UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
No non-affiliates of the registrant own common stock of the registrant.
<PAGE>
DTI HOLDINGS, INC.
FORM 10-Q
September 30, 1999
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999 and
September 30, 1999 (Unaudited) 1
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 1998 and 1999 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1998 and 1999 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5 - 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures
Exhibit Index
<PAGE>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $132,175,829 $ 94,464,515
Trade accounts receivable, net.......................... 261,372 240,091
Other receivables....................................... -- 500,000
Prepaid and other current assets........................ 294,688 300,303
------------ -------------
Total current assets............................... 132,731,889 95,504,909
Property and equipment, net............................... 213,469,187 255,085,163
Deferred financing costs, net............................. 8,895,865 8,464,480
Prepaid fiber usage rights................................ 5,273,347 4,687,420
Deferred tax asset........................................ 3,234,331 3,234,331
Other assets.............................................. 156,271 168,618
------------ -------------
Total.............................................. $363,760,890 $367,144,921
============ =============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable........................................ $ 9,561,973 $ 14,270,294
Vendor financing........................................ 2,298,946 3,026,991
Taxes payable........................................... 3,140,681 2,685,384
Other accrued liabilities............................... 1,227,344 804,881
------------ -------------
Total current liabilities.......................... 16,228,944 20,787,550
Senior discount notes, net of unamortized underwriter's
discount of $7,924,244 and $7,518,272 314,677,178 324,478,907
Deferred revenues.......................................... 22,270,006 22,783,493
Vendor financing........................................... 2,298,946 3,026,991
Other long-term liabilities................................ 366,671 458,339
----------- ------------
Total liabilities................................... 355,841,745 371,535,280
------------ -------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 20,000 shares
authorized, no shares issued and outstanding.......... -- --
Convertible series A preferred stock, $.01 par value,
(aggregate liquidation preference of $45,000,000)
30,000 shares authorized, issued and outstanding....... 300 300
Common stock, $.01 par value, 100,000,000 shares
authorized, 30,000,000 shares issued and
outstanding........................................... 300,000 300,000
Additional paid-in capital............................... 44,213,063 44,213,063
Common stock warrants.................................... 10,421,336 10,421,336
Loan to stockholder...................................... (1,450,000) (1,459,271)
Unearned compensation.................................... (72,730) (63,640)
Accumulated deficit...................................... (45,492,824) ( 57,802,147)
------------- -------------
Total stockholders' equity (deficit)............ 7,919,145 (4,390,359)
------------- -------------
Total...................................................... $363,760,890 $367,144,921
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
September 30,
1998 1999
----------- --------------
<S> <C> <C>
REVENUES:
Telecommunications services:
Carrier's carrier services............................. $ 1,624,532 $ 1,909,520
End-user services...................................... 115,117 49,930
----------- -------------
Total revenues...................................... 1,739,649 1,959,450
OPERATING EXPENSES:
Telecommunications services............................ 992,644 2,794,928
Selling, general and administrative.................... 1,536,538 1,235,845
Depreciation and amortization.......................... 692,000 3,081,808
----------- -------------
Total operating expenses............................ 3,221,182 7,112,581
LOSS FROM OPERATIONS..................................... (1,481,533) (5,153,131)
OTHER INCOME (EXPENSES):
Interest income........................................ 3,343,510 1,376,500
Interest expense....................................... (7,751,567) (8,532,692)
------------ -------------
NET LOSS................................................. $(5,889,590) $(12,309,323)
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
1998 1999
------------ -------------
<S> <C> <C>
Cash flows provided by operating activities:
Net loss................................................. $(5,889,590) $(12,309,323)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation and amortization....................... 693,000 3,081,808
Accretion of senior discount notes.................. 8,786,026 8,003,644
Amortization of deferred financing costs............ 409,042 431,385
Amortization of unearned compensation............... 100,000 9,090
Other noncash items................................. -- 88,392
Changes in assets and liabilities:
Trade accounts receivable........................ (207,373) 21,281
Other assets..................................... 179,665 67,965
Accounts payable................................. 12,425,602 4,708,321
Other liabilities................................ 259,621 (330,795)
Taxes payable.................................... 225,000 (455,297)
Deferred revenues................................ 2,508,902 513,487
------------- -------------
Net cash flows provided by operating activities............ 19,489,895 3,829,958
------------- -------------
Cash flows from investing activities:
Increase in network and equipment........................ (29,674,996) (41,541,272)
------------- -------------
Net cash used in investing activities...................... (29,674,996) (41,541,272)
------------- -------------
Cash flows from financing activities:
Deferred financing costs................................. (525,177) --
------------- -------------
Cash flows used in financing activities.................... (525,177) --
------------- -------------
Net decrease in cash and cash equivalents.................. (10,710,278) (37,711,314)
Cash and cash equivalents, beginning of period............. 251,057,274 132,175,829
------------- -------------
Cash and cash equivalents, end of period................... $240,346,996 $ 94,464,515
============= =============
Noncash investing and financing activities:
Interest capitalized to fixed assets..................... $ -- $ 1,798,085
============= =============
Fixed assets acquired through vendor financing........... $ -- $ 1,358,427
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DTI Holdings, inc. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements.
In the opinion of the management of DTI Holdings, Inc. and subsidiaries (the
"Company" or "DTI") the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the Company's financial information for
the interim periods presented and have been prepared in accordance with
generally accepted accounting principles. The interim results of operations are
not necessarily indicative of results that may be expected for any other interim
period or for the full year.
The financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June 30,
1999 included in the Company's Form 10-K for the same period filed with the
Securities and Exchange Commission. Accordingly, note disclosures which would
substantially duplicate the disclosures in the audited financial statements have
been omitted. Additionally, certain prior year balances have been reclassified
to conform with fiscal 2000 presentation.
2. NETWORK AND EQUIPMENT
Network and equipment consists of the following as of:
June 30, 1999 September 30, 1999
------------- ------------------
Land................................... $ 46,190 $ 456,703
Fiber optic cable plant................ 95,615,071 111,570,425
Fiber usage rights..................... 82,062,685 109,039,589
Fiber optic terminal equipment......... 37,014,509 38,016,655
Network buildings...................... 4,755,042 5,080,460
Leashold improvements.................. 1,309,402 1,336,848
Furniture, office equipment and other.. 585,254 585,254
------------ -----------
221,388,153 266,085,934
Less--accumulated depreciation 7,918,966 11,000,771
------------ ------------
Network and equipment, net $213,469,187 $255,085,163
============ ============
3. COMMITMENTS AND CONTINGENCIES
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.
During fiscal 2000, the Company has made and will continue to make material
commitments related to the expansion of its network.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPEREATIONS
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1999
REVENUE
Total revenue for the first quarter grew $220,000, or 13%, from $1.7 million in
fiscal 1999 to $2.0 million in fiscal 2000, primarily attributable to increased
revenue from carrier's carrier services. Revenue from carrier's carrier services
was up 17% principally from increased sales of point-to-point transport business
on our completed routes.
OPERATING EXPENSES
Total operating expenses were up $3.9 million in the first quarter of fiscal
2000 over the same period in fiscal 1999. For the first three months of fiscal
2000 compared to 1999, telecommunication services expenses increased $1.8
million. These increases reflect the growth of personnel costs related to the
building of the management and operational infrastructure, as well as increased
costs related to leased capacity to support existing customers in areas not yet
reached by our network, and costs related to recently accepted dark fiber
segments.
Selling, general and administrative expenses for the three months ended
September 30, 1999 decreased $301,000 over the same period in fiscal 1999. The
decrease is mainly due to a reduction in outside legal and professional costs as
these functions are now primarily performed in-house.
Depreciation and amortization grew 345% from last year's first quarter due to
increasing amounts of our fiber optic network being placed into service in
fiscal 1999 and 2000. 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 other income (expenses) for the first quarter increased from net expense of
$4.4 million in fiscal 1999, to a net expense of $7.2 million in fiscal 2000.
This change is due to the issuance of our Senior Discount Notes in February
1998, which resulted in increased noncash interest expense, offset in part by
interest income earned on the portion of the proceeds from the Senior Discount
Notes invested in short-term investment-grade securities.
INCOME TAXES
No income tax benefit or provision was recorded for the three-month periods
ended September 30, 1999 or 1998. A valuation allowance is being provided to
5
<PAGE>
reserve for significant deferred tax assets generated from net operating loss
carryforwards and the nondeductible interest expense related to our Senior
Discount Notes, issued in February 1998, that may not be realizable due to
uncertainties surrounding income tax law changes and future operating income
levels.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had $94.5 million of cash and cash equivalents. The
decrease of $37.7 million for the three months ended September 30, 1999 was
primarily due to expenditures on our property and equipment as we
continue to expand our fiber optic network.
The net cash provided by operating activities was $3.8 million for the
three-month period ended September 30, 1999, compared to $19.5 million in the
comparable period in fiscal 1999. The reduction in cash provided by operating
activities resulted primarily from lower cash derived from interest income and
the timing of cash payments associated with the continued development of our
network.
Cash used in investing activities for the three month period ended September 30,
1999 was $41.5 million compared to $29.7 million for the comparable period of
fiscal 1999. The growth in investing activities reflects increased purchases and
construction of network and equipment to be used in our operations.
Cash used in financing activities was $525,000 in the first three months of
fiscal 1999. We did not enter into any new cash financing transactions in the
first three quarters of fiscal 2000.
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. Our estimated capital requirements
primarily include the estimated cost of (i) constructing a portion of the
planned DTI network routes, (ii) purchasing, for cash, fiber optic facilities
pursuant to long-term indefeasible rights to use ("IRUs") for planned routes
that we will neither construct nor acquire through swaps with other
telecommunication carriers, and (iii) additional network expansion activities,
including the construction of additional local loops in secondary and tertiary
cities as network traffic volume increases. We estimate that total capital
expenditures necessary to complete our network will approximate $650 million, of
which we had expended $264 million, as of September 30, 1999. During the balance
of fiscal 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 IRU and short-term lease agreements, totaling
$29 million, which are payable in varying installments over the period through
December 31, 1999. In addition, we have a commitment at September 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 September 30, 1999, DTI had $94.5 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
6
<PAGE>
date, DTI's operating and capital requirements are expected to be funded, in
large part, out of additional debt or equity financing, advance payments under
IRUs, wholesale network capacity agreements and regional ring service
agreements, and available cash flow from operations, if any. We are exploring
the possibility of equity sales, additional vendor financing, a commercial
credit facility or an additional high yield debt offering, but have no specific
plans at this time. We are in various stages of discussions with potential
customers for IRUs, wholesale network capacity agreements and regional ring
service 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 we 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 the DTI network, we could modify, defer or abandon
plans to build or acquire certain portions of the DTI network. Our failure,
however, to raise the substantial capital required to complete the DTI network
could have a material adverse effect on us. The actual amount and timing of our
capital requirements may differ materially from our current 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, Inc. ("Digital Teleport" -
subsidiary of DTI Holdings) 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
$63.25 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 determine to pay a dividend on or make a distribution in respect of
the capital stock of Digital Teleport, there can be no assurance that Digital
Teleport will generate sufficient cash flow to pay such a dividend or distribute
such funds to us or that applicable state law and contractual restrictions,
including negative covenants contained in any future debt instruments of Digital
Teleport, will permit such dividends or distributions. The failure of Digital
Teleport to pay or to generate sufficient earnings or cash flow to distribute
any cash dividends or make any loans, advances or other payments of funds to us
would have a material adverse effect on our ability to meet our obligations on
the Senior Discount Notes. Further, there can be no assurance that we will have
available, or will be able to acquire from alternative sources of financing,
funds sufficient to repurchase the Senior Discount Notes in the event of a
Change of Control.
YEAR 2000
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
7
<PAGE>
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 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.
FORWARD LOOKING STATEMENTS
Certain statements throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this quarterly report are
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve known and unknown risks, uncertainties
and other factors that may cause actual events or results to differ materially
from those expressed or implied by the forward looking statements. The most
important factors that could prevent us from achieving our stated goals include,
but are not limited to, (a) failure to obtain substantial amounts of additional
financing at reasonable costs and on acceptable terms, (b) failure to
effectively and efficiently manage the expansion and construction of our
network, (c) failure to enter into additional indefeasible rights to use and/or
wholesale network capacity agreements, (d) failure to obtain and maintain
sufficient rights-of-way, (e) intense competition and pricing decreases, (f)
potential for rapid and significant changes in telecommunications technology and
their effect on our business, and (g) adverse changes in the regulatory
environment.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
8
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
3.1 Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-50049)).
3.2 Restated Bylaws of the Registrant (incorporated herein by reference to
Exhibit 3.2 to the S-4).
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DTI HOLDINGS, INC.
Date: November 11, 1999 /S/ Gary W. Douglass
----------------- ---------------------------------------
Gary W. Douglass, Senior Vice President
Finance and Administration and Chief
Financial Officer (Principal Financial
and Accounting Officer)
<PAGE>
Exhibits Index:
3.1 Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-50049)).
3.2 Restated Bylaws of the Registrant (incorporated herein by reference to
Exhibit 3.2 to the S-4).
27 Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet and the condensed consolidated statement of
operations of DTI Holdings, Inc. filed as part of the quarterly report on Form
10-Q and is qualified in its entirety by reference to such quarterly report on
Form 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-START> Jul-1-1999
<PERIOD-END> Sep-30-1999
<CASH> 94,464,515
<SECURITIES> 0
<RECEIVABLES> 379,716
<ALLOWANCES> 139,625
<INVENTORY> 0
<CURRENT-ASSETS> 95,504,909
<PP&E> 266,085,934
<DEPRECIATION> 11,000,771
<TOTAL-ASSETS> 367,144,921
<CURRENT-LIABILITIES> 20,787,550
<BONDS> 324,478,907
300
0
<COMMON> 300,000
<OTHER-SE> (4,090,059)
<TOTAL-LIABILITY-AND-EQUITY> 367,144,921
<SALES> 0
<TOTAL-REVENUES> 1,959,450
<CGS> 0
<TOTAL-COSTS> 7,112,581
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,532,692)
[INTEREST-INCOME] 1,376,500
<INCOME-PRETAX> (12,309,323)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,309,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,309,323)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
