<PAGE>
As filed with the Securities and Exchange Commission on January 5, 1998
Registration No. 333-_______
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 4813 91-1845100
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classifica- Identification No.)
Organization) tion Code Number)
29705 453RD AVENUE
IRENE, SOUTH DAKOTA 57037-0066
(605) 263-3301
(Address and Telephone Number of Principal Executive Offices)
THOMAS W. HERTZ PLEASE SEND COPIES OF COMMUNICATIONS TO:
CRAIG A. ANDERSON TRACY T. LARSEN
29705 453RD AVENUE GORDON R. LEWIS
IRENE, SOUTH DAKOTA 57037-0066 WARNER NORCROSS & JUDD LLP
(605) 263-3301 900 OLD KENT BUILDING
(Name, Address and Telephone 111 LYON STREET, N.W.
Number of Agents for Service) GRAND RAPIDS, MICHIGAN 49503-2487
(616) 752-2000
Approximate date of commencement of proposed sale of the
securities to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT
BECOMES EFFECTIVE.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
_________________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________________
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of Each Dollar Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Offering Registration Fee
To be Registered Registered Per Unit Price
<S> <C> <C> <C> <C> <C>
Common Stock, $5,000,000 $12.50 $5,000,000 $1,475.00
no par value
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===========================================================================
<PAGE>
PROSPECTUS
DAKOTA TELECOMMUNICATIONS GROUP, INC.
[DAKOTA TELECOMMUNICATIONS GROUP LOGO]
400,000 SHARES
COMMON STOCK, NO PAR VALUE
AT
$12.50 PER SHARE
DAKOTA TELECOMMUNICATIONS GROUP, INC., A DELAWARE CORPORATION (THE
"COMPANY"), IS A DIVERSIFIED TELECOMMUNICATIONS SERVICES COMPANY WHICH
PROVIDES WIRELINE LOCAL AND NETWORK ACCESS SERVICES, LONG DISTANCE
TELEPHONE SERVICES, OPERATOR ASSISTED CALLING SERVICES, TELECOMMUNICATIONS
EQUIPMENT SALE AND LEASING SERVICES, CABLE TELEVISION SERVICES, INTERNET
ACCESS AND RELATED SERVICES AND LOCAL AND WIDE AREA NETWORK ("LAN" AND
"WAN") SERVICES. (SEE "THE COMPANY--BUSINESS.")
THE COMPANY IS OFFERING FOR SALE UP TO 400,000 SHARES OF ITS COMMON
STOCK, NO PAR VALUE ("COMMON STOCK"). THE COMPANY IS OFFERING THESE SHARES
OF COMMON STOCK ONLY TO STOCKHOLDERS OF RECORD ("STOCKHOLDERS") OF THE
COMPANY AND DIRECTORS, OFFICERS AND EMPLOYEES ("EMPLOYEES") OF THE COMPANY
AT THE CLOSE OF BUSINESS ON ___________, 199_ (THE "RECORD DATE") WHO ARE
RESIDENTS OF THE STATES OF SOUTH DAKOTA, IOWA, MINNESOTA AND CERTAIN OTHER
SPECIFIED STATES. (SEE "PROSPECTUS SUMMARY--OFFEREES.") ALL SHARES OF
COMMON STOCK ARE BEING SOLD BY THE COMPANY. THIS OFFERING WILL EXPIRE ON
_____________, 1998, AT 5:00 P.M. LOCAL TIME (THE "EXPIRATION DATE"),
UNLESS EXTENDED OR TERMINATED EARLIER IN THE SOLE DISCRETION OF THE
COMPANY.
THE COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A CERTAIN AMOUNT
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
===========================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO PUBLIC DISCOUNTS AND PROCEEDS TO COMPANY<F2>
COMMISSIONS<F1>
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ 12.50 None $ 12.50
Total Maximum $5,000,000 $5,000,000
===========================================================================
<FN>
<F1> NO UNDERWRITER IS INVOLVED IN THIS OFFERING. THE COMPANY IS OFFERING
THE COMMON STOCK DIRECTLY TO STOCKHOLDERS, THROUGH ONE OR MORE
DIRECTORS, OFFICERS OR OTHER EMPLOYEES. NONE OF SUCH PERSONS WILL
RECEIVE, DIRECTLY OR INDIRECTLY, ANY COMMISSION OR OTHER REMUNERATION
FOR SOLICITING SALES OF SHARES OF COMMON STOCK. THERE IS NO MINIMUM
PURCHASE REQUIREMENT IN THIS OFFERING.
<F2> BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$______________; ASSUMING THE SALE OF THE ENTIRE OFFERING.
</FN>
</TABLE>
This Prospectus is dated _____________, 1998.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION
AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
The Company is a diversified telecommunications services company
which, directly or through wholly owned subsidiaries, provides wireline
local and network access services, long distance telephone services,
operator assisted calling services, telecommunications equipment sale and
leasing services, cable television services, Internet access and related
services and LAN and WAN services. (See "THE COMPANY--Business.")
The Company is a Delaware corporation that was organized in 1997. Its
predecessor was Dakota Cooperative Telecommunications, Inc., a stock-based
South Dakota cooperative association that was formed on April 3, 1952 (the
"Cooperative"). In July 1997, the Cooperative was converted (the
"Conversion") into a South Dakota corporation, which was named Dakota
Telecommunications Group, Inc. ("DTG"). Pursuant to the Conversion, DTG
assumed all of the operations, assets and liabilities of the Cooperative.
Immediately after the Conversion, DTG was merged (the "Merger") with and
into the Company. The Company was the surviving corporation in the Merger
and assumed all of the operations, assets and liabilities of DTG
immediately before the Merger. The mailing address of the Company's
principal executive office is Post Office Box 66, 29705 453rd Avenue,
Irene, South Dakota 57037-0066. Its telephone number is (605) 263-3301.
The numbers of shares of Common Stock discussed in this Prospectus are
adjusted to reflect the results of a two-for-one stock split pursuant to a
share dividend paid to persons who were stockholders of record on January 1,
1998 (the "Stock Split").
THE OFFERING
Common Stock Offered . . . . . . 400,000 shares (the "Shares") of
Common Stock (the "Offering") are
offered by the Company. There is no
minimum offering amount.
Offerees . . . . . . . . . . . . Shares are offered only to (I) holders
of record of Common Stock as of the
close of business on the Record Date
("Stockholders") and (ii) directors,
officers and employees of the Company
as of the close of business on the
Record Date ("Employees"). If the
Offering is fully subscribed by
Stockholders, Employees will not be
entitled to purchase Shares. (See
"THE OFFERING.") A person who is both
<PAGE>
a Stockholder and an Employee will be
treated as a Stockholder. Only those
Stockholders and Employees who are
legal residents of the states of South
Dakota, Iowa, Minnesota, and certain
other states may purchase Shares in the
Offering.
Shares Outstanding . . . . . . . As of the Record Date, the Company had
2,335,208 shares of Common Stock
issued and outstanding, and 359,652
shares of Common Stock subject to
outstanding options to purchase.
Assuming full subscription, the
Company would have 2,735,208 shares of
Common Stock issued and outstanding
upon completion of the Offering.
Purchase Price . . . . . . . . . $12.50 per Share (the "Purchase
Price"). (See "DETERMINATION OF
OFFERING PRICE.")
Allocation of Shares
to Stockholders. . . . . . . . Each Stockholder may subscribe for as
few as one Share or as many Shares as
the Stockholder would like to
purchase. If the Offering is
oversubscribed by Stockholders, Shares
will be allocated to Stockholders in
proportion to the number of shares of
the Company's Common Stock held by
each subscribing Stockholder as of the
Record Date. If the Offering is
oversubscribed and Shares are
allocated to Stockholders, any
Stockholder who has subscribed for
fewer Shares than the Stockholder
would be entitled to purchase under
the allocation procedure will be
permitted to purchase all Shares
subscribed for. Each Stockholder who
subscribes for 40 or fewer Shares
will, in any event, be entitled to
purchase all Shares subscribed for.
Subscriptions by Employees . . . Shares remaining, if any, after
subscriptions by Stockholders
("Remaining Shares") will be available
for purchase by Employees. Each
2
<PAGE>
Employee will be entitled to subscribe
for as few as one Share or as many
Shares as the Employee would like to
purchase. If the Offering is not
fully subscribed by Stockholders but
Remaining Shares are oversubscribed by
Employees, Remaining Shares will be
allocated per person, with each
Employee entitled to purchase the same
maximum number of Remaining Shares.
Each Employee who subscribes for a
number of Shares equal to or less than
such maximum number of Remaining
Shares shall be entitled to purchase
all Remaining Shares subscribed for
and each Employee who subscribes for
more Remaining Shares than such
maximum number shall be entitled to
purchase such maximum number of
Remaining Shares.
Record Date. . . . . . . . . . . _____________, 199_.
Offering Expiration Date . . . . ___________________, 1998, at 5:00
p.m. South Dakota time (the
"Expiration Date") unless extended or
terminated earlier.
Non-transferability of
Subscription Rights. . . . . . The right to subscribe for and
purchase Shares in the Offering is
uncertificated and is not
transferable.
Fractional Shares. . . . . . . . The Company will not issue any
fractional Shares. The Company will
round to the nearest whole number any
partial Share resulting from the
allocation of Shares.
Manner of Subscribing. . . . . . Stockholders and Employees may
subscribe for Shares by properly
completing and executing a
subscription agreement in the form
included with this Prospectus (a
"Subscription Agreement") and
delivering it to the Company, prior to
the Expiration Date, along with
payment of the Purchase Price for all
3
<PAGE>
Shares that the Stockholder or
Employee subscribes to purchase.
The Subscription Agreement and payment
of the Purchase Price must be
delivered to Dakota Telecommunications
Group, Inc., attn: Mr. Craig A.
Anderson, P.O. Box 66, 29705 453rd
Avenue, Irene, South Dakota 57037-0066
on or before the Expiration Date.
Funds for Shares not purchased will be
returned by the Company as soon as
practicable after the Expiration Date.
Any such payment will be made by
Company check mailed to the record
address of the subscribing Stockholder
or Employee, or such other address as
may be specified in the Subscription
Agreement.
Conditions . . . . . . . . . . . The Offering is not conditioned on
the subscription for or sale of any
minimum number of Shares. Once a
Stockholder or Employee has subscribed
for Shares, such subscription may not
be revoked. Accordingly, Stockholders
and Employees who subscribe for Shares
will not have a right to return of
their funds (except for Shares not
purchased, as described above), unless
the Company terminates the Offering.
The Company reserves the right at any
time prior to the Expiration Date to
terminate or extend the Offering for
any reason.
Issuance of Common Stock . . . . The Company will deliver certificates
representing Shares purchased in this
Offering as soon as practicable after
the Expiration Date.
ABSENCE OF TRADING MARKET
No public trading market currently exists for shares of the Company's
Common Stock. However, the Company intends to ask one or more regional
brokerage firms to act as a market maker for shares of the Company's Common
Stock. In addition, the Company intends to apply to have shares of its
Common Stock quoted for trading on The Nasdaq Stock Market. There can be no
assurance that the Company will be successful in finding brokerage firms to
4
<PAGE>
act as a market maker for its Common Stock or that shares of the Company's
Common Stock will ever be quoted for trading on The Nasdaq Stock Market.
Similarly, there can be no assurance that a trading market will develop or
be maintained for shares of the Company's Common Stock. The Purchase Price
was determined by the Board of Directors in its discretion and was not
determined with reference to actual prices at which shares of the Company's
Common Stock have traded in the public markets. (See "DETERMINATION OF
OFFERING PRICE.")
CASH DIVIDENDS
Since the Conversion and Merger in July 1997, the Company has not paid
cash dividends on the Common Stock.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial information has been
derived from the consolidated financial statements of the Cooperative for
each of the years in the five-year period ended December 31, 1996, which
were audited by Olsen Thielen & Co., Ltd., and the nine months ended September
30, 1996 and 1997, which have not been audited. The selected historical
financial information should be read in conjunction with "THE COMPANY--
Management's Discussion and Analysis or Plan of Operation" and the
Consolidated Financial Statements and related notes included as Appendix A
and Appendix B to this Prospectus. In the opinion of management of the
Company, the unaudited information for the nine months ended September 30,
1996 and 1997 includes all adjustments, consisting only of normal recurring
adjustments, necessary for fair presentation of the information. The
results for the nine-month periods are not necessarily indicative of full
year performance. No historical financial statements of the Company are
included in this Prospectus because the Company is merely the successor to
the Cooperative.
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
HISTORICAL
---------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 4,817,571 $ 4,822,235 $ 5,335,351 $ 6,115,529 $ 7,808,842
Costs and Expenses 3,508,881 3,797,835 3,807,320 5,273,657 7,730,992
Operating Income (Loss) 1,308,690 1,024,400 1,528,031 841,872 77,850
Other Income
(Expenses), Net<F1><F2> (308,276) (479,404) (85,654) 593,449 (413,796)
Income (Loss) Before
Income Taxes 1,000,414 544,996 1,442,377 1,435,321 (335,946)
Income Taxes Benefit -- 4,909 11,666 301,859 (175,712)
Net Income (Loss) 1,000,414 540,087 1,430,711 1,133,462 (160,234)
NET (Loss) Per Share<F3> -- -- -- -- --
BALANCE SHEET DATA:
Working Capital $ 2,764,772 $ 3,146,402 $ 5,641,071 $ 7,242,678 $ 4,946,121
Property, Plant and
Equipment - Net 11,365,290 11,760,785 11,241,422 11,041,284 14,441,104
Total Assets 15,828,294 16,871,076 18,494,208 20,121,675 23,504,875
Long-Term Debt 12,584,682 12,918,003 13,028,945 13,504,725 15,338,395
Stockholders' Equity 2,272,614 2,827,100 4,257,396 5,415,305 6,412,216
Book Value
Per Share<F3> -- -- -- -- --
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- -------------------------------
HISTORICAL
- -------------------------------
1996 1997
- ----------- -----------
<S> <C>
$ 5,284,114 $ 8,440,667
5,316,045 9,717,047
(31,931) (1,276,380)
(300,226) (551,411)
(332,157) (1,827,791)
(47,087) (292,880)
(285,070) (1,534,911)
-- (1.56)
$ 5,393,661 $ 3,313,115
14,132,689 23,315,087
22,133,032 34,198,137
15,575,120 25,715,348
5,165,813 4,763,918
-- 4.84
<FN>
<F1> Gains on sale of cellular investments were $240,811 in 1994 and
$686,336 in 1995.
<F2> Income (Loss) from cellular partnerships were:
1992 $ 77,881
1993 (33,404)
1994 125,377
1995 168,788
8
<PAGE>
<F3> Loss per share and book value per share were computed by dividing
net loss and shareholders' equity, respectively, by the number of
shares of Common Stock outstanding (985,216 shares).
</FN>
</TABLE>
GLOSSARY
The following list of definitions includes terms which are defined in
this Prospectus and used principally in the "RISK FACTORS" and "THE
COMPANY--Business," "--Competition" and "--Regulation" sections of this
Prospectus. This Glossary is intended merely to aid in the readability of
this Prospectus:
TERM DEFINITION
- ---- ----------
1984 Cable Act Cable Communications Policy Act of 1984
1992 Cable Act Cable Television Consumer Protection and
Competition Act of 1992
1996 Act Telecommunications Act of 1996
America Online America Online, Inc.
AT&T AT&T Corp.
AT&T Divestiture Decree AT&T divestiture decree, which required the
divestiture by AT&T of its 22 Bell operating
companies and divided the country into 201
LATAs
ATM Asynchronous Transfer Mode
BBN BBN Corporation
BST basic tier of cable service
CATV Community Antenna Television (Cable)
CCL Carrier Common Line
CommNet CommNet Cellular, Inc.
CompuServe CompuServe Corporation
Copyright Act Copyright Revision Act of 1976
CPST cable programming service tier
DataNet Futuristic, Inc. (d/b/a DataNet)
DBS direct broadcast satellites
DSI Dakota Systems, Inc. (DSI is not affiliated
with the Company.)
DWS Dakota Wireless Systems, Inc., a wholly owned
subsidiary of the Company
Employees Directors, officers and employees of the
Company as of the close of business on the
Record Date
EPA United States Environmental Protection Agency
Expiration Date _________, 1998
9
<PAGE>
TERM DEFINITION
- ---- ----------
FCC Interconnection Order First Report and Order in the Matter of
Implementation of the Local Competition
Provisions
FCC United States Federal Communications Commission
GTOCs GTE Corporation Operating Companies
HSDs home satellite dishes
Iway Iway, Inc., a wholly owned subsidiary of the
Company
IXCs national and regional interexchange carriers
LAN local area network
LATA Local Access and Transport Area
LECs local exchange companies
LFAs local franchising authorities
MATV Master Antenna Television
MCI MCI Communications Corporation
MMDS multi-channel, multi-point distribution
systems
MTA Major Trade Areas
NAPs Internet National Access Points
NECA National Exchange Carrier Association
NETCOM NETCOM On-Line Communication Services, Inc.
OVS open video system
PCS Broad Band Personal Communications Services
PEG public, educational and government access
PSI PSINet Inc.
Purchase Price $12.50 per Share
RBOCs Regional Bell Operating Companies
Record Date ____________, 199_
Remaining Shares Shares remaining, if any, after subscriptions
by Stockholders are fully satisfied
ROR rate-of-return
RTFC Rural Telephone Finance Cooperative
RUS Rural Utilities Service of the United States
Department of Agriculture
SFLP Sioux Falls Cellular Limited Partnership
Shares Shares of Common Stock offered in the Offering
SMATV Satellite MATV
SONET Synchronous Optical Network
Sprint Sprint Corporation
SS7 Signaling System 7 Common Channel Signaling
Stockholders Holders of record of Common Stock as of the
close of business on the Record Date
TCIC TCIC Communications, Inc., a wholly owned
subsidiary of the Company. TCIC has been
renamed DTG Communications, Inc.
10
<PAGE>
TERM DEFINITION
- ---- ----------
TCP/IP Transmission Control Protocol/Internet
Protocol
USF Universal Service Fund
US WEST US West Communications, Inc.
UUNET UUNET Technologies, Inc.
WAN wide area network
11
<PAGE>
RISK FACTORS
The following factors should be considered carefully in evaluating the
Company and its business, in addition to the other information contained in
this Prospectus. In this Prospectus, the term "Company" means the
Cooperative and its subsidiaries before the Conversion, DTG and its
subsidiaries after the Conversion and the Company and its subsidiaries
after the Conversion and the Merger.
FORWARD-LOOKING STATEMENTS
This Prospectus, particularly the under the headings "RISK FACTORS,"
"THE COMPANY--Business," "--Competition," "--Regulation" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
contains forward-looking statements relating to the Company's future
development plans, the effects of future regulation and competition and
other matters. These forward-looking statements are based on management's
beliefs, assumptions, current expectations, estimates and projections about
the telecommunications industry, the economy and the Company itself. Words
such as "anticipates," "attempts," "believes," "estimates," "expects,"
"forecasts," "intends," "is likely," "objectives" "plans," "predicts,"
"projects," variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks and
uncertainties, including but not limited to uncertainties relating to
economic conditions, acquisitions and divestitures, government and
regulatory policies, the pricing and availability of equipment, materials,
inventories and programming, technological developments and changes in the
competitive environment in which the Company operates. These risks and
uncertainties are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements, whether as a result of new information,
future events or otherwise.
COMPETITION
GENERAL. The Company faces intense competition in providing
telecommunications and cable television services both within and outside of
its local exchanges. The Company competes with AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI"), Sprint Corporation ("Sprint") and other
national and regional interexchange carriers ("IXCs"), where permissible.
Other potential competitors include cable television companies, wireless
telephone companies, electric utilities, microwave carriers and private
networks of large end-users. Most of these companies have substantially
greater market share and financial, technical, marketing and other
resources than the Company and some of them are the source of the tele-
communications network capacity used by the Company to provide a portion
of its own long distance services. (See "THE COMPANY--Competition.")
12
<PAGE>
LOCAL TELEPHONE SERVICE. Historically, the Company's local telephone
operations have not experienced significant competition. As a result of
the enactment of the federal Telecommunications Act of 1996 (the "1996
Act"), the Company anticipates that its local telephone operations will
experience increased competition from various sources, including resellers
of the Company's local exchange services, large end-users installing their
own networks, IXCs, satellite transmission services, cellular
communications providers, cable television companies, radio-based personal
communications companies, competitive access providers and other systems
capable of completely or partially bypassing the local telephone
facilities. (See "THE COMPANY--Regulation.") In 1996, the South Dakota
Public Utilities Commission approved numerous applications to provide and
resell local exchange services, including applications made by the Company
to enter other local exchanges. Many such applications are pending and the
Company anticipates that additional filings will be made by other
companies. The Company has received two formal interconnection requests
under the 1996 Act from two cellular service companies operating in its
local service areas. The Company cannot predict the specific effects of
competition on its local telephone business at this time. An increase in
such competition could have a material adverse effect on the Company's
business, financial condition and results of operations.
LONG DISTANCE TELECOMMUNICATIONS SERVICES. The United States long
distance telecommunications industry is highly competitive and is
significantly influenced by the marketing and pricing decisions of larger
industry participants. The industry has relatively insignificant barriers
to entry, numerous entities competing for the same customers and high
attrition rates (customer turnover) because customers frequently change
long distance providers in response to offers by competitors of lower rates
or promotional incentives. Most of the Company's competitors are
significantly larger, have substantially greater financial, technical,
marketing and other resources and have larger networks than the Company.
In October 1995, the United States Federal Communications Commission
(the "FCC") reclassified AT&T as a "non-dominant" carrier for domestic
interstate services, which substantially reduced the regulatory constraints
on AT&T. This reclassification may make it easier for AT&T to compete
directly with the Company for long distance subscribers. AT&T was
reclassified as a "non-dominant" carrier for international services on May
14, 1996. The Company also currently competes with US WEST, a Regional Bell
Operating Company, and other local exchange companies ("LECs") in the
provision of "short haul" toll calls completed within a local access and
transport area ("LATA") (or intra-LATA calls). In addition, as a result of
the 1996 Act, the Regional Bell Operating Companies ("RBOCs") and the GTE
Corporation Operating Companies ("GTOCs") will be allowed to compete for
the provision of "long haul" inter-LATA toll calls upon receipt of all
necessary regulatory approvals and the satisfaction of applicable
conditions. The FCC has not yet finalized all of the rules necessary to
13
<PAGE>
implement the 1996 Act and certain of those rules have been, and are
expected to continue to be, the subject of judicial challenge. Therefore
it is unclear at this time what impact the 1996 Act and the rules under the
1996 Act will have on the Company. Depending on the exact nature and
timing of GTOC and RBOC entry into the long distance market and the impact
on access rates, such entry could have a material adverse effect on the
Company's local telephone and long distance business, and its overall
results of operations and financial condition. Certain of the RBOCs have
already taken steps to provide in-region inter-LATA long distance services
and have filed applications with the FCC seeking authority to provide such
services in certain states. The Company expects that most or all of the
RBOCs will file applications for inter-LATA long distance service
authority. (See "THE COMPANY--Regulation.") To date, the FCC has rejected
each of those applications, however.
The ability of the Company to compete effectively in long distance
telecommunications services will depend upon, among other factors, its
continued ability to provide high quality services at competitive prices,
and there can be no assurance that the Company will be able to compete
successfully in the future in its markets. The Company's competitors may
reduce rates or offer incentives to existing and potential customers of the
Company, whether as a result of general competitive pressures or the entry
of the RBOCs, GTOCs and other LECs into the long distance market. Since
the Company believes that to maintain its competitive position it must be
able to reduce its prices to meet reductions in rates by others, a decrease
in the rates for long distance services charged by others could have a
material adverse effect on the Company's business, results of operations
and financial condition. The Company expects price competition to continue
to increase, which could have a material adverse effect on the Company's
business, financial condition and results of operations, including a
reduction in the Company's response rates and higher customer attrition.
The Company also expects to encounter increasing competition from the
development of new technologies and the increased availability of domestic
and international transmission capacity. For example, even though fiber
optic networks, such as the Company's new system, are now widely used for
long distance transmission, it is possible that the desirability of such
networks could be adversely affected by changes in technology. The
telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings
and increasing satellite and fiber optic transmission capacity for services
similar to those provided by the Company. The Company cannot predict which
of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
INTERNET-RELATED SERVICES. The market for data communications
services, including Internet access and on-line services, is extremely
14
<PAGE>
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company
believes that its ability to compete successfully depends on a number of
factors, including: (i) market presence in smaller regional markets;
(ii) the ability to execute a rapid expansion strategy; (iii) the capacity,
reliability and security of its network infrastructure; (iv) ease of access
to and navigation of the Internet; (v) the pricing policies of its
competitors and suppliers; (vi) the timing of the introduction of new
products and services by the Company and its competitors; (vii) the
Company's ability to meet industry standards for technology and service;
and (viii) industry and general economic trends. The success of the
Company in this market will depend heavily upon its ability to provide high
quality Internet connectivity and value-added Internet services at
competitive prices.
The Company's current and potential competitors generally may be
divided into three groups: (i) telecommunications companies, such as AT&T,
MCI, Sprint, the RBOCs, @Home (a joint venture between Tele-Communications,
Inc. and a venture capital firm) and various other cable companies; (ii)
other Internet access providers, such as UUNET Technologies, Inc.
("UUNET"), BBN Corporation ("BBN"), NETCOM On-Line Communication Services,
Inc. ("NETCOM"), PSINet Inc. ("PSI") and other national and regional
providers; and (iii) on-line services providers, such as America Online,
Inc. ("America Online"), CompuServe Corporation ("CompuServe"), Intuit
Inc., Microsoft Corp. and Prodigy Services Company. Most of these
competitors have greater market presence, engineering and marketing
capabilities, and financial, technological, personnel and other resources
than those available to the Company and some provide services relied upon
by the Company in its Internet business. As a result, these companies may
be able to develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or emerging
technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily and devote greater
resources to the marketing and sale of their services than can the Company.
The Company expects that all of the major on-line services providers
and telecommunications companies will expand their current services to
compete fully in the Internet access market. The Company also anticipates
that new competitors, including large computer hardware, software, media
and other technology and telecommunications companies, will enter the
Internet access market, resulting in even greater competition. Certain
companies, including America Online, AT&T, UUNET, BBN and PSI, have
obtained or expanded their Internet access products and services as a
result of acquisitions and strategic investments. Such acquisitions and
investments may permit the Company's competitors to devote greater
resources to the development and marketing of new competitive products and
services and the marketing of existing competitive products and services.
The Company expects these acquisitions and strategic investments to
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increase, thus creating significant new competitors. In addition, the
ability of some of the Company's competitors to bundle other services and
products with Internet access services, such as the Internet service
offerings recently announced by AT&T and MCI, could place the Company at a
competitive disadvantage.
As a result of increased competition in the Internet services
industry, the Company expects that it will continue to encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of its Internet services. The
Company previously has reduced prices on certain of its Internet access
options and may do so in the future. There can be no assurance that the
Company will be able to offset the effects of any such price reductions
with an increase in the number of its customers, higher revenues from
enhanced services, cost reductions or otherwise. In addition, the Company
believes that the data communications business, and in particular the
Internet access and on-line services businesses, are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in the industry. Increased price or other competition
could result in erosion of the Company's market share and could have a
material adverse effect on the Company's Internet business, financial
condition and results of operations. There can be no assurance that the
Company will have the financial resources, technical expertise, marketing
and support capabilities or expansion and acquisition possibilities to
continue to compete successfully.
CABLE TELEVISION SERVICES. Cable television providers compete for
customers in local markets with other providers of entertainment, news and
information. The competitors in these local markets include broadcast
television and radio, newspapers, magazines and other printed material,
motion picture theaters, video cassettes and other sources of information
and entertainment, including directly competitive cable television
operations. The extent to which the Company's cable television service is
competitive depends upon its ability to provide, on a cost-effective basis,
an even greater variety of programming than that available off-air or
through other alternative delivery sources.
Regulatory changes also impact competition in the cable industry.
(See "THE COMPANY--Regulation.") Both the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and the 1996
Act are designed to increase competition in the cable television industry.
These regulatory changes have encouraged the development and deployment of
alternative methods of distributing the same or similar video programming
offered by cable television systems. These technologies include: (I)
medium power and higher power direct broadcast satellites ("DBS") using
high frequencies to transmit signals that can be received by dish antennas
much smaller in size than traditional home satellite dishes ("HSDs"); (ii)
multi-channel, multi-point distribution systems ("MMDS") that deliver
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programming services over microwave channels received by subscribers with
special antennas; and (iii) Master Antenna Television ("MATV") systems and
Satellite MATV ("SMATV") systems that provide multi-channel program
services directly to hotel, motel, apartment, condominium and similar
multi-unit complexes. The Company already has experienced competition in
its cable system territories from MMDS and DBS companies.
Within the cable television industry, cable operators may compete with
other cable operators or others seeking franchises for competing cable
television systems at any time during the terms of existing franchises or
upon expiration of such franchises in the expectation that an existing
franchise will not be renewed. The 1992 Cable Act promotes the grant of
competitive franchises. (See "THE COMPANY--Regulation.") In addition, an
increasing number of cities are exploring the feasibility of owning their
own cable systems in a manner similar to city-provided utility services.
The 1996 Act eliminated the statutory and regulatory restrictions that
prevented telephone companies from competing with cable operators for the
provision of video services through any means. The 1996 Act also allows
local telephone companies, including RBOCs, to compete with cable
television operators both inside and outside of their telephone service
areas. (See "THE COMPANY--Regulation.") The Company expects that it will
face substantial competition from telephone companies in the provision of
video services, whether through the acquisition of cable systems, the
provision of wireless cable or the provision of upgraded telephone
networks. The Company assumes that all major telephone companies have
already entered or soon will enter the business of providing video
services. Most major telephone companies have greater financial resources
than the Company and the 1992 Cable Act ensures that telephone companies
and other providers of video services will not be precluded from providing
significant cable television programming services. Additionally, the 1996
Act eliminates certain federal restrictions on utility holding companies
and thus permits utility companies to provide cable television services.
The Company expects that utility companies could become another source of
competition in the delivery of video services. (See "THE COMPANY--
Regulation.")
REGULATORY AND LEGISLATIVE
GENERAL. Regulations, regulatory actions and court decisions have
had, and in the future may have, both positive and negative effects on the
Company and its ability to compete. The recent trend in federal and state
regulation of telecommunications service providers has been toward lessened
regulation. However, the general recent trend toward lessened regulation
also has given AT&T, the largest long distance carrier in the United
States, increased pricing flexibility that has permitted it to compete more
effectively with smaller companies, such as the Company. In addition, the
1996 Act opened the Company's local service and cable markets to increased
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competition. There can be no assurance that future regulatory, judicial
and legislative changes will not have a material adverse effect on the
Company.
TELECOMMUNICATIONS SERVICES. The Company's local and long distance
businesses are subject to varying degrees of federal, state, local and
international regulation. This regulatory environment varies substantially
by jurisdiction and is in rapid change due to legislative and technological
changes. In the United States, the Company is most heavily regulated by
the various states, in particular the South Dakota Public Utilities
Commission, especially in the provision of local exchange services. The
Company must be separately certified in each state to offer local exchange
and intrastate long distance services in that state.
The 1996 Act substantially changed the regulatory environment for
telecommunications services. The 1996 Act (I) permits RBOCs to provide
domestic and international long distance services to customers located
outside of the RBOCs' home regions; (ii) permits a petitioning RBOC to
provide domestic and international long distance service to customers
within its home region upon a finding by the FCC that the RBOC has
satisfied certain criteria for opening up its local exchange network to
competition and that its provision of long distance services would further
the public interest; and (iii) removes existing barriers to entry into
local service markets, including the Company's local exchanges.
Additionally, there have been significant changes in the manner in which
carrier-to-carrier arrangements are regulated at the federal and state
level, the procedures to revise universal service standards and the
penalties for unauthorized switching of customers. The 1996 Act also
substantially changes the regulation of cable television systems. The FCC
and the South Dakota Public Utilities Commission, as well as many other
state public utilities commissions, have instituted proceedings to
investigate the changes needed in state regulation necessary to comply
with the 1996 Act.
On March 8, 1996, the FCC initiated a rulemaking proceeding and
established a Federal-State Joint Board to recommend changes to the
existing mechanisms for universal service support. On November 8, 1996,
the Joint Board released its recommended decision, and on May 8, 1997, the
FCC released a Report and Order substantially adopting the Joint Board's
recommendations. Appeals of the FCC's Report and Order have been
consolidated before the United States Court of Appeals for the Fifth
Circuit and currently are pending. The FCC also issued a further notice of
proposed rulemaking to establish a universal service support mechanism for
non-rural carriers based on the forward-looking economic cost of
constructing and operating the network used to provide the supported
services. The FCC has further indicated its intent to commence a separate
proceeding by October 1998 to establish forward-looking economic cost
mechanisms for rural carriers. Non-rural carriers would begin to receive
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support based on forward-looking economic cost on January 1, 1999, whereas
rural carriers would shift to such an approach beginning no sooner than
January 1, 2001. Modifications to the existing universal service support
mechanism could adversely affect the amounts the Company receives under the
current Universal Service Fund ("USF") rules. The Company cannot predict
the outcome of these proceedings or whether the FCC's actions will have a
material adverse effect on its operations, although the Company
historically has not received a significant portion of its revenue from the
current universal support funds (less than two percent of gross revenue in
1996).
On August 8, 1996, the FCC released its First Report and Order in the
Matter of Implementation of the Local Competition Provisions in the 1996
Act (the "FCC Interconnection Order"). In the FCC Interconnection Order,
the FCC established nationwide rules designed to encourage new entrants to
participate in the local service markets through interconnection with the
incumbent local exchange carriers, including the Company, and resale of the
local exchange carriers' retail services and unbundled network elements.
The Company cannot predict the effect such legislation or the implementing
regulations will have on its operations or the industry. Motions to stay
implementation of the FCC Interconnection Order were filed with the FCC and
federal courts of appeal. Appeals challenging, among other things, the
validity of the FCC Interconnection Order were filed in several federal
courts of appeal and consolidated before the United States Circuit Court of
Appeals for the Eighth Circuit for disposition. The Eighth Circuit has
stayed the pricing provisions of the FCC Interconnection Order, and the
United States Supreme Court denied an application to vacate the stay. On
July 18, 1997, the Eighth Circuit overturned substantial parts of the FCC
Interconnection Order, as it related to the ability of the FCC to set
interconnection rates. The FCC has announced plans to appeal the ruling
the Supreme Court. The Company cannot predict either the outcome of the
appeals or the eventual effect on its business or the industry in general.
On December 24, 1996, the FCC initiated a rulemaking proceeding to
address the reform of access charges. Access charges are a principal
component of the Company's local telephone exchange operating revenues as
well as its long distance business line cost expense. On May 16, 1997, the
FCC released its First Report and Order adopting changes to the existing
access charge structure. With limited exceptions, those modifications
apply only to price cap incumbent LECs, which generally are the nation's
largest telephone companies. In the First Report and Order, the FCC also
stated its intention to issue a subsequent Report and Order to provide
additional rules to implement access charge reform, and to initiate
separate proceedings to examine historical cost recovery issues and access
charge reform for rate-of-return carriers, such as the Company. Appeals of
the FCC's First Report and Order have been consolidated before the Eighth
Circuit and currently are pending. The Company cannot predict whether the
result of these proceedings will have a material impact upon its
operations.
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FCC approval is required for the operation of the Company's
international long distance services. The Company believes that it has all
the necessary FCC authorizations for its current operations. There can be
no assurance, however, that the Company will receive all authorizations or
licenses necessary for new communications services or that delays in the
licensing process will not adversely affect the Company's business.
INTERNET SERVICES. The Company's Internet-related services are not
currently subject to direct regulation by the FCC or any other United
States agency, other than regulation applicable to businesses generally.
The FCC recently requested comments on a petition filed by the America's
Carriers Telecommunication Association which requests that the FCC regulate
certain voice transmissions over the Internet as telecommunications
services. In its access charge reform proceeding, the FCC also concluded
that incumbent LECs may not assess interstate access charges on information
service providers, but stated that it planned to address issues relating to
information service providers' use of the public switched network as part
of a broader set of issues under review in a related proceeding. Changes
in the regulatory environment relating to the telecommunications or
Internet-related services industry could have an adverse effect on the
Company's Internet-related services business. The 1996 Act may permit
telecommunications companies, RBOCs or others to increase the scope or
reduce the cost of their Internet access services. The Company cannot
predict the effect that the 1996 Act or any future legislation, regulation
or regulatory changes may have on its Internet business.
CABLE SERVICES. The operation of cable television systems is
extensively regulated through a combination of federal legislation and FCC
regulations, by a number of state governments and by most local government
franchising authorities such as municipalities and counties. The 1996 Act,
which alters federal, state and local laws and regulations regarding
telecommunications providers and cable television service providers, can be
expected to have a profound effect on the regulation of cable television
operations. The Cable Communications Policy Act of 1984 (the "1984 Cable
Act") and the 1992 Cable Act also extensively regulated the cable
television industry and much of that regulation remains unchanged by the
1996 Act. In addition, because cable television systems use local streets
and rights-of-way, cable systems are generally licensed or franchised by
local municipal or county governments and, in some cases, by centralized
state authorities. These franchises are granted for fixed periods of time
subject to extension or renewal and, while the Company believes that its
relationships with its franchising authorities are good, there can be no
assurance that its franchise agreements will be extended or renewed, or
that any extension or renewal will be on substantially similar terms and
conditions.
The regulation of cable television systems at the federal, state and
local levels is subject to the political process and has been in constant
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flux over the past decade. Material changes in the law and regulatory
requirements must be anticipated and there can be no assurance that the
Company's business will not be affected adversely by future legislation,
new regulation or deregulation. (See "THE COMPANY--Regulation.")
RAPID TECHNOLOGICAL CHANGES; DEPENDENCE UPON PRODUCT DEVELOPMENT
The telecommunications industry is subject to rapid and significant
changes in technology. While the Company does not believe that, for the
foreseeable future, these changes will materially and adversely affect the
continued use of fiber optic cable or materially hinder its ability to
acquire necessary technologies, the effect of technological changes,
including changes relating to emerging wireline and wireless transmission
and switching technologies, on the Company's businesses cannot be
predicted.
The market for the Company's Internet-related products and services
is particularly characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new product and
service introductions. There can be no assurance that the Company will
successfully identify new product and service opportunities and develop and
introduce new products and services to the market in a timely manner. The
Company is also at risk resulting from fundamental changes in the way
Internet access services are marketed and delivered. The Company's
Internet service strategy assumes that the Transmission Control
Protocol/Internet Protocol ("TCP/IP"), utilizing fiber optic or copper-
based telecommunications infrastructures, will continue to be the primary
protocol and transport infrastructure for Internet-related services.
Emerging transport alternatives include wireless access services, cable
modems and satellite delivery of Internet information; alternative open
protocol and proprietary protocol standards have been or are being
developed. The Company's pursuit of technological advances may require
substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet services business to
alternate access devices, conduits and protocols.
DEPENDENCE UPON TECHNOLOGY
The Company's business is dependent upon its ability to procure
technology that will permit it to offer existing and new services that are
competitive with other entities in its various markets. The Company
currently does not engage in any independent research and development and
may not have the resources necessary to acquire the best available or
necessary technology in the future. The Company's competitors also could
have proprietary rights in technology that the Company could require in the
future, which could cause such technology to be unavailable to the Company
or available only at a high cost. The inability of the Company to procure
or develop required technology in the future could have a material adverse
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effect on the Company's business, financial condition and results of
operations.
SIGNIFICANT CAPITAL REQUIREMENTS
The development of the Company's businesses and the expansion and
integration of its telephone and cable networks require significant capital
expenditures. During 1996, the Company's capital expenditures, which were
primarily for the acquisition of Community Antenna Television (Cable)
("CATV") system assets and for construction of networks and the purchase of
related equipment, were approximately $5,700,000. In 1997, the Company
rebuilt its network using SONET fiber rings, built a new centralized
switching and CATV head end facility and overbuilt four of its existing
CATV systems using new hybrid fiber coax ("HFC") technology which allows
the same system to carry both cable television and telephone signals.
Total expenditures for these projects were approximately $15 million. The
Company is currently developing plans for its 1998 construction
initiatives. These initiatives involve expanding the Company's fiber optic
network, accelerating central office interconnection and integration with
its cable television systems, deploying additional switches, providing
high-speed local Internet access and acquiring complementary businesses,
technologies or products. Expenditures for these initiatives will be
subject to the Company's assessment of a number of factors, including the
cost of any additional capital required, technological developments,
regulatory requirements and market conditions. In addition, each
initiative may be implemented in whole or in part, and independently of any
other initiative, ensuring that the Company retains maximum financial and
operating flexibility. The Company will need to finance these capital
expenditures through outside sources. There can be no assurance that
increased capital expenditures will result in enhanced profitability.
The Company historically has utilized low interest government loans
from the Rural Utilities Service (the "RUS") to finance its capital
expenditure programs. In July 1997, the Company refinanced these loans
through the Rural Telephone Finance Cooperative (the "RTFC"), which also
provided the funds for the Company's 1997 capital expenditures. There is
no assurance, however, that such loans or other normal commercial loans
will be available to cover the Company's anticipated plans. Failure to
have access to sufficient funds for capital expenditures may require the
Company to delay or abandon some of its future expansion or expenditures.
Delay or abandonment of its future expansion would make it impossible for
the Company to expand into new markets, which could have a material adverse
effect on the Company's growth and future business, financial condition and
results of operations. The delay or abandonment of its future expansion
would have no impact on the Company's current operations and markets.
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FINANCIAL LEVERAGE; DEBT SERVICE, INTEREST RATE FLUCTUATIONS, POSSIBLE
REDUCTION IN LIQUIDITY
At December 31, 1996, the Company reported $15,300,000 of long-term
debt (including capital leases and excluding current maturities) and a
long-term debt-to-equity ratio of 2.4 to 1. At September 30, 1997, long-term
debt had increased to $25,700,000. Borrowings under existing long-term
credit facilities are primarily at variable interest rates, although a
small portion of such borrowings are at fixed rates. The Company may lock
into fixed rates at any time. The Company anticipates that any borrowings
that may be required for future capital expenditures would likely bear
interest at variable rates. Increases in interest rates, economic
downturns and other adverse developments, which include many factors beyond
the Company's control, could impair the Company's ability to service its
indebtedness. In addition, the cash flow required to service the Company's
debt may reduce its ability to fund internal growth, additional
acquisitions and capital improvements.
DIVIDEND RESTRICTIONS AND OTHER RESTRICTIVE COVENANTS
Certain covenants in existing loan agreements between the Company and
the RTFC limit the circumstances under which the Company is or will be
permitted to pay dividends or make other distributions with respect to its
equity. Specifically, no cash distributions may be made without prior RTFC
consent unless, after the distribution, the Company's current assets equal
or exceed its current liabilities and the Company's adjusted net worth
equals the smaller of (I) 40 percent of the Company's adjusted assets or
(ii) the sum of 10 percent of its adjusted net assets plus 30 percent of
its adjusted net worth (in excess of 10 percent of its adjusted net assets)
plus 30 percent of any reduction in adjusted net worth resulting from the
declaration or payment of any dividend or other distribution, the purchase,
redemption or retirement of capital stock, membership certificates or
equity capital certificates or investments in affiliated companies.
Existing loan agreements further restrict the payment of cash dividends and
otherwise limit the Company's financial flexibility. Additional debt
required to fund the Company's capital expenditure plans would likely
extend these restrictions indefinitely.
In March 1997, the Company received loan commitments from the RTFC in
the aggregate amount of approximately $28,421,000. The loan terms provide
that the Company must on a consolidated basis maintain a minimum annual
debt coverage service ratio (total net income or margins plus depreciation
and interest on long-term debt for a year divided by principal and interest
on long-term debt payable in that year) and a minimum average ratio of net
income to total interest expense on long-term debt. In addition, the loan
subjects the Company to certain minimum net worth requirements, and in some
cases requires the Company to obtain prior written consent from the RTFC in
order to pay any dividends or distributions to stockholders or incur
additional indebtedness.
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OPERATING LOSSES
A substantial portion of the expenditures related to the development
of the Company's business, the installation and expansion of its telephone
and cable networks and the recently proposed linking of these networks
through the acquisition or construction of facilities, will be incurred
before the Company realizes revenues from these expenditures. These
expenditures, together with the associated up-front operating expenses,
will result in negative cash flows until an adequate customer base is
established. The Company reported net losses of approximately $160,234 for
the year ended December 31, 1996 and $1,534,911 for the nine-month period
ended September 30, 1997. Although its gross revenues increased in 1996 and
during the first half of 1997, the Company has incurred significant
increases in expenses associated with the acquisition of new cable systems
and the development and expansion of its cable and fiber optic networks,
services and customer base. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the significant expenses associated with the expansion
and development of its networks and services, the Company's operating
results could vary significantly from period to period. Additional factors
contributing to variability of operating results include the pricing and
mix of services and products sold by the Company, customer terminations of
service, the timing and costs of the expansion of the Company's network
infrastructure, the timing and costs of marketing and advertising efforts
and the timing and costs of any acquisitions of businesses, products or
technologies. Accordingly, these revenues and expenses are likely to
fluctuate from period to period.
ACQUISITION STRATEGY
In furtherance of its current business strategy, the Company has
entered and may continue to enter into strategic alliances with, acquire
assets or businesses from or make investments in companies that are
complementary to its current operations. The Company has no present
commitments or agreements with respect to any such strategic alliance,
investment or acquisition. However, effective December 1, 1997, the Company
acquire by merger Futuristic, Inc. (d/b/a DataNet) ("DataNet"), a LAN and
WAN integrator located in Sioux Falls, South Dakota. (See "THE COMPANY--
Business.") Any future strategic alliances, investments or acquisitions would
be accompanied by the risks commonly encountered in such transactions. Such
risks include, among other things, the difficulty of assimilating the
operations and personnel of the companies, the potential disruption of the
Company's ongoing business, costs associated with the development and
integration of such operations, the inability of management to maximize the
financial and strategic position of the Company by the successful
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incorporation of licensed or acquired technology into the Company's service
offerings, the maintenance of uniform standards, controls, procedures and
policies and the impairment of relationships with employees and customers as
a result of changes in management. In addition, the Company may experience
higher customer attrition with respect to customers obtained through
acquisitions. There can be no assurance that products, technologies or
businesses of acquired companies will be effectively assimilated into the
business or product offerings of the combined company. In addition, the
Company may incur significant expense to complete acquisitions and to support
the acquired products and businesses. There can be no assurance that any
acquired products, technologies or businesses will contribute to the
Company's revenues or earnings to any material extent or, due to the factors
noted above, that they will not adversely affect the Company's business,
financial condition and results of operations.
NETWORK EXPANSION AND IMPLEMENTATION
The Company is continually engaged in the expansion and development of
its networks and services. This expansion will depend on, among other
things, the Company's ability to access markets, design fiber optic network
backbone routes, install facilities and obtain rights-of-way, building
access and any required government authorizations and/or permits, all in a
timely manner, at reasonable costs and on satisfactory terms and
conditions. In addition, this expansion will depend on the Company's
ability to expand, train and manage its growing employee base. Such
expansion has placed, and is expected to continue to place, significant
demands on the Company's management and operational and financial
resources. As a result, there can be no assurance that the Company will be
able to expand its existing networks or install new networks. If the
Company is not able to expand its networks or install or acquire new
networks, there likely would be a material adverse effect on the Company's
growth and there may be a materially adverse effect on the Company's
business, financial condition and results of operation.
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES
Most telephone calls made by the Company's long distance customers are
connected via transmission lines leased by the Company from transmission
facilities-based long distance carriers. These carriers, such as AT&T, US
WEST and WorldCom, Inc., compete with the Company. The Company's
profitability will continue to depend, in part, on its ability to obtain
and utilize leased capacity on a cost-effective basis. The Company leases
its capacity pursuant to agreements with terms ranging from one to 36
months. Accordingly, the Company is vulnerable to changes in its lease
arrangements, such as price increases and service cancellations. Although
the Company believes that it has and will continue to enjoy favorable
relationships with the transmission facilities-based long distance carriers
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from which the Company leases transmission lines, there can be no assurance
that leased capacity will continue to be available at cost-effective rates.
Due to the possibility of unforeseen changes in industry conditions, the
continued availability of leased transmission facilities at historical
rates cannot be assured. The Company has, from time to time, experienced
delays in receiving leased telecommunications services, especially from US
WEST, and there can be no assurance that the Company will be able to obtain
such services on the scale and within the time frames required by the
Company at an affordable cost, or at all. Any failure to obtain such
services or additional capacity on a timely basis and at an affordable
cost, or at all, could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY
RISKS
The success of the Company in marketing its services to business and
government users requires that the Company provide superior reliability,
capacity and security via its network infrastructure. The Company's
telephone and cable networks are subject to physical damage, power loss,
capacity limitations, software defects, breaches of security (by computer
virus, break-ins or otherwise) and other factors, certain of which have
caused, and will continue to cause, interruptions in service or reduced
capacity for the Company's customers. Similarly, the Company's Internet
business relies on the availability of its network infrastructure for the
provision of Internet access services. Interruptions in service, capacity
limitations or security breaches could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY FOR INTERNET
OPERATIONS
The Company relies on other companies to supply certain key components
of its Internet network infrastructure, including telecommunications
services and networking equipment, which, in the quantities and quality
demanded by the Company, are available only from sole or limited sources.
The Company has, from time to time, experienced delays in receiving these
products and services, and there can be no assurance that the Company will
be able to obtain such services on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any failure to
obtain such services or additional capacity on a timely basis and at an
affordable cost, or at all, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's Internet business also is dependent on its suppliers' abilities
to provide necessary products and components that comply with various
Internet and telecommunications standards, interoperate with products and
components from other vendors and function as intended when installed as
part of the network infrastructure. Any failure of the Company's sole or
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limited source suppliers to provide products or components that comply with
Internet standards, interoperate with other products or components used by
the Company in its network infrastructure or by its customers or fulfill
their intended function as a part of the network infrastructure could have
a material adverse effect on the Company's business, financial condition
and results of operations.
EXPANSION OF SALES AND MARKETING ACTIVITIES
As part of its growth strategy, the Company intends to seek to further
develop and expand its sales and marketing activities, primarily by
expanding its direct sales force. The Company has historically focused
primarily on providing local telephone and cable services to residential
and business customers in its local exchanges and its marketing efforts
have primarily relied upon direct mail marketing and advertising. The
Company's future success will depend upon, among other things, the
Company's ability to build an effective direct sales force, including its
ability to attract, retain and train effective direct sales marketing
personnel, and to offer competitively-priced services that are attractive
to its customers. The Company expects to incur significant expenses and
negative operating cash flows as it expands its direct sales force and
builds its customer base. Although certain members of management have
experience in direct sales marketing, the Company itself does not have
experience in this distribution channel or market segment. There can be no
assurance that expansion costs will not exceed the Company's budgeted
amounts, that the Company will be able to successfully expand its sales and
marketing efforts or that any such expansion will prove profitable.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the
continued contributions of its management team, as well as its technical,
marketing and sales personnel. The Company's businesses are managed by a
number of key executive officers, the loss of certain of whom, particularly
Thomas W. Hertz, the Company's President and Chief Executive Officer and
Craig A. Anderson, the Company's Executive Vice President and Chief
Financial Officer, could have a material adverse effect on the Company.
While certain of the Company's employees, including Messrs. Hertz and
Anderson, have entered into employment agreements with the Company, the
Company's employees may voluntarily terminate their employment with the
Company at any time. The Company's success also will depend on its ability
to continue to attract and retain qualified management, marketing,
technical and sales personnel. The process of locating such personnel with
the combination of skills and attributes required to effectuate the
Company's strategies can be lengthy. Competition for qualified employees
and personnel in the telecommunications industry is intense and, from time
to time, there are a limited number of persons with knowledge of and
experience in particular sectors of the telecommunications industry. There
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<PAGE>
can be no assurance that the Company will be successful in attracting and
retaining such executives and personnel. The loss of the services of key
personnel, or the inability to attract additional qualified personnel,
could have a material adverse effect on the Company's results of
operations, development efforts and ability to expand.
POTENTIAL LIABILITY OF ON-LINE SERVICE PROVIDERS
The law in the United States relating to the liability of on-line
services providers and Internet access providers for information carried
on, disseminated through or hosted on their systems is currently unsettled.
Several private lawsuits seeking to impose liability on such providers are
currently pending. In one case brought against an Internet access
provider, RELIGIOUS TECHNOLOGY CENTER V. NETCOM ON-LINE COMMUNICATION
SERVICES, INC., the United States District Court for the Northern District
of California ruled in a preliminary phase that under certain circumstances
Internet access providers could be held liable for copyright infringement.
The case has been settled by the parties.
The 1996 Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. On June 12, 1996, however, a panel of three federal judges
granted a preliminary injunction barring enforcement of this portion of the
1996 Act, to the extent that enforcement is based upon allegations other
than obscenity or child pornography, as an impermissible restriction on the
First Amendment's right of free speech. On June 26, 1997, the United
States Supreme Court held the provisions unconstitutional. In addition,
Congress, in consultation with the United States Patent and Trademark
Office and the Clinton Administration's National Information Infrastructure
Task Force, is currently considering legislation to address the liability
of on-line service providers and Internet access providers, and numerous
states have adopted or are currently considering similar types of
legislation. The imposition upon Internet access providers or Web hosting
sites of potential liability for materials carried on or disseminated
through their systems could require the Company to implement measures to
reduce its exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain product or service
offerings. The Company believes that it is currently unsettled whether the
1996 Act prohibits and imposes liability for any services provided by the
Company should the content or information transmitted be subject to the
statute.
The law relating to the liability of on-line service providers and
Internet access providers in relation to information carried, disseminated
or hosted also is being discussed by the World Intellectual Property
Organization in the context of ongoing consideration of updating existing,
and adopting new, international copyright treaties. Similar developments
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<PAGE>
are ongoing in the United Kingdom and other jurisdictions. The scope of
authority of various regulatory bodies in relation to on-line services is
at present uncertain. The Office of Telecommunications in the United
Kingdom recently published a consultative document setting forth a number
of issues for discussion, including the roles of traditional
telecommunications and broadcasting regulators with respect to on-line
services. The Securities Investment Board in the United Kingdom is
investigating the status of on-line services and the transmission of
investment information over networks controlled by access providers. Such
transmissions may make an access provider liable for any violation of
securities and other financial services legislation and regulations.
Decisions regarding regulation, enforcement, content liability and the
availability of Internet access in other countries may significantly affect
the ability to offer certain services worldwide and the development and
profitability of companies offering Internet and on-line services in the
future. For example, CompuServe recently removed certain content from its
services worldwide in reaction to law enforcement activities in Germany,
and it has been reported that an Internet access provider in Germany has
been advised by prosecutors that it may have liability for disseminating
neo-Nazi writings by providing access to the Internet where these materials
are available.
The increased attention focused upon liability issues as a result of
these lawsuits, legislation and legislative proposals could affect the
growth of Internet use. Any costs incurred as a result of liability or
asserted liability for information carried on or disseminated through its
systems could have a material adverse effect on the Company's business,
financial condition and results of operations.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions which may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company without the approval of
the Company's Board of Directors. (See "DESCRIPTION OF THE COMPANY'S
CAPITAL STOCK--Other Provisions Affecting Control of the Company.") Such
provisions also may render the removal of directors and management more
difficult. Among other things, the Company's Certificate of Incorporation
and/or Bylaws: (i) provide for a classified Board of Directors serving
staggered three-year terms; (ii) impose restrictions on who may call a
special meeting of stockholders; (iii) include a requirement that
stockholder action be taken only by unanimous written consent or at
stockholder meetings; (iv) specify certain advance notice requirements for
stockholder nominations of candidates for election to the Board of
Directors and certain other stockholder proposals; and (v) impose certain
restrictions and supermajority voting requirements in connection with
specified business combinations not approved in advance by the Company's
Board of Directors. In addition, the Company's Board of Directors, without
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<PAGE>
further action by the stockholders, may cause the Company to issue up to
250,000 shares of preferred stock ("Preferred Stock") on such terms and
with such rights, preferences and designations as the Board of Directors
may determine. Issuance of such Preferred Stock, depending upon the
rights, preferences and designations thereof, may have the effect of
delaying, deterring or preventing a change in control of the Company.
(See "ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock Purchase Rights
Plan.") Further, certain provisions of the Delaware General Corporation
Law (the "Delaware Law") impose restrictions on the ability of a third
party to effect a change in control of the Company and may be considered
disadvantageous by a stockholder. (See "DESCRIPTION OF THE COMPANY'S
CAPITAL STOCK--Statutory Provisions Affecting Control of the Company.")
Finally, the Company has enacted a stockholder rights plan to protect
stockholders of the Company against unsolicited attempts to acquire control
of the Company in a manner that does not offer a fair price to all
stockholders. (See "ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock
Purchase Rights Plan.") Certain federal and state regulations requiring
prior approval of transfers of control may also have the effect of
delaying, deterring or preventing a change in control of the Company. (See
"RISK FACTORS--Regulatory and Legislative" and "THE COMPANY--Regulation.")
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
There was a public market for the Cooperative's securities and there
currently is no public market for the Company's Common Stock. Although the
Company intends to apply to have shares of its Common Stock quoted for
trading on The Nasdaq Stock Market, there can be no assurance that a
trading market would develop or be maintained or, if it did, that it would
provide the Company's stockholders a meaningful opportunity to liquidate
their equity interests in the Company at a fair value. The public trading
price of shares of the Company's Common Stock would be determined by
trading among the Company's stockholders and the Company would not have
control over these trades. The market price of the Company's stock may be
highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products or
services by the Company or its competitors, changes in the regulatory
framework or in the cost of long distance service or other operating costs
and changes in general market conditions may have a significant effect on
the market price of the stock, should a market for the Company's Common
Stock ever develop. The Purchase Price was determined by the Board of
Directors in its discretion and was not determined with reference to actual
prices at which shares of the Company's Common Stock have traded in the
public markets. (See "DETERMINATION OF OFFERING PRICE.")
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation provides for a substantial
number of authorized shares of Common Stock and Preferred Stock which could
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<PAGE>
be issued upon resolution of the Board of Directors without any additional
stockholder action or approval. Future sales of substantial numbers of
shares of the Company's stock in the public market or otherwise (including
in connection with acquisitions), or the perception that such sales could
occur, could adversely affect the market price of the stock and make it
more difficult for the Company to raise funds through equity offerings in
the future and, if such sales are made, could dilute the relative equity
interests of the stockholders of the Company. Several principal
stockholders hold a significant portion of the outstanding shares of the
Company's Common Stock, or a right to acquire a significant portion of such
shares, and a decision by one or more of these stockholders to sell their
shares, under Rule 144 issued under the Securities Act or otherwise, could
materially and adversely affect the market price of the stock. (See
"ADDITIONAL SECURITIES OF THE COMPANY--Stock Options" and "--Warrants.")
As of the Record Date, there were 2,335,208 shares of the Company's Common
Stock outstanding and an additional 359,652 shares subject to stock options
and warrants. All of these shares are freely tradeable without restriction
or further registration under the Securities Act, except for any shares held
by "affiliates" of the Company or persons who had been "affiliates" within
the three months preceding consummation of the Conversion and the Merger and
shares subject to certain existing standstill agreements. (See "ADDITIONAL
SECURITIES OF THE COMPANY--Standstill Agreements.") In addition, in November
1997 the Company filed a Registration Statement on Form S-8 under the
Securities Act to register approximately 350,000 (as adjusted for the Stock
Split) shares of the Company's Common Stock issuable under the Company's 1997
Stock Incentive Plan.
CERTAIN STANDSTILL AGREEMENTS
In connection with the Cooperative's acquisition of TCIC
Communications, Inc. ("TCIC") and I-Way Partners, Inc. (renamed "Iway,
Inc.") ("Iway"), the Cooperative issued to the former shareholders of TCIC
and Iway (collectively, the "Sellers") shares of Cooperative preferred
stock which automatically upon consummation of the Merger were converted
into 94,727 shares of Common Stock and, after the Stock Split, are now
189,454 shares of Common Stock. In addition, the Sellers collectively
received warrants which were converted into warrants to purchase an
additional 38,956 shares of Common Stock and, after the Stock Split, are now
warrants to purchase 77,912 shares of Common Stock. Assuming that such
warrants were fully exercised, the Sellers would collectively own
approximately 11.1% of the outstanding Common Stock of the Company as of the
consummation of the Merger. No individual Seller would own more than 5% of
the outstanding Common Stock of the Company. Due to the relative amount of
Common Stock of the Company that would be owned by the Sellers, the Board
does not believe that the Sellers, individually or collectively, would be
able to exercise control over the Company's management or policies,
although the Sellers would collectively own more shares of the Company's
Common Stock than the Company's management. See "MANAGEMENT--Voting
Securities and Principal Stockholders of the Company" In connection with
the issuance of the Cooperative preferred stock and warrants to the
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Sellers, the Cooperative entered into standstill agreements (the
"Standstill Agreements") with the Sellers. Pursuant to the Standstill
Agreements, the Sellers are restricted in their ability to dispose of
shares of the Company's Common Stock and have agreed to refrain from
certain other actions related to Company Common Stock. For a description
of these restrictions, see "ADDITIONAL SECURITIES OF THE COMPANY--
Standstill Agreements." Due to the restrictions contained in the
Standstill Agreements, the Standstill Agreements could affect the
development of a market for Company Common Stock by limiting the sale of or
trading in the Common Stock of the Company owned by the Sellers and may
have the effect of delaying, deterring or preventing a change in control of
the Company by limiting the Sellers' abilities to initiate or participate
in any transaction that might result in a change in control.
CERTAIN CREDIT RISKS
In the ordinary course of its business, the Company maintains
substantial cash balances at various depository institutions. At times
such deposits may exceed federally insured limits. While the Company has
not experienced any losses as a result of such deposits, the insolvency or
failure of such a financial institution could result in a substantial loss
for the Company, depending on the size of the uninsured portion of the
deposit.
THE OFFERING
The Company is offering 400,000 Shares of Common Stock at a Purchase
Price of $12.50 per Share to Stockholders and Employees of record as of the
close of business on __________, 199_ (the "Record Date"). Stockholders
and Employees of the Company on the Record Date are entitled to subscribe
for the Shares offered in this Offering subject to the conditions and in
accordance with the procedures described below. Only those Stockholders
and Employees who are legal residents of the states of South Dakota, Iowa,
Minnesota and certain other states may purchase Shares in the Offering. (See
"THE OFFERING--Subscription.") There is no minimum offering amount or
subscription amount.
OFFEREES
The Company offers the Shares only to (i) holders of record of Common
Stock as of the close of business on the Record Date ("Stockholders") and
(ii) directors, officers and employees of the Company as of the close of
business on the Record Date ("Employees"). Subscribing Stockholders will
be entitled to purchase Shares before Employees. To the extent that the
Offering is fully subscribed by Stockholders, Employees will not be
entitled to purchase Shares, as further described below. For purposes of
the Offering, a person who is both a Stockholder and an Employee will be
treated as a Stockholder only.
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<PAGE>
EXPIRATION DATE
This Offering will expire on ___________________, 1998, at 5:00 p.m.
South Dakota time (the "Expiration Date"). The Company will not be
obligated to accept any purported subscriptions received after the
Expiration Date, regardless of when the documents relating to that
subscription were sent.
ALLOCATION OF OVERSUBSCRIBED SHARES BY STOCKHOLDERS
If the aggregate number of Shares subscribed for by all Stockholders
who submit valid subscriptions is greater than 400,000 Shares, Shares will
be allocated to subscribing Stockholders in proportion to the number of
shares of the Company's Common Stock held by each subscribing Stockholder
as of the Record Date. To that end, management of the Company will compute
an allocation factor (the "Allocation Factor") which shall be that number
which, in the judgment of management, best achieves all of the following
allocation objectives:
- Each subscribing Stockholder who subscribes for a
number of Shares greater than the product obtained by
multiplying the Allocation Factor by the number of
shares held of record by that Stockholder as of the
Record Date shall receive a number of Shares equal to
the product obtained by multiplying the Allocation
Factor by the number of shares held of record by the
Stockholder as of the Record Date.
- Each Stockholder who subscribes for a number of Shares
less than the product obtained by multiplying the
Allocation Factor by the number of shares held of
record by the Stockholder as of the Record Date shall
receive the number of Shares subscribed for.
- Each Stockholder who subscribes for 40 or fewer Shares
shall receive the number of Shares subscribed for.
- The number of Shares issued in the Offering, after
taking into account allocation and rounding of
fractional Shares, shall not in any event exceed
400,000 Shares.
REMAINING SHARES
Shares remaining, if any, after subscriptions by Stockholders are
fully satisfied ("Remaining Shares") will be available for purchase by
Employees. Each Employee may subscribe for as few as one Remaining Share
or as many Remaining Shares as the Employee would like to purchase. If the
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<PAGE>
Offering is not fully subscribed by Stockholders but Remaining Shares are
oversubscribed by Employees, Remaining Shares will be allocated per person,
with each Employee entitled to purchase the same maximum number of
Remaining Shares. To that end, management of the Company will compute a
maximum number (the "Maximum Number") which shall be that number which, in
the judgment of management, best achieves the following objectives:
- Each Employee who subscribes a number of Shares equal to or
less than the Maximum Number of Remaining Shares shall be
entitled to purchase all Remaining Shares subscribed for.
- Each Employee who subscribes for more Remaining Shares than
the Maximum Number shall be entitled to purchase such
Maximum Number of Remaining Shares.
FRACTIONAL SHARES
The Company will not issue any fractional Shares in the Offering. The
Company will round to the nearest whole number any partial Share resulting
from the allocation of Shares.
NOMINEE STOCKHOLDERS
For purposes of this Offering, the Company will extend the right to
subscribe to the beneficial owners of shares of Common Stock held of record
by any broker, bank, depository or other nominee (a "Nominee Stockholder").
Nominee Stockholders may subscribe on behalf of their beneficial owners.
Thus, each Nominee Stockholder should contact the beneficial owners of such
shares as soon as practicable to ascertain the beneficial owners'
intentions and to obtain instructions with respect to the Offering.
In the event the Offering is oversubscribed by Stockholders, Nominee
Stockholders who subscribe on behalf of beneficial owners of Common Stock
may be required to certify to the Company as to the aggregate number of
Shares subscribed to be purchased by each beneficial owner and as to the
eligibility of each beneficial owner to subscribe in the Offering. Nominee
Stockholders may, at their option, complete a single Subscription Agreement
for all beneficial owners of Common Stock or a separate Subscription
Agreement for each beneficial owner of Common Stock.
PURCHASE PRICE
The Purchase Price is $12.50 per Share subscribed to be purchased.
The Purchase Price is payable in cash by check or bank money order, all as
more completely described under "THE OFFERING--Subscription."
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CONDITIONS
The Offering is not conditioned on the subscription for or sale of any
minimum number of Shares. Once a Stockholder or Employee has subscribed
for Shares, such subscription may not be revoked. Accordingly,
Stockholders and Employees who subscribe for Shares will not have a right
to return of their funds (except for unpurchased Shares, as described
below), unless the Company terminates the Offering. Any subscription
rights not exercised before the Expiration Date will expire and become
worthless. The Company reserves the right at any time prior to the
Expiration Date to terminate or extend the Offering for any reason.
SUBSCRIPTION
A Stockholder or Employee may subscribe by properly completing and
signing a Subscription Agreement and delivering it to the Company, prior to
the Expiration Date, along with payment of the total Purchase Price for the
Shares that the Stockholder or Employee subscribes to purchase. A
Subscription Agreement is included with this Prospectus. The form of
Subscription Agreement is also included as Appendix C to this Prospectus.
Photocopies of the Subscription Agreement may be used.
Until such time as the Company delivers certificates to the
subscribers representing Shares purchased in the Offering, all funds
received by the Company in payment of the Purchase Price will be held by
the Company and invested at the discretion of the Company. Earnings on
such funds will be retained by the Company regardless of whether or not the
Offering is consummated.
The method of delivery of the Subscription Agreement and payment of
the Purchase Price to the Company will be at the election and risk of
subscribing Stockholders and Employees. All questions concerning the
timeliness, validity, form and eligibility of subscriptions will be
determined by the management of the Company, whose determinations will be
final and binding. The Company, in its sole discretion, may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within
such time as it may determine, or reject the purported exercise of any
subscription. Subscription Agreements will not be deemed to have been
received or accepted until all irregularities have been waived or cured
within such time as the Company determines, in its sole discretion. The
Company is under no duty to notify any Stockholder or Employee of any defect
or irregularity in connection with the submission of Subscription Agreements,
or to incur any liability for failure to give such notification.
Subscription Agreements and payment of the Purchase Price must be
delivered to Mr. Craig A. Anderson, 29705 453rd Avenue, Irene, South Dakota
57037-0066 on or before the Expiration Date. Payment may be made by check
or bank money order, payable to Dakota Telecommunications Group, Inc. The
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Purchase Price will be deemed to have been received by the Company upon (I)
clearance of any uncertified check or (ii) receipt by the Company of any
certified check or cashier's check or of any bank money order. Return of a
check unpaid for insufficient funds or any other reason may invalidate a
subscription.
Any questions or requests for assistance concerning any method of
subscribing and any requests for additional copies of this Prospectus,
should be directed to Mr. Craig A. Anderson, 29705 453rd Avenue, Irene,
South Dakota 57037-0066, (telephone (605) 263-3301).
ISSUANCE OF COMMON STOCK
The Company will deliver certificates representing Shares purchased in
this Offering to subscribers as soon as practicable after the Expiration
Date and after the Company has made all prorations and adjustments
contemplated by the terms of the Offering.
UNDERWRITERS AND DEALERS
No underwriter is involved in this Offering, and no commissions, fees
or discounts will be paid or allowed to any underwriter, dealer, finder or
other party in connection with the Offering. The Company is offering the
Shares through its directors, officers and employees. None of such persons
will receive, directly or indirectly, any remuneration for soliciting sales
of Shares.
SALES OF SHARES TO COMPANY ESOP
Shares, if any, remaining after subscriptions by Stockholders and
Employees may be offered and sold to the Company's Employee Stock Ownership
Plan (the "ESOP"), subject to certain conditions, including the approval of
such sale by the Trustees of the ESOP. In December 1997, the ESOP purchased
49,213 shares of Common Stock. As a result of the Stock Split, the ESOP now
owns 98,426 shares of Common Stock.
DETERMINATION OF OFFERING PRICE
The Company was reorganized as a Delaware business corporation in July
1997. To date, there has been no well established public trading market
for the Company's Common Stock, trading activity has been infrequent, and
price information has not been regularly published.
The Purchase Price was determined by the Board of Directors of the
Company in the Board's discretion. In choosing the Purchase Price, the
Board of Directors considered the Company's pro forma book value per share,
the Company's pro forma earnings per share, multiples of book value per
share and earnings per share at which shares of more or less comparable
telecommunications companies are traded in the public markets, and the
general plans, prospects and risks of the Company as perceived by the Board
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of Directors. The Purchase Price was determined by the Board of Directors
in its discretion and was not determined with reference to actual prices at
which shares of the Company's Common Stock have traded in the public
markets.
NO BOARD RECOMMENDATION
Each Stockholder and Employee must evaluate his or her own best
interests and financial circumstances to determine whether to invest in the
Shares. The Board of Directors of the Company makes no recommendation to
Stockholders or Employees regarding whether they should subscribe for
Shares or Remaining Shares.
USE OF PROCEEDS
The Company will receive approximately $5 million in cash (prior to
deduction of all expenses of the Offering) if the Offering is fully
subscribed.
The Company intends to use the proceeds of the Offering for general
operating purposes. These purposes may include selective acquisitions of
capital assets to be used in the Company's business, acquisitions of other
companies engaged in the same businesses as the Company, or acquisitions of
businesses which the Company considers to be complimentary to its core
businesses. However, as of the date of this Prospectus, no specific assets
or businesses have been identified for acquisition and the costs of such
acquisitions, if any, cannot be estimated. Pending such uses, the net
proceeds will be invested in short-term investment securities.
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CAPITALIZATION
The following table sets forth as of December 31, 1997: (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale by the Company of the 400,000 shares
offered hereby (at the price to existing shareholders of $12.50 per share)
and the application of the estimated net proceeds therefrom. (See "USE OF
PROCEEDS.") This table should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Prospectus.
CAPITALIZATION TABLE
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------
ACTUAL AS ADJUSTED
------------ -------------
<S> <C> <C>
Short-term Debt:
Current maturities of long-term debt $ -- $ --
------------ ------------
Long-term Debt, net of current maturities -- --
------------ ------------
Shareholders' Equity:
Common stock, no par value, __________ shares
authorized, ____________ shares issued and
outstanding; ___________ shares issued and
outstanding as adjusted <F1> -- --
Preferred stock, no par value, 250,000 shares
authorized, 0 shares issued and
outstanding <F2>
Other Capital <F3> -- --
Accumulated deficit -- --
------------ ------------
Total shareholders' equity -- --
------------ ------------
Total capitalization $ -- --
============ ============
<FN>
<F1> Does not include __________ shares of Common Stock issued upon exercise
of outstanding options.
<F2> 15,000 shares of Preferred Stock is designated as Series A Junior
Participating Preferred Stock.
<F3> Consists of capital credits in the Company that had been allocated
to members and patrons that the Company was unable to locate at the
time of the Conversion and Merger.
</FN>
</TABLE>
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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The Company's authorized capital stock consists of 5,000,000 shares of
Common Stock, and 250,000 shares of Preferred Stock. As of the Record Date, a
total of 2,335,208 shares of Common Stock were outstanding, held by ______
stockholders of record, and no shares of Preferred Stock were outstanding.
COMMON STOCK. Holders of Common Stock are entitled to dividends out
of funds legally available for that purpose if, as and when declared by the
Board of Directors of the Company. Certain covenants in existing loan
agreements between the Company and the RTFC limit the circumstances under
which Company would be permitted to pay dividends or make other
distributions to Company stockholders. Under these agreements, the RTFC
must authorize distributions other than in shares of stock unless certain
financial ratio requirements are met. The dividend rights of the Company's
Common Stock also are subject to the rights of any Company Preferred Stock
which has been or may be issued. As of the date of this Prospectus, since
the Conversion and Merger in July 1997, the Company has not paid cash
dividends on Common Stock.
Each holder of the Company's Common Stock is entitled to one vote for
each share held on each matter presented for stockholder action. Company
Common Stock has no preemptive rights, cumulative voting rights, conversion
rights or redemption provisions.
In the case of any liquidation, dissolution or winding up of the
affairs of the Company, holders of the Company's Common Stock would be
entitled to receive, pro rata, any assets distributable to common
stockholders in respect of the number of shares held by them. The
liquidation rights of the Company's Common Stock would be subject to the
rights of holders of any Company Preferred Stock which could be issued in
the future.
All outstanding shares of the Company's Common Stock are fully paid
and nonassessable.
PREFERRED STOCK. The Company is authorized to issue, without further
stockholder approval, up to 250,000 shares of the Company's Preferred Stock
from time to time in one or more series with such designations, powers,
preferences and relative voting, distribution, dividend, liquidation,
transfer, redemption, conversion and other rights, preferences,
qualifications, limitations or restrictions as may be provided for the
issue of such series by resolution adopted by Company's Board of Directors.
Such Preferred Stock could have priority over Common Stock as to dividends
and as to the distribution of the Company's assets upon any liquidation,
dissolution or winding up of the Company.
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The Board of Directors has implemented a Preferred Stock Purchase
Rights Plan. In connection with such plan, the Company's Certificate of
Incorporation designates 15,000 shares of Preferred Stock as Series A
Junior Participating Preferred Stock for use in connection with such plan.
(See "ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock Purchase Rights
Plan.")
STOCK OPTIONS AND WARRANTS
Upon the consummation of the Merger, stock options and warrants to
purchase an aggregate of 162,936 (prior to the Stock Split) shares (or
approximately 13% of the stock outstanding on such date on a fully
diluted basis) of the Company's Common Stock were outstanding. (See
"ADDITIONAL SECURITIES OF THE COMPANY--Stock Options" and "--Warrants.") As
of the Record Date, and taking into account the effects of the Stock Split,
stock options and warrants to purchase an aggregate of 359,652 shares of
Common Stock were outstanding.
STATUTORY PROVISIONS AFFECTING CONTROL OF THE COMPANY
Section 203 of the Delaware Law prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years following the time that such person becomes an
"interested stockholder" unless certain requirements are met or unless
certain exceptions apply. The term "business combination" generally
includes (I) any merger or consolidation of the corporation or any
majority-owned subsidiary of the corporation with (A) the interested
stockholder, or (B) with any other corporation or other entity if the
merger or consolidation is caused by the interested stockholder and as a
result of the merger or consolidation Section 203 is not applicable to the
surviving entity; (ii) with certain exceptions, any sale, lease or other
disposition to or with the interested stockholder of assets of the
corporation or of any majority-owned subsidiary of the corporation where
the assets have an aggregate market value equal to 10% or more of either
the aggregate market value of all the assets of the corporation determined
on a consolidated basis or the aggregate market value of all the
outstanding stock of the corporation; (iii) any transaction which results
in the issuance or transfer by the corporation or by any majority-owned
subsidiary of the corporation of any stock of the corporation or of such
subsidiary to the interested stockholder, with certain exceptions; (iv) any
transaction involving the corporation or any majority-owned subsidiary of
the corporation which increases the proportionate share of the stock which
is owned by the interested stockholder; or (v) any receipt by the
interested stockholder of the benefit, directly or indirectly (except
proportionately as a stockholder of the corporation), of any loans,
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advances, guarantees, pledges or other financial benefits (with certain
exceptions) provided by or through the corporation or any majority-owned
subsidiary.
An "interested stockholder" is generally defined as any person (other
than the corporation or a majority-owned subsidiary) that (I) owns 15% or
more of the outstanding voting stock of the corporation, or (ii) is an
affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
past three years and the affiliates and associates of such person. Among
the exceptions from the definition of "interested stockholder" is any
person whose ownership of shares in excess of the 15% limit was the result
of action taken solely by the corporation, unless that such person
thereafter acquired additional shares of voting stock of the corporation
(except as a result of further corporate action not caused, directly or
indirectly, by such person).
There are a number of exceptions to the prohibitions of Section 203.
The first exception applies where, prior to the time that the interested
stockholder became an interested stockholder, the board of directors
approved either the business combination or the transaction which resulted
in the stockholder becoming an interested stockholder.
The second exception is where, upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
those shares owned (I) by persons who are directors and also officers and
(ii) certain employee stock plans. The third exception is where, at or
subsequent to the time the person became an interested stockholder, the
business combination was approved by the board of directors and authorized
at an annual or special meeting of stockholders (and not by written
consent) by the affirmative vote of at least 66 2/3 percent of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 also does not apply: (I) if the corporation's original
certificate of incorporation contains a provision expressly electing not to
be governed by Section 203; (ii) if the stockholders adopt an amendment to
the certificate of incorporation or bylaws expressly electing not to be
governed by Section 203; (iii) if the corporation does not have a class of
voting stock that is (A) listed on a national securities exchange, (B)
authorized for quotation on The Nasdaq Stock Market, or (C) held of record
by more than 2,000 stockholders, unless any of the foregoing results from
action taken by an interested stockholder or from a transaction in which a
person becomes an interested stockholder; (iv) if a stockholder becomes an
interested stockholder inadvertently and (A) as soon as practicable divests
itself of ownership of sufficient shares so that the stockholder ceases to
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be an interested stockholder; and (B) would not, at any time within the
three-year period immediately prior to a business combination between the
corporation and such stockholder, have been an interested stockholder but
for the inadvertent acquisition of ownership; (v) pursuant to the
"competitive bidding" exception; or (vi) if the business combination is
with an interested stockholder who became an interested stockholder at a
time when the restrictions contained in Section 203 did not apply (with
certain exceptions).
The "competitive bidding exception" referred to above provides that
(assuming the satisfaction of certain criteria) any person, including one
about to become and one who is an interested stockholder, may propose a
transaction free from the restrictions of Section 203 in certain
situations. The basic policy behind this exception is that once the board
of directors has decided to sell the corporation or a majority of its
assets or has approved (or not opposed) a tender or exchange offer for 50%
or more of the corporation's outstanding stock, the stockholders are
benefitted by the promotion of bidding contests. Subsequent bidders are
excepted from Section 203 if certain conditions are met. This exception
allows a bidder who announces a transaction after the announcement of a
management-approved transaction and prior to the completion or abandonment
of the management-approved transaction to be free of the provisions of
Section 203.
Under this exception, the corporation must give at least 20 days'
notice to all interested stockholders prior to the consummation of (I) a
merger or consolidation of the corporation (except for those mergers or
consolidations where no stockholder vote is required), (ii) a sale, lease
or other disposition of assets of the corporation or a majority-owned
subsidiary having an aggregate market value at least equal to 50% of either
the aggregate market value of all of the corporation's assets (determined
on a consolidated basis) or the aggregate market value of 50% of the
corporation's outstanding stock, or (iii) a proposed tender or exchange
offer for 50% or more of the corporation's outstanding stock. This notice
requirement ensures that an interested stockholder will have the
opportunity to decide whether to bid against a management-approved
transaction prior to the time that the transaction is approved by the
stockholders.
There are three prerequisites to the application of the "competitive
bidding exception." First, there must be board approval of one of the
three types of transactions described above. The second necessary element
is the approval of (or lack of opposition to) a proposed transaction with a
person who was not an interested stockholder during the preceding three
years or who became an interested stockholder with board approval. The
third prerequisite is that the potentially triggering transaction must
either be approved or not opposed by a majority of the members of the board
who were directors before any person became an interested stockholder in
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the preceding three years. Alternatively, directors approving or not
opposing the transaction may include those who were elected or recommended
by a majority of the continuing directors to succeed such continuing
directors.
OTHER PROVISIONS AFFECTING CONTROL OF THE COMPANY
Some provisions of the Company's Certificate of Incorporation may have
an anti-takeover impact and may make tender offers, proxy contests and
certain mergers more difficult to consummate.
PROVISIONS REGARDING THE BOARD OF DIRECTORS.
CLASSIFIED BOARD. The Company's Certificate of Incorporation
classifies the Board of Directors into three classes serving staggered,
three-year terms. Classification of the Board could have the effect of
extending the time during which the existing Board of Directors could
control the operating policies of the Company even though opposed by the
holders of a majority of the outstanding shares of Common Stock.
NOMINATION OF DIRECTORS. Under the Company's Certificate of
Incorporation, all nominations for directors by stockholders would be
required to be delivered to the Company in writing at least 120 days prior
to the notice of an annual meeting of stockholders or, in the case of a
special meeting of stockholders at which a director or directors would be
elected, at least seven days after the notice of the special meeting. A
nomination that is not received prior to these deadlines would not be
placed on the ballot. The Board believes that advance notice of
nominations by stockholders would afford a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent
deemed necessary or desirable by the Board of Directors, would provide an
opportunity to inform stockholders about such qualifications. Although
this nomination procedure would not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of
directors, the nomination procedure could have the effect of precluding a
nomination for the election of directors at a particular meeting if the
proper procedures were not followed.
REMOVAL OF DIRECTORS. Under the Company's Certificate of
Incorporation, subject to the rights of any class of stock then
outstanding, any director could be removed from office, but only for cause,
and only by stockholder action. Generally, the vote for removal would
require the affirmative vote of a majority of shares entitled to vote at an
election of directors. However, if less than the entire board was to be
removed, no single director could be removed if the votes cast against the
director's removal would be sufficient to elect the director if then
cumulatively voted at an election of the class of directors of which the
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director is a part. "Cause" for removal could only be present in the
circumstances specified in the Company's Certificate of Incorporation.
"Cause" is present when: (I) the director whose removal is proposed has
been convicted of a felony by a court of competent jurisdiction and such
conviction is no longer subject to direct appeal; (ii) the director has
been adjudicated by a court of competent jurisdiction to be liable for
negligence, or misconduct, in the performance of such person's duty to the
corporation in a matter of substantial importance to the corporation and
such adjudication is no longer subject to a direct appeal; (iii) the
director has become mentally incompetent, whether or not so adjudicated,
which mental incompetency directly affects such person's ability as a
director of the corporation; or (iv) the director's actions or failure to
act have been in derogation of the director's duties, as provided in the
Company's Bylaws or otherwise provided by law. Any proposal for removal
pursuant to (iii) or (iv) that is initiated by the Board of Directors for
submission to the stockholders would require the affirmative vote of at
least two-thirds of the total number of directors then in office, excluding
the director who is the subject of the removal action and who shall not be
entitled to vote thereon.
QUALIFICATION OF DIRECTORS. Under the Company's Certificate of
Incorporation, no person who has asserted or asserts any "Claim" (defined
below) against the corporation or any subsidiary (a "Plaintiff"), and no
person who was or became associated or affiliated with any Plaintiff (a
"Related Person"), would be eligible to be elected or to serve as a director
until the Claim was "Finally Resolved" (defined below). A director who was
validly nominated and elected as a director and who thereafter became a
Plaintiff or Related Person would continue as a director for the remainder of
the term for which the director was elected or until the director's
resignation or removal. A director who was or became a Plaintiff or a
Related Person would be required to either (i) promptly take all steps
necessary to cause the director to be neither a Plaintiff nor Related Person
or (ii) if the director cannot do so and the Claim has not been Finally
Resolved within the "Resolution Period" (defined below), resign as a director,
effective immediately, at or before the end of such Resolution Period.
A "Claim" means any claim, cross-claim, counterclaim or third-party
claim pled in any action, suit or proceeding before any court, governmental
agency or instrumentality, arbitrator or similar body or authority.
However, certain claims are excluded, including: (I) one which, when
aggregated with all other claims asserted by the Plaintiff or any Related
Person of such Plaintiff against the corporation or any subsidiary that
have not been Finally Resolved, could not, if decided adversely to the
corporation or a subsidiary, along with all other aggregated claims, cross-
claims, counterclaims and third-party claims, result in liability in excess
of 10% of the consolidated current assets of the corporation as of the most
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recent quarter or render the corporation insolvent; (ii) one arising
pursuant to a contract between the corporation and the pertinent Plaintiff
or Related Person that was approved by a majority of the Continuing
Directors (as defined below), including without limitation, claims arising
under any indemnity or employment contract; and (iii) claims asserted in
the right of the corporation (i.e., derivative actions).
The term "Finally Resolved" means that a final order has been rendered
with respect to the Claim and all available appeals from such order have
been exhausted or the time for seeking such review has expired. The term
"Resolution Period" means the 30-day period beginning on the earlier of
(i) the date on which a director of the corporation notifies the Board that
the director has become a Plaintiff or Related Person or (ii) the date on
which the Board determines that a director has become a Plaintiff or
Related Person. However, the Board could (but would not be required to)
extend a Resolution Period by up to 15 days if the director establishes to
the Board's satisfaction a reasonable likelihood that the Claim would be
Finally Resolved or such director would cease to be both a Plaintiff and a
Related Person during that extra 15-day period.
The Board of Directors would not nominate any person for election as a
director unless (I) the prospective nominee has provided the Board with
(A) all information necessary or appropriate to enable the Board to
determine whether the nominee is a Plaintiff or a Related Person and (B) a
signed statement that the prospective nominee is not aware of any reason
not disclosed to the Board why the prospective nominee would or might be
considered a Plaintiff or Related Person and (ii) after receipt of the
items the Board determines that the prospective nominee is not a Plaintiff
or Related Person.
Any stockholder who is uncertain whether any person the stockholder
desires to nominate for election as a director is a Plaintiff or Related
Person could request a determination from the Board concerning that matter,
upon delivering to the Board certain information and other items and
complying with certain deadlines. Within 10 days after receiving a
properly submitted request (or, if it is impossible or impracticable to do
so during such period, as soon as practicable thereafter), the Board would
be required to consider the request and determine whether or not the
candidate is a Plaintiff or Related Person who could not be nominated for
election to the Board.
If a candidate who was the subject of a proper and timely submitted
request was determined not to be a Plaintiff or Related Person and the
request was submitted at least five days in advance of the last date on
which the requesting stockholder otherwise would have been entitled to give
notice of intent to nominate the candidate, then the Board's determination
would operate as a waiver of the time limits otherwise applicable to the
giving of such notice of intent to the extent, if any, necessary to afford
the stockholder a period of five days after receipt of the Board's notice
within which to give notice of intent to nominate the candidate.
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If the Board determined that the candidate was a Plaintiff or Related
Person and the request was submitted at least five days in advance of the
last date on which the requesting stockholder otherwise would have been
entitled to give notice of intent to nominate, then the Board's
determination would operate as a waiver of the time limits otherwise
applicable to the giving of notice of intent to nominate to the extent, if
any, necessary to afford the requesting stockholder a period of 15 days
after receipt of the Board's notice within which to give notice of intent
to nominate another person in lieu of the ineligible candidate.
Whenever any stockholder was afforded an additional time period within
which to give notice of intention to nominate, the Board may afford the
other stockholders of the corporation a comparable additional period of
time within which to give such notice.
While the Board of Directors believes that these provisions ensure
that directors and nominees for election as directors will not have
significant conflicts of interest with the corporation, they may have the
effect of making stockholder nominations of director candidates more
difficult.
BOARD EVALUATION OF CERTAIN OFFERS. The Company's Certificate of
Incorporation provides that the Board of Directors would not initiate,
approve, adopt or recommend any offer of any person or entity (other than
the Company) to make a tender or exchange offer for any of the Company's
Common Stock or Preferred Stock, to merge or consolidate the Company with
any other entity, or to purchase or acquire all or substantially all of the
Company's assets, unless and until the Board has evaluated the offer and
determined that it would be in compliance with all applicable laws and that
the offer is in the best interests of the Company and its stockholders. In
doing so, the Board could rely on an opinion of legal counsel who is
independent from the offeror, and/or may test such legal compliance in
front of any court or agency that may have appropriate jurisdiction over
the matter.
In making its determination as to whether the transaction would be in
the best interests of the corporation and its stockholders, the Board would
be required to consider all factors it deemed relevant, including but not
limited to: (i) the adequacy and fairness of the consideration to be
received by the Company and/or its stockholders, considering historical
trading prices of the Company's Common Stock, the price that could be
achieved in a negotiated sale of the Company as a whole, past offers to
other corporations and the future prospects of the Company; (ii) the
possible social and economic impact of the proposed transaction on the
Company, its employees, customers and suppliers; (iii) the potential social
and economic impact of the proposed transaction on the communities in which
the Company and its subsidiaries operate or are located; (iv) the business
and financial condition and earnings prospects of the offering party; (v)
the competence, experience and integrity of the offering party and its
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management; and (vi) the intentions of the offering party regarding the use
of the assets of the Company to finance the transaction.
"BLANK CHECK" PREFERRED STOCK AND PREFERRED STOCK RIGHTS PLAN. The
Company's Certificate of Incorporation authorizes the Board of Directors to
issue up to 250,000 shares of the Company's Preferred Stock from time to
time in one or more series with such designations, powers, preferences and
relative voting, distribution, dividend, liquidation, transfer, redemption,
conversion and other rights, preferences, qualifications, limitations or
restrictions as may be provided for the issue of such series by resolution
adopted by the Company's Board of Directors. The Certificate of
Incorporation also designates 15,000 shares as Series A Junior
Participating Preferred Stock for possible issuance in connection with a
Preferred Stock Purchase Rights Plan which the Board of Directors of the
Company enacted following the consummation of the Merger. No stockholder
vote was taken in connection with the implementation of that plan. (See
"ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock Purchase Rights
Plan.")
SUPERMAJORITY VOTE PROVISIONS. The Company's Certificate of
Incorporation contains certain provisions that impose a supermajority vote
requirement to approve certain "business combinations" involving an
"interested stockholder." Article X provides that, in addition to any vote
required by law or other provisions of the proposed Certificate of
Incorporation, the affirmative vote of not less than 80% of the outstanding
shares of "voting stock" (which is defined as all shares of the Company's
stock that are entitled to vote generally in the election of directors,
voting as a single class) would be required for the approval of certain
"business combinations" between the corporation or a subsidiary and any
"interested stockholder."
A "business combination" is generally defined for purposes of Article
X as including mergers, sales of all or substantially all of the assets of
the corporation and certain other transactions. An "interested
stockholder" is defined as a person (other than the Company, its majority-
owned subsidiaries or their employee benefit plans), who, alone or together
with affiliated persons, beneficially owns 10% or more of the voting stock
of the Company, as well as certain other persons that are affiliated with
an interested stockholder.
These requirements would not apply when the transaction was approved
by a majority of the "continuing directors," which are directors who are
not affiliated with an interested stockholder and who were either (I)
elected to the Board prior to the time that the interested stockholder
became an interested stockholder or (ii) designated, before their initial
election as directors, as continuing directors by a majority of the
then-continuing directors. The term excludes, however, certain persons that
became directors as a result of election contests within the meaning of
Rule 14a-11 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or other types of proxy solicitations.
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In addition, Article XII provides that, in addition to any vote
required by law or other provisions of the Certificate of Incorporation,
the affirmative vote of at least 80% of the shares held by persons who are
not interested stockholders (as defined in Article X) would be required to
approve business combinations (as defined in Article X) of the corporation
or a majority owned subsidiary with any interested stockholder. This
requirement would not apply if (I) the business combination was approved by
a majority of the continuing directors (as defined in Article X) or (ii)
certain other detailed conditions are satisfied.
RESTRICTIONS ON AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE COMPANY. Several provisions of the Company's Certificate of
Incorporation require a greater-than-majority vote to be amended.
Specifically, Article XV(A) provides that no amendment to the Certificate
of Incorporation could alter, modify or repeal any or all of the provisions
of Article XII (supermajority vote/fair price requirement for certain
business combinations) or Article XV(A), unless the amendment is adopted by
the affirmative vote of not less than 80% of the outstanding shares of
voting stock held by stockholders who are not interested stockholders.
Also, Article XV(B) of the Company's Certificate of Incorporation
provides that no amendment shall alter, modify or repeal any or all of the
provisions of Articles VII (powers of the Board of Directors), VIII (Board
of Directors classification, nomination, qualification, etc.), IX
(stockholder action by written consent), X (supermajority vote required for
certain business combinations), XI (non-stockholder constituency provision)
or XIII (limitation of certain director liability), and the stockholders
would not have the right to alter, modify or repeal any or all provisions
of the Bylaws of the corporation, unless such amendment, alteration,
modification or repeal is adopted by the affirmative vote of the holders of
not less than 80% of the outstanding shares of voting stock. However, the
provisions of Article XV(B) would not apply to, and such 80% vote would not
be required for, any amendment, alteration, modification or repeal which
has first been approved by (I) the affirmative vote of 80% of the entire
Board of Directors, including the affirmative vote of at least one director
of each class of the Board of Directors and (ii) the affirmative vote of
two-thirds of the continuing directors.
STANDSTILL AGREEMENTS. In connection with the Cooperative's
acquisition of TCIC and Iway, the Cooperative entered into the Standstill
Agreements with the Sellers. These Standstill Agreements are applicable to
shares of the Company's Common Stock issued to the Sellers in connection
with the Merger, and restrict the Sellers' abilities to dispose of shares
of the Company's Common Stock and require them to refrain from certain
other actions related to the Company's Common Stock. For a description of
these restrictions, see "ADDITIONAL SECURITIES OF THE COMPANY--Standstill
Agreements." The Standstill Agreements could have the effect of delaying,
deterring or preventing a change in control of the Company.
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THE COMPANY
The following description of the Company should be considered
carefully in evaluating the Company and its business. In this Prospectus,
the term "Company" means the Cooperative and its subsidiaries before the
Conversion, DTG and its subsidiaries after the Conversion and the Company
and its subsidiaries after the Conversion and the Merger.
BUSINESS
The Cooperative was incorporated as a stock cooperative in South
Dakota on April 3, 1952, and has operated since that date in Irene, South
Dakota. The Cooperative was formed to consolidate several small
independent telephone companies in Southeastern South Dakota. The Company
and its predecessors have been engaged in the telecommunications business
since 1903. From the date of formation through 1979, the Company operated
principally as a telephone company. Today, the Company continues these
operations and has expanded into cable television and other related
telecommunications services. In 1979, the Company expanded into CATV by
building cable systems in its local markets. In the mid-1980s, the Company
expanded into the cellular market through partnerships with cellular
companies serving the Company's market area. The Company sold its rural
cellular operations in 1994 and its Sioux Falls, South Dakota operations in
1995, in an effort to focus on new personal communication service ("PCS")
technology. The Company expanded its cable operations in 1995 and 1996,
and further expanded with the acquisitions in 1996 of TCIC (long distance
and operator services) and Iway (Internet services), as described below.
Today, the Company is a diversified telecommunications services
company. The Company provides wireline local and network access service,
long distance telephone service, operator-assisted calling services,
telecommunications equipment sale and leasing services, cable television
service and Internet access and related services. Effective December 1, 1997,
the Company acquired by merger Futuristic, Inc. (d/b/a DataNet) ("DataNet"),
a LAN and WAN integrator located in Sioux Falls, South Dakota. DataNet is the
largest LAN/WAN integrator in South Dakota and is now a wholly owned
subsidiary of the Company.
The Company's local exchange services in South Dakota provide a
majority of the Company's revenues and income. In 1996, the Company made
the strategic decision to expand its operations into related
telecommunications businesses, including expansion of its cable television
services. During 1996, the Company acquired the assets of 19 additional
community cable television systems that were sold by three companies that
provided cable services for various communities in addition to the systems
purchased by the Company. In December 1996, the Company, through a wholly
owned subsidiary, merged with TCIC, a South Dakota-based provider of long
distance and operator services. Also in December 1996, in a similar
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transaction, a wholly owned subsidiary of the Company merged with Iway,
South Dakota's largest Internet service provider. Both TCIC (now renamed
DTG Communications, Inc.) and Iway continue to operate as wholly owned
subsidiaries of the Company. The Company intends to continue to explore
expansion through strategic acquisitions and business alliances in an
effort to facilitate the growth of the Company.
The telecommunications services industry is in the process of
substantial change, providing significant opportunities and risks to its
participants. Evolving and newly-developed technology, emerging
significant competition in the market for long distance and local
telecommunications services, as well as the increasing desire of customers
to have a majority or all of their various communication needs fulfilled by
one supplier, are causing many companies, including the Company, that offer
services primarily in one part of the communication services market to seek
to offer, either directly or through alliances with others, new services to
complement their primary service offerings.
A key growth strategy for the Company is to provide integrated
telecommunications services for its customers. These integrated services
include long distance, wireless, cable television, data and local telephone
service, as well as selected products and services that the Company will
remarket to customers as a single source provider. The Company is in the
process of substantially upgrading its network and supporting facilities to
provide these integrated telecommunications services. The Company is
committed to attempting to grow through expansion of its existing
businesses, the development of value-added products and services and
selected acquisitions, although there can be no assurance that the Company
will be successful in attaining the profitable growth that is desired.
(See "RISK FACTORS.")
TELECOMMUNICATIONS INDUSTRY OVERVIEW. From the formation of the
telephone industry in the late 1800s until the breakup of AT&T in 1984, the
telecommunications industry was largely dominated by AT&T through its
ownership and operation of the Bell operating companies. Rural areas which
provided little market share for AT&T were left to be served by small
independent telephone companies like the Company and its predecessors. In
1984, the structure of the industry was significantly changed by the AT&T
divestiture decree, which required the divestiture by AT&T of its 22 Bell
operating companies and divided the country into 201 LATAs (the "AT&T
Divestiture Decree"). The Bell operating companies were combined into
seven Regional Bell Operating Companies ("RBOCs") and were permitted to
provide local telephone service, local access service to long distance
carriers and long distance ("intra-LATA") service within the LATAs.
However, the Bell operating companies were prohibited from providing
inter-LATA long distance service, or service between LATAs.
The AT&T Divestiture Decree had a profound effect on the long distance
portion of the telecommunications industry in the United States. To
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encourage competition in the long distance market, the AT&T Divestiture
Decree and certain FCC regulations require most LECs to provide carriers
with access to local exchange service that is "equal in type, quality and
price" to that provided by AT&T and to allow customers to select their
preferred long distance service provider. As a result, a large number of
companies specializing in long distance services entered the market.
For each long distance call, the originating and terminating LECs
charge an access fee to the long distance carrier. The long distance
carrier charges its customers a fee for its transmission of the call, a
portion of which covers the cost of the access fees charged by the LECs.
Access charges represent a significant portion of the Company's gross
revenues from its local exchange operations as well as a significant
portion of the Company's cost of providing long distance services.
Generally, the FCC and the states regulate such access charges. The FCC
has undertaken a comprehensive review of its regulation of LEC access
charges to better account for increasing levels of local competition. (See
"RISK FACTORS--Regulatory and Legislative" and "THE COMPANY--Regulation.")
In 1996, President Clinton signed the 1996 Act. The 1996 Act
significantly changed the telecommunications industry by (among other
things) removing certain of the restrictions concerning the provision of
long distance service by the RBOCs. The RBOCs, however, are required to
obtain specific FCC approval and satisfy other conditions, including a
checklist of interconnection and other requirements applicable to LECs,
prior to providing long distance service in the regions in which the LECs
provide local exchange service. (See "RISK FACTORS--Competition" and
"--Regulatory and Legislative.") In addition, the 1996 Act opened local
service telecommunications markets to competition by preempting state and
local laws to the extent that such laws prevent competition in the
provision of any telecommunications service, and by imposing a variety of
new duties on LECs to promote competition in local exchange services.
Among other requirements, all LECs, including the Company, are required, on
a non-discriminatory basis, to permit resale of their telecommunications
services without unreasonable restrictions or conditions. The law and its
accompanying regulations will enable the Company, upon receipt of all
necessary regulatory approvals, to resell local telecommunications services
in exchanges outside of the Company's traditional service territories in
addition to its existing long distance services. The bases upon which such
local services will be available to carriers, such as the Company, for
resale are to be determined in proceedings of various state public
utilities commissions. The Company believes that the opening of the local
telecommunications services market to resellers provides the Company with
significant growth opportunities while posing a much smaller threat in its
small rural local exchanges.
BUSINESS STRATEGY. The Company's business strategy is to attempt to
achieve continued growth by developing and marketing a broad array of
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competitively priced telecommunications services. The Company's primary
objectives in pursuing this strategy are to:
(I) develop new and enhanced products and services through
upgrading the Company's existing network and expanding such
network, where feasible, into new markets. The Company is in the
process of substantially rebuilding its existing network
infrastructure, a process which it currently anticipates will be
completed in late 1997, and plans to continue expanding this
infrastructure in 1998;
(ii) expand the Company's sales and marketing activities by
increasing its advertising and promotional activities and
enlarging its sales force to include direct and independent sales
representatives and telesales marketing agents who would target
commercial and residential accounts. The Company intends to
supplement its sales force by rebuilding its customer support
functions, enhancing its strong field service operations and
improving its direct billing capabilities; and
(iii) expand its revenue base through selected acquisitions
of companies and facilities in the telecommunications and cable
television industries and other related industries.
There can be no assurance that the Company will be successful in
implementing its business strategy or attaining the profitable growth that
is desired. (See "RISK FACTORS.")
LOCAL TELECOMMUNICATIONS SERVICES. The Company's local
telecommunications services are provided directly by the Company. As of
June 30, 1997, the Company provided services to approximately 6,052 access
lines located in nine counties in Southeastern South Dakota. The Company's
service area is generally rural, covering approximately 1,100 square miles,
with an average of 5.4 access lines per square mile. The Company is
classified as a "rural company" under the 1996 Act and receives Universal
Service Fund monies, although such funds constituted less than two percent
of the Company's gross revenues in 1996.
The Company's local telecommunications services include: (I) local
dial tone; (ii) local private line and public telephone services (including
dial tone service for pay telephones owned by the Company and other pay
phone providers); (iii) data transmission services; (iv) the sale,
installation and maintenance of customer premise equipment; and (v) related
services such as directory listing services. In connection with the
Company's continuing strategy to provide a greater selection of value-added
products, the Company has also introduced advanced services such as Caller
ID, distinctive ringing, call waiting, call forwarding and three-way
calling. The Company also introduced its new Distance Learning program,
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which the Company currently anticipates by the fall of 1998 will link 14
local schools with the University of South Dakota's School of Education to
allow these local schools to share interactive televised classroom
sessions. The Company desires to implement a similar system to link
hospitals and medical clinics throughout rural communities in Southeastern
South Dakota.
In addition to providing local telephone service, the Company also
provides network access services to IXCs. Network access service refers to
the link provided by LECs between a customer's premises and the
transmission facilities of other telecommunications carriers, generally
inter-LATA long distance carriers. Examples of exchange access services
include switched access and special access services. Network access
revenues are billed directly to long distance carriers based on the number
of conversation minutes generated by their customers located in the
Company's exchanges. The interstate portion of these revenues is based on
switched, common-line and special access tariffs approved by the FCC. The
tariffs imposed by the FCC include end-user access charges to residential
and business customers. State access is based on similar rate structures
that are subject to approval by the South Dakota Public Utilities
Commission. Unlike many LECs, the Company does not provide billing or
collection services for interexchange long distance carriers operating in
the Company's local exchanges.
In addition to its current local service business, the Company also is
attempting to position itself to resell local exchange services in
exchanges where it currently does not operate. The Company has filed an
application in South Dakota, and currently intends in the future to file
applications with the public utilities commissions in several states,
seeking authorization to resell local exchange telecommunications products
and services. As of December 31, 1996, the Company obtained local exchange
resale authorization in South Dakota. The Company currently anticipates
that it will have filed applications for authorization to resell local
exchange telecommunications services and products in a number of states
surrounding South Dakota by the end of 1998. There can be no assurance
that the public utilities commissions in other states will authorize the
Company to resell local exchange telecommunications services and products
in those states.
Local service, including network access services, has historically
been the Company's core business. In 1996, revenues from local services
were approximately $4.3 million, representing approximately 55% of the
Company's aggregate revenues. The Company currently anticipates that these
revenues will continue to account for a substantial portion of the
Company's revenues in the future, subject to possible regulatory change.
(See "THE COMPANY--Regulation.") Although network bypass and alternative
local access telephone service providers are potential competitive threats
to the Company, no significant competition has occurred to date.
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LONG DISTANCE TELECOMMUNICATION SERVICES. The Company provides a wide
range of long distance telecommunications services to both residential and
commercial customers. These services include: (I) basic long distance
calling service; (ii) voice and data services; (iii) dedicated private line
services; (iv) collect calling, operator assistance and calling card
services, including prepaid calling cards; (v) toll free or 800 services;
and (vi) switched and dedicated Internet access services. The Company
offers these services individually and in combinations. Through combined
offerings, the Company is able to provide customers with added benefits
such as single billing, unified services for multi-location companies and
customized calling plans.
The Company operates its own switches, develops and implements its own
products, monitors and deploys its transmission facilities and prepares and
designs its own billing and reporting systems. All of the Company's
customers are identified by their telephone number, dedicated trunk or
validated access code, and have a rating which is used to determine the
price per minute that they pay on their outbound or inbound long distance
calls. Rates typically vary by the type of service, the volume of usage,
the distance of the calls, the time of day that calls are made, the region
that originates the call and whether the product is being provided on a
promotional basis. In 1996, long distance revenues were approximately
$1,900,000, representing 24% of the Company's gross revenues. The Company
anticipates that its long distance revenues will grow significantly in
1997, primarily as a result of its acquisition of TCIC in December 1996.
The Company provides long distance services in various ways. For
customers located in the Company's local South Dakota exchanges, long
distance services are provided primarily by the Company as part of its
local service. For customers located outside of the Company's local
exchanges or using operator assisted services, all long distance services
are provided by TCIC, the Company's wholly owned subsidiary. Currently
TCIC is authorized to sell long distance services in North Dakota, South
Dakota, Iowa, Nebraska, Minnesota, Montana and several other states.
However, most of the Company's long distance revenues are derived from
South Dakota. Internet long distance access services are provided by Iway.
WIRELESS SERVICES. The Company intends to expand its existing
telecommunications services by providing PCS. PCS is, from a customer
standpoint, similar to existing cellular radio services ("cell phones").
The primary difference between PCS and cell phones is that PCS is a digital
service rather than an analog service (although current cellular providers
are moving to digital service as well) using different technology and a
different licensed portion of the frequency spectrum. The FCC has, between
December 1994 and January 1997, auctioned six blocks of frequency for PCS
that will compete with the two existing cellular licensees in each of the
FCC-designated markets.
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On December 13, 1996, the FCC adopted rules to permit geographic
partitioning and spectrum disaggregation for all broadband PCS licensees.
These rules will give the existing licensees and potential new entrants
greater flexibility to determine how much spectrum they will need for the
geographic areas in which they provide service. The Company entered
negotiations with the winners of the A- and B-Block auctions for the
Minneapolis, Minnesota and the Des Moines, Iowa Major Trade Areas ("MTA")
to partition or disaggregate portions of the blocks that cover areas of
interest to the Company in Southeastern South Dakota, Northwestern Iowa and
Southwestern Minnesota. These negotiations have not reached a definitive
point, and there are no existing financial or other commitments between the
parties.
The Company has an agreement to share frequency with US WEST Wireless
for participation in the PCS D- and E-Block auction. This auction
concluded on January 14, 1997, with US WEST Wireless being the successful
bidder on BTA-421 (Sioux City) for the E-Block at $2.44 per population
point. The Company's agreement covers 104,900 population points in the
Company's area of interest in Southeastern South Dakota and Northwestern
Iowa outside of the municipal boundaries of Sioux City. This amounts to a
commitment of $255,956 for the Company's share of the population points and
of the license. The Company has made an escrow deposit with US WEST
Wireless of $61,905, all of which is available for, and will be applied to,
the bid commitment. The Company has entered negotiations with US WEST
Wireless for additional portions of the BTA, but there is no assurance that
these negotiations will be successful for the Company.
Currently, there are no active PCS operations in the Company's
markets. The two cellular companies that cover the Company's market are
Western Wireless, Inc. d/b/a Cellular One and CommNet Cellular, Inc.
("CommNet"). Since there will be six PCS licensees competing with two
established cellular licensees in each market area, the Company expects the
wireless service market to be highly competitive. The Company initially
plans to focus on the use of its PCS services to provide fixed wireless
services in its existing markets and surrounding areas, and to use the
wireless services as a complement and supplement to other services offered
by the Company. The Company has not yet established its final PCS
development plan. There can be no assurance that the Company will be able
to make wireless services a profitable part of its overall business.
The Company had an interest in the Sioux Falls Cellular Limited
Partnership ("SFLP") together with several other independent telephone
companies and CommNet of Englewood, Colorado. The Company had a nine
percent limited partnership interest, and a 20% interest in Dakota Systems,
Inc. ("DSI"), a South Dakota corporation, which in turn held a four percent
minority general partner interest in SFLP. In 1995, the Company sold, at a
substantial gain over its initial investment, its entire interest in SFLP
and in DSI to the remaining partners and shareholders of DSI. The
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Company's decision to sell its interest was influenced by (I) the limited
control and influence available because of the structure of the limited
partnership and (ii) the Company's decision to focus on new technology and
new markets, including PCS.
INTERNET SERVICES. The Company is the largest provider of Internet
services in South Dakota. The Company provides a wide range of Internet
services including Internet access options (both dial-up and dedicated),
Web page development and hosting services, Internet applications
development and training and consulting services to businesses,
professionals and other on-line services providers. As of June 30, 1997,
the Company hosted approximately 128 Web sites with an additional 10 sites
under development. The Company estimates that its access services are used
by approximately 6,145 users.
In December 1994, Iway started its Internet operations, which the
Company purchased in December 1996. Iway operates as a wholly owned
subsidiary of the Company. The Company anticipates that in the future it
may attempt to consummate additional acquisitions to expand its Internet
service base.
The Internet is a global collection of computer networks cooperating
to enable commercial organizations, educational institutions, government
agencies and individuals to communicate electronically, access and share
information and conduct business. The Internet originated with the
ARPAnet, a restricted network started in 1969 by the United States
Department of Defense Advanced Research Projects Agency to provide
efficient and reliable long distance data communications among the
disparate computer systems used by government-funded researchers and
organizations. Unlike other public and private telecommunications networks
that are managed by businesses, government agencies and other entities, the
Internet is a cooperative interconnection of many such public and private
networks. The networks that comprise the Internet are connected in a
variety of ways, including public switched telephone network and high-
speed, dedicated leased lines. Communications on the Internet are enabled
by TCP/IP, an Internet-working standard that enables communications across
the Internet regardless of the hardware and the software used.
Recent technological advances, including increased microprocessor
speeds and the development of easy-to-use graphic interfaces, combined with
cultural and business changes, have led to the Internet being integrated
into the activities of a multitude of individuals and the operations and
strategies of numerous business organizations. For example, a growing
number of employees within organizations have access to corporate networks,
thereby increasing the amount of electronic communication both within and
between organizations. In addition, the rapid growth of the installed base
of home personal computers equipped with communication devices such as
modems has created the ability to communicate electronically from home.
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These technological and business trends have led to an increase in the
number of on-line services and Internet access providers.
More recently, the development of World Wide Web technology and
associated easy-to-use software has made the Internet easier to navigate
and more accessible to a larger number of users and for a broader range of
applications. While there has been significant media interest in the use
of the Internet by consumers, business and professional organizations
currently represent a more significant percentage of Internet use. These
organizations increasingly are recognizing that the Internet can enhance
communications, both among their geographically distributed locations and
employees, and with their business partners and customers. In addition,
businesses are realizing that the Internet can enable many applications
which were previously unavailable or cost-prohibitive. For example, small
and medium-sized businesses can establish and maintain a global presence
and market and distribute their products and services electronically.
Despite the growing interest in the many commercial uses of the
Internet, the Company believes that many businesses, especially small
businesses, have been deterred from purchasing Internet access services for
a number of reasons, including: (i) inconsistent quality of service; (ii)
lack of availability of cost-effective high-speed options; (iii) limited
number of local access points for corporate users and customers; (iv)
inability to integrate business applications on the Internet; (v) need to
deal with multiple and frequently incompatible vendors; (vi) inadequate
protection of the confidentiality of stored data and information moving
across the Internet; and (vii) lack of tools to simplify Internet access
and use.
To address the needs of small businesses in South Dakota and
surrounding states, the Company offers a comprehensive range of Internet
access options, applications, training and consulting services tailored to
meet the needs of small and medium-sized businesses and their customers.
The products and services provided by the Company include dial-up and
dedicated access, Web page development, Web page hosting, client software
and security products and training. This array of products and services
enables Internet users to purchase access, applications and services,
including integration services, through a single source. The Company's
products and services are supported by a technical staff that it believes
is highly experienced in Internet operations and services, especially as
they relate to small businesses. The Company's objective is to continue to
develop and market value-added Internet services in the smaller markets in
South Dakota and the surrounding states. Rates for the Company's Internet
services vary depending on the type and range of service options.
CABLE TELEVISION SERVICES. Through its subsidiaries, the Company owns
and operates 26 cable television systems located in Southeastern South
Dakota, Northwestern Iowa and Southwestern Minnesota ranging in capacity
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from 300 to 750/MHZ. As of June 30, 1997, these systems provide service to
approximately 5,400 subscribers. No single community accounts for more
than 12% of the Company's total basic CATV subscribers. The Company
believes that this geographic diversity reduces its exposure to adverse
economic, competitive and regulatory factors in any particular community.
The Company has been engaged in the cable television business since 1979.
In 1996, as part of its expansion strategy, the Company acquired the assets
of 19 of its total cable television systems, accounting for approximately
3,600 of the 5,400 current subscribers. The Company anticipates that in
the future it may attempt to consummate additional acquisitions to expand
its customer base and service markets.
Cable television systems receive video, audio and data signals
transmitted by nearby television and radio broadcast stations, terrestrial
microwave relay services and communications satellites. Such signals are
then amplified and distributed by coaxial cable and optical fiber to the
premises of customers who pay a monthly fee for the service. The Company
does not hold any dedicated spectrum licenses issued by the FCC related to
its cable television operations, although the Company does hold all other
necessary licenses to operate its systems. The number of channels provided
by the Company varies by service area. The sources of the Company's cable
television programming consist of the signals received from national
television networks, local and other independent television stations that
operate in or near the Company's service areas, satellite-delivered
non-broadcast channels and public service channels and announcements.
The Company provides programming to its subscribers pursuant to
contracts with programming suppliers. The Company generally pays a flat
monthly fee per subscriber for programming on its basic and premium
services. A number of programming suppliers provide volume discount
pricing structures and/or offer marketing support to the Company through
the Company's participation in a purchasing pool with other small cable
system operators. The Company's programming contracts generally are for
fixed periods of time ranging from three to 10 years and are subject to
negotiated renewal. The costs to the Company to provide cable programming
have increased in recent years and are expected to continue to increase due
to additional programming being provided to basic subscribers, increased
costs to produce or purchase cable programming, inflationary increases and
other factors. Effective in May 1994, the FCC's rate regulations under the
1992 Cable Act permitted operators to pass through to customers increases
in programming costs in excess of the inflation rate. Management believes
that the Company will continue to have access to programming services at
reasonable price levels, although there can be no assurance that the
Company can in the future maintain its access at reasonable price levels.
(See "THE COMPANY--Regulation.")
Monthly fees for cable services vary depending on the nature and type
of service. The Company offers a basic cable service package (primarily
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comprised of local broadcast signals, popular national satellite channels
and public, educational and governmental access channels) and premium movie
channels. The monthly fee for basic service generally ranges from $17.95
to $22.74 depending on the number of channels offered, and the monthly
service fee for premium channels is $7.95 per channel. Also, the Company
generally assesses a nonrecurring installation charge of up to $35.00.
Customers are free to discontinue service at any time without penalty. The
Company currently does not offer Pay-TV or "pay-per-view" services, but
currently anticipates doing so in the future as it upgrades the capacity of
its systems.
The Company's cable television business is dependent to a large extent
on its ability to obtain and renew its franchise agreements with local
government authorities on acceptable terms. The Company believes that it
has maintained good relations with its local franchise authorities. The
Company has never had a franchise revoked and as of the date of this
Prospectus all of its franchises have been renewed or extended at their
expirations. Most of the Company's present franchises had initial terms of
approximately 10 to 15 years. As of the date of this Prospectus, all of
the Company's franchises have been renewed or extended, generally at or
prior to their stated expirations and on terms which are acceptable to the
Company. In this regard, during 1996, the Company completed negotiations
with 19 communities resulting in franchise renewals. Federal law,
including the 1984 Cable Act and the 1992 Cable Act, limits the power of
the franchising authorities to impose certain conditions upon cable
television operators as a condition of the granting or renewal of a
franchise. The Company has 26 franchises, three of which are up for
franchise renewal within the next three years. No one cable television
franchise accounts for more than 10% of the Company's total revenue.
Franchise agreements contain varying provisions relating to
construction and operation of cable television systems, including: (I) time
limitations on the commencement and/or completion of construction;
(ii) quality of service, including (in certain circumstances) requirements
as to the number of channels and broad categories of programming offered to
subscribers; (iii) rate regulation; (iv) provision of services to certain
institutions; (v) provision of channels for public access and commercial
leased-use; and (vi) maintenance of insurance and/or indemnity bonds. The
Company's franchises also typically provide for periodic payments of fees,
generally ranging from zero to three percent of revenues, to the
governmental authority which grants the franchise. Franchises usually
require the consent of the franchising authority prior to a transfer of the
franchise or a transfer or change in ownership or operating control of the
franchisee.
Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions of the franchise. Under the 1984 Cable Act,
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if a franchise is lawfully terminated, and if the franchising authority
acquires ownership of the cable television system or effects a transfer of
ownership to a third party, such acquisition or transfer must be at an
equitable price or, in the case of a franchise existing on the effective
date of the 1984 Cable Act, at a price determined in accordance with the
terms of the franchise, if any.
In connection with a renewal of a franchise, the franchising authority
may require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the
1984 Cable Act and other applicable federal, state and local law. The 1984
Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act,
establishes an orderly process for franchise renewal which protects cable
operators against unfair denial of renewal when the operator's past
performance and proposal for future performance meet the standards
established by the 1984 Cable Act. The Company believes that its cable
television systems generally have been operated in a manner which satisfies
such standards and allows for the renewal of such franchises; however,
there can be no assurance that the franchises for such systems will be
successfully renewed as they expire.
The Company used coaxial cable for transmission of television signals
to subscribers. Optical fiber is a technologically-advanced transmission
medium capable of carrying cable television signals via light waves
generated by a laser. The Company currently uses fiber optic technology to
serve six communities with two CATV head-end facilities. The Company has
also installed optical fiber technology in four of its cable systems and
anticipates that it will convert several additional systems over the next
several years. The systems, which facilitate digital transmission of voice,
video and data signals as discussed below, will have optical fiber to
neighborhood nodes tied to the Company's telecommunications network with
coaxial cable distribution downstream to subscribers' homes from that
point.
The optical fiber technology includes compressed digital video
technology that is capable of converting up to 10 analog signals (now used
to transmit video and voice) into a digital format and compressing such
signals (which is accomplished primarily by eliminating the redundancies in
television imagery) into the space normally occupied by one analog signal.
This digitally compressed signal would be distributed, via optical fiber
and coaxial cable, to the customer's home. At the home, a set-top video
terminal would convert the digital signal back into analog channels that
could be viewed on a normal television set. The Company currently
anticipates that it will begin offering such optical fiber technology to
its cable subscribers in four markets in late 1997.
MAIN NETWORK OPERATIONS. The Company provides its local services and
related long distance services primarily over its proprietary network. The
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Company operates an advanced digital telecommunications network consisting
of nine Northern Telecom DMS 10 switches for its local services network,
one Summa Logic digital switch for operator services and advanced long
distance services, leased transmission lines to complete calls for its
domestic and international long distance services and sophisticated network
management systems designed to optimize traffic routing. The Company's
proprietary network encompasses approximately 2,240 miles of copper trunk
lines and customer connections and 150 miles of fiber optic cabling.
The Company seeks to actively manage and improve its network. The
Company currently anticipates spending approximately $10 million in 1997 to
complete the deployment of Synchronous Optical Network ("SONET") fiber
rings within its network and centralize and upgrade its switching equipment
through the construction of a new switching center and the installation of
a Lucent 5Ess switching platform with advanced digital switching
technologies. Construction of the switching center is complete. The
Company is currently in the process of converting to the new switching
platform.
SONET technology substantially increases the speed at which data is
carried on the Company's network, thereby allowing the Company to provide
high-speed multimedia applications and information services throughout its
network. In addition, SONET permits the Company to install customer
circuits more quickly and improves monitoring of the network by
anticipating certain problems before they occur. Further, when deployed in
a ring design, SONET allows the Company to provide its customers with
millisecond restoration of traffic in the event of a network outage.
INTERNET NETWORK OPERATIONS. The Company's Internet network is based
on leased circuits and frame-relay based network access to the Internet
National Access Points ("NAPs") in Minneapolis, Minnesota and Omaha,
Nebraska. This network is controlled by a Bay Networks router located in
the Company's Internet network operations center in Sioux Falls, South
Dakota. Customers are able to access this network through dedicated lines,
by dialing into existing frame relay circuits or by placing a local or long
distance call (dial-up) through a modem to the Sioux Falls switching
center. Once connected, the customer's traffic is routed through the
operation center modem banks to the Bay Networks router and into the
Internet via the Company's NAP connections.
The Company continues to upgrade its network infrastructure in
response to the increased number of customers purchasing Internet access
and Web page hosting services. The Company also currently plans to
increase its NAP access speeds to handle larger levels of customer traffic
at higher data transfer speeds.
CABLE NETWORK OPERATIONS. The majority of the Company's cable systems
currently operate on a stand-alone basis with each community system
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supported by its own signal processing center, known as a cable "head-end."
Six community systems (two clusters of three) have been linked using fiber
optic technology to a common head-end. A typical Company system consists
of signal receiving, encoding and decoding apparatus, distribution systems
and subscriber house-drop equipment. The signal receiving apparatus
typically includes a tower, antenna, ancillary electronic equipment and
earth stations for reception of satellite signals. Head-ends, consisting of
associated electronic equipment necessary for the reception, amplification
and modulation of signals, are located near the receiving devices. The
Company's distribution systems consist of coaxial cables and related
electronic equipment. Subscriber equipment consists of taps, house drops,
converters and analog addressable converters.
In 1997, the Company rebuilt four of its cable systems using advanced
digital fiber optic/coax cabling techniques that allows it to offer both
cable television and additional telecommunications services, such as local
and long distance calling and high speed data transmission and Internet
access services, over the same network. These systems are interconnected
to the Company SONET fiber optic network and switched from its new
centralized switching facility. In addition, the Company currently plans
to replace many of the individual cable head-end systems by interconnecting
these systems either to advanced fiber optic links or to its new SONET
fiber network and distributing the cable programming signals from a central
head-end facility collocated in the Company's new switching facility. The
Company also currently plans to install digital advertising insertion
equipment in its central switching center. This equipment would allow the
Company to download advertisements electronically to certain head-ends,
thereby significantly enhancing the flexibility and reliability of its
advertising sales. These enhancements enable the Company to offer
increased programming channels with a higher quality signal at a lower per
channel cost. Currently, the Company is in the process of converting
several of its existing cable systems to its new centralized facility.
MARKETING. The Company's telecommunications services and cable system
operations generally have been free from competition. Accordingly, the
Company historically has relied on telemarketing, direct mail and,
occasionally, door-to-door solicitation and radio, cable television and
newspaper advertising for its marketing efforts. These marketing
activities have been supported by customer service activities in the
Company's headquarters and by an active field technician force. The
Company believes it historically has enjoyed a high reputation for quality
and responsive service and has emphasized quality customer service for many
years.
In 1996, the Company recognized that the regulatory environment was
changing and that it would have to adapt to a more active and competitive
market environment. In 1996, the Company created a formal marketing
department and in December 1996, the Company acquired TCIC, a long distance
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company with over six years of competitive selling experience, and Iway,
which operates in the highly competitive Internet services market. The
Company also is beginning to develop other marketing channels for its
products, including alliances with other independent Internet service
providers and computer services companies. The Company currently intends
to continue to expand its direct sales force and to market its products
more aggressively as competition enters the Company's previously protected
markets.
COMPETITION
The telecommunications industry is highly competitive and affected by
rapid regulatory and technological change. Regulatory trends have had, and
may have in the future, significant effects on competition in the Company's
industry. (See "THE COMPANY--Regulation.") New technology is continuing
to expand the types of available communications services and equipment and
the number of competitors offering such services. The Company faces actual
and potential competition in all of its businesses. Most of the Company's
competitors are large companies which have considerably greater financial,
technological, marketing and other resources than the Company.
The Company believes that the factors critical to a customer's choice
of a telecommunications services provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography and network
size. The Company's objective is to be one of the most responsive service
providers in the telecommunications industry, particularly when providing
customized communications services. The Company recognizes that it must
grow to be able to compete effectively in the changing telecommunications
industry and to avail itself of greater economies of scale and increased
scope in its transport and local access requirements and in its back office
operations. It is for this reason that the Company expanded its business
through the purchase of additional cable television systems and the
acquisition of companies in the long distance and Internet long distance
industries (i.e., TCIC and Iway). These additions have expanded the
Company's product line and service abilities which should enhance its
ability to compete more effectively in its changing business and regulatory
environment.
LOCAL SERVICE COMPETITION. Historically, the Company's local telephone
operations have not experienced significant competition. The Company's
local telephone operations may experience increased competition from
various sources, including resellers of the Company's local exchange
services, large end-users installing their own networks, IXCs, satellite
transmission services, cellular communications providers, cable television
companies, radio-based personal communications service companies,
competitive access providers and other systems capable of completely or
partially bypassing local telephone facilities. In 1996, the South Dakota
Public Utilities Commission approved numerous applications to provide and
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resell local exchange services, including applications made by the Company
to compete in other local exchanges throughout South Dakota. Numerous such
applications are pending and the Company anticipates that other companies
will make additional filings. The Company cannot predict the specific
effects of competition on its local telephone business, but intends to
attempt to take advantage of the various opportunities that competition
should provide, including expanding into additional market areas, if it is
able to do so. The Company is currently attempting to address potential
competition by focusing on improved customer satisfaction, reducing costs,
increasing efficiency, improving its digital network, restructuring rates
and examining new product offerings and new markets for entry.
LONG DISTANCE AND OPERATOR SERVICE COMPETITION. The long distance and
operator services industries are highly competitive and dominated on a
volume basis by the nation's three largest long distance providers: AT&T,
MCI and Sprint. In 1996, AT&T, MCI and Sprint generated an aggregate of
approximately 80% of the nation's long distance revenue of $79.3 billion.
Behind these providers, four other companies had annual revenues of $430
million to $2.2 billion each in 1996. In addition, during the same year
there were more than 300 companies with annual revenues of less than $430
million each, the majority with revenues below $50 million each. Most of
these companies surpass the Company in size and available financial,
technological, marketing and other resources. All of these companies
potentially can compete with the Company in the long distance and operator
services markets in which the Company currently operates.
In addition, the 1996 Act permits RBOCs to provide long distance
telecommunications services internationally and domestically in territories
outside of the RBOCs' respective local service regions. RBOCs also may
provide long distance telecommunications services that are incidental to
certain other services, such as wireless and video services, in their local
regions. The authority to provide long distance telecommunications
services originating outside of the RBOCs' respective regions does not
currently include calls that terminate in-region, such as private line
services, 800 services or any equivalent service, and allows the contacted
party to choose the inter-LATA carrier. RBOCs are prohibited from
providing a full range of long distance telecommunication services in their
local regions until certain important conditions are met. RBOCs own
extensive facilities in their regions and have long-standing customer
relationships and substantial capital resources, which permit them to
expend funds on technological and marketing improvements. The Company
believes that in the future RBOCs will become substantial competitors for
long distance telecommunications services, especially in their local
regions.
INTERNET COMPETITION. The market for data communications services,
including Internet access and on-line services, is extremely competitive.
There are no substantial barriers to entry, and the Company expects that
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competition will intensify in the future. The Company believes that its
ability to compete successfully will depend on a number of factors,
including: (I) market presence; (ii) the ability to execute a rapid
expansion strategy; (iii) the capacity, reliability and security of its
network infrastructure; (iv) ease of access to and navigation of the
Internet; (v) the pricing policies of its competitors and suppliers; (vi)
the timing of the introduction of new products and services by the Company
and its competitors; (vii) the Company's ability to support industry
standards; and (viii) industry and general economic trends. The Company
believes that its success in the data communications services market will
depend heavily upon its ability to provide high-quality Internet
connectivity and value-added Internet services at competitive prices.
The Company's current and potential competitors headquartered in the
United States may be divided into the following three groups: (I)
telecommunications companies, such as AT&T, MCI, Sprint, RBOCs and @Home (a
joint venture between Tele-Communications, Inc. and a venture capital
firm), and various other cable companies; (ii) other Internet access
providers, such as BBN, NETCOM, PSI and other national and regional
providers; and (iii) on-line services providers, such as America Online,
CompuServe, Intuit Inc., Microsoft Corp. and Prodigy Services Company.
Most of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological, personnel and other
resources than those available to the Company. As a result, they may be
able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and
changes in customer requirements, take advantage of acquisition and other
opportunities more readily and devote greater resources to the marketing
and sale of their services.
The Company expects that most of the major on-line services providers
and telecommunications companies will expand their current services to
compete fully in the Internet access market. The Company believes that new
competitors, including large computer hardware, software, media and other
technology and telecommunications companies, will enter the Internet access
market, resulting in even greater competition to the Company. Certain
companies, including America Online, AT&T, BBN and PSI, have obtained or
expanded their Internet access products and services as a result of
acquisitions and strategic investments. Such acquisitions or investments
may permit these companies to devote greater resources to the development
and marketing of new competitive products and services and the marketing of
existing competitive products and services. The Company expects
acquisitions and strategic investments by its competitors to increase, thus
creating significant new competitors. In addition, the ability of some of
the Company's competitors to bundle other services and products with
Internet access services, such as the Internet service offerings recently
offered by AT&T and MCI, could place the Company at a further competitive
disadvantage.
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As a result of increased competition in the Internet access and
on-line services industry, the Company expects that it will continue to
encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of its Internet
services. The Company previously has reduced prices on certain of its
Internet access options and may consider doing so in the future. There can
be no assurance that the Company will be able to offset the effects of any
such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the data communications business, and
in particular the Internet access and on-line services businesses, are
likely to encounter consolidation in the near future, which could result in
increased price and other competition in the industry. Increased price or
other competition could erode the Company's market share and could have a
material adverse effect on its business, financial condition and results of
operations. There can be no assurance that the Company will have the
financial resources, technical expertise, marketing and support
capabilities or the expansion and acquisition possibilities to continue to
compete successfully in this or any market.
CABLE TELEVISION COMPETITION. Cable television competes for customers
in local markets with other providers of entertainment, news and
information. The competitors in these markets include broadcast television
and radio, newspapers, magazines and other printed material, motion picture
theaters, video cassettes and other sources of information and
entertainment, including directly competitive cable television operations.
Cable television service initially was offered as a means of improving
television reception in markets where terrain factors or distance from
major cities limited the availability of off-air television. In some of
the areas served by cable television systems, a substantial variety of
television programming can be received off-air, including low-power UHF
television stations, which have increased the number of television signals
in the country and provided off-air television programs to limited local
areas. The extent to which cable television service is competitive depends
upon a cable television system's ability to provide, on a cost-effective
basis, a greater variety of programming than that available off-air or
through other alternative delivery sources. Regulatory changes also impact
competition in the cable industry. Both the 1992 Cable Act and the 1996
Act are designed to increase competition in the cable television industry.
(See "THE COMPANY--Regulation.")
There are alternative methods of distributing the same or similar
video programming offered by cable television systems. Further, these
technologies have been encouraged by Congress and the FCC to offer services
in direct competition with existing cable systems. A significant
competitive impact is expected from medium power and higher power DBSs that
use high frequencies to transmit signals that can be received by dish
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antennas much smaller in size than traditional home satellite dishes
("HSDs"). There are multiple DBS providers offering services in the United
States, and at least one additional provider has announced plans to provide
DBS service in the future. These services are generally available
throughout the continental U.S., including areas in which the Company
operates its cable systems.
DBS has both advantages and disadvantages as an alternative means of
distributing video signals to a customer's home. Among the advantages are
that (I) the capital investment (although initially high) for the satellite
and uplinking segment of a DBS system is fixed and does not increase with
the number of subscribers receiving satellite transmissions, (ii) DBS is
not currently subject to local regulation of service and prices or required
to pay franchise fees and (iii) the capital costs for the ground segment of
a DBS system (the reception equipment) are directly related to, and limited
by, the number of service subscribers. DBS's disadvantages presently
include (I) limited ability to tailor the programming package to the
interests of different geographic markets, such as providing local news,
other local origination services and local broadcast stations, (ii) signal
reception being subject to line-of-sight angles and (iii) intermittent
interference from atmospheric conditions and terrestrially generated radio
frequency noise.
Although the effect of competition from DBS services cannot be
specifically predicted, there has been significant growth in DBS
subscribers and the Company anticipates that such DBS competition will
increase in the future as developments in technology continue to increase
satellite transmitter power, decrease the cost and size of equipment needed
to receive these transmissions and enable DBS to overcome the disadvantages
discussed above. Further, the extensive national advertising of DBS
programming packages, including certain sports packages not currently
available on cable television systems, will likely continue the rapid
growth in DBS subscribers.
The 1996 Act eliminated the statutory and regulatory restrictions that
prevented telephone companies from competing with cable operators for the
provision of video services. (See "THE COMPANY--Regulation.") The 1996
Act allows local telephone companies, including RBOCs, to compete with
cable television operators both inside and outside of their telephone
service areas. The Company expects that it may face substantial
competition from telephone companies for the provision of video services,
whether it is through the acquisition of cable systems, the provision of
wireless cable or the provision of upgraded telephone networks. Most major
telephone companies have greater financial resources than the Company, and
the 1992 Cable Act ensures that telephone company providers of video
services will be able to acquire significant cable television programming
services. The specific manner in which telephone company provision of
video services will be regulated is described in "THE COMPANY--Regulation."
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Additionally, the 1996 Act eliminates certain federal restrictions on
utility holding companies and thus permits all utility companies to provide
cable television services. The Company expects that the elimination of
these federal restrictions could result in another source of significant
competition in the delivery of video services.
Another alternative method of distributing cable television is MMDS,
which deliver programming services over microwave channels received by
subscribers with special antennas. MMDS systems are less capital
intensive, are not required to obtain local franchises or pay franchise
fees and are subject to fewer regulatory requirements than cable television
systems. The 1992 Cable Act also ensures that MMDS systems have the
ability to provide all significant cable television programming services.
Although there are relatively few MMDS systems in the United States
currently in operation, virtually all markets have been licensed or
tentatively licensed.
The FCC has taken a series of actions intended to facilitate the
development of wireless cable systems as an alternative means of
distributing video programming, including reallocating the use of certain
frequencies to these services and expanding the permissible use of certain
channels reserved for educational purposes. The FCC's actions enable a
single entity to develop MMDS systems with a potential of up to 35
channels, which permits the MMDS systems to compete more effectively
with cable television. Developments in compression technology will
significantly increase the number of channels that MMDS can offer.
Further, in 1995, several large telephone companies acquired significant
ownership in numerous MMDS companies. This infusion of capital into the
MMDS industry can be expected to accelerate its growth and its competitive
impact. Recently, the Company has experienced increased competition from
an MMDS provider operating in several of the Company's existing cable
system communities.
Within the cable television industry, cable operators may compete with
other cable operators or other entities seeking franchises for competing
cable television systems at any time during the terms of existing
franchises or upon expiration of such franchises in the expectation that an
existing franchise will not be renewed. The 1992 Cable Act promotes the
grant of competitive franchises. Furthermore, an increasing number of
cities are exploring the feasibility of owning their own cable systems in a
manner similar to city-provided utility services.
Although there is no legal prohibition preventing long distance
telephone companies from providing video services, historically they have
not provided such services in competition with cable systems. However,
such companies may prove to be a source of competition in the future. The
long distance companies are expected to expand into local markets with
local telephone and other offerings (including video services) in
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competition with RBOCs, which under the terms and conditions of the 1996
Act are permitted to enter the long distance service market subject to
satisfying certain requirements.
In addition to competition for subscribers, the cable television
industry competes for advertising revenue with broadcast television, radio,
print media and other sources of information and entertainment. As the
cable television industry has developed additional programming, its
advertising revenue has increased. Cable operators sell advertising spots
primarily to local and regional advertisers. To date, the Company's
advertising efforts have been limited to local public service announcements
due to the limited capabilities of its existing systems. The Company
currently intends to expand its advertising efforts as it completes the
upgrade of many of its systems.
The Company has no basis upon which to estimate the number of cable
television companies and other entities with which it competes or may
potentially compete. There are a large number of individual and multiple
system cable television operators in the United States that are capable of
competing with the Company and that have substantially greater financial,
technological, marketing and other resources.
The full extent to which other media or home delivery services will
compete with cable television systems may not be known for some time and
there can be no assurance that existing, proposed or as yet undeveloped
technologies will not become dominant in the future.
REGULATION
OVERVIEW. The Company operates in a highly regulated industry and its
services are subject to varying degrees of federal, state and local
regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent that
they involve the provision, origination or termination of interstate or
international communications. The FCC also regulates many aspects of the
Company's cable television operations. The South Dakota Public Utilities
Commission retains jurisdiction over the Company's telecommunications
operations in South Dakota while other state public utilities commissions
regulate the intrastate aspects of the Company's long distance business in
their state. Finally, certain cities and municipal governments regulate by
franchise the Company's cable television operations within their
jurisdiction.
The regulation of the telecommunications industry is changing rapidly
and the regulatory environment varies substantially from state to state.
There can be no assurance that recent or future regulatory changes will not
have a material adverse impact on the Company. Recent developments
include, without limitation (I) enactment of the 1996 Act which modifies
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the AT&T Divestiture Decree restrictions on the provision of long distance
services by RBOCs between LATAs as defined in the AT&T Divestiture Decree;
(ii) FCC and state public utilities commissions actions changing access
rates charged by LECs and making other related changes to access and
interconnection policies, certain of which could have adverse consequences
for the Company's long distance and local service businesses; (iii) related
FCC and state regulatory proceedings considering additional deregulation of
LEC access pricing; (iv) pending FCC "billed party preference" rules that
could affect the Company's provision of operator services; and (v) various
legislative and regulatory proceedings that would result in new local
exchange competition.
As the following discussion illustrates, the regulation of the
telecommunications and cable industries at the federal, state and local
levels is subject to the political process and has been in constant flux
over the past decade. Material changes in the law and regulatory
requirements must be anticipated and there can be no assurance that the
Company's business will not be affected adversely by future legislation,
new regulation or deregulation.
TELECOMMUNICATIONS ACT OF 1996. On February 8, 1996, President
Clinton signed into law the 1996 Act. Among other things, this legislation
(I) permits RBOCs to provide domestic and international long distance
services in their own regions upon a finding that the petitioning RBOC has
satisfied certain criteria for opening up its local exchange network to
competition and that its provision of long distance services would further
the public interest, (ii) removes existing barriers to entry into local
service markets, (iii) significantly changes the manner in which carrier-
to-carrier interconnection arrangements are regulated at the federal and
state level and (iv) establishes procedures to revise universal service
standards.
The 1996 Act has particular relevance to the Company in four areas.
First, the 1996 Act creates a duty on the part of the Company to
interconnect its networks with those of its competitors and, in particular,
creates a duty on the part of the Company's local exchange operations to
negotiate in good faith the terms and conditions of such interconnection.
On August 8, 1996, the FCC released its FCC Interconnection Order. In the
FCC Interconnection Order, the FCC adopted a national framework for
interconnection but left to the individual states the task of implementing
the FCC's rules. The order is subject to petitions for reconsideration
filed at the FCC and petitions for review that have been consolidated
before the United States Court of Appeals for the Eighth Circuit. On
October 15, 1996, the Eighth Circuit stayed substantial portions of the
FCC's order pending judicial review. On November 1, 1996, the United
States Supreme Court denied applications to lift the stay. On July 18,
1997, the Eighth Circuit overturned substantial parts of the FCC's order as
it relates to the ability of the FCC to set interconnection rates. The FCC
has announced plans to appeal the ruling to the Supreme Court.
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Second, the 1996 Act contains a number of provisions that are intended
to reduce barriers to entry and promote competition in a variety of
telecommunications markets, including both long distance and local exchange
operations. As a part of this effort, the 1996 Act provides a framework
under which RBOCs may enter the interexchange communications business from
which they were barred under the terms of the AT&T Divestiture Decree.
Under this framework, an RBOC may provide long distance services in the
states where it provides telephone service upon demonstrating to the
affected state regulatory authority and to the FCC that: (I) it faces
competition for local telephone service from at least one facilities-based
competitor and (ii) that it satisfies a 14 point checklist that would
purport to show that the affected RBOC's local exchange operations are open
to competition. The 1996 Act establishes deadlines within which both the
affected state regulatory agency and the FCC must act upon applications
filed by an RBOC to enter the long distance business. Certain of the RBOCs
already have taken steps to provide in-region long distance services, and
have filed applications with the FCC seeking authority to provide such
services in certain states. The Company expects that most or all of the
RBOCs will file applications for authority to provide in-region long
distance service. To date, the FCC has rejected each of those
applications, however. The RBOCs can provide long distance services
immediately in other states, and also with certain restrictions, cellular,
video and incidental services.
Third, although the 1996 Act generally prohibits long distance
companies from marketing their services jointly with local telephone
services provided by an RBOC (at least until that RBOC is permitted to
enter the long distance business), it contains an exception for companies,
such as the Company, that serve less than five percent of the nation's
presubscribed access lines. Thus, the 1996 Act permits the Company to
continue to market its long distance services jointly with local telephone
services whether provided by the Company or provided by an RBOC or non-
affiliated company.
Finally, the 1996 Act modifies many of the regulations governing the
Company's cable television operations and addresses some of the issues
arising out of the combination of cable and telephone service.
The Company cannot predict the effect that this legislation and the
FCC's implementing regulations, many of which are still forthcoming or
subject to judicial challenges, will have on the Company or the industry as
a whole. However, the Company believes that it is positioned to pursue
business opportunities in the rapidly changing telecommunications market.
LOCAL SERVICE REGULATION. Historically, the Company's local telephone
operations have been governed by regulation and oversight of the South
Dakota Public Utilities Commission. The South Dakota Public Utilities
Commission has had primary jurisdiction over various matters including
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intrastate toll and access rates, quality of service, issuance of
securities, depreciation rates, disposition of public utility property,
issuance of debt and accounting systems used by the Company. The Company
has, however, been statutorily exempt from many of these requirements by
virtue of its size. The FCC historically has had primary jurisdiction over
the interstate toll and access rates of the Company and issues related to
interstate telephone service.
The 1996 Act has substantially modified both the states' and the FCC's
jurisdictions in the regulation of local exchange telephone companies. The
1996 Act prohibits any state legislative or regulatory restrictions or
barriers to entry regarding the provision of local telephone service. The
1996 Act required the FCC to develop regulations to implement various
sections of the 1996 Act including: (i) the obligations imposed on
incumbent LECs to interconnect with the networks of other
telecommunications carriers (including competing telecommunications
carriers); (ii) unbundling of services into network elements; (iii)
repricing of their services at wholesale rates for the purpose of
permitting resale of those services; (iv) allowing other telecommunications
carriers physically to collocate their equipment on the premises of the
incumbent LEC; and (v) requiring telecommunications carriers to compensate
each other based on their own costs for the transport and termination of
calls on the other carriers' networks.
As a rural telephone company, the Company is currently exempt from
certain of the foregoing obligations unless, in response to a bona fide
request, the South Dakota Public Utilities Commission removes that
exemption. The Company, by petitioning the South Dakota Public Utilities
Commission, also may qualify for exemption from certain other obligations
under the 1996 Act. In addition, pursuant to the 1996 Act, the FCC
instituted and referred to a federal-state joint board a proceeding to
recommend changes to the current method of subsidizing universal service to
assure the availability of quality telephone services at just, reasonable
and affordable rates. The federal-state joint board released an initial
"recommended decision" on November 8, 1996, and on May 8, 1997, the FCC
released a Report and Order substantially adopting the Joint Board's
recommendations. Appeals of the FCC's Report and Order have been
consolidated before the United States Court of Appeals for the Fifth
Circuit and currently are pending. On July 18, 1997, the FCC issued a
further notice of proposed rulemaking to establish a universal service
support mechanism for non-rural carriers based on the forward-looking
economic cost of constructing and operating the network used to provide the
supported services. The FCC has further indicated its intent to commence a
separate proceeding by October 1998 to establish forward-looking economic
cost mechanisms for rural carriers. Non-rural carriers would begin to
receive support based on forward-looking economic cost on January 1, 1999,
whereas rural carriers would shift to such an approach beginning no sooner
than January 1, 2001. The Company cannot predict the terms or the effect
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that the FCC's actions will have on the Company or on the industry as a
whole. However, the Company believes that it is taking proper steps to
reduce its exposure to potential declines in universal service support.
The 1996 Act requires that all telecommunications providers (including
cable operators that provide telecommunications services) contribute
equitably to a USF, although the FCC may exempt an interstate carrier or
class of carriers if their contribution would be minimal under the USF
formula. The 1996 Act allows states to determine which intrastate
telecommunications providers contribute to the USF. The purpose of the USF
is to provide consumers in all regions, including low-income consumers and
those consumers in rural, insular and high-cost areas, access to
telecommunications and information services that are reasonably comparable
to those services in urban areas at reasonably comparable rates.
The South Dakota Public Utilities Commission approved an intrastate
access rate increase for the Company effective December 10, 1996. There
are no rate requests of the Company currently pending before any regulatory
commission.
NETWORK ACCESS REGULATION. The Company is subject to the jurisdiction
of the FCC with respect to its provision of interstate network access
services and certain related services. The FCC prescribes a uniform system
of accounts for telephone companies, interstate depreciation rates and the
principles and standard procedures used to separate plant investment,
expenses, taxes and reserves of interstate services under the jurisdiction
of the FCC and of intrastate services under the jurisdiction of the
respective state regulatory authorities ("separations procedures"). The
FCC also prescribes procedures for allocating costs and revenues between
regulated and unregulated activities. The FCC has indicated that it
intends to initiate a proceeding shortly to review separations reform.
The FCC has prescribed structures for exchange access tariffs to
specify the access charges for use and availability of the Company's
facilities for the origination and termination of interstate long distance
service. In general, the tariff structures prescribed by the FCC provide
that interstate costs which do not vary based on usage ("non-traffic
sensitive costs") are recovered from subscribers through flat monthly
charges ("subscriber line charges"), and from IXCs through usage-sensitive
Carrier Common Line ("CCL") charges. Traffic-sensitive interstate costs
are recovered from carriers through variable access charges based on
several factors, primarily usage.
On December 24, 1996, the FCC initiated a rulemaking proceeding to
address access charge reform. On May 16, 1997, the FCC released its First
Report and Order adopting changes to the existing access charge structure.
With limited exceptions, those modifications apply only to price cap
incumbent LECs, which generally are the nation's largest telephone
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companies. In the First Report and Order, the FCC also stated its
intention to issue a subsequent Report and Order to provide additional
rules to implement access charge reform, and to initiate separate
proceedings to examine historical cost recovery issues and access charge
reform for rate-of-return carriers, such as the Company. Appeals of the
FCC's First Report and Order have been consolidated before the Eighth
Circuit and currently are pending.
The FCC authorizes a rate-of-return ("ROR") that telephone companies
such as the Company may earn on the interstate services they provide. The
current ROR is 11.25% for companies remaining under ROR regulation. The
FCC is currently considering changing the 11.25% ROR as a result of lower
market interest rates. Effective January 1, 1991, the FCC replaced ROR
regulation with price-cap regulation for the RBOCs and GTE Corporation and
allowed all other companies that did not remain in the National Exchange
Carrier Association ("NECA") Common Line and Traffic Sensitive Pools the
option of price-cap regulation. The Company, like most small local
exchange carriers, has elected to remain within the NECA tariff scheme.
In 1992, the FCC initiated a rulemaking proceeding (CC Docket No. 92-
135) to address regulatory alternatives for mid-size and small LECs. This
proceeding resulted in rules, adopted in September 1993, that provide for a
non-price cap form of alternative regulation. The Company would be
eligible for this form of regulation. The Company has not elected price
cap regulation for interstate purposes and continues to evaluate the
various forms of alternative regulation.
The effect of the 1996 Act on the FCC's regulations concerning ROR
regulation and alternative regulation is not yet clear, although, as a
result of the enactment of the 1996 Act, the FCC is reexamining its rules
to reflect the provisions of the 1996 Act and the associated increased
competitive market conditions.
The 1996 Act requires each LEC to continue to provide access services
in accordance with requirements effective on the date immediately preceding
the effective date of the 1996 Act, until those requirements are
specifically superseded by FCC regulations. Pursuant to the 1996 Act, the
FCC established regulations to implement the interconnection, unbundled
access, resale and collocation requirements of the 1996 Act. The 1996 Act
requires that interconnection and unbundled network elements be priced at
just and reasonable rates, based on costs, and that compensation for
transport and termination of traffic be reciprocal among carriers and be
just and reasonable.
In addition to the matters discussed above, FCC rules also govern:
(i) the allocation of costs between the regulated and unregulated
activities of a communications common carrier and (ii) transactions between
the regulated and unregulated affiliates of a communications common
carrier.
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The cost allocation rules apply to certain activities that have never
been regulated as communications common carrier offerings and activities
that have been preemptively deregulated by the FCC. The costs of these
activities are removed prior to the separations procedures process and are
assigned to unregulated activities in the aggregate, rather than to
specific services, for pricing purposes. Other activities must be
accounted for as regulated activities, and their costs are subject to
separations procedures.
The affiliate transaction rules govern the pricing of assets
transferred to and services provided by affiliates. These rules generally
require that assets be transferred between affiliates at "market price," if
such price can be established through a tariff or a prevailing price
actually charged to third parties. In the absence of a tariff or
prevailing price, "market price" cannot be established, in which case (i)
asset transfers from a regulated to an unregulated affiliate must be valued
at the higher of cost or fair market value and (ii) asset transfers from an
unregulated to a regulated affiliate must be valued at the lower of cost or
fair market value. The Company prices transactions to and between its
subsidiaries at cost.
The FCC has not attempted to make its cost allocation or affiliate
transaction rules preemptive. State regulatory authorities are free to use
different cost allocation methods and affiliate transaction rules for
intrastate rate-making and to require carriers to keep separate allocation
records.
The Company's local and intrastate operations are regulated by the
South Dakota Public Utilities Commission. Like many state regulatory
authorities, the South Dakota Public Utilities Commission is conducting
proceedings concerning the rules under which carriers may operate in an
increasingly competitive environment. The issues that the South Dakota
Public Utilities Commission is examining include unbundling and
interconnection, dialing parity for intra-LATA (or short-haul) toll
traffic, number portability, resale of local exchange service and universal
service. The 1996 Act has begun to have an effect on the timing and
outcome of proceedings in many states, including South Dakota. The Company
actively monitors the South Dakota proceedings as well as the proceedings
in other states. However, the Company cannot, at this time, predict how
these proceedings will ultimately be resolved and their effect on the
Company, or when a decision will be forthcoming.
The Company's telephone operating subsidiaries currently receive
compensation from long distance companies for intrastate long distance
services through access charges or toll settlements that are subject to
state regulatory commission approval.
LONG DISTANCE REGULATION. The FCC has classified the Company as a
non-dominant IXC for purposes of all long distance operations conducted
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outside of its existing local service exchanges. As a non-dominant carrier,
the Company may provide domestic interstate communications in these areas
without prior FCC authorization, although FCC authorization is required for
the provision of international telecommunications by non-dominant carriers.
Generally the FCC has chosen not to exercise its statutory power to closely
regulate the charges or practices of non-dominant carriers. Nevertheless,
non-dominant carriers are required by statute to offer interstate and
international services under rates, terms and conditions that are just,
reasonable and not unduly discriminatory, and the FCC acts upon complaints
against such carriers for failure to comply with statutory obligations or
with the FCC's rules, regulations and policies. The FCC also has the power
to impose more stringent regulatory requirements on the Company and to
change its regulatory classification, although the Company believes that,
in the current regulatory environment, the FCC is unlikely to do so.
Historically, both domestic and international non-dominant long
distance carriers maintained tariffs on file with the FCC. Pursuant to this
requirement, the Company filed and maintained with the FCC a tariff for its
interstate and international services. The Company also has obtained FCC
authority to provide international services through the resale of switched
services of various carriers. On March 21, 1996, the FCC initiated a rule-
making proceeding in which it proposed to eliminate the requirement that
non-dominant interstate carriers, such as the Company, maintain tariffs on
file with the FCC for domestic interstate services. On October 29, 1996,
the FCC announced that, following a nine-month transition period, long
distance carriers were no longer required to file tariffs for interstate
domestic long distance service, and that the relationship between carriers
and their customers would be governed by individual contracts. Carriers
also had the option immediately to cease filing tariffs. The Company did
not elect to cease filing interstate tariffs. Following a judicial stay of
the FCC's detariffing order, the FCC on March 6, 1997 released a public
notice stating that the tariffing rules in place prior to December 22, 1996
are once again in effect. Thus, nondominant carriers providing interstate,
domestic interexchange services, such as the Company, continue to be
required to file tariffs pursuant to the FCC's rules.
The FCC also imposes prior approval requirements on transfers of
control and assignments of operating authorizations. The FCC has the
authority to generally condition, modify, cancel, terminate or revoke
operating authority for failure to comply with federal laws and/or the
rules, regulations and policies of the FCC. Fines or other penalties also
may be imposed for such violations. Although the Company believes that it
has complied in all material respects with applicable laws and regulations,
there can be no assurance that the FCC or third parties will not raise
issues with regard to the Company's compliance with applicable laws and
regulations.
The intrastate long distance telecommunications operations of the
Company also are subject to various state laws and regulations, including
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certification requirements. Generally, the Company must obtain and
maintain certificates of public convenience and necessity from regulatory
authorities as well as file tariffs in most states in which it offers
intrastate long distance services, and in most of these jurisdictions, also
must file and obtain prior regulatory approval of tariffs for its
intrastate offerings. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of
certified carriers, and/or for corporate reorganizations; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; 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 the state regulatory authorities. Fines and
other penalties also may be imposed for such violations.
At the present time, the Company is authorized to provide originating
long distance services to customers in all states except Alaska and Hawaii.
Those services may terminate in any state in the United States and may also
terminate in countries abroad. Only 31 states have public utility
commissions that actively assert regulatory oversight over intrastate
services such as those currently offered by the Company. Like the FCC,
many of these regulating jurisdictions are relaxing the regulatory
restrictions currently imposed on telecommunications carriers for
intrastate service. While some of these states restrict the offering of
intra-LATA services by the Company and other IXCs, the general trend is
toward opening up these markets to the Company and other IXCs. Those
states that permit the offering of intra-LATA services by IXCs generally
require that end-users desiring to access these services dial special
access codes which place the Company and other IXCs at a disadvantage as
compared to LEC intra-LATA toll service which generally requires no access
code.
WIRELESS SERVICES. The Company, through its wholly owned subsidiary,
DWS, has a Spectrum Agreement with US WEST Wireless for participation in
the FCC's PCS D- and E-Block spectrum auction. This auction concluded on
January 14, 1997, with US WEST Wireless being the successful bidder on
BTA-421 (Sioux City) for the E-Block at $2.44 per population point. The
Company's agreement covers a 104,900 population point in the Company's area
of interest in Southeastern South Dakota and Northwestern Iowa outside of
the municipal boundaries of Sioux City. This amounts to a commitment of
$255,956 for the Company's share of the population points and of the
license. The Company has made an escrow deposit with US WEST Wireless of
$61,905, all of which is available for, and will be applied to, the bid
commitment. The Company has entered negotiations with US WEST Wireless for
additional portions of the BTA, but there is no assurance that these
negotiations will be successful for the Company.
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On December 13, 1996, the FCC adopted rules to permit geographic
partitioning and spectrum disaggregation for all broadband PCS licensees.
These rules give the existing licensees and potential new entrants greater
flexibility to determine how much spectrum they will need for the
geographic areas in which they provide service. The Company has entered
negotiations with the winners of the FCC's A- and B-Block auctions for the
Minneapolis, Minnesota and the Des Moines, Iowa MTAs to partition or
disaggregate portions of the blocks that cover areas of interest to the
Company in Southeastern South Dakota, Northwestern Iowa and Southwestern
Minnesota. These negotiations have not reached a definitive point, and
there are no existing financial or other commitments between the parties.
There can be no assurance that these negotiations will be successful for
the Company.
Since there will be up to six PCS licensees competing with up to two
established cellular licensees in each market area, the Company expects the
wireless service market to be highly competitive. The Company initially
plans to focus on the use of its PCS services to provide fixed wireless
services in non-metropolitan areas, and to use the wireless services as a
complement and supplement to other services offered by the Company. There
can be no assurance that the Company will be able to make wireless services
a profitable part of its overall business.
The licensing, construction, operation, acquisition and sale of PCS
networks, as well as the number of PCS, cellular and other wireless
licensees permitted in each market, are regulated by the FCC. Federal law
prohibits the states from regulating the rates charged by wireless
telecommunications carriers (including PCS and cellular). Although some
states have petitioned the FCC for authority to regulate wireless rates,
thus far no such petitions have been successful. Federal law also
expressly prohibits the states from regulating the entry of wireless
carriers. However, to the extent not otherwise preempted, the states are
permitted to regulate any other terms and conditions of wireless services,
including but not limited to customer billing information and practices;
consumer protection matters; bundling of service and equipment;
availability of wholesale capacity; and facilities siting issues. There
can be no assurance that state agencies having jurisdiction over the
Company's business will not adopt regulations, impose taxes on PCS licenses
or take other actions that would adversely affect the business of the
Company. Federal and state regulators also will determine important
aspects of the Company's operations, such as technical aspects of and
payments for interconnection with landline and other wireless networks.
On July 26, 1996, the FCC released a report and order establishing
timetables for making emergency 911 services available by PCS and other
mobile services providers, including "enhanced 911" services that provide
the caller's telephone number, location and other useful information. By
late 1997, PCS providers must be able to process and transmit 911 calls
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(without call validation), including those from callers with speech or
hearing disabilities. Assuming a cost recovery mechanism is in place, by
mid-1998 such providers must have completed actions enabling them to relay
a caller's automatic number identification and cell site, and by 2001 they
must be able to identify the location of a 911 caller within 125 meters in
67 percent of all cases. State actions incompatible with these FCC rules
are subject to preemption. Various parties have petitioned the FCC to
reconsider certain requirements imposed in the order.
On August 1, 1996, the FCC released a report and order expanding the
flexibility of PCS and other commercial mobile radio services to provide
fixed as well as mobile services. Such fixed services include, but need
not be limited to, "wireless local loop" services, for example for services
to apartment and office buildings, and wireless backup of PBXs and local
area networks, to be used in the event of interruptions due to weather or
other emergencies. A petition for reconsideration or clarification of
aspects of the FCC's order presently is pending.
PCS licenses are granted for a 10-year period, at the end of which
period the licensee may apply for renewal. The Company must obtain a
number of approvals, licenses and permits for the operation of its PCS
business, including land use regulatory approvals and licenses from the
Federal Aviation Administration in connection with its PCS towers.
Additionally, the wireless telecommunications industry is subject to
certain state and local governmental regulations. Operating costs also are
affected by other government actions that are beyond the Company's control.
There is no assurance that the various federal, state and local agencies
responsible for granting such licenses, approvals and permits will do so or
that, once granted, those agencies will not revoke or fail to renew them.
Failure to obtain such licenses, approvals and permits would adversely
affect, delay commencement of or prohibit certain business operations
proposed by the Company.
CABLE TELEVISION REGULATION. The operation of cable television
systems is extensively regulated through a combination of federal
legislation and FCC regulations, by some state governments and by most
local government franchising authorities such as municipalities and
counties. The 1996 Act also is expected to have a profound effect on the
regulation of cable television operations. This new law will alter federal,
state and local laws and regulations regarding telecommunications providers
and cable television service providers, including the Company. The
discussion below summarizes the relevant provisions of the 1996 Act and
reviews the pre-existing federal cable television regulation as revised by
the 1996 Act.
THE TELECOMMUNICATIONS ACT OF 1996. The following is a summary
of certain provisions of the 1996 Act which could materially affect
the growth and operation of the cable television industry and the
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cable and telecommunications services provided by the Company. The
FCC has undertaken, and continues to undertake, numerous rule-making
proceedings to interpret and implement the provisions discussed below.
It is not possible at this time to predict the effects of such rule-
making proceedings on the Company.
CABLE RATE REGULATION. Rate regulation of the Company's cable
television services is divided between the FCC and local units of
government, primarily the local municipalities in which the Company
provides services. The FCC's jurisdiction extends to the cable
programming service tier ("CPST"), which consists largely of
satellite-delivered programming (excluding basic tier programming and
programming offered on a per-channel or per-program basis). Local
units of government (commonly referred to as "local franchising
authorities" or "LFAs") are primarily responsible for regulating rates
for the basic tier of cable service ("BST"), which typically will
contain at least the local broadcast stations and public access,
educational and government ("PEG") channels. Equipment rates are also
regulated by LFAs. The FCC retains appeal jurisdiction from LFA
decisions. Cable services offered on a per-channel or per-program-
only basis remain unregulated. By virtue of its small size, the
Company is currently exempt from these regulations.
Because of the Company's rate structure and small size, there is
no CPST regulation of the Company's rates at the current time. If the
Company's cable operations were to increase above the thresholds
established in 1996 or if the Company were to change its rate
structure with respect to cable services, additional regulations may
apply. Those additional regulations would include CPST rate
regulations, which would be triggered only by an LFA complaint. An
LFA complaint must be based upon more than one subscriber complaint.
Prior to the 1996 Act, a FCC review of CPST rates could be occasioned
by a single subscriber complaint to the FCC. The 1996 Act does not
disturb existing or pending CPST rate settlements between the Company
and the FCC. The Company's BST rates remain subject to LFA regulation
under the 1996 Act. Existing law precludes rate regulation wherever a
cable operator faces effective competition. The 1996 Act expands the
definition of effective competition to include any franchise area
where a LEC (or affiliate) provides video programming services to
subscribers by any means other than through direct broadcast satellite
service. There is no penetration minimum for the LEC to qualify as an
effective competitor, but it must provide comparable programming
services (12 channels including some broadcast channels) in the
franchise area. By virtue of its small size, the Company is currently
exempt from most of the regulations under the 1996 Act.
Under the 1996 Act, the Company will be allowed to aggregate on a
franchise, system, regional or company level its equipment costs into
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broad categories, such as converter boxes, regardless of the varying
levels of functionality of the equipment within each such broad
category. The 1996 Act will allow the Company to average together
costs of different types of converters including non-addressable,
addressable and digital. The statutory changes will also facilitate
the rationalizing of equipment rates across jurisdictional boundaries.
These cost-aggregation rules do not apply to the limited equipment
used by "BST-only" subscribers.
CABLE UNIFORM RATE REQUIREMENTS. The 1996 Act immediately
relaxes the uniform rate requirements of the 1992 Cable Act by
specifying that such requirements do not apply where the operator
faces effective competition, and by exempting bulk discounts to
multiple dwelling units, although complaints regarding predatory
pricing may be made to the FCC. Upon a prima facie showing that there
are reasonable grounds to believe that the discounted price is
predatory, the cable system operator will have the burden of proving
otherwise.
SYSTEM SALES. The 1996 Act changes the definition of a cable
system so that competitive providers of video services will only be
regulated and franchised as a cable system if they use public rights-
of-way.
CABLE POLE ATTACHMENTS. Under the 1996 Act, investor-owned
utilities must make poles and conduits available to cable systems
under delineated terms. Electric utilities are given the right to
deny access to particular poles on a nondiscriminatory basis for lack
of capacity, safety, reliability and generally accepted engineering
purposes. On March 14, 1997, the FCC released a notice of proposed
rulemaking to amend its rules and policies governing pole attachments.
In its notice, the FCC proposed a new formula for determining rates
applicable to attachments on poles, within ducts, conduit or rights-
of-way by both cable systems and telecommunications carriers until a
separate methodology is proposed for telecommunications carriers. In
the 1996 Act, Congress directed the FCC to issue a new pole attachment
formula relating to telecommunications carriers within two years of
the effective date of the 1996 Act, to become effective five years
after enactment. On August 12, 1997, the FCC released a notice of
proposed rulemaking seeking comment on the implementation of a
methodology for determining pole attachment rates for
telecommunications carriers. Those rules will result in higher pole
rental rates for cable operators. Any increases pursuant to this
formula may not begin for five years and will be phased-in in equal
increments over the fifth through the tenth years. This new FCC
formula does not apply in states which certify that they regulate pole
rents. Pole owners must impute pole rentals to themselves if they
offer telecommunications or cable services. Cable operators need not
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pay future make-ready on poles currently contracted if the make-ready
is required to accommodate the attachments of another user, including
the pole owner.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Act declares that
no state or local laws or regulations may prohibit or have the effect
of prohibiting the ability of any entity to provide any interstate or
intrastate telecommunications service. States are authorized to
impose competitively neutral requirements regarding universal service,
public safety and welfare, service quality and consumer protection.
The 1996 Act further provides that cable operators and affiliates
providing telecommunications services are not required to obtain a
separate franchise from LFAs for such services. The 1996 Act
prohibits LFAs from requiring cable operators to provide
telecommunications service or facilities as a condition of a grant of
a franchise, franchise renewal or franchise transfer, except that LFAs
can seek institutional networks as part of such franchise
negotiations. The 1996 Act clarifies that traditional cable franchise
fees may only be based on revenues related to the provision of cable
television services. However, when cable operators provide
telecommunications services, LFAs may require reasonable,
competitively neutral compensation for management of the public
rights-of-way.
To facilitate the entry of new telecommunications providers
(including cable operators), the 1996 Act imposes interconnection
obligations on all telecommunications carriers. All carriers must
interconnect their networks with other carriers and may not deploy
network features and functions that interfere with interoperability.
Existing LECs also have the following obligations: (i) good faith
negotiation with carriers seeking interconnection; (ii) unbundling,
equal access and non-discrimination requirements; (iii) resale of
services, including resale at wholesale rates (with an exception for
certain low-priced residence services to business customers); (iv)
notice of changes in the network that would affect interconnection and
interoperability; and (v) physical collocation unless the LEC
demonstrates that practical technical reasons, or space limitations,
make physical collocation impractical. The 1996 Act also directs the
FCC, within one year of enactment, to adopt regulations for existing
LECs to share infrastructure with qualifying carriers, and the FCC
released those regulations on February 7, 1997. Under the 1996 Act,
individual interconnection rates must be just and reasonable, based on
cost, and may include a reasonable profit. Cost of interconnection
will not be determined in an ROR proceeding. Traffic termination
charges shall be mutual and reciprocal. The 1996 Act contemplates
that interconnection agreements will be negotiated by the parties and
submitted to a state public utilities commission for approval. A
public utilities commission may become involved, at the request of
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either party, if negotiations fail. If the state regulator refuses to
act, the FCC may determine the matter. If the public utilities
commission acts, an aggrieved party's remedy is to file a case in
federal district court.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Act
allows telephone companies to compete directly with cable operators by
repealing the previous telephone company/cable cross-ownership ban and
the FCC's video dialtone regulations. This will allow LECs, including
the RBOCs, to compete with cable operators both inside and outside of
their telephone service areas. If a LEC provides video via radio
waves, it is subject to broadcast jurisdiction. If a LEC provides
common carrier channel service it is subject to common carrier
jurisdiction. An LEC providing video programming to subscribers is
otherwise regulated as a cable operator (including franchising, leased
access and customer service requirements), unless the LEC elects to
provide its programming via an open video system. LEC owned
programming services will also be fully subject to program access
requirements.
The 1996 Act replaces the FCC's video dialtone rules with an open
video system ("OVS") plan by which LECs can provide cable service in
their telephone service area. LECs complying with the FCC OVS
regulations will receive relaxed oversight. The 1996 Act requires the
FCC to act on any such OVS certification within 10 days of its filing.
Only the program access, negative option billing prohibition,
subscriber privacy, EEO, PEG, must-carry and retransmission consent
provisions of the Communications Act of 1934, as amended, will apply
to LECs providing OVS. Franchising, rate regulation, consumer service
provisions, leased access and equipment compatibility will not apply.
Cable copyright provisions will apply to programmers using OVS. LFAs
may require OVS operators to pay franchise fees only to the extent
that the OVS provider or its affiliates provide cable services over
the OVS. OVS operators will be subject to LFA general right-of-way
management regulations. Such fees may not exceed the franchise fees
charged to cable operators in the area, and the OVS provider may pass
through the fees as a separate subscriber bill item.
The FCC has adopted regulations prohibiting an OVS operator from
discriminating among programmers, and ensuring that OVS rates, terms
and conditions for service are reasonable and nondiscriminatory.
Further, the FCC has adopted regulations prohibiting an LEC-OVS
operator, or its affiliates, from occupying more than one-third of the
system's activated channels when demand for channels exceeds supply,
although there are no numeric limits. The 1996 Act also mandates OVS
regulations governing channel sharing, extending the FCC's sports
exclusivity, network nonduplication and syndicated exclusivity
regulations and controlling the positioning of programmers on menus
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and program guides. The 1996 Act does not require LECs to use
separate subsidiaries to provide incidental inter-LATA video or audio
programming services to subscribers or for their own programming
ventures. The validity of the FCC's rules currently is under review
in consolidated cases pending before the United States Court of
Appeals for the Fifth Circuit.
While there remains a general prohibition on LEC buyouts of cable
systems (any ownership interest exceeding 10%), cable operator buyouts
of LEC systems and joint ventures between cable operators and LECs in
the same market, the 1996 Act provides exceptions to this prohibition.
A rural exception permits buyouts where the purchased system serves an
area with fewer than 35,000 inhabitants outside an urban area. Where
an LEC purchases a cable system, that system, in addition to any other
system in which the LEC has an interest, may not serve 10% or more of
the LEC's telephone service area. Additional exceptions are also
provided for similar buyouts. The 1996 Act also provides the FCC with
the power to grant waivers of the buyout provisions in cases where (i)
the cable operator or LEC would be subject to undue economic distress,
(ii) the system or facilities would not be economically viable or
(iii) the anticompetitive effects of the proposed transaction are
clearly outweighed by the effect of the transaction in meeting
community needs. The LFA must approve any such waiver.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION.
The 1996 Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act.
Electric utilities must establish separate subsidiaries, known as
exempt telecommunications companies, and must apply to the FCC for
operating authority. The Company anticipates that large utility
holding companies will become significant competitors to both cable
television and other telecommunications providers as a result of the
1996 Act.
CROSS-OWNERSHIP AND MUST CARRY. The 1996 Act eliminates
broadcast/cable cross-ownership restrictions (including broadcast
network/cable restrictions), but leaves in place FCC regulations
prohibiting local cross-ownership between television stations and
cable systems. The FCC is empowered by the 1996 Act to adopt rules to
ensure carriage, channel positioning and non-discriminatory treatment
of non-affiliated broadcast stations by cable systems affiliated with
a broadcast network. Previous SMATV and MMDS cable cross-ownership
restrictions have been eliminated for cable operators subject to
effective competition. By virtue of its small size, the Company is
currently exempt from these regulations. The 1996 Act preserves local
television broadcasters' rights to signal carriage on cable systems
("must-carry"), and clarifies that the geographic scope of must-carry
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is to be based on commercial publications which delineate television
markets based on viewing patterns. The FCC is directed to grant or
deny must-carry requests within 120 days of a complaint being filed
with the FCC.
CABLE EQUIPMENT COMPATIBILITY AND SCRAMBLING REQUIREMENTS. The
1996 Act directed the FCC to establish an equipment comparability rule
emphasizing that (i) narrow technical standards, mandating a minimum
degree of common design among televisions, VCRs and cable systems, and
relying heavily on the open marketplace, should be pursued, (ii)
competition for all converter features unrelated to security
descrambling should be maximized and (iii) adopted standards should
not affect unrelated telephone and computer features. The 1996 Act
directed the FCC to adopt regulations which assure the competitive
availability of converters ("navigation devices") from vendors other
than cable operators. The FCC's rules may not impinge upon signal
security concerns or theft of service protections. Waivers from these
requirements will be available if the cable operator shows the waiver
is necessary for the introduction of new services. Once the equipment
market becomes competitive, FCC regulations in this area will be
terminated.
The 1996 Act requires cable operators, upon subscriber request,
to fully scramble or block at no charge the audio and video portion of
any channel not specifically subscribed to by a household. Further,
the 1996 Act provides that sexually explicit programming must be fully
scrambled or blocked. If the cable operator cannot fully scramble or
block its signal, it must restrict transmission to those hours of the
day when children are unlikely to view such programming.
PRE-EXISTING FEDERAL REGULATION. The 1984 Cable Act and the 1992
Cable Act regulated the cable television industry and the vast
majority of that regulation remains unchanged by the 1996 Act. The
1984 Cable Act created uniform national standards and guidelines for
the regulation of cable systems. Among other things, the 1984 Cable
Act generally preempted local control over cable rates in most areas.
In addition, the 1984 Cable Act affirmed the right of franchising
authorities (state or local, depending on the practice in individual
states) to award one or more franchises within their jurisdictions.
It also prohibited non-grandfathered cable systems from operating
without a franchise in such jurisdiction. The 1984 Cable Act (i)
requires cable television systems with 36 or more activated channels
to reserve a percentage of such channels for commercial use by
unaffiliated third parties, (ii) permits franchise authorities to
require the cable operator to provide channel capacity, equipment and
facilities for public, educational and governmental access and (iii)
regulates the renewal of franchises.
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The 1992 Cable Act greatly expanded federal and local regulation
of the cable television industry. Certain of the more significant
areas of regulation imposed by the 1992 Cable Act are discussed below.
REGULATION OF PROGRAM LICENSING. The 1992 Cable Act directed the
FCC to promulgate regulations regarding the sale and acquisition of
cable programming between multichannel video program distributors
(including cable operators) and programming services in which a cable
operator has an attributable interest. The legislation and the
implementing regulations adopted by the FCC preclude most exclusive
programming contracts (unless the FCC first determines the contract
serves the public interest) and generally prohibit a cable operator
that has an attributable interest in a programmer from improperly
influencing the terms and conditions of sale to unaffiliated
multichannel video program distributors. Further, the 1992 Cable Act
requires that such cable affiliated programmers make their programming
services available to cable operators and competing video technologies
such as MMDS and DBS, and to telephone company providers of video
services, on terms and conditions that do not unfairly discriminate
among such competitors.
REGULATION OF CARRIAGE OF PROGRAMMING. Under the 1992 Cable Act,
the FCC adopted regulations prohibiting cable operators from requiring
a financial interest in a program service as a condition to carriage
of such service, coercing exclusive rights in a programming service or
favoring affiliated programmers so as to restrain unreasonably the
ability of unaffiliated programmers to compete.
REGULATION OF CABLE SERVICE RATES. The 1992 Cable Act subjected
the Company's cable systems to rate regulation, except in those cases
where they face "effective competition." The FCC was required to
establish standards and procedures governing regulation of rates for
basic cable service, equipment and installation, which were then to be
implemented by state and local franchising authorities. The 1992
Cable Act also required the FCC, upon complaint from a franchising
authority or a cable subscriber, to review the reasonableness of rates
for CPSTs. The 1996 Act amended the 1992 Cable Act to allow only LFAs
to file complaints. Services offered on an individual basis, such as
pay television and pay-per-view services, were not subject to rate
regulation.
On April 1, 1993, the FCC adopted rate regulations governing
virtually all cable systems, which were revised on February 22, 1994.
Under these regulations, existing basic and CPST service rates
typically are evaluated against benchmark rates established by the FCC
and are subject to mandatory reductions. Equipment and installation
charges are regulated based on actual costs. As noted above, the 1996
Act provides that rate regulation of the CPST automatically sunsets on
March 31, 1999.
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The FCC also allowed cable operators to elect to justify rates
under cost-of-service rules, which allow high cost systems to
establish rates in excess of the benchmark level. The FCC's interim
cost-of-service rules allowed a cable operator to recover through
rates for regulated cable services its normal operating expenses plus
a rate of return equal to 11.25% on the rate base. However, the FCC
significantly limited the inclusion in the rate base of acquisition
costs in excess of the book value of tangible assets. As a result,
the Company pursued cost-of-service justifications in only a few
cases. On December 15, 1995, the FCC adopted slightly more favorable
cost-of-service rules.
The FCC's rate regulations generally permit cable operators to
adjust rates to account for inflation and increases in certain
external costs, including programming costs, to the extent such
increases exceed the rate of inflation. However, a cable operator may
pass through increases in the cost of programming services affiliated
with such cable operator to the extent such costs exceed the rate of
inflation only if the price charged by the programmer to the
affiliated cable operator reflects either prevailing prices offered in
the marketplace by the programmer to unaffiliated third parties or the
fair market value of the programming. The FCC's revised regulations
confirm that increases in pole attachment fees ordinarily will not be
accorded external cost treatment. The FCC recently adopted a method
for recovering external costs and inflation on an annual basis. The
new method minimizes the need for frequent rate adjustments and the
regulatory lag problems associated with the previous rate adjustment
methodology.
The regulations also provide mechanisms for adjusting rates when
regulated tiers are affected by channel additions or deletions.
Additional programming costs resulting from channel additions can be
accorded the same external treatment as other program costs increases,
and cable operators presently are permitted to recover a mark-up on
their programming expenses. Under one option, operators were allowed
a flat fee increase ($.20) per channel added to an existing CPST, with
an aggregate cap on such increases ($1.20) plus a license fee reserve
($.30) through 1996. In 1997, an additional flat fee increase ($.20)
is available, and the license fees for additional channels and for
increases in existing channels are no longer subject to the aggregate
cap. This optional approach for adding services is scheduled to expire
on December 31, 1997.
The FCC adopted additional rules that permit channels of new
programming services to be added to cable systems in a separate new
product tier which the FCC has determined that it will not rate
regulate at this time. The FCC also has adopted rules allowing
operators to raise rates based on costs incurred in connection with a
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substantial upgrade of the cable system. The FCC provided additional
rate relief for small operators, including the Company, and to any
additional systems that the Company acquires to the extent that the
systems are already eligible for this favorable treatment.
REGULATION OF CUSTOMER SERVICE. As required by the 1992 Cable
Act, the FCC has adopted comprehensive regulations establishing
minimum standards for customer service and technical system
performance. Local franchising authorities are allowed to enforce
stricter customer service requirements than the FCC standards.
REGULATION OF CARRIAGE OF BROADCAST STATIONS. The 1992 Cable Act
granted commercial broadcasters a choice of must-carry rights or
retransmission-consent rights, and gave noncommercial educational
broadcasters must-carry rights. By October 1993, cable operators were
required to secure permission from broadcasters that elected
retransmission-consent rights before retransmitting the broadcasters'
signals. Local and distant broadcasters can require cable operators
to make a payment as a condition to carriage of such broadcasters'
stations on a cable system. Established superstations were not
granted such rights.
The 1992 Cable Act also imposed obligations to carry local
broadcast stations for such stations which chose a must-carry right,
as distinguished from the retransmission-consent right described
above. The 1992 Cable Act and the rules adopted by the FCC generally
provided for mandatory carriage by cable systems of all local full-
power commercial television broadcast signals selecting must-carry,
including the signals of stations carrying home-shopping programming
and, depending on a cable system's channel capacity, non-commercial
television broadcast signals. On March 31, 1997, the United States
Supreme Court upheld the constitutionality of the must-carry
provisions of the 1992 Cable Act.
OWNERSHIP REGULATIONS. The 1992 Cable Act required the FCC to:
(i) promulgate rules and regulations establishing reasonable limits on
the number of cable subscribers which may be served by a single
multiple system cable operator or entities in which it has an
attributable interest; (ii) prescribe rules and regulations
establishing reasonable limits on the number of channels on a cable
system that will be allowed to carry programming in which the owner of
such cable system has an attributable interest; and (iii) consider the
necessity and appropriateness of imposing limitations on the degree to
which multichannel video programming distributors (including cable
operators) may engage in the creation or production of video
programming. On September 23, 1993, the FCC adopted regulations
establishing a 30% limit on the number of homes nationwide that a
cable operator may reach through cable systems in which it holds an
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attributable interest (attributable for these purposes is defined as a
five percent or greater ownership interest or the existence of any
common directors), with an increase to 35% if the additional cable
systems are minority controlled. However, the FCC stayed the
effectiveness of its ownership limits pending the appeal of a
September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found
unconstitutional the provision of the 1992 Cable Act requiring the FCC
to establish such ownership limits. On appeal, however, the United
States Court of Appeals for the District of Columbia Circuit upheld
the provision. As a result, the Company's ability to acquire
interests in additional cable systems may be affected.
On September 23, 1993, the FCC also adopted regulations limiting
carriage by a cable operator of national programming services in which
that operator holds an attributable interest (using the same
attribution standards as discussed above) to 40% of the first 75
activated channels on each of the cable operator's systems. The rules
provide for the use of two additional channels or a 45% limit,
whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also
grandfather existing carriage arrangements which exceed the channel
limits, but require new channel capacity to be devoted to unaffiliated
programming services until the system achieves compliance with the
regulations. Channels beyond the first 75 activated channels are not
subject to such limitations, and the rules do not apply to local or
regional programming services.
In the same rule-making proceeding, the FCC concluded that
additional restrictions on the ability of multichannel distributors to
engage in the creation or production of video programming presently
are unwarranted.
Under the 1992 Cable Act and the FCC's regulations, a cable
operator could not hold a license for MMDS and DBS systems within the
same geographic area in which it provides cable service. The 1996 Act
would allow such ownership if effective competition exists in that
geographic area.
The 1992 Cable Act contains numerous other provisions which,
together with the 1984 Cable Act, create a comprehensive regulatory
framework. Violation by a cable operator of the statutory provisions
or the rules and regulations of the FCC can subject the operator to
substantial monetary penalties and other significant sanctions such as
suspension of licenses and authorizations, issuance of cease and
desist orders and imposition of penalties. Many of the specific
obligations imposed on the operation of cable television systems under
these laws and regulations are complex, burdensome and increase the
Company's cost of doing business.
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COPYRIGHT REGULATIONS. The Copyright Revision Act of 1976 (the
"Copyright Act") provides cable television operators with a compulsory
license for retransmission of broadcast television programming without
having to negotiate with the stations or individual copyright owners
for retransmission consent for the programming. The availability of
the compulsory license is conditioned upon the cable operators'
compliance with applicable FCC regulations, certain reporting
requirements and payment of appropriate license fees, including
interest charges for late payments, pursuant to the schedule of fees
established by the Copyright Act and regulations issued thereunder.
The Copyright Act also empowers the Copyright Office to periodically
review and adjust copyright royalty rates based on inflation and/or
petitions for adjustments due to modifications of FCC rules. The FCC
has recommended to Congress the abolition of the compulsory license
for cable television carriage of broadcast signals, a proposal that
has received substantial support from members of Congress. Any
material change in the existing statutory copyright scheme could
significantly increase the costs of programming and be adverse to the
business interests of the Company.
PRIVACY. The 1984 Cable Act imposes a number of restrictions on
the manner in which cable system operators can collect and disclose
data about individual system customers. The statute also requires
that the system operator must periodically provide all customers with
written information about its policies regarding the collection and
handling of customer data, their privacy rights under federal law and
their enforcement rights. In the event that a cable operator is found
to have violated the customer privacy provisions of the 1984 Cable
Act, it could be required to pay damages, attorneys' fees and other
costs. Under the 1992 Cable Act, the privacy requirements are
strengthened to require that cable operators take such actions as are
necessary to prevent unauthorized access to personally identifiable
information.
STATE AND LOCAL REGULATION. Because cable television systems use
local streets and rights-of-way, cable television systems are
generally licensed or franchised by local municipal or county
governments and, in some cases, by centralized state authorities with
such franchises being given for fixed periods of time subject to
extension or renewal largely at the discretion of the issuing
authority. The specific terms and conditions of such franchises vary
significantly depending on the locality, population, competitive
services and a number of other factors. While this variance takes
place among systems of essentially the same size in the same state,
franchises generally are comprehensive in nature and impose
requirements on the cable operator relating to all aspects of cable
service including franchise fees, technical requirements, channel
capacity, subscriber rates, consumer and service standards, access
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channel and studio facilities, insurance and penalty provisions.
Local franchise authorities generally control the sale or transfer of
cable systems to third parties. The franchising process, like the
federal regulatory climate, is highly politicized and no assurances
can be given that the Company's franchises will be extended or renewed
or that other problems will not be encountered at the local level. In
connection with the franchise renewal process, LFAs commonly request
the provision of enhanced cable system technology as a condition of
franchise renewal. The 1984 Cable Act grants certain protective
procedures in connection with renewal of cable franchises, which
procedures were further clarified by the renewal provisions of the
1992 Cable Act.
PROPOSED CHANGES IN REGULATION. The regulation of cable
television systems at the federal, state and local levels is subject
to the political process and has been in constant flux over the past
decade. Material changes in the law and regulatory requirements must
be anticipated and there can be no assurance that the Company's
business will not be affected adversely by future legislation, new
regulation or deregulation. Legislative, administrative and/or
judicial action may change all or portions of the foregoing statements
relating to competition and regulation.
CABLE PROVISION OF INTERNET SERVICES. Transmitting indecent
material via the Internet is made criminal by the 1996 Act. However,
on-line access providers are exempted from criminal liability for
simply providing interconnection service; they are also granted an
affirmative defense from criminal or other action where in "good
faith" they restrict access to indecent materials. The 1996 Act
further exempts on-line access providers from civil liability for
actions taken in good faith to restrict access to obscene, excessively
violent or otherwise objectionable material. On June 26, 1997, the
United States Supreme Court held unconstitutional the provisions of
the 1996 Act criminalizing indecent online transmissions.
REGULATION OF INTERNET SERVICES. Internet-related services are not
currently subject to direct regulation by the FCC or any other United
States agency, other than regulation applicable to businesses generally.
The FCC recently requested comments on a petition filed by the America's
Carriers Telecommunication Association which requests that the FCC regulate
certain voice transmissions over the Internet as telecommunications
services. Changes in the regulatory environment relating to the
telecommunications or Internet-related services industry could have an
adverse effect on the Company's Internet-related services business. The
1996 Act may permit telecommunications companies, RBOCs or others to
increase the scope or reduce the cost of their Internet access services.
In its recent access charge reform proceeding, the FCC concluded that
incumbent LECs may not assess interstate access charges on information
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service providers, but stated that it planned to address issues relating to
information service providers' use of the public switched network as part
of a broader set of issues under review in a related proceeding. Given the
present unsettled nature of the regulation of Internet services, the
Company cannot predict the effect that the 1996 Act or any future
legislation, regulation or regulatory changes may have on its business.
In addition to the regulatory uncertainties, the law relating to the
liability of on-line services providers and Internet access providers for
information carried on, disseminated through or hosted on their systems is
currently unsettled. Several private lawsuits seeking to impose such
liability are currently pending. In one action brought against an Internet
access provider, RELIGIOUS TECHNOLOGY CENTER V. NETCOM ON-LINE
COMMUNICATION SERVICES, INC., the United States District Court for the
Northern District of California ruled in a preliminary phase that under
certain circumstances Internet access providers could be held liable for
copyright infringement. The case has been settled by the parties.
The 1996 Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. On June 12, 1996, however, a panel of three federal judges
granted a preliminary injunction barring enforcement of this portion of the
1996 Act to the extent that enforcement is based upon allegations other
than obscenity or child pornography as an impermissible restriction on the
First Amendment's right of free speech. That decision was appealed to the
United States Supreme Court, which held the provisions unconstitutional.
In addition, Congress, in consultation with the United States Patent and
Trademark Office and the Clinton Administration's National Information
Infrastructure Task Force, is currently considering legislation to address
the liability of on-line service providers and Internet access providers,
and numerous states have adopted or are currently considering similar types
of legislation. The imposition upon Internet access providers or Web
hosting sites of potential liability for materials carried on or
disseminated through their systems could require the Company to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources or the discontinuation of certain
product or service offerings. The Company believes that it is currently
unsettled whether the 1996 Act prohibits and imposes liability for any
services provided by Iway should the content or information transmitted be
subject to the 1996 Act.
The law relating to the liability of on-line service providers and
Internet access providers in relation to information carried, disseminated
or hosted also is being discussed by the World Intellectual Property
Organization in the context of ongoing consideration of updating existing,
and adopting new, international copyright treaties. Similar developments
are ongoing in the United Kingdom and other jurisdictions. The scope of
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authority of various regulatory bodies in relation to on-line services is
currently uncertain.
The Office of Telecommunications in the United Kingdom recently has
published a consultative document setting out a number of issues for
discussion, including the roles of traditional telecommunications and
broadcasting regulators with respect to on-line services. The Securities
Investment Board in the United Kingdom is investigating the status of on-
line services and the transmission of investment information over networks
controlled by access providers. Such transmissions may make an access
provider liable for any violation of securities and other financial
services legislation and regulations. Decisions regarding regulation,
enforcement, content liability and the availability of Internet access in
other countries may significantly affect the ability to offer certain
services worldwide and the development and profitability of companies
offering Internet and on-line services in the future. For example, it has
been reported that CompuServe recently removed certain content from its
services worldwide in reaction to law enforcement activities in Germany,
and it has been reported that an Internet access provider in Germany has
been advised by prosecutors that it may have liability for disseminating
neo-Nazi writings by providing access to the Internet where these materials
are available.
The increased attention focused upon liability issues as a result of
these lawsuits, legislation and legislative proposals could affect the
growth of Internet use. Any costs incurred as a result of liability or
asserted liability for information carried on or disseminated through its
systems could have a material adverse effect on the business, financial
condition and results of operations of the Company.
SUMMARY ONLY. The foregoing is only a summary of some of the present
and proposed federal, state and local regulations and legislation relating
to the Company's businesses. Other existing federal regulations, copyright
licensing and, in many jurisdictions, state and local regulatory
requirements, currently are the subject of a variety of judicial
proceedings, legislative hearings and administrative and legislative
proposals which could change, in varying degrees, the manner in which the
Company operates. Neither the outcome of these proceedings nor their impact
upon the Company can be predicted at this time.
EMPLOYEES
As of October 24, 1997, the Company employed 105 employees, 90 of whom
are full-time employees and none of whom was subject to any collective
bargaining agreements.
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ENVIRONMENTAL AND OTHER MATTERS
Except for site-specific issues, environmental issues tend to impact
members of the telecommunications industry in consistent ways. The United
States Environmental Protection Agency ("EPA") and other agencies regulate
a number of chemicals and substances that may be present in facilities used
in the provision of telecommunications services. These include
preservatives which may be present in certain wood poles, asbestos which
may be present in certain underground duct systems, and lead which may be
present in certain cable sheathing. Components of the Company's network
may include one or more of these chemicals or substances. The Company
believes that in their present uses, none of such facilities of the Company
poses any significant environmental or health risk that derives from EPA
regulated substances. If EPA regulation of any such substance is
increased, or if any facilities are disturbed or modified in such a way as
to require removal of the substance(s), special handling, storage and
disposal may be required for any such facilities removed from use. At this
time the Company is not subject to any environmental litigation.
PROPERTIES
The tangible assets of the Company include a substantial investment
in telecommunications and cable equipment. The net book value of the
Company's fixed assets was $23.3 million at September 30, 1997. No single
property represents 10% or more of the Company's total assets.
The principal properties of the Company do not lend themselves to
simple description by character and location. The Company's investment in
property, plant and equipment consisted of the following at December 31,
1995 and 1996:
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(IN THOUSANDS)
<CAPTION>
FIXED ASSETS 1996 1995
- ------------ ---- ----
<S> <C> <C>
Telecommunications Plant $16,923 $15,452
Cable Systems 4,870 1,355
Other Equipment 2,510 2,100
Land and Buildings 1,604 1,581
Other 354 462
</TABLE>
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Telecommunications plant consists of switching equipment, transmission
equipment and related facilities, aerial cable, underground cable, conduit
and wiring. Cable systems consist of head-end, distribution and subscriber
equipment. Other equipment consists of public telephone instruments and
telephone equipment (including PBXs) used or leased by the Company in its
operations, poles, furniture, office equipment, vehicles and other work
equipment. Land and buildings consist of land owned in fee and
improvements thereto, principally central office buildings. Other property
consists primarily of plant under construction, capital leases and
leasehold improvements.
The Company's rights-of-way for its telecommunications and cable
transmission systems are typically held under leases, easements, licenses
or governmental permits. All other major equipment and physical facilities
are owned in fee and are operated, constructed and maintained pursuant to
rights-of-way, easements, permits, licenses or consents on or across
properties owned by others.
The Company believes that standard practices prevailing in the
telephone industry are followed by the Company's telephone operating
subsidiaries in the construction and maintenance of plant and facilities,
and that all properties presently being used for operations of the Company
are suitable, well maintained and adequately equipped for the purposes for
which they are used. Substantially all of the Company's properties are
subject to mortgage liens held by the RUS and the RTFC.
The following property is owned in fee by the Company:
Headquarters building - Irene, South Dakota
13,000 sq. ft., single story brick structure, with 8,500 sq.
ft. for offices, 3,500 sq. ft. being remodeled for office
space and 1,200 sq. ft. for storage. Originally built in
1977 and expanded twice since then.
Main warehouse - Irene, South Dakota
5,000 square feet, metal structure.
Service building - Irene, South Dakota
3,000 square feet, metal structure, with 600 sq. ft. in
office space and the balance in storage.
Network switching center - Viborg, South Dakota
7,000 sq. ft., single story brick structure, on six-acre
site in an industrial park.
Network service building - Lennox, South Dakota
1,360 sq. ft. for switching, 2,000 sq. feet for storage.
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Switching and equipment buildings
Irene, South Dakota - telephone 900 sq. ft.
Wakonda, South Dakota - 800 sq. ft.
Gayville, South Dakota - 600 sq. ft.
Parker, South Dakota - 1,400 sq. ft.
Alsen, South Dakota - 1,000 sq. ft., plus 400 sq. ft. for
storage.
Flyger, South Dakota - 900 sq. ft.
Worthing, South Dakota - 1,100 sq. ft.
Beresford, South Dakota - 700 sq. ft.
Hurley, South Dakota - 900 sq. ft.
Sundowner site - Sioux Falls, South Dakota - 200 sq. ft. with
additional 250 sq. ft. building on order, one-hundred foot
wireless equipment tower under construction, on 2.5 acre site
(owned by the Company).
The following property is leased by the Company:
Beresford, South Dakota - 250 sq. ft. (office)
9th & Phillips site - Sioux Falls, South Dakota - 3,000 sq. ft.
(office - TCIC and Iway operations).
The Company also has various CATV equipment buildings, all of which
are small (less than 300 sq. ft.) and most of which are on leased land in
various communities served by the Company. This list of properties does
not include properties owned or leased by subsidiaries of the Company, none
of which is material. All properties owned by the Company are subject to
liens for loans obtained in the ordinary course of business.
LEGAL PROCEEDINGS
On July 24, 1997, an action captioned as "Complaint/Shareholder
Derivative Action" was filed in the Circuit Court for the County of Clay,
South Dakota, First Judicial Circuit, by Ronald "Skip" Graff, on behalf of
the Cooperative the predecessor entity to the Company against the Cooperative
and Ross Benson, Dale Bye, Edward Christensen, Jr., Jeff Goeman, James Jibben,
Palmer Larson, John Roth, John Schaefer, Thomas Hertz and Craig Anderson (the
"individual defendants"). The Complaint was filed against the individual
defendants both individually and in their capacities as members of the Board
of Directors of the Cooperative.
On November 10, 1997, Hon. Arthur L. Rusch, Judge for the Circuit Court
of Clay County, South Dakota entered and filed an order dismissing the
Complaint with prejudice in its entirety for failure to state a claim,
provided, that Mr. Graff was given 10 days to amend his complaint to attempt
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to state a cause of action concerning the merger of Dakota Telecommunications
Group, Inc., a South Dakota corporation, with and into Dakota
Telecommunications Group, Inc., a Delaware corporation.
Except as set forth above, there are no material pending legal
proceedings against the Company. The Company is subject from time to time
to legal proceedings and claims that arise in the ordinary course of
business and frequently participates in regulatory proceedings in front of
the South Dakota Public Utilities Commission. However, in the opinion of
management, none of these proceedings is material to the Company's
consolidated financial condition or results of operations.
CERTAIN AGREEMENTS AFFECTING CAPITAL STOCK
TCIC AND IWAY AGREEMENTS. In connection with the Cooperative's
acquisition of TCIC and Iway, the Cooperative entered into two agreements,
one with the former shareholders of TCIC (the "TCIC Agreement") and another
with the former shareholders (collectively, together with the former TCIC
shareholders, the "Sellers") of Iway (the "Iway Agreement."). Under the
terms of these agreements, the Cooperative issued an aggregate of 931
shares of its preferred stock to the TCIC Sellers and an aggregate of 241
shares of preferred stock to the Iway Sellers.
In the Conversion and the Merger, the preferred stock was
automatically converted into shares of the Company's Common Stock. Under
the TCIC Agreement, the number of shares of the Company's Common Stock
issued in exchange for the preferred stock was such that the TCIC Sellers
collectively received a number of shares of the Company's Common Stock that
would equal 6.75% of the outstanding Common Stock immediately after the
Merger, assuming (i) that the Merger took place on November 30, 1996, and
(ii) that all capital credits outstanding on the books of the Cooperative
on that date, reduced by the amount of cash used by the Cooperative to
retire capital credits or cash out odd-lot holders (subject to a $500,000
limit), were converted into additional shares of the Company's Common
Stock. An identical provision is contained in the Iway Agreement, except
that the percentage of outstanding Common Stock that the Iway Sellers
received immediately after the Merger is 1.75% rather than 6.75%. The
total number of shares of Common Stock into which the preferred stock was
converted was 189,454 shares (as adjusted to reflect the effects of the Stock
Split).
STOCK OPTIONS. As part of its executive compensation of Thomas W.
Hertz, Chief Executive Officer and General Manager, and Craig A. Anderson,
Executive Vice President - Marketing and Chief Financial Officer, the Board
of Directors of the Cooperative granted to each of Messrs. Hertz and
Anderson stock options to purchase 767 shares of Cooperative preferred
stock, which automatically became options to purchase 123,980 (as adjusted to
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reflect the effects of the Stock Split) shares of the Company's Common Stock
at an exercise price of $6.19 (as adjusted to reflect the effects of the
Stock Split) per share when the Merger was completed. (See "ADDITIONAL
SECURITIES OF THE COMPANY--Stock Options.")
WARRANTS. Pursuant to the TCIC Agreement and the Iway Agreement,
and as part of the consideration therefor, the Board of Directors of the
Cooperative granted to the TCIC Sellers and the Iway Sellers warrants to
purchase up to an aggregate of 482 shares of Cooperative preferred stock
("Warrants"), which automatically became Warrants to purchase 77,912 (as
adjusted to reflect the effects of the Stock Split) shares of Company
Common Stock at an exercise price of $6.19 (as adjusted to reflect the
effects of the Stock Split) per share upon consummation of the Merger.
(See "ADDITIONAL SECURITIES OF THE COMPANY--Warrants.")
STANDSTILL AGREEMENTS. In connection with the issuance of shares of
Preferred Stock to the TCIC Sellers and Iway Sellers, the Cooperative
entered into the Standstill Agreements with each of such persons that
restrict the abilities of the TCIC Sellers and Iway Sellers from selling
such stock and taking various other actions, as specified in the Standstill
Agreements. The restrictions embodied in the Standstill Agreements
continue to be applicable to shares of the Company's Common Stock issuable
to the TCIC Sellers and Iway Sellers. (See "ADDITIONAL SECURITIES OF THE
COMPANY--Standstill Agreements.")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is provided by the Company's management
as its analysis of the Company's financial condition and results of
operations. This analysis should be read in conjunction with the separate
historical financial statements of the Company and notes thereto included
elsewhere in this Prospectus.
OVERVIEW
In 1996 the Company began a major reorganization and expansion
program. This program includes the redesign and rebuilding of the
Company's switching center and telecommunications network, a project which
is now in process and expected to conclude by the end of 1997, as well as
expansion of the Company's operations through selected acquisitions.
During 1996, the Company purchased the assets of nineteen cable television
systems from three companies that provided cable services to various
communities in addition to the assets purchased by the Company. In
December 1996, the Company, through a wholly owned subsidiary, merged with
TCIC Communications, Inc. ("TCIC"), a South Dakota-based provider of long
distance and operator services. Also in December 1996, in a similar
transaction, the Company merged with I-way Partners, Inc. ("Iway"), one of
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South Dakota's largest Internet service providers. Both TCIC and Iway
continue to operate as wholly owned subsidiaries of the Company. The
Company currently anticipates that additional acquisitions will form a part
of its continuing expansion plans, though no final agreements have been
concluded at this time.
As part of its reorganization plans, the Company also changed its
form of conducting business from a South Dakota cooperative into a public
Delaware business corporation. On February 19, 1997, the Company filed a
Registration Statement on Form S-4 (Registration Statement No. 333-22025)
with respect to the Conversion and the Merger. At a special meeting of the
members of the Cooperative on July 21, 1997, the Conversion was approved.
The Conversion became effective on July 22, 1997 with the filing of the
Amended Articles of Incorporation approved by the members at the July 21,
1997 meeting. Immediately following the special meeting of the Cooperative
members, a special meeting of the shareholders of the resulting South
Dakota business corporation was convened on July 21, 1997 and held open
until July 25, 1997. At that meeting, the shareholders voted to approve an
Agreement and Plan of Merger pursuant to which the South Dakota business
corporation would be merged with and into the Company. The Merger became
effective on July 25, 1997. As a result, the Company now operates as a
publicly held Delaware corporation.
The Company's reorganization and expansion plans have had, and will
continue to have, significant impacts on the Company's financial condition
and results of operations. As part of its network rebuilding project, in
1995 the Company reassessed the remaining useful life of its old
facilities. In 1996, the Company incurred approximately $5.8 million in
new capital expenditures and in 1997 anticipates spending an additional $15
million for its network construction program. These changes will combine
to result in substantially higher depreciation expense with a corresponding
reduction in the Company's net income. In addition, to implement its
growth plans, in 1996 the Company completed the acquisitions described
above and increased its employee base from 34 employees at December 31,
1995, to 76 employees at December 31, 1996 and to 102 employees at September
30, 1997, resulting in additional increases in amortization expense and
employee-related operating expenses. While the Company anticipates that
its revenue base will continue to grow in 1997 through 1999 as it completes
its new facilities and markets new services, the resultant higher expense
levels from a combination of higher depreciation, amortization and interest
expense, as well as additional employee expenses, will likely cause the
Company to recognize and report net after-tax losses in those years.
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DECEMBER 31, 1995 TO DECEMBER 31, 1996
<TABLE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Capital Expenditures 1,554.1 $ 5,751.6
Cash Provided From Operations 1,950.2 1,961.8
Cash Used for Investment 725.7 7,516.2
Cash Provided From Financing 103.3 1,353.0
Long-Term Debt Incurred 342.0 4,399.3
Total Capital Structure $19,049.1 $22,448.3
Percent of Debt to Total Capital 72% 71%
</TABLE>
The Company's total capital structure was $22,448,300 at December 31,
1996, compared to a total capital structure of $19,049,100 at December 31,
1995. The increase in total capital in 1996 of $3,399,200 consisted
primarily of additional outstanding long-term debt of $2,284,000 and
$1,172,000 in additional capital from the issuance of preferred stock to
acquire TCIC and Iway in December 1996.
Cash provided from operations was $1,962,000 in 1996 compared to
$1,951,000 in 1995, largely unchanged. Cash used in investing activities
was $7,516,000 in 1996, up from $725,700 in 1995. This increase is
primarily due to increased capital expenditures in 1996 as the Company
began rebuilding its transmission network. Investing activities for 1995
also included cash totaling $1,142,000 that was received from the sale of
the Company's investment in certain cellular operations. Cash provided
from financing activities was $1,353,000 in 1996, up from $103,300 in 1995.
The increase in 1996 was primarily attributable to increased long-term
borrowings to finance the Company's 1996 capital expenditures program. The
Company believes that it has adequate internal and external resources
available to finance its ongoing operating requirements, but will need
additional long-term financing to complete additional network construction
programs. See "RISK FACTORS--Significant Capital Requirements,"
"--Competition" and "--Dividend Restrictions and Other Restrictive
Covenants."
During 1996, the Company and its subsidiaries increased long-term debt
by $4,399,000, compared to a $342,000 increase in 1995. Approximately
$3,300,000 of the 1996 increase was related to the acquisition of the
assets of 19 additional cable television systems and was obtained from the
RTFC. The balance of the 1996 loans and the 1995 borrowings were obtained
from the RUS. In July 1996, the Company refinanced all of its outstanding
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RUS loans using proceeds of a new loan from the RTFC. The Company and its
subsidiaries expect the RTFC and other sources to continue to be available
for future borrowings.
RESULTS OF OPERATIONS
<TABLE>
SUMMARY OF CONSOLIDATED OPERATIONS
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Total Revenues $6,115.5 $7,808.8
Depreciation and Amortization 1,701.0 2,434.4
Other Costs and Expenses 3,572.6 5,296.5
-------- --------
Operating Income (Loss) 841.9 77.9
Other Income (Expense) 593.5 (413.8)
Income Tax Expense (Benefit) 301.9 (175.7)
-------- --------
Net Income (Loss) $1,133.5 $ (160.2)
</TABLE>
In 1996, revenues increased to $7,809,000, up from $6,116,000 in 1995.
This represents an increase of 28 percent in 1996 compared to 1995. This
increase reflects the addition of 19 new cable systems during 1996 as well
as rate increases for the Company's local telephone services. Total costs
and expenses increased to $7,731,000, up from $5,274,000 in 1995. This
represents an increase of 47 percent in 1996 compared to 1995. The
increase in 1996 expenses reflects the additional operating expense
associated with the new cable assets purchased during that year as well as
an increase in depreciation and amortization expense and employee costs for
the Company's telephone operations. The Company's consolidated net income
or loss for 1996 was a loss of $160,000, compared to net income of
$1,133,000 in 1995, a decrease of 114 percent in 1996 compared to 1995.
The 1995 results include a one-time pre-tax net gain in the amount of
$686,000 related to the sale of a cellular investment made by the Company.
Other income and expense consists primarily of interest and dividend
income, interest expense and gains and losses from the disposition of
non-operating assets and investments. Other income decreased $1,000,000, or
170 percent, in 1996 primarily due to the unusual net after-tax increase in
1995 from the one-time sale of the Company's investment in cellular
telephone operations. The 1996 decrease also reflects additional interest
expense from the Company's increased long-term debt over 1995.
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RESULTS OF BUSINESS SEGMENT OPERATIONS
The Company currently operates within two major business segments:
telephone operations, which includes all operations other than cable
television; and cable television operations. Because of the technological
convergence of telephone and cable systems which allow both types of
services to be offered through a single network, the Company believes that
business segment reporting will not be appropriate in future years. The
following sections discuss the operating results for these two segments in
1995 and 1996.
<TABLE>
TELEPHONE OPERATIONS
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Local Service $ 856.1 $1,058.7
Long Distance Toll Service 1,931.7 1,996.3
Access Service 2,761.8 3,267.0
Other Revenues 34.5 140.8
-------- --------
Total Revenue 5,584.1 6,462.7
Depreciation and Amortization 1,632.2 2,011.0
Other Costs and Expenses 3,220.0 3,997.6
-------- --------
Operating Income $ 731.9 $ 454.1
Access Lines 5,935 5,973
</TABLE>
Local service revenues increased $202,600, or 24 percent, in 1996
compared to 1995. The 1996 increase was due primarily to a local service
rate increase approved by the Board of Directors in December 1995 and
implemented in February and July 1996. There are no local rate requests
currently pending for the Company nor does the Company currently anticipate
any local rate increases during 1997. The Company's local service rates
are not currently regulated by the FCC or the South Dakota Public Utilities
Commission.
Long distance toll revenues increased $64,600, or three percent, in
1996 compared to 1995. These changes primarily reflect fluctuations in
minutes of use by the Company's customers.
Access revenues increased $505,200, or 18 percent, in 1996 compared to
1995. The Company reassesses its access rates and underlying cost studies
annually and adjusts its tariff rate filings and participation in NECA and
USF revenue pools accordingly. In late 1996, the Company received approval
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from the South Dakota Public Utilities Commission to increase its
intrastate access rates approximately 20 percent. The Company anticipates
that its operating costs will continue to increase in 1997 and,
accordingly, anticipates that its access revenue will increase in 1997.
Depreciation and amortization expenses increased by $378,800, or 23
percent, in 1996 as a result of the Company's additional capital
expenditures for the year, changes in the estimated useful lives of certain
assets and the amortization of costs associated with its acquisitions of
TCIC and Iway. Approximately $75,000 of this increase was due to a change
in the Company's estimate of the useful life of certain of its central
office and other telecommunications equipment. See Note 12 to the
Company's Consolidated Financial Statements contained in Appendix A to this
Prospectus.
Other telephone costs and expenses increased $777,600, or 24 percent,
for 1996, primarily due to the expense of $550,000 of costs associated with
the abandonment of the acquisition of eight wireline telephone exchanges.
The other expense increase of $227,600 in 1996 was primarily due to an
increase in network repair maintenance activities which were postponed in
earlier years.
<TABLE>
CABLE TELEVISION OPERATIONS
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Cable Service Revenue $469.4 $1,300.5
Other Revenue 61.9 45.6
------ --------
Total Cable Revenue 531.3 1,346.1
Depreciation and Amortization 68.8 423.4
Other Costs and Expenses 352.6 1,298.9
------ --------
Operating Income (Loss) $110.0 $ (376.2)
Subscribers 1,740 5,474
</TABLE>
The Company's cable service revenues increased $831,000, or 177
percent, in 1996 due to the purchase of the assets of 19 additional cable
systems during the year.
Depreciation and amortization expenses increased by $354,600, or 515
percent, in 1996 as a result of the Company's purchase of additional cable
system assets during the year, with $113,900 primarily due to the Company's
reassessment of the remaining useful life of its existing cable system
assets. See Note 12 to the Company's Consolidated Financial Statements
contained in Appendix A to this Prospectus.
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<PAGE>
Other costs and expenses increased $946,400, or 268 percent, in 1996
compared to 1995. Operating expenses increased in 1996 primarily due to
the increased level of all expenses associated with the operation of the
additional assets purchased in 1996.
<TABLE>
INTEREST EXPENSE
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Interest Expense $592.1 $723.8
</TABLE>
Interest expense increased $131,700, or 22 percent, in 1996 due to the
addition of long-term borrowings to finance the Company's 1996 capital
expenditures and the purchase of additional cable system assets and the
business operations of TCIC and Iway. The Company anticipates that it will
borrow substantial additional long-term funds in 1997 to finance its
network rebuilding project and, accordingly, anticipates that future
interest expense will increase significantly.
INCOME TAXES
The Company historically has operated as a stock cooperative and has
been granted tax exempt status under Section 501(c)(12) of the Code.
Accordingly, income tax expense has been related only to certain ancillary
operations, such as the Company's cable television operations and its prior
investments in cellular operations. Income tax expense decreased $477,500,
or 158 percent, in 1996 due to net operating losses in those operations.
SEPTEMBER 30, 1997
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
Accounts Receivable decreased from $1,784,895 at December 31, 1996 to
$1,471,754 at September 30, 1997 due to stricter collection policies
implemented by the Company in 1997. Materials and Supplies increased from
$694,097 at December 31, 1996 to $1,383,644 at September 30, 1997, primarily
due to materials on hand to be used to complete the Company's 1997
construction projects. The offsetting changes in these two asset items
accounted for most of the increase in current assets from $6,540,903 at
December 31, 1996 to $6,911,554 at September 30, 1997.
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<PAGE>
Investments and Other Assets increased from $2,522,868 at December 31,
1996 to $3,971,496 at September 30, 1997. This increase was primarily due to
the purchase by the Company of approximately $1.2 million in RTFC
Subordinated Capital Certificates in connection with the $28,421,000
long-term loan agreement entered into between the Company and RTFC in July
1997. See the discussion of the RTFC financing, below, and Note 3 to the
Consolidated Financial Statements contained in Appendix B to this Prospectus.
An additional $238,000 of this increase is attributable to the recognition of
a deferred income tax asset during 1997. See Note 4 to the Consolidated
Financial Statements contained in Appendix B.
Net Fixed Assets increased from $14,441,104 at December 31, 1996 to
$23,315,087 at September 30, 1997, representing primarily additional plant
assets constructed by the Company during 1997 as part of its network upgrade
program.
The Company's total capital structure, consisting of Stockholders' Equity
and Long-Term Debt, was $32,560,266 at September 30, 1997 compared to
$22,448,311 at December 31, 1996. The increase in total capital structure at
September 30, 1997 of $10,111,935 was composed primarily of additional
outstanding long-term debt of $11,760,253 used to finance the Company's
network rebuilding program less accumulated net losses from the Company's
operations from January 1, 1997 through September 30, 1997 (see discussion of
Results of Operations, below).
The presentation of the Stockholders' Equity account structure changed
substantially during the third quarter of 1997 due to the conversion of the
Company from a South Dakota stock cooperative into a Delaware public
corporation in July, 1997. The primary change was the reclassification of the
capital accounts from preferred stock and cooperative capital credits into
common stock. The Conversion did not change overall total equity. The
Conversion process is discussed in more detail above and in Notes 6 and 7 to
the Consolidated Financial Statements contained in Appendix B.
The Company believes that it has adequate internal financial resources to
finance its ongoing day-to-day operating requirements. Operating cash flow for
the nine-month period ended September 30, 1997, totaled $844,858, consisting of
the Company's net loss of $1,534,911 plus its noncash depreciation and
amortization expenses of $2,379,769. Adjusted for the one time, nonrecurring
reorganization expenses of $585,438 associated with the Conversion and Merger
(see Note 5 to the Consolidated Financial Statements contained in Appendix B),
operating cash flow for the period totaled $1,430,296, approximately equal to
the $1,492,773 in operating cash flow for the comparative period of 1996
(consisting of the 1996 net loss of $285,070 plus depreciation and
amortization expense of $1,777,843). See Results of Operations, below, for
additional information.
While the Company has adequate financial resources to fund its day-to-day
operations, it must rely on the availability of additional long-term debt to
finance its capital expenditures program. At September 30, 1997, the Company's
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<PAGE>
long-term debt consisted of approximately $26.2 million under a series of
loans from the RTFC, approximately $577,000 owed to various contractors in
connection with the Company's construction projects, and $1 million in
long-term financing associated with the acquisitions of TCIC and Iway (see
Note 2 to the Company's Consolidated Financial Statements contained in
Appendix B). On June 24, 1997, the Company entered into a long-term loan
arrangement with RTFC in the aggregate amount of $28,421,000. Of this
amount, $13,092,089.25 was used to refinance the then outstanding long-term
debt from the Rural Utilities Service on July 15, 1997. The remaining amounts
are allocated to refinance the $1 million in debt assumed by the Company in
the TCIC and Iway acquisitions and to cover the Company's 1997 capital
expenditures program. Approximately $10.5 million of the Company's $11.1
million of capital expenditures through September 30, 1997, were financed by
the RTFC. The balance represents amounts owed to contractors for the project.
As of September 30, 1997, the Company's construction projects were on schedule
and within budget. Accordingly, the Company currently believes that the
balance of the RTFC loan facility will be adequate to cover all of its
remaining 1997 capital expenditures. The Company further expects that the
RTFC and other long-term financing sources will continue to be available to
fund future capital expenditures and developments.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Revenues increased from $5,284,114 during the first nine months of 1996
to $8,440,667 in the first nine months of 1997, an increase of $3,156,553, or
approximately 60%. Approximately $875,442 of this increase reflects the
impact of rate increases in the Company's telephone operations put into
effect during 1996. The remaining increase reflects additional revenues from
the 19 new cable systems purchased by the Company during 1996, and additional
revenues of $1,053,143 and $767,512 from the TCIC and Iway operations,
respectively. Revenues from the Iway operations are included in Other
Revenue in 1997 and account for a majority of the increase in Other Revenue
during the first nine months of 1997 compared to the same period in 1996.
Plant Operations expense increased from $1,278,642 during the first nine
months of 1996 to $2,672,679 in the first nine months of 1997, an increase of
$1,394,037, or approximately 109%. Approximately $657,035 and $363,839 of
this increase was due to the additional costs and expenses from the
operations of TCIC and Iway, respectively. The remaining increase is
primarily due to increased operating costs associated with the 19 additional
cable systems purchased by the Company during 1996.
Depreciation and Amortization expense increased from $1,777,843 in the
first nine months of 1996 to $2,379,769 during the first nine months of 1997,
an increase of $601,926 or approximately 34%. Approximately $168,188 of this
increase was due to the amortization of the excess of cost over net assets
acquired in the acquisitions of TCIC and Iway and the depreciation of assets
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<PAGE>
used in those operations. The balance of this increase is due primarily to
the depreciation of additional assets used to operate the 19 cable systems
acquired in 1996 and assets installed by the Company during the first nine
months of 1997 as part of its network construction program.
Other costs and expenses, including Customer, General and Administrative
and Other Operating Expenses, increased from $2,259,560 during the first nine
months of 1996 to $4,664,599 in the first nine months of 1997, an increase of
$2,405,039 or approximately 106%. Of this increase, $585,438 is due to the
inclusion of one-time, nonrecurring charges associated with the Conversion
and Merger of the Company described above. These reorganization expenses do
not arise from and are not representative of the Company's ongoing business.
See Note 5 to the Company's Consolidated Financial Statements contained in
Appendix B. Approximately $771,449 and $406,778 of this increase is due to
the additional costs and expenses from the operations of TCIC and Iway,
respectively. The remaining increase is primarily due to increased employee
costs in the Company's telephone and cable television operations.
Interest Expense increased from $522,971 for the first nine months of 1996
to $791,920 during the first nine months of 1997, an increase of $268,949, or
approximately 51%. Approximately $65,000 of this increase was attributable to
the long-term debt assumed by the Company in its acquisitions of TCIC and Iway
in December 1996. The balance of this increase is primarily due to the
increase in long-term debt incurred by the Company to acquire the assets of
19 cable television systems in 1996, to refinance its RUS loans in July 1997,
and to fund its 1996 and 1997 capital expenditures.
FINANCIAL STATEMENTS
The audited consolidated financial statements of Dakota Cooperative
Telecommunications, Inc. for the years ended December 31, 1996 and 1995,
together with the notes thereto and the report of Olsen Thielen & Co., Ltd.
dated January 18, 1997, are included as Appendix A to this Prospectus. The
unaudited consolidated financial statements of Dakota Cooperative
Telecommunications, Inc. for the nine months ended September 30, 1997 and 1996,
together with the notes thereto, are included as Appendix B to this
Prospectus.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is divided into three classes, which
will be as nearly equal in number as possible. Each class of directors
serves a successive three-year term of office. Biographical information
concerning the persons who are directors or executive officers of the
Company is presented below. Except as otherwise indicated, all of the
named individuals have had the same principal employment for over five
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<PAGE>
years. Executive officers are appointed annually and serve at the pleasure
of the Board of Directors.
DIRECTORS WITH TERMS EXPIRING IN 2000
Thomas W. Hertz (age 50) has been a director and Chief Executive
Officer and President of the Company since its formation (February 1997),
was Chief Executive Officer of the Cooperative from July 1996 until the
Merger and was General Manager of the Cooperative from December 1995 until
the Merger. Prior to December 1995, Mr. Hertz was an attorney in private
practice with the law firm of Ulmer, Hertz & Bertsch, P.C. Mr. Hertz's law
firm provided services to the Cooperative during 1995 in the amount of
$68,708 while Mr. Hertz was a shareholder in that firm. Mr. Hertz's
proportionate interest in such fees was $41,225.
Palmer O. Larson (age 73) was a director of the Cooperative from 1976
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Larson is a semi-retired agribusiness (farm) owner
and operator.
John (Jack) A. Roth (age 66) was a director of the Cooperative from
1970 until the Merger and has been a director of the Company since its
formation (February 1997). Mr. Roth retired as an agent for State Farm
Insurance in Parker, South Dakota, after working as an insurance agent for
33 years.
DIRECTORS WITH TERMS EXPIRING IN 1999
Ross L. Benson (age 62) was a director of the Cooperative since 1980
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Benson is an agribusiness (farm) owner and operator.
Dale Q. Bye (age 66) was a director of the Cooperative from 1975 until
the Merger and has been a director of the Company since its formation
(February 1997). Mr. Bye is a semi-retired agribusiness (farm) owner and
operator.
James H. Jibben (age 46) was a director of the Cooperative from 1988
until the Merger and its Chairman of the Board from 1995 until the Merger
and has been a director and Chairman of the Board of Directors of the
Company since its formation (February 1997). Mr. Jibben was President of
the Cooperative prior to the Conversion and the Merger. Mr. Jibben is an
agribusiness (farm) owner and operator.
DIRECTORS WITH TERMS EXPIRING IN 1998
Craig A. Anderson (age 42) has been a director and Executive Vice
President, Chief Financial Officer and Treasurer of the Company since its
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<PAGE>
formation (February 1997) and was Executive Vice President - Marketing and
Chief Financial Officer of the Cooperative from January 1, 1997 until the
Merger. Prior to January 1, 1997, Mr. Anderson was Vice President -
Marketing of the Cooperative from September 1996 to January 1, 1997. From
January 1994 until September 1996, Mr. Anderson was an independent business
consultant and from May 1994 until December 1995 attended the University of
South Dakota, earning a Masters of Business Administration and Masters in
Professional Accounting. From November 1992 until January 1994, Mr.
Anderson was a director and Vice President - Chief Financial Officer and
Secretary of the Austad Company (a catalog retailer of golf equipment).
From July 1989 to September 1992, Mr. Anderson served as a director and
Vice President - Chief Financial Officer, General Counsel and Secretary of
Dial-Net, Inc. (a long distance reseller).
Jeffrey J. Goeman (age 39) was a director of the Cooperative from 1988
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Goeman is President of and has owned and operated
Goeman Auction Service and Real Estate, Inc. in Lennox, South Dakota (a
real estate brokerage and appraisal and auction firm) since 1980.
Edward D. Christensen, Jr. (age 71) was a director of the Cooperative
from 1975 until the Merger and has been a director of the Company since its
formation (February 1997). Mr. Christensen is a semi-retired agribusiness
(farm) owner and operator.
John A. Schaefer (age 71) was a director of the Cooperative from 1974
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Schaefer is retired. He formerly was an agribusiness
(farm) owner and operator.
Jeffrey G. Parker (age 51) has been a director of the Company since
July 1997. Mr. Parker's principal occupation is as the President and Chief
Executive Officer of Parker Transfer and Storage, Inc., a transportation
and storage company with which he has been associated since 1969. Mr.
Parker also serves as President of Slip and Trip, Inc., a service provider
to Parker Transfer and Storage, Inc. and as a director of HF Financial Corp.
Mr. Parker served as Vice President of TCIC from 1990 until 1996 and as
President of TCIC during 1996.
OTHER EXECUTIVE OFFICERS.
Timothy Dupic (age 43) is the Secretary of the Company, a position he
has held since July 1997. Mr. Dupic also serves as Vice President of
Operations of the Company, a position he has held since January 1996.
Prior to that time, Mr. Dupic worked in management of the National
Association of Telecommunication Industry.
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<PAGE>
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth information concerning the number of
shares of Common Stock held by each stockholder who is known to the
Company's management to be the beneficial owner of more than 5% of the
Common Stock as of _________, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES OF
BENEFICIAL OWNER COMMON STOCK PERCENT<F1>
- ---------------- ------------ -----------
<S> <C> <C>
Gery Baar 160,000 6.5
4401 E. Tomar Road
Sioux Falls, South Dakota 57105
Doug English 160,000 6.5
909 E. Plum Creek Road
Sioux Falls, South Dakota 57105
- ----------------------------------
<FN>
<F1> The percentages reflected in this column were computed with reference
to a total of 2,471,612 shares of the Company's Common Stock
outstanding, representing 2,335,208 shares of the Company's Common
Stock and warrants and options to purchase no more than 136,404 shares
of Common Stock currently outstanding that are currently exercisable
or that may be exercised within 60 days.
</FN>
</TABLE>
The following table shows certain information concerning the number of
shares of the Company's Common Stock held as of _____________, 1998 by each
of the Company's directors, each of the named executive officers and all of
the Company's directors and executive officers as a group.
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<PAGE>
<TABLE>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP<F1><F2>
<CAPTION>
SOLE SHARED
VOTING AND VOTING OR TOTAL PERCENT
DISPOSITIVE DISPOSITIVE BENEFICIAL OF
NAME OF BENEFICIAL OWNER POWER POWER<F3> OWNERSHIP CLASS<F4>
- ------------------------ ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Craig A. Anderson<F5> 50,804 --- 50,804 2.1
Ross L. Benson<F6> 2,000 300 2,300 <F*>
Dale Q. Bye<F6> 2,264 --- 2,264 <F*>
Edward D. Christensen, Jr.<F6> 2,530 --- 2,530 <F*>
Timothy Dupic 200 --- 200 <F*>
Jeffrey J. Goeman<F6> 2,000 1,642 3,642 <F*>
Thomas W. Hertz<F5> 53,228 --- 53,228 2.2
James H. Jibben<F6> 2,512 --- 2,512 <F*>
Palmer O. Larson<F6> 2,186 --- 2,186 <F*>
Jeffrey G. Parker<F5> 107,962 --- 107,962 4.4
John A. Roth<F6> 3,784 164 3,948 <F*>
John A. Schaefer<F6> 2,384 --- 2,384 <F*>
All directors and executive
officers as a group 231,854 2,106 233,960 9.5
_______________________________
<FN>
<F*>Less than one percent
<F1> The numbers of shares stated are based on information furnished by
each person listed and include shares personally owned of record by
that person and shares which under applicable regulations are deemed
to be otherwise beneficially owned by that person. Under these
regulations, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting power or
dispositive power with respect to the security. Voting power includes
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<PAGE>
the power to vote or to direct the voting of the security.
Dispositive power includes the power to dispose or to direct the
disposition of the security. A person also will be considered the
beneficial owner of a security if the person has a right to acquire
beneficial ownership of the security within 60 days.
<F2> The numbers of shares of Common Stock reflected include those that
were issued in the Conversion and Merger. Prior to the Conversion and
the Merger, the persons set forth above owned no more than one (1)
share of Cooperative common stock.
<F3> These numbers include shares over which the listed person is legally
entitled to share voting or dispositive power by reason of joint
ownership, trust or other contract or property right, and shares held
by spouses and children over whom the listed person may have
substantial influence by reason of relationship.
<F4> The percentages reflected in this column were computed with reference
to a total of 2,471,612 shares of the Company's Common Stock
outstanding, representing 2,335,208 shares of the Company's Common
Stock and warrants and options to purchase no more than 136,404 shares
of Common Stock currently outstanding that are currently exercisable
or that may be exercised within 60 days.
<F5> The number of shares includes options and warrants to purchase shares
of Common Stock exercisable within 60 days held by the following
persons:
NAME NUMBER OF SHARES
---- ----------------
Craig A. Anderson 49,592
Thomas W. Hertz 49,592
Jeffrey G. Parker 33,284
Thomas Wilson 3,936
<F6> Includes 2,000 shares awarded as director compensation to be issued
effective January 1, 1998.
</FN>
</TABLE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS OF THE COOPERATIVE
The following table shows certain information concerning the
compensation paid to Thomas W. Hertz, Chief Executive Officer and General
Manager of the Cooperative, for services rendered during the years ended
December 31, 1996 and 1995. No other executive officer of the Cooperative
earned cash compensation in excess of $100,000 during 1996.
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<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION<F1>
- --------------------------- ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
Thomas W. Hertz 1996 $117,501 $15,000 $1,439
Chief Executive Officer 1995 20,455 -- 72
and General Manager
_____________________________
<FN>
<F1> All other compensation for 1996 and 1995 represents premiums paid by
the Cooperative for life insurance for the benefit of Mr. Hertz.
</FN>
</TABLE>
During 1996, the Cooperative compensated its directors at the rate of
$500 per regular monthly board meeting attended, $250 per special board
meeting attended and $100 per telephonic board meeting attended. Directors
also are provided with travel and accident insurance at a cost of $125 per
year per director. Directors are eligible to participate in the medical
reimbursement plan. These compensation arrangements were continued by the
Company after the Merger and Conversion in July 1997.
Under the Company's 1997 Stock Incentive Plan, each nonemployee
director of the Company will be entitled to receive semi-annually, on June
30 and December 31 of each year, stock options to purchase 400 (as adjusted
to reflect the effects of the Stock Split) shares of Common Stock at 100
percent of the market value on the date of grant. The stock options will be
issued for a term of 10 years. The formula grant provisions for nonemployee
directors may be amended by the Board of Directors not more than once every
six months, other than to comport with changes in the Code, the Exchange Act
or the rules thereunder. Nonemployee directors may pay the exercise price
using previously held shares of Common Stock to the extent that other plan
participants are permitted to do so.
In November 1997, the Board of Directors adopted the Director Stock Plan
of 1997, under which each non-employee director who has or will have served
more than 5 years on the Board of Directors of the Cooperative and the Company
will receive a one-time award of 2,000 (as adjusted to reflect the effects of
the Stock Split) shares of Common Stock. This award was payable on January
1, 1998 to directors who had previously served 5 years, and will be payable
on the fifth anniversary of service to all other non-employee directors.
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<PAGE>
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Cooperative entered into separate but substantially identical
Employment Agreements ("Agreements") with its Chief Executive Officer and
General Manager, Thomas W. Hertz, and its Executive Vice President -
Marketing and Chief Financial Officer, Craig A. Anderson (the
"Executives"). Upon consummation of the Merger, the Company assumed
the Agreements according to their terms.
Each Agreement is for a three-year term of employment, expiring
December 31, 2000. The employment term under each Agreement will be
automatically extended for an additional year at the end of each year,
unless either party gives written notice that the employment term under the
Agreement is not to be extended further, in which case the employment term
under the Agreement will expire at the end of two additional years, except
that the employment term under the Agreement will also be extended
automatically for three years following the date of any Change in Control
(as defined in the Agreements) occurring during the employment term under
the Agreement.
The Agreements provide minimum salaries of $135,000 per year for
Thomas W. Hertz and $100,000 per year for Craig A. Anderson, and also
provide for an annual bonus to each of the Executives equal to 15% of the
increase, if any, in corporate net income over prior year net income. "Net
income," for purposes of the bonus calculations, is pre-tax net income
before depreciation, amortization and other non-cash expenses, before
annual bonuses under the two Agreements and after eliminating the effect of
extraordinary items. Under the formula, no bonuses will be payable for
1997.
Under the Agreements, the Company or the Executive may terminate the
Executive's employment at any time upon 30 days' notice. If the Company
terminates the Executive's employment involuntarily during the term of the
employment under the Agreements other than as the result of a Disability or
for Cause, or if the Executive terminates the employment for Good Reason
during the employment term under the Agreements, the Agreements entitle the
terminated Executive to Severance Pay. "Disability" is defined as the
Executive's inability to substantially perform his duties for a continuous
period of nine months. "Cause" is defined as willful and continued failure
by the Executive to substantially perform his duties after notice of the
deficiency, or willful misconduct by the Executive that is materially
injurious to the Company and occurs without good-faith belief by the
Executive that the action was in the best interests of the Company.
Termination for Cause requires the affirmative vote of two-thirds of the
Board of Directors. "Good Reason" is defined to include: (i) a material
breach by the Company of the Agreements or any other agreement with the
Executive; (ii) assignment to the Executive of duties inconsistent with his
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<PAGE>
position; (iii) removal of the Executive from his position; (iv) relocation
of the Company's principal executive offices outside a 60-mile radius from
Irene, South Dakota or any requirement by the Company that the Executive
be located other than at the executive offices or that he engage in
substantially increased job related travel; or (v) failure of the Company
to obtain the agreement of any successor to assume the Agreements. The
Executive may not terminate his employment with Good Reason without first
giving the Company notice and 10 days' opportunity to cure any occurrence
constituting Good Reason.
"Severance Pay" under the Agreements consists of continuation of the
Executive's salary, bonus and benefits for the unexpired employment term
under the Agreements at the time of the termination (with a minimum annual
bonus each year equal to that of the year before the termination),
reasonable out-placement services and immediate vesting of all restricted
stock and stock option rights. Severance Pay is not reduced by any post-
termination employment or other income of the Executive. If the Executive
dies while entitled to receive Severance Pay, the remaining Severance Pay
is to be paid to the Executive's estate. If a termination entitling the
Executive to Severance Pay occurs after a Change in Control, or if the
Company defaults on Severance Pay obligations, the monthly salary and bonus
payments are accelerated and become payable immediately in a lump sum.
The Agreements prohibit the Executive from competing with the Company
during his employment, and after his employment while he is receiving
Severance Pay. The Executive may end the post-employment noncompetition
period at any time by renouncing any right to further Severance Pay.
The Agreements provide for payment of the Executive's reasonable legal
fees and expenses incurred in seeking to enforce the Executive's rights
under the Agreements, to the extent the Executive is successful in his
claims, with payment made contemporaneously but with the Executive required
to repay any amount to which he is ultimately found not to be entitled.
The Agreements also provide that the Company will make the Executive whole
for any taxes, interest or penalties incurred by the Executive on account
of the characterization of any payment to which the Executive is entitled
from the Company as an "excess parachute payment" under Section 280G of the
Code or any successor provision of the Code, so that the net payments to
the Executive after all such taxes, interest and penalties will be the same
as if no such characterization had occurred.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
Directors and officers of the Company, businesses they own or
represent, and members of their immediate families purchase services from
the Company and its subsidiaries in the ordinary course of business. Rates
and charges for these services are the same as those available to the
general public.
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In connection with the Cooperative's acquisition of TCIC and Iway,
the Cooperative issued to the former shareholders of TCIC and Iway
(collectively, the "Sellers") shares of Cooperative preferred stock which
automatically upon consummation of the Merger were converted into 189,454 (as
adjusted for the Stock Split) shares of Common Stock. In addition, the
Sellers collectively received warrants which were converted into warrants to
purchase an additional 77,912 (as adjusted for the Stock Split) shares of
Common Stock. Jeff Parker, a director of the Company, was a shareholder of
TCIC and I-Way prior to the Cooperative's acquisition of TCIC and Iway. As a
result of those acquisitions, Mr. Parker received shares of Cooperative
preferred stock which were converted into 54,078 (as adjusted for the Stock
Split) shares of Common Stock upon consummation of the Merger and warrants
which were converted into warrants to purchase an additional 24,668 (as
adjusted for the Stock Split) shares of Common Stock. (See "RISK FACTORS--
Certain Standstill Agreements" and "THE COMPANY--Certain Agreements Affecting
Capital Stock.") In addition, Mr. Parker has loaned the Company $45,000.
This loan is evidenced by a promissory note bearing interest at 9.5 percent
and which is due in full in May 1998.
ADDITIONAL SECURITIES OF THE COMPANY
PREFERRED STOCK PURCHASE RIGHTS
On July 22, 1997, the Board of Directors of the Company declared a
dividend of one Preferred Stock Purchase Right (the "Rights") on each
outstanding share of common stock, no par value (the "Common Stock"), of the
Company to stockholders of record on August 5, 1997. Each Right will entitle
the holder thereof until August 4, 2007 (or, if earlier, until the redemption
of the Rights), to buy one one-hundredth of a share (a "Unit") of Series A
Junior Participating Preferred Stock, no par value (the "Preferred Stock"),
at an exercise price of $100 per Unit, subject to certain antidilution
adjustments. The Rights will be represented by certificates for Common Stock
and will not be exercisable or transferable apart from the Common Stock until
the earlier of (i) 10 days following a public announcement that a person or
group of affiliated or associated persons acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
Common Stock (such person being referred to as an "Acquiring Person" and the
date upon which such person becomes an Acquiring Person being referred to as
the "Stock Acquisition Date"), (ii) 10 business days following the
commencement or announcement of an intention to commence a tender or exchange
offer, the consummation of which would result in beneficial ownership by a
person of 15% or more of the outstanding shares of Common Stock, or (iii) 10
business days after the Company's Board of Directors determines, pursuant to
certain criteria set forth in the Rights Agreement, that a person
beneficially owning 10% or more of the outstanding shares of Common Stock is
an "Adverse Person" (the earlier of such dates being called the "Distribution
Date"). Separate certificates representing the Rights will be mailed to
record holders of Common Stock as of the Distribution Date. The Rights will
first become exercisable on the Distribution Date, unless earlier redeemed,
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and could then begin trading separately from the Common Stock. Until a right
is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company with respect to the shares for which the right is
exercisable, including the right to vote or to receive dividends. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A., as
Rights Agent (the "Rights Agent").
Each share of Preferred Stock purchasable upon exercise of the Rights
will have a minimum preferential quarterly dividend rate of $10 per share but
will be entitled to an aggregate dividend of 100 times the dividend declared
on the shares of Common Stock. In the event of liquidation, the holders of
Preferred Stock will receive a minimum preferred liquidation payment of $100
per share but will be entitled to receive an aggregate liquidation payment
equal to 100 times the payment made per share of Common Stock. Each share of
Preferred Stock will have 100 votes, voting together with the Common Stock.
In the event of any merger, consolidation or other transaction in which
shares of Common Stock are exchanged, each share of Preferred Stock will be
entitled to receive 100 times the amount received per share of Common Stock.
The rights of the holders of Preferred Stock as to dividends, liquidation and
voting, and in the event of mergers and consolidations, are protected by
customary antidilution provisions. Because of the nature of the Preferred
Stock's dividend, liquidation and voting rights, the value of the interest in
a share of Preferred Stock purchasable upon the exercise of each Right should
approximate the value of one share of Common Stock.
In the event that, any time following the Stock Acquisition Date, the
Company were acquired in a merger or other business combination transaction
or in the event 50% or more of its assets or earning power is sold, proper
provision will be made so that each holder of a Right shall thereafter have
the right to receive, upon the exercise thereof at the then current exercise
price of the Right, that number of shares of common stock of the acquiring
company which at the time of such transaction would have a market value of
two times the exercise price of the Right. Alternatively, in the event that,
any time following the Distribution Date, the Company were the surviving
corporation in a merger with an Acquiring Person and its Common Stock was not
changed or exchanged, or an Acquiring Person were to engage in certain
specified self-dealing transactions with the Company, or an Acquiring Person
becomes the beneficial owner of more than 15% of the then outstanding shares
of Common Stock, or a person had been or was designated as an Adverse Person
by the Company's Board of Directors in accordance with the criteria set forth
in the Rights Agreement, proper provision shall be made so that each holder of
a Right, other than the Acquiring Person, Adverse Person and certain related
parties (whose Rights will thereafter be void), will thereafter have the right
to receive upon exercise of a Right that number of shares of Common Stock
having a market value of two times the exercise price of such Right.
The Rights are redeemable, in whole but not in part, at a price of $.01
per Right at any time prior to the designation of a person as an Adverse
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Person under the Rights Plan or the fifteenth day after the Stock Acquisition
Date. Immediately upon the action of the Board of Directors ordering
redemption of the Rights, the Rights will terminate and thereafter, the only
right of holders of the Rights will be to receive the redemption price. The
Rights will expire on August 4, 2007 (unless earlier redeemed).
The purchase price payable, and the number of one one-hundredths of a
share of Preferred Stock or other securities or property issuable, upon
exercise of the Rights is subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Preferred Stock, (ii) as a result of
the grant to holders of the Preferred Stock of certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the
current market price of the Preferred Stock, or (iii) upon the distribution
to holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular periodic cash dividends) or of subscription rights or
warrants (other than those referred to above). With certain exceptions, no
adjustment in the purchase price will be required until cumulative
adjustments require an adjustment of at least 1% in such purchase price.
Other than those provisions relating to the principal economic terms of
the Rights, any of the provisions of the Rights Agreement may be amended by
the Board of Directors of the Company prior to the Distribution Date. After
the Distribution Date, the provisions of the Rights Agreement may be amended
by the Board in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights, or to shorten or
lengthen any time period under the Rights Agreement, so long as no amendment
to adjust the time period governing redemption shall be made at a time when
the Rights are not redeemable.
As of August 5, 1997, there were 985,216 shares of Common Stock
outstanding. One Right was distributed to stockholders of the Company for
each share of Common Stock owned of record by them on August 5, 1997. As
long as the Rights are attached to the Common Stock, the Company will issue
one Right with each new share of Common Stock issued so that all such shares
will have Rights attached. The Company's Board of Directors has reserved
for issuance upon exercise of the Rights 15,000 shares of Preferred Stock.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's Board of Directors, except
pursuant to an offer conditioned on the Rights being redeemed. The Rights
should not interfere with any merger or other business combination approved
by the Board of Directors prior to the fifteenth day after the Stock
Acquisition Date since the Rights may be redeemed by the Company at $.01 per
Right prior to such time.
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STOCK OPTIONS
To provide an incentive for Thomas W. Hertz, Chief Executive Officer
and General Manager of the Cooperative, and Craig A. Anderson, Executive
Vice President - Marketing and Chief Financial Officer of the Cooperative
(collectively, the "Optionees"), to operate the Cooperative to promote the
Cooperative's long-term growth and profitability and to help align their
economic interests with those of the Cooperative's members and security
holders, effective as of January 1, 1997, the Board of Directors of the
Cooperative adopted stock option agreements granting options to each
Optionee to purchase up to an aggregate of 767 shares of Cooperative
preferred stock at a price of $1,000 per share. Upon consummation of the
Merger, these options automatically became options to purchase Common Stock
(converted on an approximately 80.8-to-1 basis). Thus, Mr. Anderson and
Mr. Hertz each now hold options to acquire 123,980 shares of Common Stock at
a price of $6.19 per share.
The options call for delayed vesting so that 20% of each option
becomes exercisable at the earlier of (i) 90 days after the date the
preferred stock is converted into Common Stock or (ii) January 1, 1998.
Thereafter, an additional 20% of each option becomes exercisable on each
anniversary date of the stock option agreements if the Optionees are then
employed by the Company until the total number of shares subject to each
option become exercisable. Each option remains outstanding for 10 years
from the date it was granted. The options are non-transferable.
Under the terms of the stock option agreements, the options are not
incentive stock options under Section 422 of the Code. The options were
not subject to tax when they were granted. Upon exercise, the Optionee
will recognize compensation income in the amount of the spread between the
market value of the options and the option exercise price. The Company
will receive a corresponding deduction. The option price must be paid in
cash or shares of stock of the Company, valued at the market value on the
date of exercise.
On a fully diluted basis, assuming that all vesting periods and other
restrictions contained in the options have been satisfied or lapsed and all
the options were exercised in full, each Optionee would own approximately
five percent of the total number of shares of the Company's outstanding
Common Stock. The exercise price of the Company's Common Stock under the
stock option agreements would be $6.19 per share.
WARRANTS
Pursuant to the TCIC Agreement and the Iway Agreement, and as part of
the consideration therefor, the Board of Directors of the Cooperative
granted warrants to purchase shares of Cooperative preferred stock to each
of the former shareholders of TCIC and Iway ("Warrants"), which
automatically became Warrants to purchase shares of the Company's Common
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Stock upon consummation of the Merger. The Warrants allowed each holder to
purchase a specified number of shares (a total of 482 shares under all
Warrants) of Cooperative preferred stock at a price of $1,000 per share.
The number of shares that each holder may purchase was based on the
person's share ownership of TCIC and Iway, respectively, at the time of the
mergers. Upon consummation of the Merger, the Warrants became Warrants to
purchase an aggregate of 77,912 shares of Common Stock at a price of $6.19
per share.
The Warrants are exercisable immediately and remain outstanding until
the later of (i) six months after the public registration of the Company's
Common Stock or (ii) January 2, 1998. The Warrants are non-transferable.
The exercise price for the Warrants must be paid in cash. Upon
exercise, each Warrant holder would be deemed to have purchased the
underlying stock which will then have a basis equal to the purchase price
plus any basis that the holder has in the holder's Warrant. Upon
subsequent sale, the proceeds will be capital gain or loss to the holder
with no tax impact on the Company. The Company would receive the purchase
price for the exercise of each Warrant as an addition to its capital.
STANDSTILL AGREEMENTS
In connection with the Cooperative's acquisition of TCIC and Iway, the
Cooperative entered into the Standstill Agreements with each of the former
shareholders of TCIC and Iway (as previously defined, collectively, the
"Sellers"). The Sellers received shares of Cooperative preferred stock and
the Warrants.
Under the Standstill Agreements, the Sellers agreed to refrain from
certain actions, including: (i) acquiring any Common Stock in excess of
five percent of the Company's Common Stock outstanding at any time during
the term of the Standstill Agreements, with certain exceptions such as the
sale or transfer of shares among the Sellers; (ii) making or participating
in any "solicitation of proxies," as that term is defined in Regulation 14A
under the Exchange Act; (iii) forming, joining or participating in a
"group," as that term is defined in Section 13(d)(3) of the Exchange Act,
with respect to any Common Stock; (iv) initiating or participating in any
stockholder proposal to be voted upon by the holders of the Company's
Common Stock or calling any special meeting of stockholders of the Company;
(v) depositing any shares of the Company's Common Stock into a voting trust
or subjecting such shares to a voting agreement; or (vi) seeking in any way
to gain control of the Company or its Board of Directors or seeking to
influence the Company's management or policies.
The Standstill Agreements further provide that the Sellers will not
dispose of any shares of the Company's Common Stock (with certain
exceptions) except in accordance with certain provisions of the Standstill
Agreements. The Standstill Agreements grant to the Company a "First
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Purchase Option" to buy all, but not less than all, of the Sellers' shares
of the Company's Common Stock that they wish to sell ("First Option
Shares") for a period of three years following the date that the
Cooperative preferred stock was converted into shares of the Company's
Common Stock. Under the First Purchase Option, if a Seller desires to sell
any of the person's shares of Common Stock, the Seller must first notify
the Company, which then has 30 days to determine whether to purchase the
First Option Shares. If the Company exercises its option, it must purchase
all of the First Option Shares. If the Company does not exercise its First
Purchase Option, the Seller who gave the notice may then sell those First
Option Shares to a third party at the same price specified in the person's
initial notice to the Company. However, if the Seller fails to sell the
First Option Shares to a third party within 60 days after the Company's
option expires, then the process must start over.
Under the Standstill Agreements, in the event that a third party makes
a tender offer (a "Tender Offer") for shares of the Company's Common Stock,
then the Sellers must grant the Company an option (the "Tender Offer
Option") to purchase all, but not less than all, of the shares that the
Sellers wish to sell in the Tender Offer. This process works much the same
as for a First Purchase Option, except that the deadlines are shorter. In
addition, if a competing tender offer arises prior to the closing of the
sale pursuant to the Tender Offer Option at a higher per-share price, the
Sellers can withdraw their notice of the Tender Offer Option, after which
the process starts over. The price per share pursuant to the Tender Offer
Option is the product of (i) the number of shares subject to the Tender
Offer Option with respect to which the Company exercises its option,
multiplied by (ii) the Tender Offer price per share as in effect on the
last day specified in the Tender Offer on which the offeror may accept
shares of the Company's Common Stock for payment or exchange. If the
Company fails to exercise its Tender Offer Option, then the Sellers can
sell their shares in the Tender Offer, but at a price not less than that
specified in the notice of the Tender Offer Option.
The provisions of the Standstill Agreements that prevent the Sellers
from acquiring additional shares of the Company's Common Stock, seeking to
acquire control of the Company, etc. (all of which are described above)
apply for a period of five years beginning on the "Conversion Date," which
is defined in the Standstill Agreements as the date on which the Sellers'
Cooperative preferred stock was converted into Common Stock. The
provisions that prevent the Sellers from disposing of any shares of the
Company's Common Stock (all of which are described above) apply for three
years following the Conversion Date. The Standstill Agreements do not
contain any specific termination provisions.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware Law permits corporations to adopt a provision in their
certificate of incorporation eliminating, with certain exceptions, the
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personal liability of a director to the corporation or its stockholders for
monetary damages for breach of the director's fiduciary duty as a director.
Under the Delaware Law, a corporation may not eliminate or limit director
monetary liability for (i) breaches of the director's duty of loyalty to
the corporation or its stockholders, (ii) acts or omissions not in good
faith or involving intentional misconduct or a knowing violation of law,
(iii) unlawful dividends, stock repurchases or redemptions, or
(iv) transactions from which the director received an improper personal
benefit. This provision also may not limit a director's liability for
violation of, or otherwise relieve a corporation or its directors from the
necessity of complying with, federal or state securities laws, or affect
the availability of non-monetary remedies such as injunctive relief or
rescission. The Company's Certificate of Incorporation contains a
provision stating that directors shall not be personally liable for
monetary damage to the Company, except to the extent required by the
Delaware Law.
The Delaware Law provides that a corporation may indemnity any person
who is or was a party, or is threatened to be made a party, to any
proceeding by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another entity, against expenses (including attorney fees), judgments fines
and amounts paid in settlement actually and reasonably incurred by the
person in the proceeding, so long as the person acted in good faith and in
a manner that he or she reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to criminal actions,
had no reasonable cause to believe his or her conduct was unlawful. The
termination of a proceeding by judgment, order, settlement, conviction or
plea of NOLO CONTENDERE does not by itself create a presumption that the
person did not meet these standards.
The Delaware Law generally permits indemnification of expenses
incurred in the defense or settlement of a derivative or third-party
action, provided that there is a determination by a majority vote of
disinterested directors (even though less than a quorum) or, if there are
no such directors, or if such directors so direct, by independent legal
counsel in a written opinion or by the stockholders, that the person
seeking indemnification acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to a criminal proceeding, which the person
had no reasonable cause to believe the person's conduct was unlawful.
Without court approval, however, no indemnification may be made in respect
of any derivative action in which the person is adjudged liable to the
corporation. The Delaware Law requires indemnification of expenses when
the individual being indemnified has successfully defended the action on
the merits or otherwise.
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The Company's Certificate of Incorporation provides that directors and
executive officers shall be indemnified to the full extent provided by the
Delaware Law. As to other persons who are not directors or executive
officers but who may be eligible for indemnification, the Certificate of
Incorporation provides that such persons may be indemnified by the Company
to the extent permissible by law and the Certificate and authorized by the
Board of Directors. The Certificate further provides that the Company may
purchase and maintain insurance to cover such expenses, whether or not
indemnification would be permissible under the Delaware Law in the absence
of insurance.
As an additional measure to strengthen the protection afforded the
directors and executive officers of the Company, the Company entered into
an indemnity agreement (the "Indemnity Agreement") with each of its
directors and executive officers ("Business Leaders"). Set forth below is
a summary of certain key provisions of the Indemnity Agreement.
The Indemnity Agreement establishes a presumption that a Business
Leader has met the applicable standard of conduct required for
indemnification under the Delaware Law. Under the Indemnity Agreement,
a Business Leader will be indemnified unless a majority of a quorum of
disinterested directors or, in the event of a Change in Control (as defined
below) of the Company or if a quorum of disinterested directors cannot be
obtained, independent legal counsel, determines that the applicable
standard of conduct has not been met. The burden of proof is on the Board
of Directors or independent counsel, as the case may be, to overcome the
presumption that a Business Leader is entitled to indemnification. If the
Board of Directors or independent legal counsel determines that a Business
Leader did not meet the standard of conduct required for indemnification,
the Indemnity Agreement allows the Business Leader to petition a court for
an independent determination of whether the Business Leader is entitled to
indemnification under the Indemnity Agreement. In such a proceeding, the
Company has the burden of proving that the Business Leader did not meet the
applicable standard of conduct.
The Indemnity Agreement also provides that litigation and
investigation expenses will be advanced to a Business Leader upon the
Business Leader's request, provided that the Business Leader undertakes to
repay amounts advanced if it is ultimately determined that the Business
Leader is not entitled to indemnification for such expenses.
The Indemnity Agreement further provides that the Company will
indemnify a Business Leader for costs, including the satisfaction of a
judgment, fine or penalty incurred in, or any amount paid in settlement of,
any proceeding, including a proceeding brought by or in the name of the
Company (such as a stockholder derivative suit), if such expenses and costs
(i) would have been covered under the liability insurance policy presently
covering the Business Leader or under any future policy maintained by the
Company or (ii) are indemnifiable under the Delaware Law, as that law may
change or be interpreted from time to time.
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Without limiting a Business Leader's right to indemnification under
any other provisions of the Indemnity Agreement, the Indemnity Agreement
provides that a Business Leader involved in a derivative suit shall be
indemnified for expenses and amounts paid in settlement unless (i) the
Board of Directors or independent legal counsel, as the case may be,
determines that the Business Leader did not act in good faith or acted in a
manner opposed to the best interests of the Company or (ii) the Business
Leader was adjudged liable to the Company, in which case any
indemnification must be authorized by a court. If the Board of Directors
or independent legal counsel finds that the Business Leader did not meet
the applicable standard of conduct, the Business Leader may petition a
court to make an independent determination of whether the Business Leader
is entitled to indemnification under the Indemnity Agreement.
The Indemnity Agreement also provides for partial indemnification of
costs and expenses in the event a Business Leader is not entitled to full
indemnification under the terms of the Indemnity Agreement. Under the
Indemnity Agreement, a Business Leader is automatically entitled to
indemnification for expenses incurred in successfully defending against
any claim, whether on the merits or otherwise.
In addition, the Indemnity Agreement provides that, in the event of a
Change in Control or a potential Change of Control of the Company as
described below, the Company must establish, upon a Business Leader's
request, a trust funded in an amount sufficient to satisfy the Company's
anticipated indemnification obligations to the Business Leader. Thus, each
Business Leader who will be the beneficiary of the trust will determine
whether the trust will be established or funded. The trust is to be used
to advance expenses to a Business Leader and to pay any amount subject to
indemnification under the Indemnity Agreement. The amount or amounts to be
deposited in the trust will be determined by a majority vote of a quorum of
disinterested directors, the Executive Committee of the Board of Directors
or the Chief Executive Officer of the Company, or, if none of those
individuals is disinterested, by independent legal counsel.
Funds placed into such a trust will revert to the Company if (i) a
Change in Control has not occurred and (ii) the Executive Committee of the
Board of Directors or the Chief Executive Officer determines that the need
for the trust no long exists. Prior to a Change in Control of the Company,
a Business Leader may not be indemnified in connection with an action, suit
or proceeding initiated by the Business Leader against the Company or other
Business Leaders unless the Company consents to such action or joins in it.
The term "Change in Control" as used in the Indemnity Agreement means
the following: (i) the failure of the "Continuing Directors" at any time
to constitute at least a majority of the members of the Board of Directors;
(ii) the acquisition by any "person" (as defined in Section 13(d) and
14(d)(2) of the Exchange Act), other than the Company, its subsidiaries or
their employee benefit plans, of beneficial ownership of 20 percent or more
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of the outstanding Common Stock or the combined voting power of the
Company's securities entitled to vote generally in the election of
directors; (iii) the approval by the stockholders of the Company of a
reorganization, merger or consolidation, unless with or into certain
permitted successor entities; or (iv) the approval by the stockholders of a
complete liquidation or dissolution of the Company or the sale or
disposition of all or substantially all of the Company's assets, other than
to certain permitted successor entities. For purposes of this definition,
the term "Continuing Directors" means the persons who are directors at the
time the Indemnity Agreement is signed, as well as subsequent directors
whose election or nomination as a director was approved by two-thirds of
the then-Continuing Directors. The term excludes certain persons that
became directors as a result of election contests within the meaning of
Rule 14a-11 under the Exchange Act or other types of proxy solicitations.
A Business Leader's rights under the Indemnity Agreement are not
exclusive of any other rights that the Business Leader may have under the
Delaware Law, the Company's Certificate of Incorporation or Bylaws, any
other agreement or any vote of stockholders or disinterested directors.
The Indemnity Agreement does prevent, however, double payment and
specifically provides that if the Company pays a Business Leader pursuant
to the Indemnity Agreement, the Company will be subrogated to the Business
Leader's rights to recover from third parties.
In accordance with Article XIV of the Company's Certificate of
Incorporation, the Indemnity Agreement is designed to provide the maximum
protection allowed by law. The indemnification required under the
Indemnity Agreement could include indemnification for liabilities arising
under the Securities Act. Although the enforceability of the provisions of
the Indemnity Agreement has not been tested in court and remains subject to
public policy considerations, the Board of Directors believes that such
provisions are permitted under the Delaware Law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the Shares of Common Stock offered hereby will be
passed upon for the Company by Warner Norcross & Judd LLP, Grand Rapids,
Michigan.
EXPERTS
The financial statements of the Company included in Appendix A to this
Prospectus have been audited by Olsen, Thielen & Co. Ltd., independent public
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accountants, as indicated in their report with respect thereto. Such
financial statements and their report have been included herein in reliance
upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange
Act. Reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional
Offices of the Commission: Chicago Regional Office, Suite 1400, Citicorp
Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661; and
New York Regional Office, 7 World Trade Center, 13th Floor, Suite 1300, New
York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission also
maintains a Web site (http://www.sec.gov) that contains reports and other
information regarding the Company.
This Prospectus constitutes a part of a registration statement on Form
SB-2 (the "Registration Statement") filed by the Company with the
Commission under the Securities Act. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission, and reference is hereby made to the Registration Statement and
to the exhibits relating thereto for further information with respect to
the Company and the Common Stock. Any statements contained herein
concerning the provisions of any documents are not necessarily complete,
and, in each instance, reference is made to the copy of such document filed
as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such
reference.
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APPENDIX A
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
IRENE, SOUTH DAKOTA
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH INDEPENDENT
AUDITORS' REPORT
DECEMBER 31, 1996
OLSEN THIELEN & CO., LTD.
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
A-1
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONTENTS
===========================================================================
PAGE
----
INDEPENDENT AUDITORS' REPORT A-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet A-4
Consolidated Statement of Operations A-5
Consolidated Statement of Stockholders' Equity A-6
Consolidated Statement of Cash Flows A-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A-8-15
A-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dakota Cooperative Telecommunications, Inc.
and Subsidiaries
Irene, South Dakota
We have audited the accompanying consolidated balance sheet of Dakota
Cooperative Telecommunications, Inc. (a South Dakota Cooperative) and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dakota
Cooperative Telecommunications, Inc. and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/OLSEN THIELEN & CO., LTD.
St. Paul, Minnesota
January 18, 1997 OLSEN THIELEN & CO., LTD.
A-3
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,121,444 $ 6,322,884
Temporary Cash Investments 1,249,000 --
Accounts Receivable, Less Allowance for
Uncollectibles of $152,300 and $80,700 1,784,895 1,223,123
Deposits 274,889 719,708
Income Taxes Receivable 248,500 --
Materials and Supplies 694,097 417,709
Prepaid Expenses 168,078 110,136
----------- -----------
Total Current Assets 6,540,903 8,793,560
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired 1,830,959 --
Other Intangible Assets 509,559 --
Deposit 61,905 --
Other Investments 63,817 30,840
Deferred Charges 56,628 255,991
----------- -----------
Total Investments and Other Assets 2,522,868 286,831
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 14,441,104 11,041,284
----------- -----------
TOTAL ASSETS $23,504,875 $20,121,675
=========== ===========
</TABLE>
A-4
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 697,700 $ 579,100
Accounts Payable 399,694 449,384
Accrued Income Taxes -- 260,655
Other Current Liabilities 497,388 261,743
----------- -----------
Total Current Liabilities 1,594,782 1,550,882
----------- -----------
LONG-TERM DEBT 15,338,395 13,054,725
----------- -----------
DEFERRED CREDITS 159,482 100,763
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 26,185 26,125
Preferred Stock 1,172,000 --
Capital Credits 4,732,723 4,643,909
Retained Earnings 481,308 745,271
----------- -----------
Total Stockholders' Equity 6,412,216 5,415,305
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,504,875 $20,121,675
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-5
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUES:
Local Network $1,058,667 $ 856,133
Network Access 3,266,969 2,761,839
Long Distance Network 1,996,301 1,931,722
Cable Television Service 1,300,512 469,440
Other 186,393 96,395
---------- ----------
Total Operating Revenues 7,808,842 6,115,529
---------- ----------
COSTS AND EXPENSES:
Plant Operations 2,114,266 1,472,697
Depreciation and Amortization 2,434,416 1,701,020
Customer 500,802 405,673
General and Administrative 1,817,869 1,325,025
Other Operating Expenses 863,639 369,242
---------- ----------
Total Operating Expenses 7,730,992 5,273,657
---------- ----------
OPERATING INCOME 77,850 841,872
---------- ----------
OTHER INCOME AND (EXPENSES):
Interest and Dividend Income 309,982 330,395
Interest Expense (723,778) (592,070)
Income From Cellular Investments -- 168,788
Gain on Sale of Cellular Investments -- 686,336
---------- ----------
Net Other Income and (Expenses) (413,796) 593,449
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (335,946) 1,435,321
INCOME TAX EXPENSE (BENEFIT) (175,712) 301,859
---------- ----------
NET INCOME (LOSS) $ (160,234) $1,133,462
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-6
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
COMMON PREFERRED CAPITAL RETAINED
STOCK STOCK CREDITS EARNINGS TOTAL
------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE on December 31, 1994 $25,835 $ -- $4,049,248 $ 182,421 $4,257,504
Net Income 570,612 562,850 1,133,462
Common Stock Issued, Net 290 290
Retirement of Capital
Credits to Estates (16,772) (16,772)
Excise Tax Refund 40,821 40,821
------- ---------- ---------- --------- ----------
BALANCE on December 31, 1995 26,125 -- 4,643,909 745,271 5,415,305
Net Income (Loss) 103,729 (263,963) (160,234)
Common Stock Issued, Net 60 60
Preferred Stock Issued
(1,172 Shares) 1,172,000 1,172,000
Retirement of Capital
Credits to Estates (14,915) (14,915)
------- ---------- ---------- --------- ----------
BALANCE on December 31, 1996 $26,185 $1,172,000 $4,732,723 $ 481,308 $6,412,216
======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-7
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (160,234) $ 1,133,462
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided By Operating Activities:
Depreciation and Amortization 2,469,873 1,735,090
Deferred Charges 208,248 --
Deposits 274,889 --
Income From Cellular Investments -- (168,788)
Gain on Sale of Cellular Investments -- (686,336)
Receivables (155,521) (450,599)
Income Taxes Receivable (248,500) --
Other Current Assets (52,618) (3,340)
Accounts Payable (379,143) 21,254
Accrued Income Taxes (260,655) 260,655
Other Current Liabilities 206,778 76,610
Deferred Credits 58,719 32,159
----------- -----------
Net Cash Provided By
Operating Activities 1,961,836 1,950,167
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment, Net (5,751,604) (1,554,131)
Sale of Cellular Investment -- 1,141,620
Deposits 107,822 (212,464)
Purchase of Temporary Cash Investments (1,249,000) --
Purchase of Other Investments (32,977) (12,063)
Purchase of Other Intangible Assets (541,300) --
Deferred Charges (8,885) (88,677)
Acquisition Costs, Net of Cash Acquired (40,295) --
----------- -----------
Net Cash Used In Investing Activities (7,516,239) (725,715)
----------- -----------
A-8
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-Term Debt 4,399,270 342,000
Principal Payments of Long-Term Debt (2,844,967) (562,942)
Construction Contracts Payable (182,912) 299,822
Retirement of Capital Credits (14,915) (16,772)
Excise Tax Refund -- 40,821
Other (3,513) 399
----------- -----------
Net Cash Provided by Financing Activities 1,352,963 103,328
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,201,440) 1,327,780
CASH AND CASH EQUIVALENTS at Beginning of Year 6,322,884 4,995,104
----------- -----------
CASH AND CASH EQUIVALENTS at End of Year $ 2,121,444 $ 6,322,884
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-9
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. NATURE OF OPERATIONS - The Company is a diversified telecommunications
services company, which, directly or through wholly owned
subsidiaries, provides wireline local and network access services,
long distance telephone services, operator assisted calling services,
telecommunications equipment sale and leasing services, cable
television services, Internet access and related services. The
principal market for these telecommunications and cable services are
local residential and business customers residing in southeastern
South Dakota, with a portion of its cable television customers in
northwestern Iowa and southwestern Minnesota.
Local service rates charged to telephone customers are established by
the Company and are subject to approval of Rural Utilities Service
before becoming effective. Toll and access rates are subject to state
and Federal Communications Commission regulation. Rates charged cable
television customers are established by the Company.
B. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Dakota Cooperative Telecommunications, Inc.
and its wholly owned subsidiaries, Dakota Telecom, Inc., Iway, Inc.,
TCIC Communications, Inc. and Dakota Telecommunications Systems, Inc.
and its wholly owned subsidiary, Dakota Wireless Systems, Inc. All
significant intercompany transactions and accounts have been
eliminated.
C. BASIS OF ACCOUNTING - The accounting policies of the Company are in
conformity with generally accepted accounting principles and the
Company does not have any regulatory assets or liabilities as defined
by Financial Accounting Standards Board Statement No. 71, "Accounting
for the Effects of Certain Types of Regulation".
D. ACCOUNTING ESTIMATES - The presentation of financial statements in
conformity with generally accepted accounting principles requires
management to make 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 and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A-10
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. CASH INVESTMENTS - Cash and cash equivalents include general funds and
short-term investments with original maturities of three months or
less. Investments with original maturities of three months to twelve
months are classified as temporary cash investments. Cash investments
are valued at market value.
F. MATERIALS AND SUPPLIES - Inventories are recorded at average unit
cost.
G. PROPERTY, PLANT AND DEPRECIATION - Property, plant and equipment are
recorded at original cost. Additions, improvements or major renewals
are capitalized. If the telecommunication and cable television
utility plant is sold, retired or otherwise disposed of in the
ordinary course of business, the cost plus removal costs less salvage,
is charged to accumulated depreciation.
Depreciation is computed using principally the straight-line method
based upon the estimated service lives of the depreciable assets.
H. EXCESS OF COST OVER NET ASSETS ACQUIRED - The excess of cost over net
assets of acquired companies is being expensed equally over fifteen
years and is shown net of accumulated amortization of $10,032 at
December 31, 1996.
I. OTHER INTANGIBLE ASSETS - Other intangible assets consist of customer
lists and is being expensed equally over fifteen years and shown net
of accumulated amortization of $31,741 at December 31, 1996.
J. OTHER INVESTMENTS - Other investments are recorded at cost.
K. CAPITAL CREDITS - The Company operates as a cooperative. Amounts
received from the furnishing of telephone service, interest income and
other nonoperating operations in excess of costs and expenses are
assigned to telephone patrons on a patronage basis to the extent they
are not needed to offset prior losses.
Dividend income from the subsidiaries will be allocated to telephone
patrons on a patronage basis when received.
A-11
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L. REVENUE RECOGNITION - Revenues are recognized when earned, regardless
of the period in which they are billed. Network access and long
distance revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies. Revenues
include estimates pending finalization of cost studies. Network
access revenues are based upon interstate tariffs filed with the
Federal Communications Commission by the National Exchange Carriers
Association and state tariffs filed with state regulatory agencies.
Management believes recorded revenues are reasonable based on
estimates of final cost separation studies which are typically settled
within two years.
M. INCOME TAXES AND EXCISE TAX REFUNDS - The Parent Company operates as
a cooperative and has been granted tax exempt status under Section
501(c)12 of the Internal Revenue Code; therefore the Parent Company
income is not taxable. Under the Internal Revenue Code a tax exempt
telephone company is entitled to a refund for overpayment of federal
excise taxes by its patrons. Excise tax refunds are allocated to
telephone patrons' along with net income. The State of South Dakota
does not have an income tax.
The wholly owned subsidiaries, Dakota Telecom, Inc., Iway, Inc., TCIC
Communications, Inc., Dakota Telecommunications Systems, Inc., (and
its wholly owned subsidiary Dakota Wireless Systems, Inc.) are taxable
at the federal level and in Minnesota and Iowa for operations in those
states. Income taxes for these companies are provided for the tax
effects of transactions reported in the financial statements and
include taxes currently payable and deferred income taxes which
reflect the estimated income tax consequences of the differences
between the income tax bases of assets and liabilities and their
financial reporting bases. The differences relate to taxable
subsidiaries' property and equipment.
N. CREDIT RISK - Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of
temporary cash investments. The Company places its temporary cash
investments with high credit quality financial institutions and, by
policy, generally limits the amount of credit exposure to any one
financial institution. Concentrations of credit risk with respect to
trade receivables are limited due to the Company's large number of
customers. The Company maintains its cash in bank deposit accounts
A-12
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on temporary cash
investments.
O. RECLASSIFICATIONS - Certain reclassifications have been made to the
1995 financial statements to conform to the 1996 presentations. These
reclassifications had no effect on net income.
NOTE 2 - INVESTMENT IN CELLULAR ENTITIES AND GAIN ON SALE OF CELLULAR
INVESTMENTS
In 1995, the Company sold its investment in Sioux Falls Cellular Limited
Partnership and Dakota Systems, Inc. for cash. The gain on the sale of the
investments was $686,336 ($456,413 net of income taxes).
The Company's share of operating gains for the cellular franchises were
$168,788 in 1995.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment are as
follows:
A-13
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1996 1995
--------- ----------- -----------
<S> <C> <C> <C>
Land $ 101,573 $ 98,072
Buildings 16-33 years 1,486,491 1,483,236
Leasehold Improvements 3-5 15,677 --
Machinery and Equipment 5-7 1,499,518 1,173,137
Furniture and Fixtures 3-20 1,010,234 926,621
Telecommunications Plant 4-25 16,922,589 15,451,807
Cable Television Plant 8-12 4,869,851 1,355,252
Construction In Progress -- 354,025 461,819
----------- -----------
26,259,958 20,949,944
Less Accumulated
Depreciation 11,818,854 9,908,660
----------- -----------
Total $14,441,104 $11,041,284
=========== ===========
</TABLE>
Depreciation included in costs and expenses was $2,392,643 in 1996 and
$1,701,020 in 1995.
The Company intends to add new construction in 1997 of approximately
$16,000,000.
A-14
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 4 - LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Rural Utilities Service (RUS) mortgage notes:
2% payable in quarterly installments $ 2,595,175 $ 2,845,775
5% payable in monthly installments 10,756,343 10,158,861
----------- -----------
13,351,518 13,004,636
RUS - Rural Communication Development
Fund 5% mortgage note -- 217,955
Rural Telephone Finance Cooperative (RTFC)
Mortgage Note, matures 2006, variable
interest rate (6.3% at December 31, 1996) 1,537,537 --
Norwest Bank South Dakota, N.A. matures 1998,
variable interest rate (prime plus one percent,
9.25% at December 31, 1996) payable upon
maturity 330,000 --
Norwest Bank South Dakota, N.A. matures 1998,
variable interest rate (prime plus one percent,
9.25% at December 31, 1996) payable upon maturity 650,469
Unsecured Notes to a Preferred Shareholder,
matures 1998, variable interest rate (prime
plus one percent, 9.25% at December 31,
1996), payable upon maturity 45,000 --
Other 4,661 111,412
Construction Contracts Payable 116,910 299,822
----------- -----------
16,036,095 13,633,825
Amount Due Within One Year (697,700) (579,100)
----------- -----------
Total Long-Term Debt $15,338,395 $13,054,725
=========== ===========
</TABLE>
A-15
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 4 - LONG-TERM DEBT (CONTINUED)
Substantially all telephone company assets are pledged as security for the
RUS mortgage notes. RUS mortgage notes mature in twenty to thirty-five
years at various dates ranging from 1997 to 2021. No principal payments on
RUS notes are required for the first two to three years after issuance. The
RTFC loan is collateralized by the cable plant located in ten cities in
southeastern South Dakota.
The $330,000 Norwest Bank loan is secured by the assets of Iway, Inc. and
guaranteed by the former shareholders of I-Way Partners, Inc. and the
$650,469 Norwest Bank loan is secured by the assets of two of the former
shareholders of TCIC Communications, Inc. and their personal guarantees.
The former shareholders of I-Way Partners, Inc. and TCIC Communications,
Inc. are preferred shareholders of the Company.
Approximate annual principal payments on the existing debt for the next
five years are: 1997 - $697,700; 1998 - $1,744,700; 1999 - $738,600; 2000
- - $754,600 and 2001 - $768,800.
Unadvanced loan funds of $3,983,175 are available to the Company on loan
commitments from RUS. Loan proceeds will be used to refinance current
construction and to finance future construction.
A-16
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 5 - CAPITAL STOCK
<TABLE>
<CAPTION>
COMMON PREFERRED
------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ----------
<S> <C> <C> <C> <C>
BALANCE - December 31, 1994 5,167 $25,835 -- $ --
Issued 457 2,285
Redeemed (399) (1,995)
----- -------
BALANCE - December 31, 1995 5,225 26,125
Issued 456 2,280 1,172 1,172,000
Redeemed (444) (2,220)
----- ------- ----- ----------
BALANCE - December 31, 1996 5,237 $26,185 1,172 $1,172,000
===== ======= ===== ==========
</TABLE>
The Company's common stock has a par value of $5 per share. There are
15,000 shares authorized. No person may own more than one share of common
stock and each holder of common stock has one vote in the affairs of the
Company. Nonvoting preferred stock has a par value of $100 per share and
there are 63,000 shares authorized. The preferred stock is shown on the
balance sheet at its redemption value of $1,000 per share. Preferred
shareholders are entitled to a Non-Liquidity Fee of $80 per share payable
semi-annually in cash or preferred stock at the discretion of the Company.
The first non-liquidity fee payment will be made December 15, 1997, and
will be prorated for the period from September 1, 1997, if the conversion
(Note 15) has not been consummated by that date. Preferred shareholders
also were granted warrants which entitled them to purchase additional
preferred stock at $1,000 per share. At December 31, 1996 there were
warrants outstanding which may be exercised through January 2, 1998 to
purchase 482 shares of preferred stock. Effective January 1, 1997, the
Company granted management options to purchase up to 1,534 shares of
preferred stock at $1,000 per share.
A-17
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 6 - CAPITAL CREDITS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Assignable $ 103,729 $ 611,433
Assigned to date 5,577,780 4,966,236
---------- ----------
Total 5,681,509 5,577,669
Retired to date (948,786) (933,760)
---------- ----------
Balance $4,732,723 $4,643,909
========== ==========
</TABLE>
The long-term debt agreements with the Rural Utilities Service contain
restrictions on retirements of capital credits, capital stock, and equity
capital. The restrictions are related in general to the Company's adjusted
net worth and assets as defined in the agreements. The Company may,
however, make distributions in any calendar year equal to twenty-five
percent of the net income of the immediate preceding calendar year.
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and temporary cash investments approximates
their fair value due to the short maturity of the instruments. The fair
value of the Company's long-term debt, after deducting current maturities,
is estimated to be $12,905,145 at December 31, 1996 and $10,068,719 at
December 31, 1995, compared to carrying values of $15,338,395 and
$13,054,725, respectively. The fair value estimates are based on the
overall weighted rates and maturity compared to rates and terms currently
available in the long-term financing markets.
NOTE 8 - DEPOSITS
In October, 1996 Dakota Wireless Systems, Inc. entered into an agreement
with another company to bid on a license for a Broadband Personal
Communications Services System to provide service to Southeastern South
Dakota and Northwestern Iowa and on January 14, 1997 was awarded the
license. The Company made a deposit of $61,905 as of December 31, 1996 and
has a future commitment of $194,051.
A-18
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 8 - DEPOSITS (CONTINUED)
On December 7, 1994, the Company and its wholly owned subsidiary, Dakota
Telecommunications Systems, Inc., entered into an agreement with US WEST
Communications, Inc. to purchase the assets and acquire the right to
provide and operate wireline telecommunication services in eight exchanges
in the state of South Dakota for $10,144,884. In 1996, the Company
canceled the agreement. The Company has a $549,778 earnest money deposit
on the purchase. The deposit was written down by $274,889 to the estimated
recoverable amount of $274,889. In addition, the Company charged $275,252
of related acquisition costs to net income in 1996.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
CASH PAYMENTS FOR:
Interest $ 730,633 $592,067
Income Taxes $ 283,415 $ 18,875
NONCASH FINANCING ACTIVITY:
Preferred Stock Issued for Acquisition of I-Way
Partners, Inc. and TCIC Communications, Inc. $1,172,000
</TABLE>
NOTE 10 - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Current $(225,740) $279,530
Deferred 50,028 22,329
--------- --------
Total $(175,712) $301,859
========= ========
</TABLE>
A-19
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 10 - INCOME TAXES (CONTINUED)
The differences between the statutory federal rate and the effective tax
rate were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Consolidated Income (Loss) Before Income Taxes $(335,946) $1,435,321
Less Tax Exempt Income (100,729) (534,077)
--------- ----------
Taxable Income (Loss) $(436,675) $ 901,244
========= ==========
Statutory Tax Rate 35.0% 35.0%
Effect of Graduated Rates and Other 5.2 (1.5)
--------- ----------
Effective Tax Rate 40.2% 33.5%
========== ===========
</TABLE>
Deferred tax liabilities of $88,932 and $38,904 as of December 31, 1996 and
1995 are included on the balance sheet as deferred credits.
NOTE 11 - PENSION PLANS
Pension benefits for substantially all employees are provided through the
National Telephone Cooperative Association Retirement and Security Program
(a defined benefit plan) and Savings Plan (a defined contribution plan).
The Company makes annual contributions to the plans equal to the amounts
accrued for pension expense. The Retirement and Security Program is a
multi-employer plan and the accumulated benefits and plan assets are not
determined or allocated separately by individual employer. The total
pension costs for 1996 and 1995 were $150,220 and $114,663.
A-20
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 12 - CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1996, the Company revised its estimate of the useful
lives of telecommunication computers and fiber optic cable which were being
depreciated over 12 and 25 years. The revised useful lives are 4 and 10
years.
Effective February 1, 1996, the Company revised its estimate of the useful
lives of cable television plant. Previously the plant was depreciated over
20 years. The revised useful life of the plant ranges from eight to twenty
years. These changes were made to better reflect the estimated periods
during which such assets will remain in service. The 1996 changes
increased depreciation expense by approximately $189,000 in 1996.
Effective January 1, 1995, the Company revised its estimate of the useful
lives of central office equipment. Previously central office equipment was
depreciated over 16.67 years and the revised useful life was three years.
The change increased depreciation expense approximately $660,000 in 1995.
NOTE 13 - ACQUISITIONS
In the first half of 1996, Dakota Telecom, Inc. purchased the assets of
nineteen cable service areas from three companies that provided cable
services to various communities in addition to the assets purchased by
Dakota Telecom, Inc. in three separate purchase transactions and one asset
exchange transaction. These acquisitions were accounted for using the
purchase method of accounting. The total purchase price was $3,858,704.
Customer lists acquired for $541,300 are being expensed equally over
fifteen years. No goodwill was recorded as a result of these acquisitions.
Operations of the service areas purchased are included in the consolidated
statements of operations subsequent to their purchase.
In December, 1996 the Company acquired I-Way Partners, Inc. and TCIC
Communications, Inc. in exchange for 1,172 shares of preferred stock valued
at $1,172,000. The acquisitions were accounted for as purchases. The
excess of the aggregate purchase price and liabilities assumed exceed the
fair value of the assets by $1,840,991 and is being expensed equally over
fifteen years. Operations of the companies acquired are included in the
consolidated statement of operations subsequent to their purchase. The
following table summarizes the unaudited consolidated pro forma results of
operations, assuming the acquisition had occurred at the beginning of each
of the following years:
A-21
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 13 - ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Total Revenues $9,474,178 $7,455,901
Net Income (Loss) (616,726) 477,417
</TABLE>
NOTE 14 - SEGMENT INFORMATION
The Company operates in two businesses: telecommunications and cable
television. Industry segment information is as follows:
A-22
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Telecommunications $ 6,462,704 $ 5,584,155
Cable Television 1,346,138 531,374
----------- -----------
$ 7,808,842 $ 6,115,529
=========== ===========
Operating Income (Loss):
Telecommunications $ 454,097 $ 731,944
Cable Television (376,247) 109,928
----------- -----------
$ 77,850 $ 841,872
=========== ===========
Identifiable Assets:
Telecommunications $18,246,345 $18,084,644
Cable Television 5,258,530 2,037,031
----------- -----------
$23,504,875 $20,121,675
=========== ===========
Depreciation and Amortization Expense:
Telecommunications $ 2,011,046 $ 1,632,197
Cable Television 423,370 68,823
----------- -----------
$ 2,434,416 $ 1,701,020
=========== ===========
Capital Expenditures:
Telecommunications $ 1,930,389 $ 1,516,061
Cable Television 3,821,215 38,070
----------- -----------
$ 5,751,604 $ 1,554,131
=========== ===========
</TABLE>
A-23
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 15 - CHANGE IN CORPORATE STRUCTURE
The Company intends to file a registration statement with the Securities
and Exchange Commission under the Securities Act of 1933 and to submit to
its common stockholders (members) a proposal to convert from a tax exempt
cooperative into a taxable business corporation.
In the proposed conversion, owners of the Cooperative's common stock,
capital credits and preferred stock, issued and outstanding, would receive
common shares of the business corporation.
A-24
<PAGE>
APPENDIX B
B-1
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
===========================================================================
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,801,176 $ 2,121,444
Temporary Cash Investments 900,000 1,249,000
Accounts Receivable, Less Allowance for
Uncollectibles of $343,000 and $92,000 1,471,754 1,784,895
Deposits -- 274,889
Income Taxes Receivable 109,802 248,500
Materials and Supplies 1,383,644 694,097
Prepaid Expenses 245,178 168,078
----------- -----------
Total Current Assets 6,911,554 6,540,903
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired 1,738,901 1,830,959
Other Intangible Assets 560,725 509,559
Deposit 61,905 61,905
Other Investments 1,314,454 63,817
Deferred Charges 57,511 56,628
Deferred Income Taxes 238,000 --
----------- -----------
Total Investments and Other Assets 3,971,496 2,522,868
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 23,315,087 14,441,104
----------- -----------
TOTAL ASSETS $34,198,137 $23,504,875
=========== ===========
</TABLE>
B-2
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 2,081,000 $ 697,700
Accounts Payable 922,018 399,694
Other Current Liabilities 595,421 497,388
----------- -----------
Total Current Liabilities 3,598,439 1,594,782
----------- -----------
LONG-TERM DEBT 25,715,348 15,338,395
----------- -----------
DEFERRED CREDITS 120,432 159,482
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 5,637,855 26,185
Preferred Stock -- 1,172,000
Other Capital 179,666 --
Capital Credits -- 4,732,723
Retained Earnings (Accumulated Deficit) (1,053,603) 481,308
----------- -----------
Total Stockholders' Equity 4,763,918 6,412,216
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,198,137 $23,504,875
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
===========================================================================
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
Local Network $ 924,903 $ 746,995
Network Access 2,796,044 2,098,510
Long Distance Network 2,438,754 1,422,051
Cable Television Service 1,156,633 877,833
Other 1,124,333 138,725
---------- ----------
Total Operating Revenues 8,440,667 5,284,114
---------- ----------
COSTS AND EXPENSES:
Plant Operations 2,672,679 1,278,642
Depreciation and Amortization 2,379,769 1,777,843
Customer 828,096 339,045
General and Administrative 3,006,705 1,325,224
Other Operating Expenses 829,798 595,291
---------- ----------
Total Operating Expenses 9,717,047 5,316,045
---------- ----------
OPERATING LOSS (1,276,380) (31,931)
---------- ----------
OTHER INCOME (EXPENSES):
Interest and Dividend Income 240,509 222,745
Interest Expense (791,920) (522,971)
---------- ----------
Net Other Income (Expenses) (551,411) (300,226)
---------- ----------
LOSS BEFORE INCOME TAXES (1,827,791) (332,157)
INCOME TAX BENEFIT (292,880) (47,087)
---------- ----------
NET LOSS $(1,534,911) $ (285,070)
========== ==========
LOSS PER SHARE $ (1.56)
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
===========================================================================
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,534,911) $ (285,070)
Adjustments to Reconcile Net Loss to Net
Cash Provided By Operating Activities:
Depreciation and Amortization 2,379,769 1,777,843
Receivables 313,141 252,360
Income Taxes Receivable 138,698 (61,000)
Other Current Assets (77,100) (48,723)
Accounts Payable 522,324 (114,397)
Accrued Income Taxes -- (260,655)
Other Current Liabilities 98,033 108,078
Deferred Credits (39,050) 43,120
----------- -----------
Net Cash Provided By Operating Activities 1,800,904 1,411,556
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment, Net (11,131,102) (4,665,000)
Materials and Supplies (689,547) (389,197)
Purchase of Other Investments (1,250,637) (500,000)
Decrease (Increase) in Temporary Cash Investments 349,000 (749,000)
Decrease in Deposits 274,889 --
Purchase of Other Intangible Assets (81,759) (541,299)
Increase in Deferred Charges (883) (52,555)
Increase in Deferred Income Taxes (238,000) --
----------- -----------
Net Cash Used In Investing Activities (12,768,039) (6,897,050)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-Term Debt 11,686,551 3,791,270
Principal Payments of Long-Term Debt (386,059) (977,188)
Increase (Decrease) in Construction Contracts Payable 459,761 (282,787)
Retirement of Patronage Capital (28,235) (11,210)
Other (85,151) 196
----------- -----------
Net Cash Provided by Financing Activities 11,646,867 2,520,281
----------- -----------
B-5
<PAGE>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 679,732 (2,965,213)
CASH AND CASH EQUIVALENTS at Beginning of Year 2,121,444 6,322,884
----------- -----------
CASH AND CASH EQUIVALENTS at End of Period $ 2,801,176 $ 3,357,671
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest Expense $ 791,920 $ 609,548
Income Taxes 18,883 282,790
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheets as of September 30, 1997 and December 31, 1996, statements
of operations and cash flows for the nine months ended September 30, 1997 and
1996 have been prepared by the Company without audit. In the opinion of
management, all adjustments (consisting solely of normal recurring accruals)
necessary to present fairly the financial position, results of operations and
changes in cash flows have been made.
The Consolidated Financial Statements have been prepared in accordance with
the requirements of Item 310(b) of Regulation S-B and with the instructions
to Form 10-QSB. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These condensed financial statements should be read in conjunction with the
financial statements and accompanying notes for the years ended December
31, 1996 and 1995. The results of operations for the nine month periods
ended September 30, 1997 are not necessarily indicative of the operating
results to be expected for the year ending December 31, 1997.
NOTE 2 - ACQUISITIONS
In the first quarter of 1996, Dakota Telecom, Inc. purchased the assets of
ten cable service areas in two separate purchase transactions and one asset
exchange transaction. In the second quarter of 1996, Dakota Telecom, Inc.
purchased the asses of an additional nine cable service areas. Operations
of the nineteen cable service areas are included in the consolidated
statements of operations for the nine months ended September 30, 1996
subsequent to their purchase. Operations of the nineteen cable service
areas are included in the consolidated statement of operations for the nine
months ended September 30, 1997.
In December 1996, the Company acquired I-Way Partners, Inc. and TCIC
Communications, Inc. in exchange for 1,172 shares of preferred stock valued
at $1,172,000. Operations of the companies acquired are included in the
consolidated statement of operations for the nine months ended September 30,
1997.
B-7
<PAGE>
NOTE 3 - LONG-TERM DEBT
<TABLE>
Long-term debt is as follows:
<CAPTION>
9/30/97 12/31/96
------- --------
<S> <C> <C>
Rural Utilities Service (RUS) mortgage notes:
2% payable in quarterly installments $ -- $ 2,595,175
5% payable in monthly installments -- 10,756,343
------------- ------------
-- 13,351,518
Rural Telephone Finance Cooperative (RTFC):
Mortgage Note, matures 2006, variable
interest rate (6.65% at September 30, 1997) 1,439,377 1,537,537
Mortgage Note, matures 2012, variable
interest rate (6.65% at September 30, 1997) 13,684,210 --
Mortgage Note, matures 2012, variable
interest rate (6.65% at September 30, 1997) 9,570,621 --
Norwest Bank South Dakota, N.A. matures
May 1998, variable interest rate (prime plus
one percent, 9.5% at September 30, 1997)
payable upon maturity 330,000 330,000
Norwest Bank South Dakota, N.A. matures
May 1998, variable interest rate (prime plus
one percent, 9.5% at September 30, 1997)
payable upon maturity 650,469 650,469
Unsecured Notes to a Shareholder,
matures May 1998, variable interest rate
(prime plus one percent, 9.5% at
September 30, 1997), payable upon maturity 45,000 45,000
RTFC variable rate (7.25% at September 30, 1997)
Lines of Credit: $1,500,000 Limit Maturing
May 2002 1,500,000
Other -- 4,661
Construction Contracts Payable 576,671 116,910
------------- ------------
27,796,348 16,036,095
Amount Due Within One Year 2,081,000 (697,700)
------------- ------------
Total Long-Term Debt $ 25,715,348 $ 15,338,395
============= ============
</TABLE>
B-8
<PAGE>
The RTFC loans, maturing in 2012, are collateralized by all assets and
revenues and stock of the Company's subsidiaries.
The RTFC loan, maturing in 2006, is collateralized by the cable plant
located in ten cities in southeastern South Dakota and is payable in
quarterly installments. The $330,000 Norwest Bank loan is secured by the
assets of Iway, Inc. and is guaranteed by the former shareholders of I-Way
Partners, Inc.; the $650,469 Norwest Bank loan is secured by the assets of
two of the former shareholders of TCIC Communications, Inc.
and their personal guarantees. The former shareholders of I-Way Partners,
Inc. and TCIC Communications, Inc. are shareholders of the Company.
Approximate annual principal payments on the existing debt for the next
five years are: 1998 - $2,081,000; 1999 - 1,140,000; 2000 - $1,219,000;
2001 - $1,302,000; and 2002 - $2,890,000.
Unadvanced loan funds of $5,166,221 are available to the Company on loan
commitments from the RTFC. Loan proceeds will be used to refinance current
construction and to finance future construction.
The Company has a line of credit arrangement for $1.5 million with RTFC
which expires in 2002. Interest is payable quarterly at prime rate plus
1.5%. Any advances must be paid in full within 360 days of the advance and
remain at a zero balance for at least five consecutive business days.
Advances from the line of credit were used to finance construction approved
in the RTFC long-term agreements. At September 30, 1997, the outstanding
line of credit balance was classified as a long-term obligation in
anticipation of the receipt of previously approved RTFC funds.
The Company received loans of $14,737,000 and $13,684,000 from the RTFC for
the purposes of refinancing its RUS debt and RTFC lines of credit and to
finance plant construction. The loans are payable quarterly, with full
payment due in fifteen years. On July 15, 1997, the Company retired its
entire RUS debt with loan proceeds from the RTFC. In order to obtain
financing from RTFC, the loans include borrowings of $1,188,000 to purchase
Subordinated Capital Certificates (SCC) of RTFC. The SCCs bear no interest
and will be repaid to the Company. SCCs are included in other investments
on the balance sheet. The Company is required to maintain a debt service
coverage of not less than 1.25 and a times interest earned ratio of not
less than 1.50, each ratio is determined by averaging the two highest
annual calculations during the three most recent fiscal years. The Company
is restricted from incurring any additional unsecured debt in excess of
five percent of total assets from any other lender and from declaring or
paying any dividend or purchasing or redeeming any capital stock in excess
of 25 percent of the prior fiscal year-end cash margins without written
approval of the lender.
B-9
<PAGE>
NOTE 4 - INCOME TAXES
As of July 22, 1997, Dakota Telecommunications Group, Inc. became taxable
at the federal level. Prior to that date, the Parent Company operated as a
cooperative and had been granted tax exempt status under Section 501(c)12
of the Internal Revenue Code and therefore the Parent Company's income was
not taxable prior to July 22, 1997.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Current $ (54,880) $ (47,087)
Deferred (238,000) --
----------- ----------
Total $ (292,880) $ (47,087)
=========== ==========
</TABLE>
The difference between the statutory federal rate and effective tax rate
were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Consolidated Taxable Income
(Loss) Before Taxes $ (1,827,791) $ (332,157)
Less Tax Exempt Loss (Income 626,412 (27,426)
------------ -----------
Taxable Income (Loss) $ (1,201,379) $ (359,583)
============ ===========
Statutory Tax Rate 35.0% 35.0%
Effect of Graduated Tax Rates
and Other (1.2) (3.2)
Losses with No Future Tax Benefits (9.4) (18.7)
------------ -----------
Effective Tax Rate 24.4% 13.1%
============ ===========
</TABLE>
The state of South Dakota does not have a tax on income. Deferred tax
assets of $238,000 as of September 30, 1997 and deferred tax liabilities of
B-10
<PAGE>
$88,932 as of September 30, 1997 and December 31, 1996 are included on the
balance sheet.
NOTE 5 - REORGANIZATION COSTS
Included in general and administrative expenses for the nine months ended
September 30, 1997 is $585,438 of costs related to the reorganizing of the
Company as explained in Note 6.
NOTE 6 - REORGANIZATION
At a special meeting of the stockholders on July 21, 1997, the stockholders
approved an amendment to the Company's articles of incorporation which
resulted in the conversion of the Company from a cooperative to a South
Dakota business corporation. Also at a meeting convened on July 21, 1997,
and subsequently adjourned and completed on July 25, 1997, the shareholders
of the South Dakota business corporation approved an Agreement and Plan of
Merger that provided for the subsequent merger of the South Dakota business
corporation with and into the Company. The conversion of equity in the
Cooperative to equity in the South Dakota business corporation and then
into equity in the Company was at the rate of one share of common stock for
each share of the Cooperative's common stock, 80.8216445 shares of common
stock for each share of preferred stock and 0.2 of a share of common stock
for each dollar of capital credits.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company has 5,000,000 shares of no par common stock authorized and
985,216 shares are issued and outstanding as of September 30, 1997. The
Company also has 250,000 shares of no par preferred stock of which 15,000
shares are designated as Series A Junior Participating preferred stock. No
preferred stock has been issued or is outstanding as of September 30, 1997.
Other capital consists of capital credits in the Company that had been
allocated to members and patrons that the Company was unable to locate at
the time of the reorganization.
On July 22, 1997, the Board of Directors adopted a leveraged employee stock
ownership plan ("ESOP") and the 1997 Stock Incentive Plan. The ESOP and
Stock Incentive Plan are effective upon the registration of the plans with
SEC.
On July 22, 1997, the Board of Directors declared a dividend of one right
for each outstanding share of common stock that was distributed to common
stockholders of record on August 5, 1997. Each right represents the right
to purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock. The exercise price of the rights are $100 per right and
the redemption price is $.01. The rights expire August 4, 2007.
B-11
<PAGE>
NOTE 8 - EARNINGS PER SHARE
Earnings per share was computed by dividing the net loss by the number of
common shares outstanding, as though the common stock were outstanding for
the entire period.
B-12
<PAGE>
APPENDIX C
FORM OF SUBSCRIPTION AGREEMENT
C-1
<PAGE>
OFFER EXPIRES 5:00 P.M., SOUTH DAKOTA TIME, ______________, 1998
SUBSCRIPTION AGREEMENT
(THE INSTRUCTIONS ON THE REVERSE SIDE ARE A PART OF THIS AGREEMENT)
Dakota Telecommunications Group, Inc.
29705 453rd Avenue
Irene, South Dakota 57037-0066
The undersigned (the "Purchaser") acknowledges receipt of a prospectus
(the "Prospectus") dated ___________, 1998, which describes the offering by
Dakota Telecommunications Group, Inc. (the "Company"), of up to 400,000
shares of Common Stock (the "Shares"). Subject to the terms and conditions
of the offering described in the Prospectus (the "Offering"), the Purchaser
hereby irrevocably subscribes for the number of Shares indicated below.
This subscription, when and if accepted by the Company, will constitute the
binding obligation of the Purchaser to purchase that number of Shares or
such lesser number of Shares as may be allocated in the Offering. The
price per Share is $12.50.
__________________ x ________12.50__ = ______________________
(Number of Shares) (Price per Share) (Total Purchase Price)
The Purchaser represents and warrants that: (a) the Purchaser was as of
the close of business on __________, 199_ (the "Record Date"),
CHECK [ ] a stockholder of the Company or
CHECK [ ] an employee of the Company (if the Purchaser is both a
stockholder and an employee, the Purchaser will be treated
only as a stockholder);
(b) the Purchaser has carefully reviewed the Prospectus (including,
without limitation, the "Risk Factors" section) and understands the terms,
conditions and risks of the Offering; (c) no representative of the Company
has made any oral statements to the Purchaser that are inconsistent with
the Prospectus.
This Subscription Agreement is qualified in its entirety by reference
to the Prospectus, which describes the terms and conditions of the Offering
and is incorporated by reference in this Subscription Agreement. The
Purchaser agrees to be bound by the Company's allocation method and other
determinations as to the number of Shares to be purchased by the Purchaser.
C-2
<PAGE>
(Please correct any inaccuracy in Dated: __________________, 1998
the information concerning the
Purchaser set forth below.) Purchaser Signature:
[Name and address label here] X______________________________
_______________________________
SPECIAL MAILING INSTRUCTIONS (Print Name)
The Purchaser requests that the
stock certificates and/or check X______________________________
be mailed to: (Joint Owner, if applicable)
_____________________________
_____________________________
_____________________________
_______________________________
[ ]Change address of record to above (Print Name)
(INSTRUCTIONS ARE ON THE REVERSE SIDE)
C-3
<PAGE>
INSTRUCTIONS
GENERAL INSTRUCTIONS FOR SUBSCRIBING. THIS SUBSCRIPTION AGREEMENT AND
PAYMENT OF THE TOTAL PURCHASE PRICE MUST BE DELIVERED TO DAKOTA
TELECOMMUNICATIONS GROUP, INC., ATTN: MR. CRAIG A. ANDERSON, 29705
453RD AVENUE, IRENE, SOUTH DAKOTA 57037-0066, ON OR BEFORE THE EXPIRATION
DATE. Payment may be made by check or bank money order, payable to Dakota
Telecommunications Group, Inc. The Purchase Price will be deemed to have
been received by the Company only upon (i) clearance and payment or any
uncertified check, or (ii) receipt by the Company of any bank money order.
ALLOCATION. If the Offering is oversubscribed by subscribing stockholders,
(a) Shares will be allocated in proportion to the number of shares of the
Company's Common Stock held by each subscribing stockholder as of the
Record Date and (b) any subscribing stockholder who has subscribed for
fewer Shares than he or she would be entitled to purchase under the
allocation procedure will be permitted to purchase all Shares subscribed
for. Each subscribing stockholder who subscribes for 40 or fewer Shares
will, in any event, be entitled to purchase all Shares subscribed for.
Stockholders will be entitled to subscribe for Shares before employees.
Shares remaining, if any, after subscriptions by Stockholders ("Remaining
Shares") will be available for purchase by employees. Each subscribing
employee will be entitled to subscribe for as few as one Share or as many
Shares as the subscribing employee would like to purchase. If Remaining
Shares are oversubscribed by employees, Remaining Shares will be allocated
per person, with each subscribing employee entitled to purchase the same
maximum number of Remaining Shares. Each subscribing employee who
subscribes for a number of Shares equal to or less than such maximum number
of Remaining Shares will be entitled to purchase all Remaining Shares
subscribed for any subscribing employee who subscribes for more Remaining
Shares than such maximum number will be entitled to purchase such maximum
number of Remaining Shares.
CONDITIONS; RETURN OF FUNDS FOR UNPURCHASED SHARES. The Offering is not
conditioned on the subscription for or sale of any minimum number of
Shares. Once a Purchaser has subscribed for Shares or Remaining Shares,
such subscription may not be revoked. Accordingly, Purchasers who
subscribe for Shares will not have a right to return of their funds (except
for unpurchased Shares), unless the Company terminates the Offering. The
Company reserves the right at any time prior to the Expiration Date to
terminate or extend the Offering for any reason. Refunds of payments for
unpurchased Shares will be returned by company check mailed to the address
of the Purchaser shown above as soon as practicable after the Expiration
Date.
<PAGE>
NOMINEE STOCKHOLDERS. In the event of oversubscription, Nominee
Stockholders (as that term is defined in the Prospectus) will be required
to provide information concerning the names and stock holdings of each
beneficial owner of Common Stock as of the Record Date. Nominee
Stockholders may complete one Subscription Agreement for all of their
beneficial owners or a separate Subscription Agreement for each beneficial
owner.
MISCELLANEOUS. The method of delivery of this Subscription Agreement and
payment of the total Purchase Price to the Company will be at the election
and risk of the Purchaser. All questions concerning the timeliness,
validity, form and eligibility of subscriptions will be determined by the
management of the Company, whose determinations will be final and binding.
The Company, in its sole discretion, may waive any defect or irregularity,
or permit a defect or irregularity to be corrected within such time as it
may determine, or reject any subscription. Subscription Agreements will
not be deemed to have been received or accepted until all irregularities
have been waived or cured within such time as the Company determines, in
its sole discretion. The Company is under no duty to notify any Purchaser
of any defect or irregularity in connection with the submission of
Subscription Agreements, and the Company will not incur any liability for
failure to give such notification.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING ANY METHOD OF
SUBSCRIBING SHOULD BE DIRECTED TO DAKOTA TELECOMMUNICATIONS GROUP,
INC., ATTN: MR. CRAIG A. ANDERSON, 29705 453RD AVENUE, IRENE,
SOUTH DAKOTA 57037-0066, TELEPHONE (605) 263-3301.
<PAGE>
===========================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY AN OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Determination of Offering Price. . . . . . . . . . . . . . . . . . . . . 24
No Board Recommendation . . . . . . . . . . . . . . . . . . . . . . . . 24
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Description of the Company's
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Additional Securities of the Company . . . . . . . . . . . . . . . . . . 73
Indemnification of Directors and Officers . . . . . . . . . . . . . . . 77
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . 79
Appendix A--Consolidated Financial
Statements for years ended
December 31, 1996 and 1995
Appendix B--Consolidated Financial
Statements for the periods ended
September 30, 1997 and 1996
Appendix C--Form of Subscription Agreement
===========================================================================
<PAGE>
===========================================================================
400,000 SHARES
[DAKOTA TELECOMMUNICATIONS GROUP LOGO]
COMMON STOCK
AT
$12.50 PER SHARE
______________
PROSPECTUS
______________
_____________, 1998
===========================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation and Bylaws contain provisions
relating to the indemnification of directors, officers and certain other
persons. See "INDEMNIFICATION OF DIRECTORS AND OFFICERS." In addition,
the Company has entered into Indemnity Agreements with each of its
directors and executive officers. See 'INDEMNIFICATION OF DIRECTORS AND
OFFICERS."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the Common Stock being registered, other than
underwriting discounts and commissions. All amounts shown are estimates,
except the SEC registration fee, and assume sale of 400,000 shares in the
offering.
SEC registration fee. . . . . . . . . . . . . . . . . . . . $ 1,475.00
Printing and mailing expenses . . . . . . . . . . . . . . . 15,000.00
Fees and expenses of counsel (including blue sky) . . . . . __________
Accounting and related expenses . . . . . . . . . . . . . . 12,000.00
Blue Sky fees and expenses (not including counsel fees) . . $ 3,000.00
Registrar and Transfer Agent fees . . . . . . . . . . . . . __________
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . __________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $_________
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1997, the Company issued a total of 175 shares of Common
Stock as a bonus to two employees of the Company. (This amount was increased
to 350 shares as a result of the Stock Split.) Because these shares of
Common Stock were issued as a bonus, no "offer" or "sale" within the
meaning of the Securities Act was involved.
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following exhibits are filed as part of this
Registration Statement:
NUMBER EXHIBIT
- ------ -------
3.1 Certificate of Incorporation of Dakota Telecommunications Group,
Inc., a Delaware corporation. Filed as Exhibit 3.1 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation. Filed as Appendix F to the Prospectus and
Ballot/Proxy Statement filed as part of the Registrant's Form S-4
Registration Statement that became effective on June 13, 1997
(the "S-4 Registration Statement") and here incorporated by
reference.
4.1 Certificate of Incorporation of Dakota Telecommunications Group,
Inc., a Delaware corporation. See Exhibit 3.1 above.
4.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation. Filed as Appendix F to the Prospectus and
Ballot/Proxy Statement filed as part of the S-4 Registration
Statement and here incorporated by reference.
4.3 Rights Agreement, dated as of July 22, 1997, between the Company
and Norwest Bank Minnesota, N.A., which includes the form of
Rights Certificate as Exhibit A and the Summary of Rights to
Purchase Preferred Stock as Exhibit B. Filed as Exhibit 4.3 to
the Registrant's Report on Form 10-QSB for the quarter ended
September 30, 1997 and here incorporated by reference.
4.4 Standstill Agreement dated November 27, 1996, among Dakota
Cooperative Telecommunications, Inc. and the Selling Shareholders
of TCIC Communications, Inc. Filed as Exhibit 4.7 to the S-4
Registration Statement and here incorporated by reference.
4.5 Standstill Agreement dated November 27, 1996, among Dakota
Cooperative Telecommunications, Inc. and the Selling Shareholders
of I-Way Partners, Inc. Filed as Exhibit 4.8 to the S-4
Registration Statement and here incorporated by reference.
4.6 Dakota Cooperative Telecommunications, Inc. Form of Warrant
Agreement. Filed as Exhibit 4.11 to the S-4 Registration
Statement and here incorporated by reference.
II-2
<PAGE>
NUMBER EXHIBIT
- ------ -------
4.7 Dakota Cooperative Telecommunications, Inc. Form of Option
Agreement. Filed as Exhibit 4.12 to the S-4 Registration
Statement and here incorporated by reference.
4.8 Agreement Regarding Stock (I-Way Partners, Inc.) dated November
27, 1996. Filed as Exhibit 4.13 to the S-4 Registration
Statement and here incorporated by reference.
4.9 Agreement Regarding Stock (TCIC Communications, Inc.) dated
November 27, 1996. Filed as Exhibit 4.14 to the S-4 Registration
Statement and here incorporated by reference.
4.10 Dakota Telecommunications Group, Inc. Common Stock Certificate.
Filed as Exhibit 4.16 to the S-4 Registration Statement and here
incorporated by reference.
4.11 Dakota Telecom, Inc. Loan Agreement with Rural Telephone Finance
Cooperative dated January 29, 1996. Filed as Exhibit 4.34 to the
S-4 Registration Statement and here incorporated by reference.
4.12 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Loan Agreement with Rural Telephone Finance Cooperative
dated June 24, 1997. Filed as Exhibit 4.31 to the Registrant's
Report on Form 10-QSB for the quarter ended June 30, 1997 and here
incorporated by reference.
4.13 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Mortgage and Security Agreement with Rural Telephone Finance
Cooperative dated June 24, 1997. Filed as Exhibit 4.32 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
4.14 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Pledge and Security Agreement with Rural Telephone Finance
Cooperative dated June 24, 1997. Filed as Exhibit 4.33 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
4.15 The Company has several classes of long-term debt instruments
outstanding in addition to those described in Exhibits 4.11
through 4.14. The amount of these classes of debt outstanding
on December 1, 1997, does not exceed 10% of the Company's
total consolidated assets. The Company agrees to furnish copies
of any agreement defining the rights of holders of any such long-
term indebtedness to the Securities and Exchange Commission upon
request.
II-3
<PAGE>
NUMBER EXHIBIT
- ------ -------
4.16 Form of Subscription Agreement. Filed as Appendix C to this
Registration Statement and here incorporated by reference.
5 Form of Opinion of Warner Norcross & Judd LLP regarding the
legality of the securities being registered. (Signed opinion to
be filed by amendment.)
10.1 1997 Stock Incentive Plan.<F*> Attached as Appendix J to the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.2 Form of Indemnity Agreement.<F*> Attached as Appendix K to the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.3 Employment Agreement of Thomas W. Hertz.<F*> Filed as Exhibit
10.3 to the S-4 Registration Statement and here incorporated by
reference.
10.4 Employment Agreement of Craig A. Anderson.<F*> Filed as Exhibit
10.4 to the S-4 Registration Statement and here incorporated by
reference.
10.5 Early Retirement and Consulting Agreement of Robert R.
DeNeui.<F*> Filed as Exhibit 10.5 to the S-4 Registration
Statement and here incorporated by reference.
10.6 The registrant is a party to a number of loan contracts that are
material to the registrant's business (included in Exhibits 4.11
through 4.14).
10.7 Amendment to Articles of Incorporation of Dakota Cooperative
Telecommunications, Inc. Filed as Appendix A to the Prospectus
and Ballot/Proxy Statement filed as part of the Form S-4
Registration Statement and here incorporated by reference.
10.8 Agreement and Plan of Merger. Filed as Appendix B the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.9 Merger Agreement dated November 27, 1996, between Dakota
Cooperative Telecommunications, Inc., Dakota Acquisition Corp. #2
and I-Way Partners, Inc. Filed as Exhibit 2.3 to S-4
Registration Statement and here incorporated by reference.
II-4
<PAGE>
NUMBER EXHIBIT
- ------ -------
10.10 Merger Agreement dated November 27, 1996, between Dakota
Cooperative Telecommunications, Inc., Dakota Acquisition Corp. #1
and TCIC Communications, Inc. Filed as Exhibit 2.4 to S-4
Registration Statement and here incorporated by reference.
10.11 Dakota Telecommunications Group, Inc. Employee Stock Purchase Plan.
Filed as Exhibit 10.2 to the Registrant's Report on Form 10-QSB for
the quarter ended September 30, 1997 and here incorporated by
reference.
10.12 Dakota Telecommunications Group, Inc. Director Stock Plan of 1997.*
21 Subsidiaries of Registrant.
23.1 Consent of Counsel (included in Exhibit 5).
23.2 Consent of Independent Auditors.
24 Limited Powers of Attorney.
<F*>Management contract or compensatory plan or arrangement.
ITEM 28. UNDERTAKINGS.
(1) The registrant will:
(a) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation form the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price present no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
II-5
<PAGE>
(iii) Include any additional or changed material information
on the plan of distribution.
(b) For determining liability under the Securities Act, treat
each post-effect amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial BONA FIDE offering.
(c) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer
or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Irene, State of South Dakota, on
December 18, 1997.
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(Registrant)
By /s/Thomas W. Hertz
Thomas W. Hertz, President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/Ross L. Benson* December 18, 1997
Ross L. Benson, Director
/s/Dale Q. Bye* December 18, 1997
Dale Q. Bye, Director
/s/Edward D. Christensen, Jr.* December 18, 1997
Edward D. Christensen, Jr., Director
/s/Jeffrey J. Goeman* December 18, 1997
Jeffrey J. Goeman, Director
/s/James H. Jibben* December 18, 1997
James H. Jibben, Chairman of the
Board and Director
/s/Palmer O. Larson* December 18, 1997
Palmer O. Larson, Director
/s/Jeffrey G. Parker* December 18, 1997
Jeffrey G. Parker, Director
II-7
<PAGE>
/s/John (Jack) A. Roth* December 18, 1997
John (Jack) A. Roth, Director
/s/John A. Schaefer* December 18, 1997
John A. Schaefer, Director
/s/Thomas W. Hertz December 18, 1997
Thomas W. Hertz, Director, President
and Chief Executive Officer
/s/Craig A. Anderson December 18, 1997
Craig A. Anderson, Director, Executive
Vice President - Marketing, Chief
Financial Officer and Treasurer
(Principal Accounting and Financial
Officer)
*By /s/Thomas W. Hertz
Thomas W. Hertz
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT
- ------ -------
3.1 Certificate of Incorporation of Dakota Telecommunications Group,
Inc., a Delaware corporation. Filed as Exhibit 3.1 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation. Filed as Appendix F to the Prospectus and
Ballot/Proxy Statement filed as part of the Registrant's Form S-4
Registration Statement that became effective on June 13, 1997
(the "S-4 Registration Statement") and here incorporated by
reference.
4.1 Certificate of Incorporation of Dakota Telecommunications Group,
Inc., a Delaware corporation. See Exhibit 3.1 above.
4.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation. Filed as Appendix F to the Prospectus and
Ballot/Proxy Statement filed as part of the S-4 Registration
Statement and here incorporated by reference.
4.3 Rights Agreement, dated as of July 22, 1997, between the Company
and Norwest Bank Minnesota, N.A., which includes the form of
Rights Certificate as Exhibit A and the Summary of Rights to
Purchase Preferred Stock as Exhibit B. Filed as Exhibit 4.3 to
the Registrant's Report on Form 10-QSB for the quarter ended
September 30, 1997 and here incorporated by reference.
4.4 Standstill Agreement dated November 27, 1996, among Dakota
Cooperative Telecommunications, Inc. and the Selling Shareholders
of TCIC Communications, Inc. Filed as Exhibit 4.7 to the S-4
Registration Statement and here incorporated by reference.
4.5 Standstill Agreement dated November 27, 1996, among Dakota
Cooperative Telecommunications, Inc. and the Selling Shareholders
of I-Way Partners, Inc. Filed as Exhibit 4.8 to the S-4
Registration Statement and here incorporated by reference.
4.6 Dakota Cooperative Telecommunications, Inc. Form of Warrant
Agreement. Filed as Exhibit 4.11 to the S-4 Registration
Statement and here incorporated by reference.
4.7 Dakota Cooperative Telecommunications, Inc. Form of Option
Agreement. Filed as Exhibit 4.12 to the S-4 Registration
Statement and here incorporated by reference.
<PAGE>
NUMBER EXHIBIT
- ------ -------
4.8 Agreement Regarding Stock (I-Way Partners, Inc.) dated November
27, 1996. Filed as Exhibit 4.13 to the S-4 Registration
Statement and here incorporated by reference.
4.9 Agreement Regarding Stock (TCIC Communications, Inc.) dated
November 27, 1996. Filed as Exhibit 4.14 to the S-4 Registration
Statement and here incorporated by reference.
4.10 Dakota Telecommunications Group, Inc. Common Stock Certificate.
Filed as Exhibit 4.16 to the S-4 Registration Statement and here
incorporated by reference.
4.11 Dakota Telecom, Inc. Loan Agreement with Rural Telephone Finance
Cooperative dated January 29, 1996. Filed as Exhibit 4.34 to the
S-4 Registration Statement and here incorporated by reference.
4.12 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Loan Agreement with Rural Telephone Finance Cooperative
dated June 24, 1997. Filed as Exhibit 4.31 to the Registrant's
Report on Form 10-QSB for the quarter ended June 30, 1997 and here
incorporated by reference.
4.13 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Mortgage and Security Agreement with Rural Telephone Finance
Cooperative dated June 24, 1997. Filed as Exhibit 4.32 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
4.14 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Pledge and Security Agreement with Rural Telephone Finance
Cooperative dated June 24, 1997. Filed as Exhibit 4.33 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
4.15 The Company has several classes of long-term debt instruments
outstanding in addition to those described in Exhibits 4.11
through 4.14. The amount of these classes of debt outstanding
on December 1, 1997, does not exceed 10% of the Company's
total consolidated assets. The Company agrees to furnish copies
of any agreement defining the rights of holders of any such long-
term indebtedness to the Securities and Exchange Commission upon
request.
4.16 Form of Subscription Agreement. Filed as Appendix C to this
Registration Statement and here incorporated by reference.
<PAGE>
NUMBER EXHIBIT
- ------ -------
5 Form of Opinion of Warner Norcross & Judd LLP regarding the
legality of the securities being registered. (Signed opinion to
be filed by amendment.)
10.1 1997 Stock Incentive Plan.<F*> Attached as Appendix J to the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.2 Form of Indemnity Agreement.<F*> Attached as Appendix K to the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.3 Employment Agreement of Thomas W. Hertz.<F*> Filed as Exhibit
10.3 to the S-4 Registration Statement and here incorporated by
reference.
10.4 Employment Agreement of Craig A. Anderson.<F*> Filed as Exhibit
10.4 to the S-4 Registration Statement and here incorporated by
reference.
10.5 Early Retirement and Consulting Agreement of Robert R.
DeNeui.<F*> Filed as Exhibit 10.5 to the S-4 Registration
Statement and here incorporated by reference.
10.6 The registrant is a party to a number of loan contracts that are
material to the registrant's business (included in Exhibits 4.11
through 4.14).
10.7 Amendment to Articles of Incorporation of Dakota Cooperative
Telecommunications, Inc. Filed as Appendix A to the Prospectus
and Ballot/Proxy Statement filed as part of the Form S-4
Registration Statement and here incorporated by reference.
10.8 Agreement and Plan of Merger. Filed as Appendix B the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.9 Merger Agreement dated November 27, 1996, between Dakota
Cooperative Telecommunications, Inc., Dakota Acquisition Corp. #2
and I-Way Partners, Inc. Filed as Exhibit 2.3 to S-4
Registration Statement and here incorporated by reference.
10.10 Merger Agreement dated November 27, 1996, between Dakota
Cooperative Telecommunications, Inc., Dakota Acquisition Corp. #1
and TCIC Communications, Inc. Filed as Exhibit 2.4 to S-4
Registration Statement and here incorporated by reference.
<PAGE>
NUMBER EXHIBIT
- ------ -------
10.11 Dakota Telecommunications Group, Inc. Employee Stock Purchase Plan.
Filed as Exhibit 10.2 to the Registrant's Report on Form 10-QSB for
the quarter ended September 30, 1997 and here incorporated by
reference.
10.12 Dakota Telecommunications Group, Inc. Director Stock Plan of 1997.*
21 Subsidiaries of Registrant.
23.1 Consent of Counsel (included in Exhibit 5).
23.2 Consent of Independent Auditors.
24 Limited Powers of Attorney.
<F*>Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 5 AND 23.1
[FORM OF LEGAL OPINION--TO BE FILED BY AMENDMENT]
___________, 1998
Dakota Telecommunications Group, Inc.
Post Office Box 66
27905 453rd Avenue
Irene, South Dakota 57037-0066
RE: REGISTRATION STATEMENT ON FORM SB-2
Gentlemen:
We represent Dakota Telecommunications Group, Inc., a Delaware
corporation (the "Company"), with respect to the above-captioned
Registration Statement on Form SB-2 (the "Registration Statement") filed
pursuant to the Securities Act of 1933 (the "Act") to register 400,000
shares of the Company's common stock, no par value ("Common Stock").
As counsel for the Company, we are familiar with its Certificate
of Incorporation and Bylaws and have reviewed the various proceedings taken
by the Company to authorize the issuance of the Common Stock to be sold
pursuant to the Registration Statement. We have also reviewed and assisted
in preparing the Registration Statement. In our review, we have assumed
the genuineness of all signatures, the legal capacity of all natural
persons, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of
such copies.
On the basis of the foregoing, we are of the opinion that when the
Registration Statement has become effective under the Act, any and all shares
of Common Stock which are the subject of the Registration Statement will,
when issued upon payment of the purchase price therefor to the Company, be
validly issued, fully paid and nonassessable.
This opinion is rendered for purposes of Item 27 of Form SB-2 and
Item 601 of Regulation S-B and may not be used, quoted or referred to or
filed for any other purpose without our prior written permission.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the references to our firm in the Registration
Statement.
Very truly yours,
WARNER NORCROSS & JUDD LLP
By:
<PAGE>
EXHIBIT 10.12
DAKOTA TELECOMMUNICATIONS GROUP, INC.
DIRECTOR STOCK PLAN OF 1997
SECTION 1
ESTABLISHMENT OF PLAN; PURPOSE OF PLAN
The Company hereby establishes the DIRECTOR STOCK PLAN OF 1997 (the
"Plan") for its Outside Directors. The Plan permits the grant and award of
shares of the Company's Common Stock. The purpose of the Plan is to
provide Outside Directors with an increased incentive to make significant
contributions to the long-term performance and growth of the Company, to
join the interests of Outside Directors with the interests of the Company's
stockholders and to attract and retain Outside Directors of exceptional
abilities.
SECTION 2
DEFINITIONS
The following words have the following meanings unless a
different meaning is plainly required by the context:
2.1 "Common Stock" means the Common Stock of the Company, no par
value.
2.2 "Company" means Dakota Telecommunications Group, Inc., a Delaware
corporation, its successors and assigns, and its predecessors,
including without limitation Dakota Cooperative
Telecommunications, a South Dakota cooperative association, and
Dakota Telecommunications Group, Inc., a South Dakota
corporation.
2.3 "Outside Director" means a director of the Company who is not
employed by the Company or its subsidiaries as an officer or
employee on a basis which requires more than 1,000 hours of
service per year.
SECTION 3
SHARES SUBJECT TO THE PLAN
3.1 NUMBER OF SHARES. Subject to adjustment as provided in Section
4.2 of the Plan, a maximum of twenty thousand (20,000) shares of Common
Stock shall be available for awards under the Plan. Such shares shall be
authorized and may be either unissued or treasury shares.
3.2 ADJUSTMENTS. If the number of shares of Common Stock outstanding
changes by reason of a stock dividend, stock split, recapitalization,
merger, consolidation, combination, exchange of shares or any other change
in the corporate structure or shares of the Company, the number and kind of
<PAGE>
securities subject to and reserved under the Plan and the number of shares
in each stock award, shall be appropriately adjusted.
SECTION 4
GRANT OF STOCK AWARDS
Upon the fifth (5th) anniversary of his service as a director of the
Company, an Outside Director shall be granted one thousand (1,000) shares
of Common Stock, subject to the provisions of the Plan. Outside Directors
of the Company who, as of the effective date of this Plan, have served as
Outside Directors for at least five (5) years, shall each be granted one
thousand (1,000) shares of Common Stock as of January 1, 1997.
SECTION 5
GENERAL PROVISIONS
5.1 WITHHOLDING. The Company shall be entitled to: (a) withhold and
deduct from future compensation of an Outside Director, or make other
arrangements for the collection of, all legally required amounts necessary
to satisfy any and all federal, state and local withholding and
employment-related tax requirements attributable to a stock award; or (b)
require an Outside Director promptly to remit the amount of such withholding
to the Company before taking any action with respect to a stock award.
5.2 COMPLIANCE WITH LAWS; LISTING AND REGISTRATION OF SHARES. All
stock awards granted under the Plan (and all issuances of Common Stock or
other securities under the Plan) shall be subject to all applicable laws,
rules and regulations, and to the requirement that if at any time the
listing, registration or qualification of the shares covered thereby upon
any securities exchange or under any state or federal law, or the consent
or approval of any governmental regulatory body, is necessary or desirable
as a condition of, or in connection with, the grant of such stock award,
such stock award may not be made in whole or in part, unless and until such
listing, registration, qualification, consent or approval shall have been
effected or obtained.
5.3 GOVERNING LAW. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of South Dakota and applicable
federal law.
5.4 SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining provisions of the Plan and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included.
-2-
<PAGE>
SECTION 6
EFFECTIVE DATE; TERMINATION AND AMENDMENT
This Plan shall take effect as of October 28, 1997. The Plan may be
terminated by the Board of Directors at any time. No stock award shall be
granted under the Plan after termination. The Board may terminate the Plan
at any time, or may from time to time amend the Plan as it deems proper and
in the best interests of the Company.
-3-
<PAGE>
EXHIBIT 21
NorDruk Investment Company Limited Partnership
P.O. Box 364
Caledonia, MI 49316
PAUL C. DRUEKE
General Partner
December 22, 1997
HAND DELIVERY
Mr. Marlan Smith, Acting Secretary
Ameriwood Industries International Corporation
168 Louis Campau Promenade, Suite 400
Grand Rapids, MI 49503
RE: NOMINATION OF MR. JACOB C. MOL FOR ELECTION TO BOARD OF
DIRECTORS
Dear Mr. Smith:
On December 11, 1997, the Concerned Shareholders for Better
Management of Ameriwood (the "Committee") delivered to the Board of
Directors a letter requesting that the Board nominate Jacob C. Mol for
election as a Director of Ameriwood Industries International Corporation
(the "Company") at the Company's annual meeting to shareholders to be held
in April 1998. Not having received a reply from the Company, NorDruk
Investment Company Limited Partnership ("NorDruk"), a record shareholder of
the Company, hereby delivers to you its formal notice that it intends to
nominate Mr. Mol for election at the Company's 1998 annual meeting of
shareholders.
Name of Nominee................................. Jacob C. Mol
Age............................................. 63 years
Business Address................................ 3075 Baldwin Street
Hudsonville, Michigan 49426
(616) 669-8960
Residence Address............................... same
Principal Occupation or Employment.............. Self-employed businessman and
investor
Number of Shares Beneficially Owned............. 157,113 shares of the
Company's common stock.
<PAGE>
Mr. Mol is willing to be nominated for election as a Director of
the Company. As required by Article IX, Section C of the Company's
Articles of Incorporation, NorDruk confirms that the information concerning
Mr. Mol contained in the enclosed Schedule 13D (a copy of which has
previously been delivered to you but which is included here for ease of
reference) is complete and correct as of the date of this letter, and
appears to include all information required for the Company's proxy
materials.
As confirmed in the Committee's December 11, 1997 letter, Mr. Mol
commits that he will furnish the Board of Directors with such additional
and updated information concerning himself as is required under the rules
of the Securities and Exchange Commission to be included in the Company's
proxy materials, upon request of the Company's Secretary.
Also enclosed is Mr. Mol's signed statement that, after having
reviewed Article III, Section 1 of the Company's Bylaws, he is aware of no
reason not disclosed to the Board of Directors why he would or might be
considered a Plaintiff or Related Person (as defined in Article III of the
Bylaws). This statement, which was included in the Committee's December
11, 1997 letter, also includes Mr. Mol's undertaking that, if he is
nominated, he promptly will inform the Board of Directors, by written
notice to the Chairman of the Board or the Secretary of the Company, if at
any time prior to the election he becomes aware of any fact or
circumstance, whether in existence on the date of the undertaking or
arising afterward, which has given Mr. Mol any reason to believe that he is
or might be considered a Plaintiff or Related Person.
If you should have any questions or comments, please contact Mr.
Gordon Lewis of Warner Norcross & Judd LLP at 752-2752.
Sincerely,
NORDRUK INVESTMENT COMPANY
LIMITED PARTNERSHIP
By /s/Paul C. Drueke
Paul C. Drueke, General Partner
Enclosures
2
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Dakota
Telecommunications Group, Inc. on Form SB-2 of our report dated January 18,
1997, on the consolidated financial statements of Dakota Cooperative
Telecommunications, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and for the years then ended. We also consent to the references
to us in the Prospectus contained in this Registration Statement.
/s/ Olsen Thielen & Co., Ltd.
Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
January 5, 1998
<PAGE>
EXHIBIT 24
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Dakota Telecommunications Group, Inc.,
does hereby appoint THOMAS W. HERTZ and CRAIG A. ANDERSON, and either
of them, his or her attorney or attorneys with full power of
substitution to execute in his or her name, in her or her capacity as
a director or officer, as the case may be, of Dakota
Telecommunications Group, Inc., a Form SB-2 Registration statement of
Dakota Telecommunications Group, Inc. for the issuance of up to $5
million in common stock, any and all pre-effective of post-effective
amendments to such Registration Statement, and to file the same with
all exhibits thereto and all other documents in connection therewith
with the Securities and Exchange Commission.
Dated September 30, 1997.
/s/James H. Jibben
James H. Jibben
/s/John A. Schaefer
John A. Schaefer
/s/Palmer O. Larson
Palmer O. Larson
/s/Jeffrey Parker
Jeffrey Parker
/s/Jeffrey J. Goeman
Jeffrey J. Goeman
/s/Edward D. Christensen, Jr.
Edward D. Christensen, Jr.
/s/Dale Q. Bye
Dale Q. Bye
/s/Ross L. Benson
Ross L. Benson
/s/John (Jack) A. Roth
John (Jack) A. Roth
