-users on the basis of pricing,
customer responsiveness and creative product implementation.
Competition
The telecommunications industry is highly competitive. We compete and, as
we expand our network, expect 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. We are 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, our 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 our competitors, however, 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 DTI network's regional rings, which markets we believe are under
served by existing carriers and are not expected to be the primary targets of
most such newly constructed long distance networks.
We compete primarily on the basis of price, transmission quality,
reliability, customer service and support. Prices in our industry have been
declining and are expected to continue to do so. Our competitors in carrier's
carrier services include many large and small IXCs including AT&T, MCI WorldCom,
Sprint, IXC Communications, Qwest and McLeod. We compete with both LECs and IXCs
in our end-user business. In the end-user private line services market, our
principal competitors are SBC, GTE Corporation ("GTE") and Sprint. In the local
exchange market, we expect 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 Telecommunications Act of 1996 (the "Telecom
Act"), from long distance providers. See "--Risk Factors - Regulatory change
could occur which might adversely affect our business."
11
<PAGE>
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.
MCI WorldCom currently provides both local exchange and long distance
telecommunications services throughout the United States. Unlike MCI WorldCom,
however, DTI's network is designed to reach secondary and tertiary markets,
which are substantially bypassed by MCI WorldCom's long haul and local exchange
networks. Qwest, a communications provider building a coast-to-coast fiber optic
network in the United States, following its merger with LCI International, Inc.,
a retail long distance provider, has become the nation's fourth largest long
distance company. Qwest has announced that, on July 18, 1999, it entered into a
merger agreement under which U.S. West, one of the regional bell operating
companies ("RBOCs"), with local and long haul facilities in the central and
western U.S., would be merged into Qwest. In addition, in July 1998 AT&T
completed its acquisition of Teleport Communications Group, Inc. ("TCG"), a
facilities-based CLEC with networks in operation in 57 markets in the United
States and recently announced its merger with Tele-Communications, Inc. ("TCI"),
a major cable franchise company. SBC has announced agreements to acquire
Ameritech, one of the original seven RBOCs, and Southern New England
Telecommunications Corporation. Bell Atlantic Corporation has also announced its
agreement to merge with GTE. Many of these combined entities could offer a
package of integrated services directly in competition with DTI in many of our
targeted markets. In addition, other companies, such as CapRock Communications
and Adelphia Business Solutions (formerly Hyperion) have announced business
plans specifically focusing on secondary and tertiary markets in areas including
our Midwestern region offering direct competition for our products.
We also believe 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.
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, we may be subject to more intense competition due to the
development of new technologies and an increased supply of transmission capacity
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 we
provide. 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. Certain companies have
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 our 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 our services, or a reduction in the amount these companies
are willing or able to pay for our services. There can also be no assurance that
we will be able to offer our telecommunications services to end-users at a price
that is competitive with the Internet-based telecommunications services offered
by these companies. We do not currently market to Internet service providers
("ISPs") and therefore may not realize any revenues from the Internet-based
telecommunications market. If we do 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 our business, financial condition and results of
operations. The introduction of such new products by other carriers or the
12
<PAGE>
emergence of such new technologies may reduce the cost or increase the supply of
certain services similar to those we provide. We cannot predict which of many
possible future products and service offerings will be crucial to maintain our
competitive position or what expenditures will be required to profitably develop
and provide such products and services.
We believe our 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 our 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 our competitors and potential competitors have financial,
personnel, marketing and other resources significantly greater than we have, as
well as other competitive advantages. The 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 compete effectively will depend upon, among other things,
our ability to deploy the planned DTI network and to maintain high quality
services at prices equal to or below those charged by our competitors. There can
be no assurance that we 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. Our
failure to do so would have a material adverse effect on our business, financial
condition, results of operations and business prospects.
Regulatory Matters
General Regulatory Environment
Our 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 ("PUCs") 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 DTI. All of our 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 us, or that domestic regulators or third
parties will not raise material issues with regard to our compliance or
noncompliance with applicable regulations.
The Telecom Act is likely to have significant effects on our operations.
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 DTI and such customers. However, we believe the RBOCs' and
other companies' participation in the market will also provide opportunities for
us to lease fiber which has not yet been activated ("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
13
<PAGE>
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. No RBOCs have received FCC approval to provide in-region services.
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 DTI as a non-dominant carrier. Under existing
regulations, non-dominant carriers are required to file FCC tariffs listing the
rates, terms and conditions of both interstate and international services
provided by the 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 us and to change its regulatory classification. In
the current regulatory atmosphere, we believe the FCC is unlikely to do so with
respect to our service offerings.
As a non-dominant carrier, we 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, we currently
do not and have 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. We are required to offer our interstate services on a
nondiscriminatory basis, at just and reasonable rates, and we are 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. We 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 our practices. We cannot predict either the
likelihood of the filing of any such complaints or the results if filed.
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 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
14
<PAGE>
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. On August 19, 1998, the Eighth
Circuit upheld the FCC's decision in regard to interstate access charges. On
August 5, 1999, the FCC gave ILECs progressively greater flexibility in setting
interstate access rates as competition develops, including permitting those LECs
to file tariffs for services on a streamlined basis and permitting them to
remove interstate toll services between local access and transport areas
("LATAs") from price cap regulation upon full implementation of intra- and
inter-LATA toll dialing parity. Though we believe that access reform through
lowering and/or eliminating excessive access services charges will have a
positive effect on our services offerings and operations, we cannot predict how
or when such benefits may present themselves.
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, which were consolidated in 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.
On January 25, 1999, the U.S. Supreme Court reversed the Eighth Circuit
and upheld the FCC's authority to issue regulations governing pricing of
unbundled network elements provided by the ILECs in interconnection agreements
(including regulations governing reciprocal compensation, which is discussed in
more detail below). In addition, the Supreme Court affirmed the "pick and chose"
rules which allows carriers to chose individual portions of existing
interconnection agreements with other carriers and to opt-in only to those
portions of the interconnection agreement that they find most attractive. In
addition, the Supreme Court disagreed with the standard applied to the FCC for
determining whether an ILEC should be required to provide a competitor with
particular unbundled network elements.
On September 15, 1999, the FCC, on remand, reaffirmed that ILECs must
provide particular unbundled network elements to competitors. The FCC determined
that ILECs must provide six of the original seven network elements that it
required to be unbundled in its original 1996 order. We cannot predict what
appeals, if any, may be made of this latest FCC decision, which makes it
difficult to predict whether we will be able to rely on existing interconnection
agreements or have the ability to negotiate acceptable interconnection
agreements in the future.
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 FCC role. Furthermore, other
FCC rules related to local telephone competition remain the subject of legal
15
<PAGE>
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.
When the FCC released its access reform order in 1987, it also released
a companion order on universal service reform. 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
DTI, 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 has initiated a proceeding to obtain comments on the mechanism
for continued support of universal service in high cost areas in a subsequent
proceeding. We are unable to predict the outcome of these proceedings or of any
judicial appeal or petition for FCC reconsideration on our operations.
On February 26, 1999, the FCC issued a declaratory ruling and notice of
proposed rulemaking concerning ISP traffic. The FCC concluded in its ruling that
ISP traffic is jurisdictionally interstate in nature. The FCC has requested
comment as to what reciprocal compensation rules should govern this traffic upon
expiration of existing interconnection agreements. The FCC also determined that
no federal rule existed that governed reciprocal compensation for ISP traffic at
the time existing interconnection agreements were negotiated and concluded that
it should permit states to determine whether reciprocal compensation should be
paid for calls to ISPs under existing interconnection agreements, until the FCC
has issued rules. The FCC notice period for comments on this issue expired on
April 27, 1999, but a decision is still pending. In the meantime, some states
have determined that reciprocal compensation for ISP traffic should continue to
be paid but we cannot predict the outcome of the FCC's proceedings and various
states.
To the extent that we operate as an LEC, we will be required to comply with
local number portability rules and regulations. Compliance may require changes
in our business processes and support systems and may impact our call
processing.
State Regulation
We are also subject to various state laws and regulations. Most PUCs
require providers such as DTI to obtain authority from the commission prior to
the initiation of service. In most states, we also are required to file tariffs
setting forth the terms, conditions and prices for services that are classified
as intrastate and, in some cases, interstate. We are also required to update or
amend our tariffs when we adjust our rates or adds new products, and are 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 our compliance with applicable laws or
regulations.
16
<PAGE>
We have all the necessary authority to offer local and interstate and
intrastate long-haul services in the states we now serve. We also hold other
authorities in various other states in which we plan to provide service. As it
becomes necessary, we will obtain those operating authorities in other states on
an as needed basis. Our receipt of necessary state certifications is dependent
upon the specific procedural requirements of the applicable PUC and the workload
of its staff. Additionally, receipt of state certifications may be subject to
delay as a result of a challenge to the applications and/or tariffs by third
parties, including the ILECs, which could delay our provision of services over
affected portions of the planned DTI network and could cause us to incur
substantial legal and administrative expenses. To date, we have not experienced
significant difficulties in receiving certifications, maintaining tariffs, or
otherwise complying with our regulatory obligations. There can be no assurances,
however, that we will not experience delay or be subject to third-party
challenges in obtaining necessary regulatory authorizations. The failure to
obtain such authorizations on a timely basis would have a material adverse
effect on our business, financial condition and results of operations.
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.
We 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 DTI 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 our ability to pursue our business plan.
States also regulate the intrastate carrier's carrier services of the
ILECs. We are required to pay access charges to ILECs to originate and terminate
our intrastate long distance traffic. We 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 intra-LATA
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. Our business could be adversely affected by
such changes.
We also will be affected by how states regulate the retail prices of the
ILECs with which we compete. We believe 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 our services with revenues generated from
non-competitive services, thereby allowing ILECs to offer competitive services
at lower prices than they otherwise could. We cannot predict the extent to which
this may occur or its impact on our 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 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. We may
benefit from the ability to offer 1 + intra-LATA services in states that allow
this type of dialing parity.
17
<PAGE>
Employees
As of June 30, 1999, we employed 38 people. We believe our future success
will depend on our continued ability to attract and retain highly skilled and
qualified employees. We believe that the relations with our employees are good.
Risk Factors
Set out below is a description of certain risk factors that may adversely
affect our business and results of operations. You should carefully consider
these risk factors and the other information contained in this report before
investing in our Senior Discount Notes issued in 1998, which are described below
in Item 5 - "Market for the Company's Common Stock and Related Shareholder
Matters". Investing in our securities involves a high degree of risk. Any or all
of the risks listed below could have a material adverse effect on our business,
operating results or financial condition, which could cause the market price of
our Senior Discount Notes to decline. You should also keep these risk factors in
mind when you read forward-looking statements. There are other risks which may
adversely affect our business which we are not able to anticipate, and the risks
identified here may adversely affect our business or financial condition in ways
which we cannot anticipate.
We have a limited operating history and have sustained substantial net losses
We have a limited operating history and have historically sustained
substantial operating and net losses. For the following periods, we reported net
losses of:
Year ended June 30, 1997....................... $ .6 million
Year ended June 30, 1998....................... $ 9.4 million
Year ended June 30, 1999....................... $ 32.7 million
Inception through June 30, 1999................ $ 45.5 million
These net losses may continue. During the remainder of calendar 1999
and thereafter, our ability to generate operating income, earnings before
interest, taxes, depreciation and amortization ("EBITDA ") and net income will
depend largely on demand for carrier's carrier services and our ability to sell
those services. We cannot assure you that we will be profitable in the future.
Failure to accomplish these goals may impair our ability to:
- meet our obligations under the Senior Discount Notes, or other
indebtedness; or
- raise additional equity or debt financing needed to expand our network
or for other reasons.
These events could have a material adverse effect on our business,
financial condition and results of operations.
We may be unable to meet our substantial debt obligations
We have a substantial amount of debt. As of June 30, 1999, we had
approximately $319.3 million of indebtedness outstanding, most of which was
evidenced by our Senior Discount Notes. Because we are a holding company that
conducts our business through Digital Teleport, all existing and future
indebtedness and other liabilities and commitments of our subsidiary, including
trade payables, are effectively senior to the Senior Discount Notes, and Digital
Teleport is not a guarantor of the Senior Discount Notes. As of June 30, 1999,
DTI Holdings had aggregate liabilities of $355.8 million, including $22.3
million of deferred revenues. The indenture under which the Senior Discount
Notes were issued (the "Indenture") limits but does not prohibit the incurrence
of additional indebtedness by us, and we expect to incur additional indebtedness
in the future, some of which may be incurred by Digital Teleport and any future
subsidiaries. As a result of our high level of debt, we:
18
<PAGE>
- will need significant cash to service our debt, which will reduce
funds available for operations, future business opportunities and
investments in new or developing technologies and make us more
vulnerable to adverse economic conditions;
- may not be able to refinance our existing debt or raise additional
financing to fund future working capital, capital expenditures, debt
service requirements, acquisitions or other general corporate
requirements;
- may have less flexibility in planning for, or reacting to, changes in
our business and in the telecommunications industry that affect how we
implement our financing, construction or operating plans; and
- we may be at a competitive disadvantage with respect to competitors
who have lower levels of debt.
Our ability to pay the principal of and interest on our indebtedness will
depend upon our future performance, which is subject to a variety of factors,
uncertainties and contingencies, many of which are beyond our control. If we
fail to make the required payments or to comply with our debt covenants we will
default on our debt, which could result in acceleration of the debt. In such
event there can be no assurance that we would be able to make the required
payments or borrow sufficient funds from alternative sources to make any such
payments. Even if additional financing could be obtained, there can be no
assurance that it would be on terms that are acceptable to us.
Covenants in our debt agreements restrict our operations
The covenants in our Indenture related to our Senior Discount Notes may
materially and adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities. Among other things,
these covenants limit our ability and the ability of our subsidiaries to:
- incur certain indebtedness;
- pay dividends, make certain other restricted payments;
- use assets as collateral for loans;
- permit other restrictions on dividends and other payments by our
subsidiaries;
- guarantee certain indebtedness;
- dispose of assets;
- enter into transactions with affiliates or related persons; or
- consolidate, merge or transfer all or substantially all of our assets.
Further, there can be no assurance that we will have available, or will be
able to acquire from alternative sources of financing, funds sufficient to
repurchase the Senior Discount Notes, as required under the Indenture, in the
event of a Change of Control (as defined).
We may be unable to raise the additional capital necessary to implement our
business strategy
The development of our business and the installation and expansion of
our network have required and will continue to require substantial capital.
While we anticipate that our existing financial resources will be adequate to
fund our current priorities and our existing capital commitments through the
next twelve months, we expect to require significant additional capital in the
future to fully complete the planned DTI network. We 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. Our ability to fund our required capital
expenditures depends in part on:
- completing our network expansion as scheduled;
- satisfying our fiber sale obligations;
- otherwise raising significant capital; and
- increasing cash flow.
Our failure to accomplish any of these may significantly delay or
prevent capital expenditures. If we are unable to make our capital expenditures
19
<PAGE>
as planned, our business may grow slower than expected. This would have a
material adverse effect on our business, financial condition and results of
operations.
The actual amount and timing of future capital requirements may differ
materially from our current estimates depending on demand for our services, our
ability to implement our current business strategy and regulatory, technological
and competitive developments in the telecommunications industry. We may seek to
raise additional capital from public or private equity or debt sources. There
can be no assurance that we will be able to raise such capital on satisfactory
terms or at all. If we decide to raise additional capital through the incurrence
of debt, we may become subject to additional or more restrictive financial
covenants. In the event that we are unable to obtain such additional capital on
acceptable terms or at all, we may be required to reduce the scope or pace of
deployment of our network, which could materially adversely affect our business,
results of operations and financial condition and our ability to compete and to
make payments on the Senior Discount Notes.
A large number of options and warrants are outstanding, and the exercise of
those options and warrants would most likely raise less capital than DTI could
receive in a public offering
At June 30, 1999, options and warrants to purchase an aggregate of
5,551,560 shares of common stock were outstanding. The warrant holders have
certain rights to require the registration of the common stock that would be
received upon exercise of the warrants. The outstanding shares of our Series A
Convertible Preferred Stock are convertible into an aggregate of 30,000,000
shares of our common stock. Although the exercise of options or warrants may
raise capital for us, the amounts raised may be less than we could receive in a
public offering at the time of exercise.
We are dependent on a limited number of large customers
A relatively small number of customers account for a significant amount of
our total revenues. Our three largest customers in 1999 accounted for
approximately 85% of our revenues. Our three largest customers in 1998 accounted
for approximately 65% of our revenues.
Our business plan assumes that a large proportion of our future revenues
will come from our carrier's carrier services, which by their nature are
marketed to a limited number of telecommunications carriers. Most of our
arrangements with large customers do not provide any guarantees that they will
continue using our services at current levels. In addition, if our customers
build their own facilities, our competitors build additional facilities or there
are further consolidations in the telecommunications industry involving our
customers, then our customers could reduce or stop their use of our services
which could have a material adverse effect on our business, financial condition
and results of operations.
We may be unable to complete our network in a timely and cost-effective manner
Our ability to achieve our strategic objectives will depend in large part
upon the successful, timely and cost-effective completion of our network. The
completion of our network may be affected by a variety of factors, uncertainties
and contingencies, many of which are beyond our control. The successful and
timely completion of our network will depend upon, among other things, our
ability to:
- obtain substantial amounts of additional capital and financing, at
reasonable costs and on satisfactory terms and conditions,
- effectively and efficiently manage the construction and acquisition of
the planned network route segments,
- obtain IRUs from other carriers on satisfactory terms and conditions
and at reasonable prices,
- access markets and enter into additional customer contracts to sell or
lease high volume capacity on our network and
- obtain additional franchises, permits and rights-of-way to permit us
to complete our planned strategic routing.
20
<PAGE>
Successful completion of our network also will depend upon our 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 we will obtain sufficient capital
and financing to fund our 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 us to
accomplish these objectives may significantly delay or prevent, or substantially
increase the cost of, completion of our network, which would have a material
adverse effect on our business, financial condition and results of operations.
Certain of our 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 segments from the
system route to be delivered. We are currently not in compliance with
construction schedules under contracts with two of our customers. There can be
no assurance that such customers or other customers will not in the future find
us to have materially breached our contracts, that such customers will not
terminate such contracts or that such customers will not seek other remedies.
Under our agreement with the MHTC, we have 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 loss of our exclusive rights to routes constructed in
accordance with the MHTC Agreement could have a material adverse effect on our
business, financial condition and results of operations and our ability to make
payments on the Senior Discount Notes. See "Our Business - Build-Out Plan."
Competitors with greater resources may adversely affect our business
The telecommunications industry is highly competitive. Many of our
competitors and potential competitors have far greater financial, personnel,
technical, marketing and other resources than we do. Many also have a more
extensive transmission network. These competitors may build additional fiber
capacity in the geographic areas that our network serves or in which we plan to
expand. Recent mergers and acquisitions in the telecommunications industry have
resulted in increased competitive pressures, which we expect to continue and to
increase in the future.
Our ability to compete effectively depends on our ability to maintain
high-quality services at prices generally equal to or lower than those of our
competitors. Prices have been declining and are expected to continue to do so.
Our competitors in carrier's carrier services include many large and small IXCs.
In the local exchange market, we expect 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.
An alternative method of transmitting telecommunications traffic is
through satellite transmission. Satellite transmission is superior to fiber
optic transmission for distribution communications, like video broadcasting.
Although satellite transmission is not preferred to fiber optic transmission for
voice traffic in most parts of the United States because it exhibits an
approximately one-quarter-second delay, this slight time delay is unimportant
for many data-oriented uses. If the market for data transmission grows, we will
compete with satellite carriers in that market.
Under the Telecom Act, the original RBOCs and others may enter the long
distance market. When RBOCs enter the long distance market, they may acquire, or
take substantial business from, our customers or us. We cannot assure you that
we will be able to compete successfully with existing competitors or new
entrants in our markets. Our failure to do so would have a material adverse
effect on our business, financial condition and results of operations and the
value of our securities.
Under an agreement between the United States and the World Trade
Organization, foreign companies may be permitted to enter domestic U.S.
telecommunications markets and acquire ownership interest in U.S. companies.
Foreign telecommunications companies could also be significant new competitors
to us.
21
<PAGE>
Pricing pressures and the risk of industry over-capacity may adversely affect
our business
The long distance transmission industry has generally been
characterized by over-capacity and declining prices since shortly after the AT&T
break-up in 1984. We anticipate that our prices will continue to decline over
the next several years because of new competition. Other long distance carriers
(new and existing) are expanding their capacity and are constructing new fiber
optic and other long distance transmission networks. As a result of the recent
mergers, we face stronger competitors with larger networks and greater capacity.
We believe that although some new entrants seeking to establish fiber optic
networks will face significant barriers, others may have sufficient resources
that the barriers will not be significant to them.
As our competitors expand existing networks and build new networks,
these networks will have greater capacity. Because the cost of fiber is a
relatively small portion of the cost of building new transmission lines,
companies building such lines are likely to install fiber that provides far more
transmission capacity than will be needed over the short or medium term.
Further, recent technological advances have shown the potential to greatly
expand the capacity of existing and new fiber optic cable. Although such
technological advances may enable us to increase our network's capacity, an
increase in our competitors' capacity could adversely affect our business. If
overall capacity in the industry exceeds demand in general or along any of our
routes, severe additional pricing pressure could develop. Certain industry
observers have noted the beginning of what may be dramatic and substantial price
reductions and have predicted that long distance calls will soon not be much
more expensive than local calls. Price reductions could have a negative and
material impact on our business.
We need to expand our network and obtain and maintain franchises, permits and
rights-of-way
Our continuing network expansion is an essential element of our future
success. In the past, we have experienced delays in constructing our network and
may experience similar delays in the future. We have substantial existing
commitments to purchase materials and labor for expanding our network. In
addition, we will need to obtain additional materials and labor that may cost
more than anticipated. Some sections of our network are constructed by other
carriers or their contractors. We cannot guarantee that these third parties will
complete their work according to schedule. If any delays prevent or slow down
our network expansion our financial results would be materially and adversely
effected.
The expansion of our network depends, among other things, on acquiring
rights-of-way and required permits from railroads, utilities and governmental
authorities on satisfactory terms and conditions and on financing such
expansion, acquisition and construction. We have entered into long-term
agreements with highway authorities in Arkansas, Kansas, Missouri and Oklahoma
and with electric utilities operating in Missouri and Southern Illinois as well
as Tulsa, Oklahoma, under which we generally have access to various
rights-of-ways in given localities. However, these agreements cover only a small
portion of our planned network. In addition, after our network is completed and
required rights and permits are obtained, we cannot guarantee that we will be
able to maintain all of the existing rights and permits. If we fail to obtain
rights and permits or we lose a substantial number of rights and permits our
financial results would suffer which could have a material adverse effect on our
business, financial condition and results of operation.
System failures or interruptions in our network may cause loss of customers
Our success depends on the seamless uninterrupted operation of our network
and on the management of traffic volumes and route preferences over our network.
Furthermore, as we continue to expand our network to increase both its capacity
and reach, and as traffic volume continues to increase, we will face increasing
demands and challenges in managing our circuit capacity and traffic management
systems. Any prolonged failure of our communications network or other systems or
hardware that causes significant interruptions to our operations could seriously
damage our reputation and result in customer attrition and financial losses.
22
<PAGE>
Regulatory change could occur which might adversely affect our business
Some of our operations are regulated by the FCC under the Communications
Act of 1934. In addition, some of our businesses are regulated by state public
utility or public service commissions. Regulatory or interpretive changes in
existing legislation or new legislation that affects our operations could have a
material adverse effect on our business, financial condition and results of
operations. Recent and proposed regulatory changes are expected to allow the
RBOCs and others to enter the long distance business. We anticipate that some
entrants will be strong competitors because, among other reasons, they may:
- be well capitalized;
- already have substantial end-user customer bases; and/or - enjoy cost
advantages relating to local loops and access charges.
See "Business -- Industry Overview;" and "Business -- Regulation."
We are required to obtain certain authorizations from state public utility
commissions ("PUC") to offer certain of our telecommunication services, as well
as to file tariffs with the FCC and the PUCs for many of our services. We have
all the necessary authority to offer local and interstate and intrastate
long-haul services in the states we now serve. We also hold other authorities in
various other states in which we plan to provide service. As it becomes
necessary, we will obtain those operating authorities in other states on an as
needed basis. The receipt by the Company of necessary state certifications is
dependent upon the specific procedural requirements of the applicable PUC and
the workload of its staff. Additionally, receipt of state certifications may be
subject to delay as a result of a challenge to the applications and/or tariffs
by third parties, including the ILECs, which could cause us to delay provision
of services over affected portions of our network and to incur substantial legal
and administrative expenses. To date, we have not experienced significant
difficulties in receiving certifications, maintaining tariffs, or otherwise
complying with its regulatory obligations. There can be no assurances, however,
that we will not experience delays or be subject to third-party challenges in
obtaining necessary regulatory authorizations. The failure to obtain such
authorizations on a timely basis would have a material adverse effect on our
business, financial condition and results of operations.
We will be affected by how the states regulate the retail prices of the
ILECs with which we compete. As the degree of intrastate competition increases,
states may offer the ILECs increasing pricing flexibility. This flexibility may
present the ILECs with an opportunity to subsidize services that compete with
our services with revenues generated by non-competitive services, thereby
allowing ILECs to offer competitive services at lower prices than they may
otherwise. Any pricing flexibility or other significant deregulation of the
ILECs by the states could have a material adverse effect on us.
In addition to the rules affecting local and long distance competition, the
FCC or the states have adopted, or may adopt, rules and regulations which impose
fees or surcharges based on revenues derived from the provision of our
telecommunications services or require changes to our network configuration to
provide certain services. Compliance with these existing and future regulations
may have a material adverse effect on our results of operations.
We are dependent on major suppliers for key equipment, materials and labor
We are dependent upon single or limited source suppliers for our fiber
optic cable, electronic equipment and construction services used in completing
our network, some of which components employ advanced technologies built to
specifications provided by us to such suppliers. In particular, due to our
two-year agreement to purchase all of our fiber optic cable from Pirelli, we are
dependent primarily on Pirelli for our supply of fiber optic cable. We have also
entered into a three-year agreement with Pirelli in which we agreed to purchase
from them at least 80% of our needs for DWDM equipment. Therefore, we are
dependent on Pirelli for DWDM equipment. To date, our arrangements have provided
us with a supply of fiber optic cable at a stable, attractive price. We also are
dependent on a small number of contractors for the construction of network
23
<PAGE>
routes built by DTI. Our network design strategy also is dependent on obtaining
transmission equipment from Fujitsu Network Transmission Systems, Inc.
("Fujitsu") which supplies such equipment to other substantially larger
customers. There can be no assurance that our suppliers will be able to meet our
future requirements on a timely basis. We could obtain equipment and services of
comparable quality from several alternative suppliers. However, we may fail to
acquire compatible services and equipment from such alternative sources on a
timely and cost-efficient basis.
Some of the technologically advanced equipment, including the DWDM
equipment, which we plan to deploy in our network, has not been extensively
field-tested. We believe that such 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 us.
We may be adversely affected if we cannot retain key personnel
We continue to rely upon the contribution of a number of key executives. We
have entered into employment agreements with certain of these executives. We can
not assure you that we will be able to retain such qualified personnel. In the
past, we have lost the services of certain of our senior executives. Our future
success and ability to manage growth will be dependent also upon our 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. We can not assure you that we will be able to attract
and retain such qualified personnel.
We may face difficulties in integrating, managing and operating new technology
Our operations depend on our ability to successfully integrate new and
emerging technologies and equipment. These include the technology and equipment
required for DWDM, which allows multiple signals to be carried simultaneously,
and IP transmission using DWDM technology. Integrating these new technologies
could increase the risk of system failure and result in further strains.
Additionally, any damage to our network control center in our carrier's carrier
services line of business could harm our ability to monitor and manage the
network operations.
We must continue improving our accounting, processing and information systems
Sophisticated information and processing systems are vital to our
operations and growth and our ability to monitor costs, process customer orders,
provide customer service, render monthly invoices for services and achieve
operating efficiencies. We have developed processes and procedures in the
implementation and servicing of customer orders for telecommunications services,
the provisioning, installation and delivery of those services and monthly
billing for those services. However, we must improve our internal processes and
procedures and install additional accounting, processing and information systems
to accommodate our anticipated growth. We intend to obtain and install the
accounting, processing and information systems necessary to provide our services
efficiently. However, there can be no assurance that we will be able to
successfully obtain, install or operate such systems. The failure to maintain
effective internal processes and systems for these service elements could have a
material adverse effect on our ability to achieve its growth strategy. Any
acquisitions would place additional burdens on our accounting, information and
other systems.
Failure of our computer systems to recognize the year 2000 could disrupt our
business and operations
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including among others, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
While we believe that our existing systems and software applications are,
and that any new systems to be installed will be, Year 2000 compliant, there can
24
<PAGE>
be no assurance until the year 2000 that all of our systems then in place will
function adequately. The failure of our systems or software applications to
accommodate the year 2000 could have a material adverse effect on our business,
financial condition and results of operations. Further, if the systems or
software applications of telecommunications equipment suppliers, ILECs, IXCs or
others on whose services or products we depend are not Year 2000 compliant, any
loss of such services or products could have a material adverse effect on our
business, financial condition and results of operations. We intend to continue
to monitor the performance of our accounting, information and processing systems
and software applications and those of our suppliers and customers to identify
and resolve any Year 2000 issues. To the extent necessary, we 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, we do not expect that the costs of such replacements,
upgrades and reprogramming will be material to our business, financial condition
or results of operations. Most major domestic carriers have announced that they
have achieved substantial Year 2000 compliance for their networks and support
systems; however, other domestic carriers may not be Year 2000 compliant, and
failures on their networks and systems could adversely affect the operation of
our network and support systems and have a material adverse effect on our
business, financial condition and results of operations. We have not developed a
contingency plan with respect to the failure of our systems or the systems of
our suppliers or other carriers to achieve Year 2000 compliance.
Unanticipated problems in any of the above areas, or our inability to
implement solutions in a timely manner or to establish or upgrade systems as
necessary, could have a material adverse impact on our ability to reach our
objectives and on our business, financial condition and results of operations.
25
<PAGE>
Item 2. Properties
Our network in progress and fiber optic cable, transmission equipment and
other component assets are our principal properties. Our installed fiber optic
cable is laid under various rights-of-way that we maintain. Other fixed assets
are located at various leased locations in geographic areas served by us. We
believe that our existing properties are adequate to meet our anticipated needs
in the markets in which we have deployed or begun to deploy our network and that
additional facilities are and will be available to meet our development and
expansion needs in existing and planned markets for the foreseeable future.
Our principal executive offices and Network Control Center are located in
St. Louis, Missouri. We lease this 16,000 square-feet of space pursuant to the
terms of the lease that expires in July 2001. The Company also leases additional
office and equipment space in St. Louis, Missouri from Mr. Weinstein at market
rates under an agreement that expires on December 31, 1999. See "Certain
Relationships and Related Transactions." We are also constructing a second
control center in Kansas City, Missouri that can serve as a backup network
control center for our entire network.
Item 3. Legal Proceedings
In June 1999, we and Mr. Weinstein settled 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. Pursuant to the terms of the
settlement we paid $1.25 million and Mr. Weinstein paid $1.25 million to the
plaintiff. Mr. Weinstein obtained a loan from us for his portion of the
settlement cost plus approximately $200,000 representing 50% of the legal costs
incurred by the Company, that is repayable by Mr. Weinstein to us at the
earliest of the following three events:
- a change in control of DTI
- a public offering of shares of DTI
- three years after the date of the loan
The loan will earn interest at a rate of 7.5% which will be payable at the same
time as the principal balance is due. Mr. Weinstein has pledged 1,500,000 shares
of his common stock in the Company as collateral for the loan.
From time to time we are named as a defendant in routine lawsuits
incidental to our business. Based on the information currently available, we
believe that none of such current proceedings, individually or in the aggregate,
will have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders
None.
26
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related Shareholder Matters
There is no existing trading market for our common stock. As of June 30,
1999, there was one holder of our common stock. We have never declared or paid
cash dividends on our common stock. It is our present intention to retain all
future earnings for use in our business and, therefore, we do not expect to pay
cash dividends on the common stock in the foreseeable future. The declaration
and payment of dividends on the common stock is restricted by the terms of our
indebtedness under the indenture pursuant to which we issued our Senior Discount
Notes.
On February 23, 1998, we consummated a private placement in reliance upon
the exemption from registration under Section 4(2) of the Securities Act of 1933
(the "Securities Act"), pursuant to which we issued and sold 506,000 units (the
"Units") consisting of $506 million aggregate principal amount at maturity of
Senior Discount Notes and warrants to purchase 3,926,560 shares of Common Stock
(the "Warrants"). The Senior Discount Notes were sold at an aggregate price of
$275.2 million, and we received approximately $264.7 million net proceeds, after
deductions for offering expenses. The Warrants were allocated a value of $10
million. The Senior Discount Notes were initially purchased by Merrill Lynch,
Pierce, Fenner & Smith Incorporated and TD Securities USA Inc., and were resold
in accordance with Rule 144A and Regulation S under the Securities Act of 1933,
as amended. On September 15, 1998, we completed an Exchange Offering under the
Securities Act of 1933, of Series B Senior Discount Notes due 2008 and Warrants
to Purchase 3,926,560 Shares of Common Stock for the Company's then outstanding
Senior Discount Notes due 2008 and Warrants to Purchase 3,926,560 Shares of
Common Stock. The form and terms of the Series B Senior Discount Notes are
identical in all material respects to those of the Senior Discount Notes, except
for certain transfer restrictions and registration rights relating to the Senior
Discount Notes and except for certain interest provisions related to such
registration rights. Together the Series B Senior Discount Notes and Senior
Discount Notes are referred to as the "Senior Discount Notes" throughout this
document.
We have used approximately $147.0 million of the $264.7 million net
proceeds of the Senior Discount Notes for construction of our fiber optic
telecommunications network or purchase of IRUs, with the remaining net proceeds
temporarily invested in certain short-term investment grade securities.
Through September 24, 1999, under our Incentive Award Plan, we granted or
became obligated to grant options to purchase an aggregate of 1,325,000 shares
of our Common Stock to certain of our directors and key employees at exercise
prices ranging from $2.60 to $6.66 per share. Such transactions were completed
without registration under the Securities Act in reliance on the exemption
provided by Section 4(2) of the Securities Act and Rule 701 under the Securities
Act.
27
<PAGE>
Item 6. Selected Financial Data
Selected Consolidated Financial Data
The following is a summary of selected historical financial data as of and
for the five years in the period ended June 30, 1999 which has been derived from
our audited Consolidated Financial Statements. 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", "Business" and
the audited Consolidated Financial Statements and notes thereto appearing
elsewhere in this document.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
1995(a) 1996(a) 1997 1998 1999
------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Statement Data:
Total revenues......................... $ 199,537 $ 676,801 $ 2,033,990 $ 3,542,771 $ 7,209,383
------------ ----------- ------------ ------------- ------------
Operating expenses:
Telecommunication services........... 165,723 296,912 1,097,190 2,294,181 6,307,678
Other services....................... -- -- 364,495 -- --
Selling, general and administrative.. 240,530 548,613 868,809 3,668,540 5,744,417
Depreciation and amortization........ 70,500 425,841 757,173 2,030,789 4,653,536
------------ ----------- ------------ ------------- -------------
Total operating expenses 476,753 1,271,366 3,087,667 7,993,510 16,705,631
------------ ----------- ------------ ------------- ------------
Loss from operations................... (277,216) (594,565) (1,053,677) (4,450,739) (9,496,248)
Interest income (expense) - net........ (9,516) (191,810) (798,087) (6,991,773) (22,219,999)
------------ ----------- ------------ -------------- -------------
Loss before income tax benefit......... (286,732) (786,375) (1,851,764) (11,442,512) (31,716,247)
Income tax benefit/(provision)......... -- -- 1,214,331 2,020,000 (1,000,000)
------------ ----------- ------------ -------------- -------------
Net loss (e)........................... $ (286,732) $ (786,375) $ (637,433) $ (9,422,512) $(32,716,247)
============ =========== ============ ============== =============
Balance Sheet Data:
Cash and cash equivalents.............. $ 140,220 $ 817,391 $ 4,366,906 $ 251,057,274 $132,175,829
Network and equipment, net............. 6,788,582 13,064,169 34,000,634 77,771,527 213,469,187
Total assets........................... 11,983,497 15,025,758 39,849,136 342,865,160 363,760,890
Accounts payable....................... 2,114,748 1,658,836 5,086,830 4,722,418 9,561,973
Vendor financing:
Current............................ -- -- -- -- 2,298,946
Long-term.......................... -- -- -- -- 2,298,946
Senior discount notes, net............. -- -- -- 277,455,859 314,677,178
Deferred revenues...................... 5,027,963 6,734,728 9,679,904 16,814,488 22,270,006
Redeemable Convertible Preferred
Stock (b).............................. -- -- 28,889,165 -- --
Stockholders' equity (deficit) (b)..... (237,638) (1,100,703) (4,729,867) 41,958,122 7,919,145
Other Financial Data:
Cash flows from operations............. $ 6,903,884 $ 299,710 $ 7,674,272 $ 9,707,957 $ 11,461,067
Cash flows from investing activities (11,804,176) (1,122,569) (19,417,073) (44,952,682) (128,367,335)
Cash flows from financing activities... 5,030,000 1,500,030 15,292,316 281,935,093 (1,975,177)
EBITDA (c)............................. (206,716) (168,724) (259,068) (2,419,950) (4,842,712)
Capital expenditures................... 6,804,176 5,663,047 19,876,595 44,952,682 128,367,335
Ratio of earnings to fixed charges (d). -- -- -- -- --
</TABLE>
(a) Through June 30, 1996, we were considered a development stage enterprise
focused on developing our network and customer base.
(b) On February 13, 1998, in conjunction with the Senior Discount Notes
Offering, we 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.
(c) EBITDA represents net loss before interest income (expense), loan
commitment fees, income tax benefit, depreciation and amortization. EBITDA
is included because we understand that such information is commonly used by
investors in the telecommunications industry as an additional basis on
which to evaluate our 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 our results of operations and liquidity and should
be considered in evaluating our 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").
28
<PAGE>
Additionally, EBITDA should not be used as a comparison between companies,
as it may not be calculated in a similar manner by all companies.
(d) 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, 1997, 1998 and 1999 our earnings were insufficient to cover fixed
charges by approximately $2.0 million, $2.4 million, $2.5 million, $12.3
million and $39.3 million, respectively.
(e) Net loss attributable to Common Stock, loss per shares 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.
29
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis relates to our financial condition and
results of operations for each of the three years ended June 30, 1999. This
information should be read in conjunction with our consolidated financial
statements and the notes thereto and the other financial data appearing
elsewhere in this document.
Overview
Introduction
We are a facilities-based communications company that is creating an
approximately 20,000 route mile digital fiber optic network comprised of
approximately 23 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. We
currently provide carrier's carrier services under contracts with AT&T, Sprint,
MCI WorldCom, Ameritech Cellular, IXC Communications and other telecommunication
companies. We also provide private line services to a few targeted business and
governmental end-user customers. We are 50% owned by an affiliate of Kansas City
Power & Light Company ("KCP&L"), which has agreed to be acquired by Western
Resources, Inc.
Revenues
We derive 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,
1999, we derived approximately 94% and 6% of our total revenues from carrier's
carrier services and end-user services, respectively. Of our total carrier's
carrier service revenues, approximately 86% related to wholesale network
capacity services and 14% related to IRU agreements.
During the past several years, market prices for many telecommunications
services have been declining, which is a trend we believe will likely continue.
This decline has had and will continue to have a negative effect on our gross
margin, which may not be offset by decreases in our cost of services. However,
we believe that such decreases in prices may be partially offset by increased
demand for our telecommunications services as we expand our network and
introduce new services.
We derive carrier's carrier services revenues from IRUs and wholesale
network capacity agreements. IRUs typically have a term of 20 or more years. We
provide 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 us as
deferred revenue and are then recognized on a straight-line basis over the terms
of the IRU 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 years ended June 30, 1998 and 1999, our three largest carrier
customers combined accounted for an aggregate of 74% and 91%, respectively, of
carrier's carrier services revenues, or 65% and 85%, respectively, of total
revenues. The terms of these agreements are such that there are no stated
obligations to return any of the advance payments. Our 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 segments from the system route to be delivered.
30
<PAGE>
End-user services are telecommunications services provided directly to
businesses and governmental end-users. We currently provide 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. Our 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. For the year ended June 30, 1998 and 1999, four
customers accounted for all of our end-user services revenue, or an aggregate of
13% and 6%, respectively, of total revenues.
As of June 30, 1999, we have received aggregate advance payments of
approximately $24.4 million from certain of our IRU, carrier's carrier and
end-user customers which are recorded as deferred revenue when received.
Deferred revenues from IRUs, carrier's carrier and end-user customers are
recognized on a straight-line basis over the life of the contract. Upon
expiration, such agreements may be renewed or services may be provided on a
month-to-month basis.
In fiscal 1997, at the request of a specific carrier customer, we designed,
constructed and installed inner-duct for such customer's own fiber optic
network. While we do not presently consider the provision of such services to be
part of our core business strategy, we will consider such opportunities as they
arise. We expect that future revenues, if any, from network construction
services will not be a significant contributor to our overall revenues or
results of operations.
Operating Expenses
Our 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, operating costs in connection with our
owned facilities and more recently costs related to fibers accepted under our
long-term IRUs. Because we currently provide carrier's carrier and end-user
services principally over our 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 our network and
typically where we plan to expand our network) and no ILEC access charges.
Leased space, electrical and maintenance costs have increased significantly as
we have accepted fibers related to our long-term IRUs. Further, leased line
capacity costs and access charges are expected to increase significantly because
we expect 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 our network in a given local market. Operating
costs include, but are not limited to, costs of managing our network facilities,
technical personnel salaries and benefits, rights-of-way fees, locating
installed fiber to minimize the risk of fiber cuts and property taxes.
SG&A expenses include the cost of salaries, benefits, occupancy costs, sales
and marketing expenses and administrative expenses. We plan to add sales offices
in selected markets, as additional segments of our network become operational.
Depreciation and amortization are primarily related to fiber optic cable plant,
electronic terminal equipment and network buildings, and are expected to
increase as we incur substantial capital expenditures to build and acquire the
components of our network and begin to install our own switches. In general,
SG&A expenses have increased significantly as we have developed and expanded our
network. We expect 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 we continue to recruit
experienced personnel to implement our business strategy.
31
<PAGE>
Operating Losses
As a result of build-out and operating expenses, we have incurred
significant operating and net losses to date. Losses from operations in fiscal
1997, 1998 and 1999 were $1.1 million, $4.5 million and $9.5 million,
respectively. We may incur significant and possibly increasing operating losses.
There can be no assurance that we will achieve or sustain profitability or
generate sufficient positive cash flow to meet our debt service obligations and
working capital requirements. If we cannot achieve operating profitability or
positive cash flows from operating activities, we may not be able to service the
Senior Discount Notes or meet our other debt service or working capital
requirements, which could have a material adverse effect on us.
Results of Operations
The table set forth below summarizes our percentage of revenue by source and
operating expenses as a percentage of total revenues:
Fiscal Year Ended June 30,
1997 1998 1999
---- ---- ----
Revenue:
Carrier's carrier services.................. 40% 87% 94%
End-user services........................... 25 13 6
-- ---- ----
65 100 100
Other services.............................. 35 -- --
-- --- ---
Total revenue............................ 100% 100% 100%
=== === ===
Operating Expenses:
Telecommunications services................. 54% 65% 88%
Other services.............................. 18 -- --
Selling, general and administrative......... 43 104 80
Depreciation and amortization............... 37 57 64
-- ----- ----
Total operating expenses................. 152% 226% 232%
=== ==== ===
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1999
Revenue. Total revenue grew 103% from $3.5 million in 1998 to $7.2 million
in 1999 principally due to increased revenue from carrier's carrier services.
Revenue from carrier's carrier services was up 121% to $6.8 million primarily
due to increased sales of point-to-point transport business on our completed
routes. End-user revenues declined 9%, which is attributable to the expiration
of a customer's contract.
Operating Expenses. Operating expenses grew 109% from $8.0 million in 1998
to $16.7 million in 1999, due primarily to increases in telecommunications
services, selling, general and administrative expenses and depreciation and
amortization. Telecommunications services expenses were up 175% to $6.3 million
in 1999 due to increased personnel costs to support the expansion of our
network, property taxes, leased capacity costs incurred to support customers in
areas not yet reached by our network, and costs related to recently accepted
dark fiber segments on previously acquired routes. Selling, general and
administrative expenses were up 57% to $5.7 million in 1999, in order to support
the expansion of our network, which includes an increase in administrative and
sales personnel and the related expenses of supporting these personnel.
Depreciation and amortization grew 129% over last year due to higher amounts of
plant and equipment being in service in 1999 versus 1998. We expect that
significant additional amounts of plant and equipment will be placed in service
throughout fiscal 2000 and fiscal 2001. As a result, depreciation and
amortization will continue to grow as we continue to invest in capital assets to
increase network capacity and as additional network routes are placed into
service.
Other Income (Expenses). Net interest and other income (expense) increased
from a net expense of $7.0 million in 1998 to net expense of $22.2 million in
1999. Interest income increased from $5.1 million in 1998 to $10.7 million in
1999 due to the investment of the proceeds from the Senior Discount Notes.
Similarly, as a result of the Senior Discount Notes issued in February 1998,
32
<PAGE>
interest expense increased from $12.1 million in 1998 to $31.5 million in 1999.
Additionally, we and Mr. Weinstein, President and CEO of the Company, settled a
lawsuit which resulted in a one-time charge of $1.5 million in fiscal 1999.
Income Taxes. An income tax benefit of $2.0 million was recorded in fiscal
1998 as management believes it is more likely than not that we will generate
taxable income sufficient to realize certain of the tax benefit associated with
future deductible temporary differences and net operating loss carryforwards
prior to their expiration. A tax provision of $1.0 million was recorded in
fiscal 1999 related to the anticipated settlement of an income tax examination.
Net Loss. Net loss for the fiscal year ended 1998 was $9.4 million compared
to $32.7 million for the fiscal year ended June 30, 1999.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1998
Revenue. Total revenue increased 74% from $2.0 million in 1997 to $3.5
million in 1998 principally due to increased revenue from carrier's carrier
services. Revenue from carrier's carrier services increased 281% from $807,000
in 1997 to $3.1 million in 1998. This increase resulted principally from the
completion of additional network segments, as well as from adding traffic on our
existing network. End-user revenues decreased 9% from $516,000 in 1997 to
$467,000 in 1998. This decrease was attributable to the expiration of a
customer's contract.
Operating Expenses. Operating expenses increased 159% from $3.1 million in
1997 to $8.0 million in 1998, due primarily to increases in telecommunications
services, selling, general and administrative expenses and depreciation and
amortization. Telecommunications services expenses increased 109% from $1.1
million in 1997 to $2.3 million in 1998 due to increased personnel to support
the expansion of our network, as well as increased costs related to property
taxes and other costs in connection with obtaining leased capacity to support
customers in areas not yet reached by our network. Selling, general and
administrative expenses increased 322%, from $869,000 in 1997 to $3.7 million in
1998, in order to support the expansion of our 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 168%, from $757,000 in 1997 to $2.0 million in 1998, due
to higher amounts of plant and equipment being in service in 1998 versus 1997.
Other Income (Expenses). Net interest and other income (expense) increased
from a net expense of $798,000 in 1997 to net expense of $7.0 million in 1998.
Interest income increased from $102,000 in 1997 to $5.1 million in 1998 due to
the investment of the proceeds from the Senior Discount Notes. Similarly, as a
result of the Senior Discount Notes issued in February 1998, interest expense
increased from $153,000 in 1997 to $12.1 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 that was not used.
Income Taxes. An income tax benefit of $1.0 million and $2.0 million was
recorded in fiscal 1997 and 1998, respectively, as management believes it is
more likely than not that we will generate taxable income sufficient to realize
certain of the tax benefit associated with future deductible temporary
differences and net operating loss carryforwards prior to their expiration.
Net Loss. Net loss for the fiscal year ended 1997 was $637,000 compared to
$9.4 million for the fiscal year ended June 30, 1998.
Liquidity and Capital Resources
We have funded our capital expenditures, working capital and debt
requirements and operating losses through a combination of advance payments for
future telecommunications services received from certain major customers, debt
and equity financing and external borrowings. In addition to utilizing the net
proceeds of the Senior Discount Notes, we intend to finance our 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, we may seek borrowings under bank credit facilities and additional
debt or equity financing.
33
<PAGE>
The net cash provided by operating activities for the years ended June 30,
1998 and 1999 totaled $9.7 million and $11.5 million, respectively. During
fiscal 1998, net cash provided by operating activities resulted principally from
an increase in deferred revenues of $7.1 million relating to advanced payments
received under IRUs, wholesale network capacity agreements and end-user
agreements. During fiscal 1999, net cash provided by operating activities
resulted principally from an increase in interest income of $5.7 million and
additional deferred revenues of $5.5 million relating to advance payments
received under IRUs, wholesale network capacity agreements and end-user
agreements. As of June 30, 1999, advance payments of approximately $25.6 million
will become due us over the next five years under existing agreements with
certain major customers upon meeting our obligations under certain agreements,
which require us to provide telecommunications services or dark fiber capacity
In January 1998, we 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, to fund our
working capital requirements until consummation of our Senior Discount Notes
offering issued in February 1998. Certain covenants under the Credit Facility
required that all outstanding borrowings be repaid upon the consummation of the
Senior Discount Notes and effectively precluded any additional borrowings under
the Credit Facility after such amounts were so repaid. We have repaid all
borrowings under and have terminated the Credit Facility. We intend to pursue a
new long-term bank credit facility.
On February 23, 1998 we completed the issuance and sale of the Senior
Discount Notes, from which we received proceeds, net of underwriting discounts
and expenses, totaling approximately $264.7 million. We are using the net
proceeds (i) to fund additional capital expenditures required for the completion
of the our network, (ii) to expand our management, operations and sales and
marketing infrastructure and (iii) for additional working capital and other
general corporate purposes. We may incur significant and possibly increasing
operating losses and expect to generate negative net cash flows after capital
expenditures during at least the next two years as we continue to invest
substantial funds to complete our network and develop and expand our
telecommunications services and customer base. Accordingly, if we cannot achieve
operating profitability or positive cash flows from operating activities, we may
not be able to service the Senior Discount Notes or to meet our other debt
service or working capital requirements, which would have a material adverse
effect on us.
At June 30, 1999, we had a working capital surplus of $116.5 million, which
represents a decrease of $128.5 million compared to the working capital surplus
of $245.0 million at June 30, 1998. This decrease is primarily attributable to
the continued build-out of our network.
Our investing activities used cash of $45.0 million for the year ended June
30, 1998 and $128.4 million for the year ended June 30, 1999. During both years
100% of the investing activities were in network and equipment.
Cash provided by financing activities was $281.9 million for the year ended
June 30, 1998 and $2.0 million for the year ended June 30, 1999. During fiscal
1998, we received $17.3 million in proceeds from the issuance of Series A
Preferred Stock to KLT, Inc. ("KLT"), a wholly-owned subsidiary of KCP&L, $3.0
million under the Credit Facility and $275.2 million from the Senior Discount
Notes offering. The proceeds of the Senior Discount Notes offering were used to
pay off the $3.0 million due under the Credit Facility and $10.5 million in
additional financing costs. During fiscal 1999 the Company paid an additional
$525,000 in financing costs and granted a loan to an officer for $1.5 million as
described in Item 13 below, "Certain Relationships and Related Transactions."
Additionally, in December, 1998 we entered into a vendor financing agreement
with our fiber optic cable vendor allowing for deferred payment terms of one and
two-year periods on qualifying cable purchases up to $15.0 million.
To achieve our business plan, we will need significant financing to
fund our capital expenditure, working capital and debt service requirements and
our anticipated future operating losses. We estimate capital requirements
primarily include the estimated cost of (i) constructing approximately one-third
of our planned network routes, (ii) purchasing, for cash, fiber optic facilities
pursuant to long-term IRUs for planned routes that we will neither construct nor
34
<PAGE>
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. We estimate that total capital expenditures necessary to
complete our network will be approximately $650 million, of which we have
expended $219.5 million as of June 30, 1999. During the balance of calendar 1999
and all of calendar 2000, we anticipate our capital expenditure priorities will
be focused principally on expanding from our existing Missouri/Arkansas base by
building additional regional rings that adjoin existing rings and those that
initiate new rings in areas in which strong carrier interest has been expressed.
We anticipate that our existing financial resources will be adequate to fund the
above mentioned priorities and our existing capital commitments, principally
payments required under existing preliminary and definitive IRU and short-term
lease agreements, totaling $50.9 million which are payable in varying
installments over the period through December 31, 1999. In addition, we have a
commitment at June 30, 1999 for eight telecommunications switches totaling $15
million which is cancelable upon the payment of a cancellation fee of $42,000
for each of the remaining unpurchased switches. We 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 June 30, 1999, we had $132.2 million of cash and cash equivalents.
Such amount is expected to provide sufficient liquidity to meet our operating
and capital requirements through the next twelve months. Subsequent to such
date, our operating and capital requirements are expected to be funded, in large
part, out of additional debt or equity financing, advance payments under IRUs
and wholesale network capacity agreements, and available cash flow from
operations, if any. We are exploring the possibility of an additional high yield
debt offering, a commercial credit facility and equity sales, but have no
specific plans at this time. We are in various stages of discussions with
potential customers for IRUs and wholesale network capacity agreements. There
can be no assurance, however, that we 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 us and within the restrictions under our
existing financing arrangements, or at all. If we fail to obtain the capital
required to complete our network, we could modify, defer or abandon plans to
build or acquire certain portions of our network. The failure by us, however, to
raise the substantial capital required to complete our network could have a
material adverse effect on us. The actual amount and timing of our capital
requirements may differ materially from those estimates depending on demand for
our services, and our ability to implement our current business strategy as a
result of regulatory, technological and competitive developments (including
market developments and new opportunities) in the telecommunications industry.
Subject to the Indenture provisions that limit restrictions on the ability
of any of our Restricted Subsidiaries to pay dividends and make other payments
to us, future debt instruments of Digital Teleport may impose significant
restrictions that may affect, among other things, the ability of Digital
Teleport to pay dividends or make loans, advances or other distributions to us.
The ability of Digital Teleport to pay dividends and make other distributions
also will be subject to, among other things, applicable state laws and
regulations. Although the Senior Discount Notes do not require cash interest
payments until September 1, 2003, at such time the Senior Discount Notes will
require annual cash interest payments of $63.3 million. In addition, the Senior
Discount Notes mature on March 1, 2008. We currently expect that the earnings
and cash flow, if any, of Digital Teleport will be retained and used by such
subsidiary in its operations, including servicing its own debt obligations. We
do not anticipate that we will receive any material distributions from Digital
Teleport prior to September 1, 2003. Even if we 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 us or that applicable
state law and contractual restrictions, including negative covenants contained
in any future debt instruments of Digital Teleport, will permit such dividends
or distributions. The failure of Digital Teleport to pay, or to generate
sufficient earnings or cash flow to distribute, any cash dividends or make any
loans, advances or other payments of funds to us would have a material adverse
effect on our ability to meet our obligations on the Senior Discount Notes.
Further, there can be no assurance that we will have available, or will be able
to acquire from alternative sources of financing, funds sufficient to repurchase
the Senior Discount Notes, which would be required under the terms of the Senior
Discount Notes, in the event of a Change of Control, as defined.
35
<PAGE>
Inflation
We do not believe that inflation has had a significant impact on our
consolidated results of operations.
Year 2000 Compliance
While we believe that our existing systems and software applications are
Year 2000 compliant, there can be no assurance until the year 2000 that all of
our systems and software applications then in place will function adequately.
The failure of our systems or software applications to accommodate the Year 2000
could have a material adverse effect on our business, financial condition and
results of operations and our ability to meet our obligations on the Senior
Discount Notes. Further, if the systems or software applications of
telecommunications equipment suppliers, ILECs, IXCs or others on whose services
or products we depend or with whom our systems must interface are not Year 2000
compliant, it could have a material adverse effect on our business, financial
condition and results of operations and our ability to meet our obligations on
the Senior Discount Notes. We intend to continue to monitor the performance of
our accounting, information and processing systems and software applications and
those of our third-party constituents to identify and resolve any Year 2000
issues. To the extent necessary, we 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, we do not expect
that the costs of such replacements, upgrades and reprogramming will be material
to our business, financial condition or results of operations. Most major
domestic carriers have announced that they have achieved Year 2000 compliance
for their networks and support systems; 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 our networks and support systems and have a material adverse effect
on our business, financial condition and results of operations. We have not
developed a contingency plan with respect to the failure of our systems or the
systems of our suppliers or other carriers to achieve Year 2000 compliance.
New Accounting Standards
During 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, and FASB
Interpretation 43, Real-estate Sales, an interpretation of FASB 66 which
specifies the accounting for IRUs. The Company is continuing to evaluate the
effect of these statements which are effective for fiscal years 2002 and 2000,
respectively.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Index to Consolidated Financial Statements on Page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
36
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
The following table sets forth certain information concerning directors and
executive officers of the Company as of June 30, 1999.
Directors and Executive Officers Table
Name Age Position(s) with the Company
- --------------------------------------------------------------------------------
Richard D. Weinstein (1) 47 President, Chief Executive Officer and
Secretary; Director
Gary W. Douglass 48 Senior Vice President, Finance and
Administration and Chief Financial Officer
H.P. Scott 61 Senior Vice President
Jerry W. Murphy 41 President - DTI Network Services and Chief
Technology Officer
Daniel A. Davis 33 Vice President and General Counsel
Ronald G. Wasson (1) 54 Director
Bernard J. Beaudoin 59 Director
Richard S. Brownlee, III 53 Director
Kenneth V. Hager 48 Director
- -------------------------
(1) Member of Compensation Committee
Background of Directors and Executive Officers
Richard D. Weinstein has been our President, Chief Executive Officer and
Secretary since we commenced operations. He founded DTI in 1989. Prior to 1989,
Mr. Weinstein owned and managed Digital Teleresources, Inc., a firm that
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 Bank of America), as well as various cellular and
health care firms. In this capacity, Mr. Weinstein worked closely with SBC
Communications, Inc.'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 our Senior Vice President, Finance and
Administration and Chief Financial Officer, 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 publicly held 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,
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 us in May 1998 as Senior Vice President. From May 1997 to
May 1998, Mr. Scott was Vice President of Business Development of IXC
Communications of Austin, Texas. From May 1996 to May 1997, Mr. Scott was Vice
President of Engineering and Construction of IXC Communications, 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 our President - DTI Network Services and Chief Technology
Officer, joined us in June 1998. From October 1996 to December 1997, Mr. Murphy
was the Director of Construction Support of MCImetro. Mr. Murphy was MCImetro's
37
<PAGE>
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.
Daniel A. Davis our Vice President and General Counsel, joined us in June
1998 from the law firm of Bryan Cave LLP, our primary outside counsel. At Bryan
Cave, Mr. Davis practiced in the corporate transactions and corporate finance
groups, representing primarily telecommunications and other technology based
companies. Mr. Davis specialized in mergers and acquisitions, public offerings,
financings and federal securities law. Mr. Davis received a B.A. from the
University of Illinois and a J.D. from St. Louis University School of Law, cum
laude.
Ronald G. Wasson has been one of our directors since March 1997. He is
currently President and Director of KLT. He is also President of KLT Telecom
Inc., and serves as director of KLT Energy Services, all of which are
wholly-owned subsidiaries of KLT Inc. Mr. Wasson joined KCP&L 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 KCP&L 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 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 one of our directors since October 1997. He is
currently the President of KCP&L. KLT is an indirect wholly-owned subsidiary of
KCP&L. Mr. Beaudoin joined KCP&L in 1980 as Manager of Corporate Planning.
Previously he was with New England Electric System, where he was Director of
Economic Planning. At KCP&L, 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 employment as President. He was named Executive
Vice President & CFO of KCP&L in November 1996 and then elected President and
Member of the Board of Directors of KCP&L in January 1999. Mr. Beaudoin also
serves as Chairman of the Board of Directors of Carondelet Health, a holding
company for a variety of health provider services.
Richard S. Brownlee, III has been one of our directors since December 1998.
Mr. Brownlee is currently a partner at Hendren and Andrae, LLC whose practice is
primarily devoted to matters dealing with governmental, civil and environmental
litigation. He has a regular administrative practice before the State of
Missouri Public Service Commission, Department of Insurance and Department of
Natural Resources. In addition, he has served as principal counsel in the
certification process of over 50 interexchange carriers and currently services
as counsel on certain regulatory matters of the Company. He also serves as
Missouri counsel for the Williams Companies of Tulsa, Oklahoma.
Kenneth V. Hager has been one of our directors 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.
38
<PAGE>
General
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 our Company.
The Board of Directors has a Compensation Committee comprised of Messrs.
Wasson (Chairman) and Weinstein.
A Shareholders' Agreement among ourselves, 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. 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. Hager and Brownlee, 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, ourselves or KLT are paid a $20,000 annual retainer fee payable in
quarterly installments. All directors are reimbursed for expenses incurred in
connection with attending Board and committee meetings. We have also granted
options to purchase 150,000 shares under the Plan to each of Messrs. Hager and
Brownlee, our non-affiliated directors.
39
<PAGE>
Item 11. Executive Compensation
The following table sets forth all compensation awarded, earned or paid
during the last three fiscal years to our: (i) Chief Executive Officer and (ii)
the four most highly compensated executive officers in fiscal 1999 other than
the Chief Executive Officer, (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term Compensation
Other Annual Restricted Securities All Other
Name and Annual Compensation Compensation Stock Underlying Compensation
Principal Position Year Salary($) Bonus($) ($) Awards($) Options(#) ($)
- ------------------------ ------- --------- -------- ------------- --------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard D. Weinstein, 1999 $150,000 -- -- -- -- $ 85,098 (1)
President, Chief Executive 1998 150,000 -- -- -- -- 83,234 (1)
Officer and Secretary 1997 69,231 -- -- -- -- 49,897
H.P. Scott, Senior Vice 1999 168,350 -- -- -- -- 169,600 (2)
President 1998 28,000 $100,000 -- -- -- --
1997 -- -- -- -- -- --
Gary W. Douglass, Senior 1999 192,308 66,667 -- $200,000 (3) 200,000 (4) --
VP, Finance and 1998 -- -- -- -- -- --
Administration and Chief 1997 -- -- -- -- -- --
Financial Officer
Jerry W. Murphy, President - DTI 1999 170,385 83,333 -- -- 300,000 (5) 12,297 (7)
Network Services and 1998 5,538 -- -- -- -- --
Chief Technology Officer (6) 1997 -- -- -- -- -- --
Daniel A. Davis, Vice President 1999 127,308 45,000 -- -- 150,000 (5) --
and General Counsel (6) 1998 23,846 -- -- -- -- --
1997 -- -- -- -- -- --
------------
<FN>
(1) Amount represents rent paid for our POP and switch facility site in St.
Louis and other fringe benefits.
(2) Amount reflects payment of sales awards in accordance with Mr. Scott's
consulting agreement.
(3) Represents the dollar value (net of consideration to be paid by Mr.
Douglass) for 200,000 shares of restricted stock, which represents the
aggregate value and number of shares of restricted stock held by Mr.
Douglass. The shares vest in an amount of one-third each year on the three
anniversary dates of grant, beginning on July 9, 1999. Mr. Douglass will
receive a tax gross-up for taxes due related to this restricted stock at
the time Mr. Douglass incurs the tax.
(4) Shares of common stock underlying stock options awarded under the Stock
Option Plan. Mr. Douglass also has a put feature that will allow him to put
these shares to us at a price of $12.16 per share. Additionally, Mr.
Douglass will receive a tax gross-up for taxes due related to this award.
(5) Shares of common stock underlying stock options awarded under the Stock
Option Plan.
(6) In August 1999 Mr. Murphy was promoted from Vice President Network
Operations to President - DTI Network Services and Chief Technology Officer
and Mr. Davis was promoted from Vice President Legal - Corporate to Vice
President and General Counsel.
(7) Represents reimbursed relocation expenses.
</FN>
</TABLE>
40
<PAGE>
Options/SAR Grants in Last Fiscal Year
The following table provides information on stock option grants to the
five most highly compensated officers in 1999 under the Stock Option Plan.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Exercise or
Underlying Granted to Base Grant Date
Options Employees Price ($/Sh.) Expiration Present
Name Granted (#) In Fiscal Year Options (#) Date Value ($) (2)
---- ----------- -------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Richard D. Weinstein......... -- -- -- -- --
H.P. Scott................... -- -- -- -- --
Gary W. Douglass (3)......... 200,000 (1) 13.6% $6.66 7-9-08 $1,049,085
Jerry W. Murphy.............. 300,000 (1) 20.3 6.66 6-8-08 1,574,228
Daniel A. Davis.............. 150,000 (1) 10.2 6.66 6-10-08 787,113
</TABLE>
1. All of these options vest in an amount of one-third each year on the three
anniversary dates of grant through calendar year 2001.
2. The present value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield 0%, expected volatility of .678, and risk-free
interest rate of 5.6% and expected life of ten years.
3. Mr. Douglass has the right to put his exercisable options to the Company at
their fair market value, as determined in accordance with his employment
agreement.
Employment and Consulting Agreements
Weinstein Employment Agreement
As a condition of the KLT Investment, we and Mr. Weinstein entered into an
employment agreement (the "Weinstein Employment Agreement"), which provides that
Mr. Weinstein will serve as our 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 our POP and switch facility site in St. Louis
entered into as of December 31, 1996 by and among Mr. Weinstein, his wife and us
(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 our other 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 us
upon 90 days notice to Mr. Weinstein, Mr. Weinstein shall thereafter receive his
annual base salary for the remainder of the employment period (but none of our
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 us 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. The Lease Agreement has been
extended by mutual agreement of the parties thereto, and will terminate on
December 31, 1999.
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, Finance and
Administration and Chief Financial Officer, of both Digital Teleport and
ourselves 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 is eligible for
discretionary incentive compensation of up to one-third of his annual base
compensation each year.
41
<PAGE>
In addition to his cash compensation, we are obligated to grant Mr.
Douglass (i) 200,000 shares of restricted shares of our 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 our Common Stock at $6.66 per share. We have a right to call the
vested restricted nonvoting shares in the event that Mr. Douglass is no longer
employed by us for any reason at a price equal to the greater of $1.00 per share
or our per share book value; 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 our 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 us 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 our Common Stock.
We have 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 we 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 we 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 our Common Stock;
provided that the option put right does not terminate unless our 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, we have 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 April 1999, the Company and Mr. H.P. Scott entered into a new 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 $5,000 per
month for such consulting services, and currently Mr. Scott spends approximately
5 days per month providing such services.
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 or conduit 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 or conduit received by
the Company pursuant to a swap for dark fiber or conduit 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 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.
Additionally, Mr. Scott is eligible for reimbursement of certain expenses.
42
<PAGE>
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.
Murphy Employment Agreement
In November 1998, Digital Teleport and Mr. Murphy entered into an
employment agreement (the "Murphy Agreement"), which provides that Mr. Murphy
will serve in a full-time capacity as President - DTI Network Services and Chief
Technology Officer, of Digital Teleport for a term of three years for a minimum
base compensation of $180,000 per year, in addition to group health or other
benefits generally provided to other Digital Teleport employees. Moreover, Mr.
Murphy is eligible for discretionary incentive compensation of up to one-third
of his annual base compensation each year. In addition to his cash compensation,
we granted Mr. Murphy nonqualified options to purchase 300,000 shares of our
Common Stock at $6.66 per share.
The Murphy Agreement restricts the ability of Mr. Murphy 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 Murphy Agreement also
imposes on Mr. Murphy certain confidentiality obligations and proprietary and
non-solicitation restrictions with respect to Digital Teleport employees,
customers and clients.
Davis Employment Agreement
In June 1998, Digital Teleport and Mr. Davis entered into an employment
agreement (the "Davis Agreement"), which provides that Mr. Davis will serve in a
full-time capacity as Vice President and General Counsel of Digital Teleport for
a term of three years for a minimum base compensation of $140,000 per year, in
addition to group health or other benefits generally provided to other Digital
Teleport employees. Moreover, Mr. Davis is eligible for discretionary incentive
compensation of up to one-third of his annual base compensation each year. In
addition to his cash compensation, we granted Mr. Davis nonqualified options to
purchase 150,000 shares of our Common Stock at $6.66 per share.
The Davis Agreement restricts the ability of Mr. Davis 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, provided that Mr. Davis is
not restricted from any activitiy in the practice of law or any business
activities incident thereto. The Davis Agreement also imposes on Mr. Davis
certain confidentiality obligations and proprietary and non-solicitation
restrictions with respect to Digital Teleport employees, customers and clients.
Incentive Award Plan
Our 1997 Long-Term Incentive Award Plan (the "Plan") was adopted by our
Board of Directors in December 1997. A total of 3,000,000 shares of our Common
Stock has been reserved for issuance under the Plan. We have granted or are
obligated to grant options to purchase an aggregate of 1,325,000 shares of
Common Stock to certain of our key employees at an exercise price equal to the
fair market value of the Common Stock on the applicable date of grant. We have
also granted options to purchase 150,000 shares of Common Stock to each of our
non-affiliated directors (i.e., Messrs. Hager and Brownlee) at an exercise price
equal to the fair market value of the Common Stock on the date of grant. We are
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.
43
<PAGE>
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 nonqualified stock
options.
44
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Stock of DTI as of June 30, 1999 by each
person or entity who is known by us to beneficially own 5% or more of the Common
Stock, which includes our President and Chief Executive Officer, each of our
directors and all of our directors and executive officers as a group.
Number Of Shares Percent Of
Beneficially Common Stock
Name Of Beneficial Owner Owned Outstanding (a)
- -------------------------------- ---------------- ----------------
Richard D. Weinstein........... 30,000,000 50%
8112 Maryland Avenue, 4th Floor
St. Louis, Missouri 63105
KLT Telecom Inc.(b)............. 30,000,000 50%
1201 Walnut Avenue
Kansas City, Missouri 64141
Ronald G. Wasson(b)............. 30,000,000 50%
Bernard J. Beaudoin(b).......... 30,000,000 50%
Richard S. Brownlee, III........ -- --
Kenneth V. Hager................ -- --
---------- ----
Directors and executive officers
as a group (7 persons) 60,000,000 100%
========== ====
- -------------------------
(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 Telecom Inc. KLT Telecom
Inc. is a wholly-owned subsidiary of KLT Inc. (together "KLT"), a wholly-owned
subsidiary of KCP&L. Mr. Wasson is the President of KLT. Mr. Beaudoin is the
President of KCP&L. 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.
45
<PAGE>
Item 13. Certain Relationships and Related Transactions
On December 31, 1996, Mr. Weinstein, Mr. Weinstein's wife and we formalized
a lease with respect to our POP and switch facility site in St. Louis (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, 1999. The Company believes that the terms of the
current Lease Agreement are comparable to those that 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 these operations, Mr. Weinstein will
first offer to us the opportunity to build or own such building. If we decline
to exercise this right, then the rent we would pay for occupying such building
would be 80% of the market-appraised rate for such space.
Effective July 1996, we 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 KCP&L 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 5 of the notes to the 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 had 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 had pledged
his Common Stock to secure such guarantee. Such obligations to KLT were
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 Item 3 "Legal Proceedings." Mr. Weinstein had
pledged his shares of Common Stock to KLT, which had 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 had also agreed to bear one-half of any such losses. As a result
of the settlement of the Frank litigation in June 1999 the guaranty and stock
pledge agreements were terminated. A new loan and security agreement was entered
into in June 1999 with Mr. Weinstein for $1,450,000 which is collateralized by
1,500,000 shares of Mr. Weinstein's common stock in the Company.
46
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial statements
See index to Consolidated Financial Statements
(a)(2) Financial statement schedules
None.
(a)(3) Exhibits required by Item 601 of Regulation S-K
See Exhibit Index for the exhibits filed as part of or incorporated by reference
into this Report.
(b) Reports on Form 8-K
None.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DTI HOLDINGS, INC.
BY: /S/ GARY W. DOUGLASS
Gary W. Douglass
Senior Vice President, Finance and
Administration and Chief Financial
Officer (principal financial and
accounting officer)
September 24, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ RICHARD D. WEINSTEIN President, Chief Executive Officer, September 24, 1999
Richard D. Weinstein Secretary and Director (Principal
Executive Officer)
/S/ GARY W. DOUGLASS Senior Vice President, Finance and September 24, 1999
Gary W. Douglass Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
/S/ RONALD G. WASSON Director September 24, 1999
Ronald G. Wasson
/S/ BERNARD J. BEAUDOIN Director September 24, 1999
Bernard J. Beaudoin
/S/ RICHARD S. BROWNLEE, III Director September 24, 1999
Richard S. Brownlee, III
/S/ KENNETH V. HAGER Director September 24, 1999
Kenneth V. Hager
</TABLE>
48
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DTI HOLDINGS, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of June 30, 1998 and 1999................. F-3
Consolidated Statements of Operations for the years ended June 30, 1997,
1998 and 1999.......................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1997, 1998 and 1999..................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1998 and 1999.......................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
<PAGE>
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 subsidiaries (the "Company") as of June 30, 1998 and 1999
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended June
30, 1999. 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, 1998
and 1999 and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1999 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE, LLP
St. Louis, Missouri
August 12, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1999
1998 1999
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................... $251,057,274 $132,175,829
Accounts receivable, less allowance for doubtful accounts of $139,625
in 1999 (Note 13)...................................................... 501,612 261,372
Prepaid and other current assets............................................ 69,635 294,688
------------ ------------
Total current assets................................................... 251,628,521 132,731,889
Network and equipment, net (Note 3)........................................... 77,771,527 213,469,187
Deferred financing costs, net (Note 4)........................................ 10,028,558 8,895,865
Prepaid fiber usage rights and fees........................................... -- 5,273,347
Deferred tax asset (Note 9)................................................... 3,234,331 3,234,331
Other assets.................................................................. 202,223 156,271
------------ ------------
Total.................................................................. $342,865,160 $363,760,890
============ ============
Liabilities and stockholders' equity Current liabilities:
Accounts payable............................................................ $ 4,722,418 $ 9,561,973
Vendor financing (Note 4)................................................... -- 2,298,946
Taxes payable............................................................... 1,830,668 3,140,681
Other current liabilities................................................... 83,605 1,227,344
----------- ------------
Total current liabilities.............................................. 6,636,691 16,228,944
Senior discount notes, net of unamortized underwriter's discount of $9,465,882
and $7,924,244 in 1998 and 1999, respectively (Note 4)................. 277,455,859 314,677,178
Deferred revenues (Note 7).................................................... 16,814,488 22,270,006
Vendor financing (Note 4)..................................................... -- 2,298,946
Other liabilities............................................................. -- 366,671
----------- ------------
Total liabilities...................................................... 300,907,038 355,841,745
----------- ------------
Commitments and contingencies (Notes 10, 11 and 12)
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, (aggregate
liquidation preference of $45,000,000) 30,000 shares authorized,
issued and outstanding (Notes 5 and 8)................................... 300 300
Common stock, $.01 par value, 100,000,000 shares authorized,
30,000,000 shares issued and outstanding (Note 6)........................ 300,000 300,000
Additional paid-in capital (Note 5)......................................... 44,013,063 44,213,063
Common stock warrants (Notes 4 and 6)....................................... 10,421,336 10,421,336
Loan to stockholder (Note 12)............................................... -- (1,450,000)
Unearned compensation....................................................... -- (72,730)
Accumulated deficit......................................................... (12,776,577) (45,492,824)
------------- -------------
Total stockholders' equity......................................... 41,958,122 7,919,145
------------ ------------
Total......................................................................... $342,865,160 $363,760,890
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1997 1998 1999
-------------- ------------ ----------
<S> <C> <C> <C>
REVENUES:
Telecommunications services:
Carrier's carrier services......................... $ 807,347 $ 3,075,527 $ 6,783,571
End-user services.................................. 515,637 467,244 425,812
---------- ------------ ------------
1,322,984 3,542,771 7,209,383
Other services....................................... 711,006 -- --
---------- ------------ ------------
Total revenues.................................. 2,033,990 3,542,771 7,209,383
---------- ------------ ------------
OPERATING EXPENSES:
Telecommunications services........................ 1,097,190 2,294,181 6,307,678
Other services..................................... 364,495 -- --
Selling, general and administrative................ 868,809 3,668,540 5,744,417
Depreciation and amortization...................... 757,173 2,030,789 4,653,536
---------- ------------ ------------
Total operating expenses........................ 3,087,667 7,993,510 16,705,631
---------- ------------ ------------
Loss from operations............................ (1,053,677) (4,450,739) (9,496,248)
OTHER INCOME (EXPENSES):
Interest income.................................... 101,914 5,063,655 10,724,139
Interest expense................................... (152,937) (12,055,428) (31,494,138)
Litigation settlement (Note 12).................... -- -- (1,450,000)
Loan commitment fees (Note 6)...................... (784,500) -- --
Equity in earnings of joint venture (Note 8)....... 37,436 -- --
---------- ------------ ------------
Loss before income tax benefit.................. (1,851,764) (11,442,512) (31,716,247)
INCOME TAX BENEFIT/(PROVISON) (Note 9)............... 1,214,331 2,020,000 (1,000,000)
---------- ------------- -------------
NET LOSS............................................. $ (637,433) $ (9,422,512) $(32,716,247)
========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1997 1998 1999
- --------------------------------------------------------------------- ---------------- ------------ ------------
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year $ -- $ -- $ --
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year -- -- --
- --------------------------------------------------------------------- ------------ ------------ ------------
Convertible series A preferred stock:
Balance at beginning of year -- -- 300
Reclassification of redeemable convertible stock to convertible
series A preferred stock and reversal of related accretion (Note 5) -- 300 --
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year -- 300 300
- --------------------------------------------------------------------- ------------ ----------- -----------
Common stock:
Balance at beginning of year 300,000 300,000 300,000
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year 300,000 300,000 300,000
- --------------------------------------------------------------------- ------------ ------------ ------------
Additional paid-in capital:
Balance at beginning of year -- -- 44,013,063
Reclassification of redeemable convertible stock to convertible
series A preferred stock and reversal of related accretion (Note 5) -- 44,283,033 --
Reclassification to additional paid-in capital of charge to -- --
accumulated deficit to effect the 1,000 to 1 stock splits (Note 6) (269,970)
Allocation of restricted stock -- -- 200,000
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year -- 44,013,063 44,213,063
- --------------------------------------------------------------------- ------------ ------------ ------------
Common stock warrants:
Balance at beginning of year -- 450,000 10,421,336
Issuance of common stock warrants (Note 6) 450,000 -- --
Allocation of proceeds from senior discount notes offering to -- 9,971,336 --
related warrants (Note 4)
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year 450,000 10,421,336 10,421,336
- --------------------------------------------------------------------- ------------ ------------ ------------
Loan to stockholder (Note 12):
Balance at beginning of year -- -- --
Issuance of loan to stockholder -- -- (1,450,000)
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year -- -- (1,450,000)
- --------------------------------------------------------------------- ------------ ------------ ------------
Unearned compensation:
Balance at beginning of year -- -- --
Issuance of restricted stock -- -- (200,000)
Amortization of unearned compensation -- -- 127,270
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year -- -- (72,730)
- --------------------------------------------------------------------- ------------ ------------ ------------
Accumulated deficit:
Balance at beginning of year (1,400,703) (5,479,867) (12,776,577)
Accretion/repurchase of common stock warrants (Note 4) (1,585,899) -- --
Accretion of redeemable convertible preferred stock to redemption
price (Note 5) (1,855,832) (4,985,442) --
Reclassification of redeemable convertible stock to convertible
series A preferred stock and reversal of related accretion (Note 5) -- 6,841,274 --
Reclassification to additional paid-in capital of charge to -- --
accumulated deficit to effect the 1,000 to 1 stock splits (Note 6) 269,970
Net loss for the year (637,433) (9,422,512) (32,716,247)
- --------------------------------------------------------------------- ------------ ------------ ------------
Balance at end of year (5,479,867) (12,776,577) (45,492,824)
- --------------------------------------------------------------------- ------------ ------------ ------------
Total stockholder's equity (deficit) $(4,729,867) $41,958,122 $ 7,919,145
- --------------------------------------------------------------------- ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1997 1998 1999
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (637,433) $(9,422,512) $ (32,716,247)
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization............................. 757,173 2,030,789 4,653,536
Accretion of senior discount notes........................ -- 11,355,675 29,638,899
Amortization of deferred financing costs.................. -- 509,869 1,657,870
Deferred income taxes..................................... (1,214,331) (2,020,000) --
Loan commitment fees on common stock warrants............. 450,000 -- --
Other..................................................... -- -- 323,721
Changes in assets and liabilities:
Accounts receivable.................................... (81,278) (342,344) 240,240
Prepayments to suppliers............................... 554,261 -- --
Other assets........................................... (56,572) (164,861) (5,452,448)
Accounts payable....................................... 3,427,994 (364,412) 4,839,555
Other current liabilities.............................. -- 83,605 1,510,410
Taxes payable.......................................... 1,529,282 907,564 1,310,013
Deferred revenues...................................... 2,945,176 7,134,584 5,455,518
----------- ------------- --------------
Net cash flows provided by operating activities.................. 7,674,272 9,707,957 11,461,067
----------- ------------- --------------
Cash flows from investing activities:
Increase in network and equipment.............................. (19,876,595) (44,952,682) (128,367,335)
Change in restricted cash...................................... 459,522 -- --
------------ ------------- --------------
Net cash used in investing activities....................... (19,417,073) (44,952,682) (128,367,335)
------------ ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of senior discount notes and
attached warrants........................................... -- 275,223,520 --
Deferred financing costs....................................... -- (10,538,427) (525,177)
Proceeds from issuance of redeemable convertible
preferred stock, including cash from
contributed joint venture of $2,253,045 in 1997............. 10,492,316 17,250,000 --
Repurchase of common stock warrants granted to a
customer.................................................... (2,700,000) -- --
Proceeds from notes payable.................................... 8,000,000 -- --
Payment of notes payable....................................... (500,000) -- --
Loan to stockholder............................................ -- -- (1,450,000)
Proceeds from credit facility.................................. -- 3,000,000 --
Principal payments on credit facility.......................... -- (3,000,000) --
------------ ------------- --------------
Net cash provided by (used in) financing activities 15,292,316 281,935,093 (1,975,177)
------------ ------------- --------------
Net increase (decrease) in cash and cash equivalents........... 3,549,515 246,690,368 (118,881,445)
Cash and cash equivalents, beginning of period................. 817,391 4,366,906 251,057,274
------------ ------------- --------------
Cash and cash equivalents, end of period....................... $ 4,366,906 $251,057,274 $132,175,829
============ ============= ==============
Supplemental cash flow statement information:
Non-cash investing and financing activities:...................
Interest capitalized to fixed assets...................... $ -- $ 848,000 $ 7,582,420
Fixed assets acquired through vendor financing............ -- -- 4,401,441
Allocation of restricted stock............................ -- -- 200,000
Non-cash 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 consolidated financial statements.
F-6
<PAGE>
DTI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1. Description of Business
DTI Holdings, Inc. (the "Company" or "DTI") was incorporated in December
1997 as part of the reorganization (the "Reorganization") of Digital Teleport,
Inc., a wholly-owned subsidiary of DTI ("Digital Teleport"). 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 (see Note 4). 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 its subsidiaries.
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. 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. All of the Company's operations are subject to federal and
state regulations, any changes in these regulations could materially impact the
Company.
At June 30, 1999, activities were primarily located in the States of
Missouri and Arkansas providing interexchange end-user and carrier's carrier
services. Carrier's carrier services are provided through wholesale network
capacity agreements and indefeasible rights to use ("IRU") agreements. Wholesale
network capacity agreements provide carriers with virtual circuits or bandwidth
capacity on DTI's network for terms specified in the agreements, ranging from
one to five years. The carrier customer in a wholesale network capacity
agreement 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 indefeasible 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 typically have a term of 20 years or longer. 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.
F-7
<PAGE>
2. Summary of Significant Accounting Policies
Principles of Consolidation -- The consolidated financial statements
include the accounts of DTI and its wholly-owned subsidiaries, Digital Teleport,
Inc. and Digital Teleport, Inc. of Virginia. 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. Also, in September 1998 Digital Teleport, Inc. of
Virginia was established in order to conduct business in the state of Virginia.
All intercompany transactions and balances have been eliminated.
Revenues -- The Company recognizes revenue under its various agreements as
follows:
Carrier's Carrier Services:
Wholesale network capacity agreements -- All revenues are deferred by
the Company until related route segments are ready for service. Advance
payments, one-time installation fees and fixed monthly service payments are
then recognized on a straight-line basis as revenue over the terms of the
agreements, which represent the periods during which services are provided.
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. 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. Fiber usage rights include the costs
associated with obtaining the right to use fiber accepted under long-term IRU
agreements. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets as follows:
Fiber optical cable plant....................... 25 years
Fiber usage rights.............................. 20 years
Network buildings............................... 15 years
Leasehold improvements.......................... 10 years
Fiber optic terminal equipment.................. 8 years
Furniture, office equipment and other........... 5 years
The carrying value of long-lived assets is periodically evaluated by
management for impairment. Upon indication of an impairment, the Company will
F-8
<PAGE>
record a loss on its long-lived assets if the undiscounted cash flows estimated
to be generated by those assets are less than the related carrying amount of the
assets. In such circumstances the amount of impairment would be measured as the
difference between the estimated fair market value of the asset and its carrying
amount.
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 temporary differences between the financial statement and
tax bases of assets and liabilities given the provisions of the enacted tax
laws.
Deferred Financing Costs -- Deferred financing costs are stated at cost and
amortized over the life of the related debt using the effective interest method.
Amortization of deferred financing costs is included in interest expense.
Stock-Based Compensation -- Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and is recognized over the
service period. SFAS No. 123 generally allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. The Company has elected generally to account for its
stock-based compensation in accordance with the provisions of APB No. 25 and
presents pro forma disclosures of net loss as if the fair value method had been
adopted.
Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents and other short-term financial instruments approximate fair
value because of the short-term maturity of these instruments. As of June 30,
1998 and 1999, the fair value of the Senior Discount Notes was $273.2 million
and $187.3 million compared to its carrying value of $277.5 million and $314.7
million, respectively. The fair value of debt instruments as of June 30, 1998
and 1999 was determined based on quoted market prices. The recorded amounts for
all other long-term debt of the Company approximates fair value.
New Accounting Standards -- During 1999, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and FASB Interpretation 43, Real-estate Sales, an
interpretation of FASB 66 which specifies the accounting for IRUs. The Company
is continuing to evaluate the effect of these statements which are effective for
fiscal years 2002 and 2000, respectively.
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.
Concentrations of Risk -- The Company currently operates in the
telecommunications industry within the States of Missouri and Arkansas. See Note
7 regarding concentration of credit risk associated with deferred revenues and
revenues. Additionally, the Company is dependent upon single or limited source
suppliers for its fiber optic cable and for the electronic equipment used in its
network.
Reclassifications -- Certain amounts for prior years have been reclassified
to conform to the 1999 presentation.
F-9
<PAGE>
3. Network and Equipment
Network and equipment consists of the following as of June 30:
1998 1999
----------- ------------
Land....................................... $ $ 46,190
-
Fiber optic cable plant.................... 52,619,430 95,615,071
Fiber usage rights......................... - 82,062,685
Fiber optic terminal equipment............. 24,970,648 37,014,509
Network buildings.......................... 2,591,326 4,755,042
Leasehold improvements..................... 390,186 1,309,402
Furniture, office equipment and other...... 465,367 585,254
----------- -----------
81,036,957 221,388,153
Less-- accumulated depreciation............ 3,265,430 7,918,966
----------- -----------
Network and equipment, net $77,771,527 $213,469,187
=========== ============
At June 30, 1998 and 1999, fiber optic cable plant, fiber optic terminal
equipment and network buildings include $37,752,267 and $52,690,082 of
construction in progress, respectively, that was not in service and,
accordingly, has not been depreciated. Also, during the years ended June 30,
1997, 1998 and 1999 $562,750, $848,000 and $7,582,420 of interest costs were
capitalized, respectively.
4. Borrowing Arrangements
Senior Discount Notes -- On February 23, 1998, the Company issued 506,000
Units consisting of $506.0 million aggregate principal amount at maturity of 12
1/2% Senior Discount Notes (effective interest rate 12.9%) due March 1, 2008 and
warrants to purchase 3,926,560 shares of Common Stock, for which the Company
received proceeds, net of underwriting discounts and expenses (deferred
financing costs), of approximately $264.7 million. Of the $275.2 million gross
proceeds from the issuance of the Units, $265.2 million was allocated to 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 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 offerings, at a redemption price
of 112.5% of the accreted value (determined at the redemption date). The
discount on the Senior Discount Notes accrues from the date of the issue until
March 1, 2003 at which time cash interest on the Senior Discount Notes accrues
at a rate of 12 1/2% per annum and is payable semi-annually in arrears on March
1 and September 1, commencing September 1, 2003.
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, did not effect the conversion of the Series A
Preferred Stock into common stock (see Note 5).
F-10
<PAGE>
On April 14, 1998, the Company filed a Registration Statement on Form S-4
(subsequently amended and registered) relating to an offer to exchange, under
substantially similar terms, the Company's 12 1/2% Series B Senior Discount
Notes due March 1, 2008 for its outstanding Senior Discount Notes (the "Exchange
Offer"). The Exchange Offer did not constitute a "qualified public offering"
within the meaning of the Company's Articles of Incorporation and, therefore,
did not effect the conversion of the Series A Preferred Stock into common stock
(see Note 5).
Credit Facility -- 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, to fund its working capital requirements. 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
discussed above and then cancelled.
KLT Loan -- Effective April 30, 1996, and as subsequently amended, the
Company entered into a loan agreement with KLT Telecom Inc,. a wholly-owned
subsidiary of KLT, Inc. (together "KLT"), which in turn is a wholly-owned
subsidiary of Kansas City Power and Light Company ("KCP&L"), 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"). A total
of $14,000,000 had been borrowed under this facility as of March 12, 1997. The
outstanding principal of the KLT Loan, plus accrued interest, was contributed on
March 12, 1997 as consideration under the Stock Purchase Agreement referred to
in Note 5.
Customer Loan -- 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 from the note payable 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 executed 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 warrant was being accreted from the date of
issuance until February 1997, the initial date at which the Company could have
been 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.
Vendor Financing Agreement -- On December 15, 1998, the Company entered
into a vendor financing agreement with its fiber optic cable vendor allowing for
deferred payment terms for one and two-year periods on qualifying cable
purchases up to $15 million. Interest under the agreement will accrue at a rate
of LIBOR plus 2%.
F-11
<PAGE>
5. Convertible Series A Preferred Stock
During fiscal 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 KLT 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:
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
===========
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 6
and the Reorganization discussed in Note 1) 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 shares
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. 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.
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:
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
===========
During fiscal 1998, the remaining 11,500 shares of Series A Preferred Stock
were issued for cash payments of $17,250,000.
In conjunction with the Stock Purchase Agreement, the Company entered into a
Shareholders' Agreement whereby the Series A Preferred Stock shareholders will
designate half of the directors of the Company's Board of Directors.
On February 13, 1998, in connection with the Company's offering of Senior
Discount Notes (See Note 4), 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, is now classified with stockholders' equity subsequent
to such date.
F-12
<PAGE>
6. Equity Transactions
Stock Splits -- 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, and in the discussion below,
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 recorded an entry in the third quarter of
fiscal 1998 to reclassify this amount from accumulated deficit to additional
paid-in capital recorded in conjunction with the reclassification of Series A
Preferred Stock on February 13, 1998 (see Note 5).
Common Stock -- As of June 30, 1996, the Company had authorized 50,000,000
shares of common stock, $.01 par value. In February 1997, the Company authorized
50,000,000 additional shares of common stock.
Warrant to Third Party -- In connection with a loan commitment from a 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. 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.
Stock Based Compensation -- 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. 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.
For purposes of the pro forma disclosures required by SFAS 123, the fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 1998 and 1999: risk-free interest rate of 5.6%; no
dividend yield; volatility factor of the expected market price of the Company's
common stock of .678; and a weighted-average expected life of the options of
approximately 10 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
F-13
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1998 1999
---------- -----------
Loss applicable to common stockholders:
As reported.......................... $9,422,512 $31,716,247
========== ===========
Pro Forma............................ $9,516,824 $33,728,351
========== ===========
A summary of the Company's stock option activity, and related
information for the years ended June 30, 1999 follows:
<TABLE>
<CAPTION>
1998 1999
---------------------------- -----------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C>
Outstanding - beginning of year........ - - 575,000 $4.54
Granted................................ 1,175,000 2.99 950,000 6.66
Exercised.............................. - - -
-
Forfeited.............................. (600,000) 1.50 (200,000) 3.62
--------- ----- --------- -----
Outstanding - end of year.............. 575,000 $4.54 1,325,000 $6.20
========= ===== ========= =====
Exercisable - end of year.............. - - - -
========= ===== ========= =====
</TABLE>
The following table summarizes outstanding options at June 30, 1999 by price
range:
<TABLE>
<CAPTION>
Outstanding
------------------------------------------------------------------------------------
Weightd Average
Range of Exercise Weighted Average Remaining Contractual
Number of Options Price Exercise Price Life of Options
----------------- ----------------- ---------------- ---------------------
<S> <C> <C> <C>
150,000 $ 2.60 $ 2.60 8.51
1,175,000 6.66 6.66 9.10
--------- ---------------- -------- ------
1,325,000 $ 2.60 to $6.66 6.20 9.04
========= ================ ======== ======
</TABLE>
In July 1998, in conjunction with the execution of an officer's employment
agreement the Company became 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.
7. Customer Contracts
The Company enters into agreements with unrelated third parties whereby the
Company will provide IRUs in multiple fibers along certain routes, wholesale
network capacity agreements 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 terms are
typically 20 years or more, 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 wholesale network
capacity agreements and end-user contracts that provide for a combination of
advance payments, which are detailed below, and monthly payments. The following
schedule details the advanced payments received or to be received under IRU,
wholesale network capacity agreements and end-user service agreements and the
components of deferred revenue at June 30:
F-14
<PAGE>
<TABLE>
<CAPTION>
1998
End-user
IRUs WNCAs Services Total
<S> <C> <C> <C> <C>
Total contract amounts...................... $24,470,380 $ 1,539,750 $ 11,278,288 $37,288,418
Less: future payments due under
contracts................................. 14,979,500 -- 4,190,000 19,169,500
- ---------- ----------- ------------ -----------
Total amounts collected to date............. 9,490,880 1,539,750 7,088,288 18,118,918
Less: total amounts recognized as
revenues to date.......................... 703,480 114,750 486,200 1,304,430
----------- ----------- ------------ -----------
Deferred revenue............................ 8,787,400 1,425,000 6,602,088 16,814,488
Less: amounts to be recognized
within 12 months.......................... 893,868 75,000 162,954 1,131,822
----------- ----------- ------------ -----------
$ 7,893,532 $ 1,350,000 $ 6,439,134 $15,682,666
=========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
1999
End-user
IRUs WNCAs Services Total
<S> <C> <C> <C> <C>
Total contract amounts...................... $37,970,380 $ 1,500,000 $ 10,573,039 $ 50,043,419
Less: future payments due under
contracts................................. 21,889,500 -- 3,730,000 25,619,500
----------- ----------- ------------ ------------
Total amounts collected to date............. 16,080,880 1,500,000 6,843,039 24,423,919
Less: total amounts recognized as
revenues to date......................... 1,593,972 150,000 409,941 2,153,913
----------- ----------- ------------ ------------
Deferred revenue............................ 14,486,908 1,350,000 6,433,098 22,270,006
Less: amounts to be recognized
within 12 months.......................... 886,325 75,000 154,988 1,116,313
----------- ----------- ------------ ------------
$13,600,583 $ 1,275,000 $ 6,278,110 $ 21,153,693
=========== =========== ============ ============
</TABLE>
Future minimum rentals due over the next five years under the IRU agreements
accounted for as operating leases are generally receivable upon completion of
related routes and are as follows as of June 30, 1999:
2000............................. $11,500,000
2001............................. 3,030,000
2002............................. 2,730,000
2003............................. 2,277,500
2004............................. 1,717,500
Thereafter....................... 634,500
------------
Total............................ $ 21,889,500
============
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 $7,907,000 at June 30, 1999.
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 the receipt of periodic maintenance payments,
which are recognized as revenue 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 29%, 19%, 17% and 11% of deferred
revenues at June 30, 1999. Additionally, four customers accounted for 47%, 23%,
15% and 10% of amounts to be received per the customer contracts referred to
above.
F-15
<PAGE>
During fiscal 1999, the Company's two largest customers accounted for 60%
and 18% of telecommunications services revenue. During fiscal year 1998, the
Company's three largest customers accounted for 44%, 11% and 10% of
telecommunications services revenue. During fiscal year 1997, the Company's
three largest customers accounted for 18%, 18% and 16% of telecommunications
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 partially 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 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.
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.
9. Income Taxes
The actual income tax benefit (provision) for the years ended June 30,
1997, 1998 and 1999 differs from the "expected" income tax expense, computed by
applying the U.S. Federal corporate tax rate of 35% to loss before income taxes
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ------------
<S> <C> <C> <C>
Tax benefit at federal statutory rates.............. $ 648,117 $4,004,879 $11,100,686
State income tax benefit net of federal effect...... 52,684 572,126 1,330,152
Change in valuation allowance....................... 424,964 (2,232,780) (12,402,275)
Disqualified interest related to the Senior Discount
Notes............................................. -- (414,967) (1,016,036)
Permanent and other differences..................... 88,566 90,742 (12,527)
---------- ---------- ------------
Benefit (provision) for income taxes........... $1,214,331 $2,020,000 $(1,000,000)
========== ========== ============
</TABLE>
F-16
<PAGE>
Significant components of the benefits (provision) for income taxes are as
follows at June 30:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal......................................... $ $ $(1,000,000)
- -
State........................................... -
---------- ---------- ------------
- -
Provision for income taxes................... $ $ $(1,000,000)
========== ========== ============
- -
Deferred:
Federal......................................... $1,062,540 $1,767,500 -
State........................................... 252,500 -
----------- --------- ------------
151,791
Benefit for income taxes..................... $1,214,331 $2,020,000 $ -
========== ========== ============
Total benefit (provision) for income taxes... $1,214,331 $2,020,000 $(1,000,000)
========== ========== ============
</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>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred revenues.................................... $ 603,723 $ 1,411,954
Net operating loss carryforward...................... 1,546,244 1,401,141
Accretion on senior discount notes................... 4,195,779 15,032,097
Other................................................ 315,651 930,985
----------- -----------
Total deferred tax assets......................... 6,661,397 18,776,177
Deferred tax liabilities-- accelerated depreciation.... (1,194,353) (906,859)
Valuation allowance.................................... (2,232,713) (14,634,987)
----------- ------------
Net deferred tax assets........................... $3,234,331 $3,234,331
========== ===========
</TABLE>
A valuation allowance of $14,634,987 was established to offset a portion of the
Company's deferred tax asset, primarily related to the accretion on the Senior
Discount Notes, that may not be realizable due to the ultimate uncertainty of
its realization. The Company 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 related to the remaining net deferred
tax asset. This belief is based primarily upon changes in operations over the
last two years which included the equity investment by KLT (see Note 5) and the
senior discount note offering (see Note 4), 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. Tax net operating losses of approximately $4.0 million expire in the
year 2020 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.
F-17
<PAGE>
10. Operating Leases and IRU Commitments
The Company is a lessee under operating leases and IRUs for fiber, equipment
space, maintenance, electrical costs and office space. The Company's POP and
switch facility in St. Louis is leased from the Company's President and Chief
Executive Officer at a rate of $75,000 per year through December 31, 1999. In
June 1998, the Company entered into a three-year lease agreement for new
headquarters and network control center space, which was occupied beginning in
August 1998. Additionally, fiber, equipment space, maintenance and electrical
costs related to IRUs are typically for periods up to 20 years. Also, most of
the IRUs contain renewal options of five to ten years. Minimum rental
commitments under these operating leases and IRUs are as follows:
Year ending June 30:
2000................................. $ 3,868,000
2001................................. 3,424,000
2002................................. 2,598,000
2003................................. 2,598,000
2004................................. 2,598,000
Thereafter........................... 38,017,000
------------
Total........................... $ 53,103,000
============
Total expense of operating leases and IRUs aggregated $49,897, $75,000 and $2.1
million for the years ended June 30, 1997, 1998 and 1999, respectively.
11. Commitments
Highway and Utility Rights-of-Way -- In July 1994, the Company entered into
an agreement with the Missouri Highway and Transportation Commission ("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 construct
approximately 1,200 miles of fiber cable along the Missouri interstate and state
highway systems substantially all of which has been completed. We also have the
option of constructing an additional 800 miles by the end of 1999 of which
approximately 570 miles have already been completed. Over 1,700 route miles of
the entire 2,000-mile network have been completed. We may lose our exclusive
rights under the MHTC Agreement if we are in breach of the agreement and do not
cure such breach within 60 days of notice of any such breach. Additionally, the
Company was required to post a $250,000 performance and payment bond under the
terms of 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. 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. DTI
also has a license from KCP&L granting it the right to use conduits, poles,
ducts, manholes and rights-of-way owned by KCP&L to construct the DTI network in
the Kansas City metropolitan area. The Company has also reached agreement on
right-of-way access agreements with state authorities in Oklahoma. The Company
will continue to seek and 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.
F-18
<PAGE>
Licensing Agreements -- The Company has entered into various licensing
agreements with municipalities. Under the terms of these agreements, the Company
maintains certain performance bonds, totaling $1,579,000 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 some instances, the Company is
obligated to make nominal annual cash payments for such rights based on linear
footage.
Employment Agreements -- DTI has employment agreements entered into during
fiscal years 1997, 1998 and 1999 with certain senior management personnel. These
agreements are effective for various periods through fiscal 2001, unless
terminated earlier by the executive or DTI, and provide for annual salaries,
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.
Supplier Agreements -- DTI's supplier agreements are with its major network
construction contractors and its equipment suppliers.
Purchase Commitments -- DTI's remaining aggregate purchase commitment for
construction and switching equipment at June 30, 1999 is approximately $26
million. The switching equipment commitment totaling $15 million is cancelable
upon the payment of a $42,000 cancellation fee for each of the remaining eight
unpurchased switches. Additionally, the Company has entered into preliminary and
definitive agreements to purchase for cash IRUs for fiber optic strands (fiber
usage rights) with remaining payments of approximately $50.9 million to be paid
over the next fiscal year. The IRU agreements have 20-year terms.
Other Commitments -- In September 1998 and March, April and July of 1999 the
Company entered into four separate long-term IRU and fiber swap agreements, in
which it will obtain or give access to dark fiber and receive on a net basis
approximately $35.5 to $50.5 million, depending on the number of options for
additional routes and fiber strands exercised by the parties, in up-front cash
in exchange for providing dark fiber along the Company's network.
12. Contingencies
In June 1999, the Company and Mr. Weinstein, President and Chief Executive
Officer, settled 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. Pursuant to the terms of the settlement the Company paid $1.25
million and Mr. Weinstein paid $1.25 million to the plaintiff and the Company
released Mr. Weinstein from his indemnification. Mr. Weinstein obtained a loan
from the Company for his portion of the settlement cost plus approximately
$200,000 representing 50% of the legal costs incurred by the Company, that is
repayable by Mr. Weinstein to the Company at the earliest of the following three
events:
- - a change in control of DTI
- - a public offering of shares of DTI
- - three years after the date of the loan
F-19
<PAGE>
The loan will earn interest at a rate of 7.5% which will be payable at the same
time as the principal balance is due. Mr. Weinstein has pledged 1,500,000 shares
of his common stock in the Company as collateral for the loan.
The Company has received notice from a customer that it intends to set off
against amounts payable to the Company up to $32,000 per month, which as of June
30, 1999 totaled approximately $342,000 (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 $342,000 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 Senior Discount Notes 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 $4.0 million, less penalties, for the Company's
telecommunications services over its network
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. Valuation and Qualifying Accounts
Activity in the Company's allowance for doubtful accounts was as follows:
Additions
Balance at Charged to Costs Balance at
For the year ended Beginning of Year and Expenses Deductions End of Year
- ------------------ ----------------- ------------ ---------- -----------
June 30, 1997...... $ - $ 48,000 $ - $ 48,000
======== ========= ======== ==========
June 30, 1998...... $ 48,000 $ 139,768 $ 187,768 $ -
======== ========= ========= ==========
June 30, 1999...... $ - $ 139,625 $ - $ 139,625
======== ========= ======== ==========
14. Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
The Company's unaudited quarterly results are as follows:
For the 1998 Quarter Ended
September 30, 1997 December 31, 1997 March 31, 1998 June 30, 1998
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Total revenues........ $ 452,082 $ 566,449 $ 1,104,043 $ 1,510,197
=========== ============= ============= ============
Loss from operations.. $ (747,554) $ (1,072,123) $ (905,902) $ (1,725,160)
=========== ============= ============== =============
Net loss.............. $ (417,277) $ (602,254) $ (1,824,755) $ (6,578,226)
=========== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
For the 1999 Quarter Ended
September 30, 1998 December 31, 1998 March 31, 1999 June 30, 1999
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Total revenues........ $ 1,739,649 $ 1,730,432 $ 1,810,758 $ 1,928,544
============ ============== ============== =============
Loss from operations.. $(1,481,533) $ (1,544,543) $ (2,701,550) $ (3,768,622)
============= ============== ============== =============
Net loss.............. $(5,889,590) $ (6,289,135) $ (7,900,601) $(12,636,921)
============= ============== ============== =============
</TABLE>
* * * * * *
F-20
<PAGE>
Exhibit Index
Number Description
2.1 Stock Purchase Agreement by and between KLT Telecom Inc. and Digital
Teleport, Inc., dated December 31, 1996 (incorporated herein by
reference to Exhibit 2.1 to the Company's Registration Statement on
Form S-4 (File No. 333-50049) (the "S-4")).
2.2 Amendment No. 1 to Stock Purchase Agreement between KLT Telecom Inc.
and Digital Teleport, Inc. dated February 12, 1998 (incorporated
herein by reference to Exhibit 2.2 to the S-4).
3.1 Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 3.1 to the S-4).
3.2 Restated Bylaws of the Registrant (incorporated herein by reference to
Exhibit 3.2 to the S-4).
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) (incorporated herein by reference to
Exhibit 4.1 to the S-4).
4.2 Note Registration Rights Agreement by and among the Registrant and the
Initial Purchasers named therein, dated as of February 23, 1998
(incorporated herein by reference to Exhibit 4.2 to the S-4).
4.3 Warrant Agreement by and between the Registrant and The Bank of New
York, as Warrant Agent, dated February 23, 1998 (incorporated herein
by reference to Exhibit 4.3 to the S-4).
4.4 Warrant Registration Rights Agreement by and among the Registrant and
the Initial Purchasers named therein, dated February 23, 1998
(incorporated herein by reference to Exhibit 4.4 to the S-4).
4.5 Digital Teleport, Inc. Shareholders' Agreement between Richard D.
Weinstein and KLT Telecom Inc., dated March 12, 1997 (incorporated
herein by reference to Exhibit 4.5 to the S-4).
4.6 Amendment No. 1 to the Digital Teleport, Inc. Shareholders' Agreement,
dated November 7, 1997 (incorporated herein by reference to Exhibit
4.6 to the S-4).
4.7 Amendment No. 2 to the Digital Teleport, Inc. Shareholders' Agreement,
dated December 18, 1997 (incorporated herein by reference to Exhibit
4.7 to the S-4).
4.8 Amendment No. 3 to the Digital Teleport, Inc. Shareholders' Agreement,
dated February 12, 1998 (incorporated herein by reference to Exhibit
4.8 to the S-4).
4.9 Stock Pledge Agreement between Richard D. Weinstein and KLT Telecom
Inc., dated March 12, 1997, securing the performance of Digital
Teleport, Inc.'s obligations under that certain Stock Purchase
Agreement dated as of December 31, 1996, as amended, (incorporated
herein by reference to Exhibit 4.9 to the S-4).
4.10 Amendment No. 1 to Stock Pledge Agreement between Richard D. Weinstein
and KLT Telecom Inc., dated December 18, 1997 (incorporated herein by
reference to Exhibit 4.10 to the S-4).
4.11 Amendment No. 2 to Stock Pledge Agreement between Richard D. Weinstein
and KLT Telecom Inc., dated February 12, 1998 (incorporated herein by
reference to Exhibit 4.11 to the S-4).
4.12 Subordination Agreement, by and among the Registrant, Digital
Teleport, Inc., KLT Telecom Inc. and Richard D. Weinstein, dated
February 12, 1998 (incorporated herein by reference to Exhibit 4.12 to
the S-4).
10.1 Employment Agreement between Digital Teleport, Inc. and Richard D.
Weinstein, dated December 31, 1996 (incorporated herein by reference
to Exhibit 10.1 to the S-4).
10.2 Director Indemnification Agreement between the Registrant and Richard
D. Weinstein, dated December 23, 1997 (incorporated herein by
reference to Exhibit 10.2 to the S-4).
10.4 Director Indemnification Agreement between the Registrant and Bernard
<PAGE>
J. Beaudoin, dated December 23, 1997 (incorporated herein by reference
to Exhibit 10.4 to the S-4).
10.5 Director Indemnification Agreement between the Registrant and Ronald
G. Wasson, dated December 23, 1997 (incorporated herein by reference
to Exhibit 10.5 to the S-4).
10.6 Director Indemnification Agreement between the Registrant and James V.
O'Donnell, dated December 23, 1997 (incorporated herein by reference
to Exhibit 10.6 to the S-4).
10.7 Director Indemnification Agreement between the Registrant and Kenneth
V. Hager, dated December 23, 1997 (incorporated herein by reference to
Exhibit 10.7 to the S-4).
10.8 1997 Long-Term Incentive Award Plan of the Registrant (incorporated
herein by reference to Exhibit 2.2 to the S-4).
10.9 Employment Agreement between Digital Teleport, Inc. and Robert F.
McCormick, dated September 9, 1997 (incorporated herein by reference
to Exhibit 10.9 to the S-4).
10.10 Amendment No. 1 to the Employment Agreement between Digital Teleport,
Inc. and Robert F. McCormick, dated January 28, 1998 (incorporated
herein by reference to Exhibit 10.10 to the S-4).
10.11 Amendment No. 2 to the Employment Agreement between Digital Teleport,
Inc. and Robert F. McCormick, dated January 28, 1998 (incorporated
herein by reference to Exhibit 10.11 to the S-4).
10.12 Product Attachment -- Carrier Networks Products Agreement between
Digital Teleport, Inc. and Northern Telecom, Inc., effective October
23, 1997 (incorporated herein by reference to Exhibit 10.12 to the
S-4).
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 (incorporated herein by reference to
Exhibit 10.13 to the S-4).
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 (incorporated
herein by reference to Exhibit 10.14 to the S-4).
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 (incorporated
herein by reference to Exhibit 10.15 to the S-4).
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 (incorporated
herein by reference to Exhibit 10.16 to the S-4).
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, (incorporated herein
by reference to Exhibit 10.17 to the S-4).
10.18 Fiber Optic Cable Agreement, between the Arkansas State Highway and
Transportation Department and Digital Teleport, Inc., dated May 29,
1997 (incorporated herein by reference to Exhibit 10.18 to the S-4).
10.19 Missouri Interconnection Agreement between Southwestern Bell Telephone
Company and Digital Teleport, Inc., executed July 1, 1997
(incorporated herein by reference to Exhibit 10.19 to the S-4).
10.20 Arkansas Interconnection Agreement between Southwestern Bell Telephone
Company and Digital Teleport, Inc., executed August 21, 1997
(incorporated herein by reference to Exhibit 10.20 to the S-4).
10.21 Kansas Interconnection Agreement between Southwestern Bell Telephone
Company and Digital Teleport, Inc., executed August 21, 1997
(incorporated herein by reference to Exhibit 10.21 to the S-4).
10.22 Oklahoma Interconnection Agreement between Southwestern Bell Telephone
Company and Digital Teleport, Inc., executed August 21, 1997
(incorporated herein by reference to Exhibit 10.22 to the S-4).
10.23 Missouri Interconnection, Resale and Unbundling Agreement between GTE
Midwest Incorporated, GTE Arkansas Incorporated and Digital Teleport,
Inc. executed November 7, 1997 (incorporated herein by reference to
Exhibit 10.23 to the S-4).
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
(incorporated herein by reference to Exhibit 10.24 to the S-4).
<PAGE>
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 (incorporated herein
by reference to Exhibit 10.25 to the S-4).
10.26 Texas Interconnection, Resale and Unbundling Agreement between GTE
Southwest Incorporated and Digital Teleport, Inc., executed November
18, 1997 (incorporated herein by reference to Exhibit 10.26 to the
S-4).
10.27 Kansas Master Resale Agreement between United Telephone Company of
Kansas (Sprint) and Digital Teleport, Inc., dated September 30, 1997
(incorporated herein by reference to Exhibit 10.27 to the S-4).
10.28 Commercial Lease between Richard D. Weinstein and Digital Teleport,
Inc., dated December 31, 1996 (incorporated herein by reference to
Exhibit 10.28 to the S-4).
10.29 Commercial Lease Extension Agreement between Richard D. Weinstein and
Digital Teleport, Inc., dated December 31, 1997 (incorporated herein
by reference to Exhibit 10.29 to the S-4).
10.30 Purchase Agreement by and between the Registrant and the Initial
Purchasers named therein, dated as of February 13, 1998 (incorporated
herein by reference to Exhibit 10.30 to the S-4).
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), (incorporated herein by reference
to Exhibit 10.31 to the S-4).
10.32 IRU and Maintenance Agreement between Digital Teleport, Inc. and IXC
Communications Services, Inc., executed July 30, 1998 (Chicago,
Illinois to Hudson, Ohio) (incorporated herein by reference to Exhibit
10.32 to the S-4).
10.33 Consulting Agreement between Digital Teleport, Inc. and H.P. Scott,
dated May 4, 1998, (incorporated herein by reference to Exhibit 10.33
to the S-4).
10.34 Employment Agreement between Digital Teleport, Inc. and Gary W.
Douglass, dated July 20, 1998 (incorporated herein by reference to
Exhibit 10.34 to the S-4).
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
(incorporated herein by reference to Exhibit 10.35 to the S-4).
10.36 Agreement for the Purchase and Sale of Optical Amplifier and Dense
Wavelength Division Multiplexing Equipment between Digital Teleport,
Inc. and Pirelli Cables and Systems LLC dated as of September 1, 1998
(incorporated by reference to Exhibit 10.36 to the Company's Current
Report on Form 8-K filed October 13, 1998).
12 Statement re: Computation of Ratios
21 Subsidiaries of the Registrant (incorporated herein by reference to
Exhibit 21.1 to the S-4).
27 Financial Data Schedule
- -------------------------
Exhibit 12
STATEMENT RE COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
DTI Holdings, Inc
Computation of Ratio of Earnings to Fixed Charges
Fiscal Year Ended
- -------------------------------------------- ---------------------------------------------
Selected Historical Data: Earnings were
calculated as follows: 1997 1998 1999
- -------------------------------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
Loss before income taxes $(1,851,764) $(11,442,512) $ (31,716,247)
Add: Fixed charges 1,454,130 13,122,333 39,762,863
Deduct: Capitalized interest (562,750) (848,000) (7,582,420)
Earnings (960,384) 831,821 464,196
Fixed charges were calculated as follows:
Interest expense 51,023 11,545,559 29,836,268
Amortization of deferred financing costs 0 509,869 1,657,870
Portion of rentals attributable to interest 55,857 218,905 686,305
(one third of lease payments)
Loan commitment fees 784,500 0 0
Capitalized interest 562,750 848,000 7,582,420
Fixed charges 1,454,130 13,122,333 39,762,863
Ratio fixed earnings to fixed charges n/a n/a n/a
Deficiency 2,414,514 12,290,512 39,298,667
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations of DTI
Holdings, Inc. filed as part of the annual report on Form 10-K and is qualified
in its entirety by reference to such annual report on Form 10-K.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Jun-30-1999
<CASH> 132,175,829
<SECURITIES> 0
<RECEIVABLES> 261,372
<ALLOWANCES> 139,625
<INVENTORY> 0
<CURRENT-ASSETS> 132,731,889
<PP&E> 221,388,153
<DEPRECIATION> 7,918,966
<TOTAL-ASSETS> 363,760,890
<CURRENT-LIABILITIES> 16,228,944
<BONDS> 314,677,178
300
0
<COMMON> 300,000
<OTHER-SE> 7,618,845
<TOTAL-LIABILITY-AND-EQUITY> 363,760,890
<SALES> 0
<TOTAL-REVENUES> 7,209,383
<CGS> 0
<TOTAL-COSTS> 16,705,631
<OTHER-EXPENSES> (1,450,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (31,494,138)
[INTEREST-INCOME] 10,724,139
<INCOME-PRETAX> (31,716,247)
<INCOME-TAX> 1,000,000
<INCOME-CONTINUING> (32,716,247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,716,247)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
