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, 2000
[ ] 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, 2000
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000 and
September 30, 2000 (Unaudited) 1
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 1999 and 2000 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1999 and 2000 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures
Exhibit Index
<PAGE>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, September 30,
2000 2000
------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 32,841,453 $ 30,261,793
Trade accounts receivable, net............................ 451,467 406,723
Other receivables......................................... 13,271,495 --
Prepaid and other current assets.......................... 752,518 1,497,226
------------- -------------
Total current assets................................. 47,316,933 32,165,742
Property and equipment, net................................. 317,103,473 336,203,174
Deferred financing costs, net............................... 7,042,054 6,550,693
Prepaid fiber usage rights.................................. 2,929,639 367,712
Other assets................................................ 429,903 479,831
------------- -------------
Total................................................ $ 374,822,002 $ 375,767,152
============= =============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable.......................................... $ 10,248,286 $ 18,783,524
Vendor financing.......................................... 6,566,250 6,837,630
Taxes payable............................................. 2,490,589 2,700,932
Other accrued liabilities................................. 859,207 2,802,106
------------- -------------
Total current liabilities............................ 20,164,332 31,124,192
Senior discount notes, net of unamortized underwriter's 356,712,668 367,823,738
discount of $6,183,209 and $5,723,009
Deferred revenues........................................... 41,917,427 40,461,310
Vendor financing 3,843,158 3,139,534
Other long-term liabilities................................. 1,600,024 --
------------- -------------
Total liabilities.................................... 424,237,609 442,548,774
------------- -------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 20,000 shares
authorized, no shares issued and outstanding........... -- --
Convertible series A preferred stock, $.01 par value,
(aggregate liquidation preference of $45,000,000)
30,000 shares authorized, issued and outstanding........ 300 300
Common stock, $.01 par value, 100,000,000 shares
authorized, 30,000,000 shares issued and
outstanding............................................ 300,000 300,000
Additional paid-in capital................................ 44,213,063 44,213,063
Common stock warrants..................................... 10,421,336 10,421,336
Unearned compensation-restricted stock
Unearned compensation..................................... (36,370) (27,280)
Loan to stockholder....................................... (1,539,582) (1,566,352)
Accumulated deficit....................................... (102,774,354) (120,122,689)
-------------- --------------
Total stockholders' equity (deficit)............. (49,415,607) (66,781,622)
-------------- --------------
Total....................................................... $ 374,822,002 $ 375,767,152
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
1
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<TABLE>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Three Months Ended
September 30,
1999 2000
------------- -------------
<S> <C> <C>
REVENUES:
Telecommunications services:
Carrier's carrier services......................... $ 1,909,520 $ 2,740,119
End-user services.................................. 49,930 138,371
------------- ------------
Total revenues.................................. 1,959,450 2,878,490
------------- ------------
OPERATING EXPENSES:
Telecommunications services........................ 2,794,928 3,767,880
Write-off of prepaid fiber usage rights............ -- 1,976,000
Selling, general and administrative................ 1,235,845 1,267,326
Depreciation and amortization...................... 3,081,808 4,005,369
------------- ------------
Total operating expenses........................ 7,112,581 11,016,575
------------- ------------
LOSS FROM OPERATIONS................................. (5,153,131) (8,138,085)
OTHER INCOME (EXPENSE):
Interest income.................................... 1,376,500 525,912
Interest expense................................... (8,532,692) (9,736,162)
------------ -------------
NET LOSS............................................. $(12,309,323) $(17,348,335)
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
2
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<TABLE>
DTI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
1999 2000
-------------------- --------------
<S> <C> <C>
Cash flows provided by operating activities:
Net loss............................................. $(12,309,323) $(17,348,335)
Adjustments to reconcile net loss to cash provided
by operating activities: 3,081,808 4,005,369
Depreciation and amortization...................
Accretion of senior discount notes.............. 8,003,644 8,927,246
Amortization of deferred financing costs........ 431,385 491,361
Amortization of unearned compensation........... 9,090 9,090
Other noncash items............................. 88,392 179,517
Changes in assets and liabilities:
Trade accounts receivable.................... 21,281 44,744
Other assets................................. 67,965 15,038,786
Accounts payable............................. 4,708,321 8,535,238
Other liabilities............................ (330,795) 342,875
Taxes payable................................ (455,297) 210,343
Deferred revenues............................ 513,487 (1,456,117)
------------- -------------
Net cash flows provided by operating activities........ 3,829,958 18,980,117
------------- ------------
Cash flows from investing activities:
Increase in network and equipment.................... (41,541,272) (20,921,246)
------------- ------------
Net cash used in investing activities.................. (41,541,272) (20,921,246)
------------- ------------
Cash flows from financing activities:
Repayment of vendor financing........................ -- (638,531)
------------ ------------
Cash flows used in financing activities................ -- (638,531)
------------ ------------
Net decrease in cash and cash equivalents.............. (37,711,314) (2,579,660)
Cash and cash equivalents, beginning of period......... 132,175,829 32,841,453
------------ ------------
Cash and cash equivalents, end of period............... $ 94,464,515 $ 30,261,793
============ ============
Noncash investing and financing activities:
Interest capitalized to fixed assets................. $ 1,798,085 $ 2,183,824
============= ============
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,
2000 included in the Company's Form 10-K for the same period filed with the
Securities and Exchange Commission. Accordingly, note disclosures which would
substantially duplicate the disclosures in the audited financial statements have
been omitted. Additionally, certain prior year balances have been reclassified
to conform with fiscal 2001 presentation.
2. GOING CONCERN
The accompanying consolidated financial statements and financial
information has been prepared assuming that the Company will continue as a going
concern. The Company incurred losses from operations of $22 and $8 million and
net losses of $57 and $17 million during the fiscal year ended June 30, 2000 and
the three month period ended September 30, 2000, respectively. The Company has
not yet been successful in obtaining additional financing to sustain its
operations and may have insufficient liquidity to meet its needs for continuing
operations and meeting its obligations. As of September 30, 2000, DTI had $30
million of cash and cash equivalents. Such amounts are expected to provide
sufficient liquidity to meet DTI's operating and capital requirements into
approximately January 2001. In its most recent Form 10K filing for the year
ended June 30, 2000, the Company disclosed that its cash on hand coupled with
anticipated collections of additional amounts due it under existing IRU
agreements upon delivery of specific route segments, were expected to provide
sufficient liquidity to meet DTI's operating and capital needs through
approximately March, 2001. The principal factor that has given rise to the
accelerated date of January, 2001 referred to above is further delays
encountered in delivery of specific route segments under the above mentioned IRU
agreements. Consequently, there is substantial doubt about DTI's ability to
continue as a going concern. The Company's continuation as a going concern is
dependent upon its ability to (a) generate sufficient cash flow to meet its
obligations on a timely basis, (b) obtain additional financing as may be
required, and (c) ultimately sustain profitability. Management's recent actions
and plans in regard to these matters are as follows:
1. The Company is in the process of completing specific route segments to
deliver to counter parties under existing IRU agreements that should
result in the collection of amounts under those agreements.
4
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2. The Company is attempting to increase sales of monthly bandwidth
capacity to reduce the amount of cash flow required to fund
operations.
3. The Company is selectively evaluating opportunities to sell additional
dark fiber and empty conduits to supplement its liquidity position.
4. The Company is exploring vendor financing options as a source of
funding for its electronics purchases in order to light additional
network capacity.
5. The Company is exploring its options with respect to obtaining
additional equity infusions as well as the possibility of additional
debt financing. Under its Indenture provisions, the Company has the
ability to borrow up to $100 million on a senior secured basis
provided that the Company's Board of Directors approves such
financing.
6. The Company is considering delaying, modifying or abandoning plans to
build or acquire certain portions of its network in order to conserve
cash until such time as additional cash is generated to support its
business plan.
There can be no assurance, however, that DTI will be successful in any
of the above mentioned actions or plans in a timely basis or on terms that are
acceptable to it and within the restrictions of its existing financing
arrangements, or at all.
3. NETWORK AND EQUIPMENT
Network and equipment consists of the following as of:
June 30, 2000 September 30, 2000
------------- ------------------
Land................................... $ 756,945 $ 1,447,409
Fiber optic cable plant................ 154,775,867 166,790,403
Fiber usage rights..................... 128,667,295 136,771,418
Fiber optic terminal equipment......... 42,596,743 44,151,315
Network buildings...................... 8,696,531 9,399,855
Furniture, office equipment and other.. 2,846,165 2,884,218
Leasehold improvements................. 605,407 601,406
------------- -------------
338,944,953 362,046,024
Less-- accumulated depreciation........ 21,841,480 25,842,850
------------- -------------
Network and equipment, net $ 317,103,473 $ 336,203,174
============= =============
4. WRITE-OFF OF PREPAID FIBER USEAGE RIGHTS
The Company decided in November 2000 to abandon its two-fiber lease
from Las Vegas to Dallas and St. Louis to Chicago as the Company has now
developed alternative solutions for these routes. The effects of this
transaction were recorded as of September 30, 2000.
5
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5. 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 2001, the Company has made and may continue to make
material commitments related to the expansion of its network.
6. RECENT EVENTS
On September 27, 2000, Kansas City Power & Light confirmed that its
subsidiary KLT Telecom Inc. intended to make a tender offer for the Notes and
Warrants of DTI. KLT Telecom also agreed in September, on a conditional basis,
to acquire an additional 31 percent of the fully diluted common stock in DTI
Holdings, which would increase KLT's fully diluted ownership to 78 percent of
the Company. The stock acquisition was contingent upon KLT Telecom's successful
purchase of at least 90 percent of the outstanding Notes and Warrants.
On October 23, 2000, Kansas City Power & Light Company announced that
KLT Telecom had placed on hold the anticipated tender offer for the 10-year
Senior Discount Notes and related Warrants of DTI Holdings, Inc. and the
acquisition of additional shares referred to above due to the unfavorable credit
market for telecommunication companies.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
REVENUE
Total revenue for the quarter ended September 30, 2000 increased
$919,000 (47%) from comparable fiscal 2000 period. This growth is primarily
attributable to increased revenue from carrier's carrier services. Revenue from
carrier's carrier services was up 43% principally from increased sales of
transport business on our in-service routes.
OPERATING EXPENSES
Total operating expenses were up $3.9 million in the first three months
of fiscal 2001 over the same period in fiscal 2000. For the first quarter of
fiscal 2001 compared to 2000, telecommunication services expenses increased $1.0
million. This increase primarily reflects the growth of personnel costs related
to the growth of the operational infrastructure, costs related to accepted dark
fiber segments and property taxes. Additionally, the Company abandoned its
short-term two-fiber lease from Las Vegas to Dallas and St. Louis to Chicago as
the Company has now developed alternative solutions for these routes. As a
result of this decision, the Company recorded a write-off of prepaid fiber usage
rights of $2.0 million.
Selling, general and administrative expenses for the three months ended
September 30, 2000 increased $31,000 compared to the same periods in fiscal
2000. The increase is due mainly to an increase in professional service costs.
Depreciation and amortization grew $1.0 million for the quarter ended
September 30, 2000 in comparison to the same period in fiscal 2000 due to
increasing amounts of our fiber optic network being placed into service in
fiscal 2000 and 2001. Depreciation and amortization will continue to grow as
additional network routes are placed into service and as we move forward with
our investment in capital assets in order to increase network capacity.
OTHER INCOME (EXPENSE)
Net other income (expense) for the first quarter increased from net
expense of $7.2 million in fiscal 2000 to a net expense of $9.2 million in
fiscal 2001. This change is due to the continued accretion of the Senior
Discount Notes issued in February 1998, which results in increasing 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. As the average cash balances have decreased as we have implemented
our business strategy so has the related interest income generated from our
short-term investment-grade securities.
INCOME TAXES
No income tax benefit or provision was recorded for the three-month
periods ended September 30, 2000 or 2001. A valuation allowance is being
provided to reserve for significant deferred tax assets generated from net
operating loss carryforwards and the nondeductible interest expense related to
our Senior Discount Notes, issued in February 1998, that may not be realizable
due to uncertainties surrounding income tax law changes and future operating
income levels.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have funded our capital expenditures, working capital and debt
requirements and operating losses through a combination of advance payments for
future telecommunications services received from certain major customers, debt
and equity financing and external borrowings.
At September 30, 2000, we had a working capital surplus of $1.0
million, which represents a decrease of $26.2 million compared to the working
capital surplus of $27.2 million at June 30, 2000. This decrease is primarily
attributable to the continued build-out of our network.
The net cash provided by operating activities for the periods ended
September 30, 1999 and 2000 totaled $3.8 million and $19.0 million,
respectively. During fiscal 2001, net cash provided by operating activities
resulted principally from collection of an IRU-related receivable of $13.3
million recorded as an other receivable at June 30, 2000.
Our investing activities used cash of $41.5 million for the period
ended September 30, 1999 and $20.9 million for the period ended September 30,
2000. During both periods 100% of the investing activities were in network and
equipment.
Cash used in financing activities was $0 for the period ended September
30, 1999 and $.6 million for the period ended September 30, 2000. Amounts paid
in fiscal 2001 were due under our vendor financing agreement.
The accompanying consolidated financial statements and financial information has
been prepared assuming that the Company will continue as a going concern. The
Company incurred losses from operations of $22 and $8 million and net losses of
$57 and $17 million during the fiscal year ended June 30, 2000 and the three
month period ended September 30, 2000, respectively. The Company has not yet
been successful in obtaining additional financing to sustain its operations and
may have insufficient liquidity to meet its needs for continuing operations and
meeting its obligations. As of September 30, 2000, DTI had $30 million of cash
and cash equivalents. Such amounts are expected to provide sufficient liquidity
to meet DTI's operating and capital requirements into approximately January
2001. In its most recent Form 10K filing for the year ended June 30, 2000, the
Company disclosed that its cash on hand coupled with anticipated collections of
additional amounts due it under existing IRU agreements upon delivery of
specific route segments, were expected to provide sufficient liquidity to meet
DTI's operating and capital needs through approximately March, 2001. The
principal factor that has given rise to the accelerated date of January, 2001
referred to above is further delays encountered in delivery of specific route
segments under the above mentioned IRU agreements. Consequently, there is
substantial doubt about DTI's ability to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to (a)
generate sufficient cash flow to meet its obligations on a timely basis, (b)
obtain additional financing as may be required, and (c) ultimately sustain
profitability. Management's recent actions and plans in regard to these matters
are as follows:
1. The Company is in the process of completing specific route
segments to deliver to counter parties under existing IRU
agreements that should result in the collection of amounts under
those agreements.
2. The Company is attempting to increase sales of monthly bandwidth
capacity to reduce the amount of cash flow required to fund
operations.
8
<PAGE>
3. The Company is selectively evaluating opportunities to sell
additional dark fiber and empty conduits to supplement its
liquidity position.
4. The Company is exploring vendor financing options as a source of
funding for its electronics purchases in order to light
additional network capacity.
5. The Company is exploring its options with respect to obtaining
additional equity infusions as well as the possibility of
additional debt financing. Under its Indenture provisions, the
Company has the ability to borrow up to $100 million on a senior
secured basis provided that the Company's Board of Directors
approves such financing.
6. The Company is considering delaying, modifying or abandoning
plans to build or acquire certain portions of our network in
order to conserve cash until such time as additional cash is
generated to support its business plan.
There can be no assurance, however, that DTI will be successful in any
of the above mentioned actions or plans in a timely basis or on terms that are
acceptable to us and within the restrictions of our existing financing
arrangements, or at all.
To achieve our business plan, we will need significant financing to
fund our capital expenditure, working capital, debt service requirements and our
anticipated future operating losses. Our estimated capital requirements
primarily include the estimated cost of (i) constructing the remaining portions
of the planned DTI network routes, (ii) purchasing, for cash, fiber optic
facilities pursuant to long-term 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
$351 million as of September 30, 2000. During the balance of fiscal year 2001,
we anticipate our capital expenditure priorities will be focused principally on
completing our nationwide backbone and lighting rings in our network in areas in
which we believe there is strong carrier interest. Our existing capital
commitments consist principally of construction commitments of $13 million for
network segments under construction and payments required under existing IRU and
short-term lease agreements, totaling $9 million, which are payable within the
next twelve months as related contract completion criteria are met. In addition,
we have a commitment at September 30, 2000 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.
We have entered into various agreements with state Department of
Transportation's (DOTs) that require us to construct our network facilities in
order to obtain rights-of-way. Our agreement with the Kansas Department of
Transportation requires us to build approximately 750 miles of fiber optic
network along an interstate highway system by September 2000, of which
approximately 600 miles have been completed as of September 30, 2000. We may
lose our rights under this agreement if we are declared in breach of the
agreement and do not cure such breach as required under the terms of the
agreement.
9
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In November 1999, we entered into an IRU agreement with Adelphia
Business Solutions for over 4000 route miles on our network initially valued at
between $27 to $42 million to DTI depending on the number of options for
additional routes of fiber strands exercised by the parties. Adelphia paid $10
million in advance cash payments under the terms of the Agreement. In August
2000, Adelphia cancelled five routes or portions thereof, which will result in
approximately $3.8 million in reduced future cash collections under the
Agreement, plus the repayment to Adelphia of approximately $1.6 million
previously paid to DTI by Adelphia, which was repaid in September 2000. In
addition to providing for certain rights to cancel delivery of route segments
not delivered to them by agreed upon dates, the Agreement also provides for
monthly financial penalties for late deliveries. As of September 2000, DTI is
late with respect to delivery of all routes, and accrued penalties under the
Agreement totaled approximately $3.5 million. These penalties will result in an
offset to future cash receipts by DTI upon delivery of the remaining routes. If
Adelphia were to cancel all remaining route segments under the Agreement; then
we would no longer receive the remaining approximate $20 million, net of
penalties, due under the Agreement and would be required to return the remaining
$8 million received upon execution of the Agreement plus interest. Additionally,
we would receive none of the maintenance and other monthly and annual payments
due under the terms of the Agreement.
We have a swap agreement with a counter party under which both DTI and
the counter party have not delivered their respective routes by the contracted
due date. The counter party to the agreement has initiated the delivery process
for their two routes but we have started the delivery process related to one of
our two routes. Once the counter party has delivered their routes and we have
accepted them we will be required to begin making annual cash payments to them
of approximately $1.4 million, plus quarterly building and maintenance fees, in
advance of their making payments to us for our routes. Additionally, we may be
required to accrue penalties for late delivery of $100,000 per route per month.
If the counter party were to exercise their rights to cancel delivery of our
routes we would not receive approximately $26 million in lease payments over the
term of the agreement plus quarterly maintenance, building space and other
quarterly and annual payments due under the terms of the agreement.
In another swap agreement, if we do not settle an obligation by
providing the counter party with additional DTI fiber by December 31, 2000, we
will be required to pay an additional $7 million in cash to the counter party.
An agreement dating back to October 1994, between AmerenUE and
ourselves requires us to construct a fiber optic network linking AmerenUE's 86
sites throughout the states of Missouri and Illinois in return for cash payments
to DTI and the use of various rights-of-way including downtown St. Louis. As of
September 30, 2000, we had completed approximately 70% of the sites required for
AmerenUE and expect to complete all such construction by the end of fiscal 2001.
AmerenUE has given us notice that they intend to set off against amounts payable
to us up to $90,000 per month, which as of September, 2000 totaled approximately
$1.5 million (in addition to $400,000 previously set off against other payments)
as damages and penalties under our contract with them due to our failure to meet
certain construction deadlines, and AmerenUE has reserved its rights to seek
other remedies under the contract which could potentially include reclamation of
the rights-of-way granted to DTI. We are behind schedule with respect to such
contract as a result of AmerenUE not obtaining on behalf of the Company certain
rights-of-way required for completion of certain network facilities, and the
limitation of our financial and human resources, particularly prior to the
Senior Discount Notes Offering. We have obtained alternative rights-of-way to
accelerate the completion of such construction. Upon completion and turn-up of
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services, AmerenUE is contractually required to pay us a remaining lump sum of
approximately $4.1 million, less the above mentioned penalties, for their
telecommunications services over our network.
On February 23, 1998, we completed the issuance and sale of the Senior
Discount Notes, from which we received proceeds, net of underwriting discounts
and expenses, totaling approximately $265 million. We are using and have used
the net proceeds (i) to fund additional capital expenditures required for the
completion of the our network, (ii) to expand our management, operations and
sales and marketing infrastructure and (iii) for additional working capital and
other general corporate purposes. We may incur significant and possibly
increasing operating losses and expect to generate negative net cash flows after
capital expenditures during at least the next 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.
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 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.
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
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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.
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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).
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(b) Reports on Form 8-K
(1) Form 8-K dated September 27, 2000 was filed pursuant to Item 1
(Changes in Control of Registrant) and Item 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1999 /S/ Gary W. Douglass
----------------- ---------------------------------------
Gary W. Douglass, Senior Vice President
Finance and Administration and Chief
Financial Officer (Principal Financial
and Accounting Officer)
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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
