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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________
COMMISSION FILE NUMBER: 333-22025
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 91-1845100
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
29705 453RD AVENUE
IRENE, SOUTH DAKOTA 57037-0066
(Address of Principal Executive Offices) (Zip Code)
(605) 263-3301
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(g) of the Exchange Act: NONE
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. __X__
State issuer's revenues for its most recent fiscal year. The issuer's
revenues for the year ended December 31, 1997, were $14,005,196.
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As of March 11, 1998, the aggregate market value of the common stock held
by non-affiliates of the issuer was approximately $21,961,587.50. This
amount is based the price of $12.50 share for the registrant's stock as sold
by it in a registered offering on such date.
As of March 16, 1998, the issuer had outstanding 1,907,255 shares of Common
Stock, no par value.
Transitional Small Business Disclosure Format (check one) Yes No __X__
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 5, 6 and 7, incorporate by reference portions of the
Registrant's Annual Report to Stockholders for the year ended December 31,
1997.
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PART I
ITEM 1. DESCRIPTION OF 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"). 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.
BUSINESS
The Company is a competitive local exchange carrier ("CLEC")
specializing in the design, construction and operation of broadband
telecommunications systems for communities in South Dakota and the
surrounding states. The Company currently operates 13 exchanges in
southeastern South Dakota, four of which were built in 1997, incorporating
over 2,240 miles of copper plant, 300 miles of coaxial cable and
approximately 10,000 fiber miles of fiber optic lines. The Company's main
growth strategy is to continue to expand and build new systems in South
Dakota, Minnesota, Iowa and Nebraska.
The Company provides a full range of bundled telecommunications
products and services to its customers including switched local dial tone
and enhanced services, network access services, long distance telephone
services, operator assisted calling services, telecommunications equipment
sale and leasing services, cable television services, data networking
services, Internet access and related services and local area network and
wide area network ("LAN/WAN") services. The Company's customer base
includes approximately 6,100 local service access lines, 5,500 cable
television subscribers, 7,000 Internet users, and over 2,000 active
LAN/WAN business customers located primarily in South Dakota,
Northwestern Iowa and Southwestern Minnesota. The Company and its
predecessors have been engaged in the telecommunications business
since 1903.
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The Company has a long history of aggressive and proactive growth.
The Company was originally incorporated as a stock cooperative in South
Dakota on April 3, 1952, through the consolidation of several small
independent telephone companies in Southeastern South Dakota. 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 community antenna television (cable) ("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 wireless technologies. The Company
expanded its cable operations in 1995 and 1996, and further expanded with
the acquisitions in 1996 of TCIC Communications, Inc. ("TCIC") (long distance
and operator services), Iway Inc. ("Iway") (Internet services), and in 1997 of
Futuristic, Inc. dba DataNet ("DataNet") (LAN/WAN integration services). All
three companies continue to operate as wholly-owned subsidiaries of the
Company under the names DTG Communications, Inc., DTG Internet, Inc.
and DTG DataNet, Inc., respectively. The Company has also entered into an
agreement to acquire by merger Vantek Communications, Inc. and Van/Alert,
Inc., two South Dakota corporations (collectively, "Vantek"). Vantek is a
leading mobile radio operator and operates one of the largest paging businesses
in South Dakota. The Company anticipates that, subject to the satisfaction of
necessary conditions, the merger will be completed in mid 1998. As a result of
this expansion, today the Company is a fully diversified telecommunications
services company, offering product and service bundles which currently cannot
be matched by any competitor in its existing and selected target markets.
The Company intends to continue to explore expansion through strategic
acquisitions and business alliances in an effort to facilitate the growth of
the Company.
TELECOMMUNICATIONS INDUSTRY OVERVIEW. From the formation of the
telephone industry in the late 1800s until the breakup of AT&T Corp.
("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
local access and transport areas ("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.
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The AT&T Divestiture Decree had a profound effect on the long distance
portion of the telecommunications industry in the United States. To
encourage competition in the long distance market, the AT&T Divestiture
Decree and certain Federal Communications Commission ("FCC") regulations
require most local exchange companies ("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.
In February 1996, President Clinton signed the Telecommunications Act
of 1996 (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.
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 basis 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 through the construction and operation of new
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broadband telecommunications systems and by developing and marketing a broad
array of competitively priced telecommunications services over these systems.
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 this network, where
feasible, into new markets. The Company substantially rebuilt
its existing network in 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.
LOCAL TELECOMMUNICATIONS SERVICES. The Company's local
telecommunications services are provided directly by the Company. As of
December 31, 1997, the Company provided services to approximately 6,100
access lines located in 13 communities 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 one percent of the Company's gross revenues in 1997.
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) dedicated and switched 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, which the Company currently anticipates by the fall of 1998 will
link 14 local schools with the University of South Dakota's School of
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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 national and regional interexchange
carriers ("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 its own facilities. 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, 1997, 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 1997, revenues from local services
were approximately $5.4 million, representing approximately 39% 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.
Although network bypass and alternative local access telephone service
providers are potential competitive threats to the Company, no significant
competition has occurred to date in the Company's incumbent local exchange
communities. Competition is very active in the new communities the Company
enters as part of its CLEC expansion strategy.
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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 1997, long distance revenues were approximately $3.5
million, representing 25% of the Company's gross revenues. The Company
anticipates that its long distance revenues will continue to grow in 1998,
due to the building of new telecommunications systems and the Company's
sales efforts.
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 DTG Communications, Inc., the Company's wholly owned
subsidiary. Currently DTG Communications, Inc. 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 DTG Internet, Inc.
WIRELESS SERVICES. The Company is exploring the possibility of
expanding its existing telecommunications services by providing broadband
personal communications services ("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 ("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.
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. The total
investment by the Company is $255,956. 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
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.
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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 December 31,
1997, the Company hosted approximately 143 Web sites with an additional 6
sites under development. The Company estimates that its access services
are used by approximately 7,000 users. Total Internet revenues in 1997
were approximately $1 million, representing approximately 7% of the
Company's total gross revenues.
In December 1994, Iway started its Internet operations, which the
Company purchased in December 1996. Iway, now renamed DTG Internet
Services, Inc., 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 transmission control protocol/Internet protocol ("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.
These technological and business trends have led to an increase in the
number of on-line services and Internet access providers.
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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
from 300 to 750 MHZ. As of December 31, 1997, these systems provide
service to approximately 5,500 subscribers. No single community accounts
for more than 12% of the Company's total basic CATV subscribers. Total
cable revenues in 1997 were approximately $1.5 million, representing
approximately 11% of the Company's total gross revenues.
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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 5,500 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 believes that it holds
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 3 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
Cable Television Consumer Protection and Competition Act of 1992 (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.
Monthly fees for cable services vary depending on the nature and type
of service. The Company offers a basic cable service package (primarily
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 $24.95 depending on the number of channels offered, and the monthly
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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
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 December 31, 1997, 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 December 31, 1997, 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 Cable Communications Policy
Act of 1984 (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 cable
television 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,
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
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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.
LAN/WAN SERVICES. Through its DataNet subsidiary, the Company is a
leading provider of services and products designed to build and manage
personal computer network infrastructures for businesses throughout its
service territories. The Company provides customized, integrated solutions
for its customers' distributed computing networks by combining a comprehensive
offering of value-added services with its expertise in sourcing and
distributing PCs, network products, computer peripherals and software from
a variety of vendors. The Company endeavors to provide a one-stop source
for integrating the design and consulting, acquisition and deployment,
operation and support, and enhancement and migration of computer network
operations. Typical services provided by the Company include the review of
customer system requirements; the selection, design and planning of system
components; the procurement, configuration, distribution, installation,
cabling and connectivity of complete computer networks; and operating and
network support services such as equipment adds, moves, and changes, repair
and maintenance, help desk operations, and network monitoring. The
Company's LAN/WAN customer base extends to approximately 6,000 business
customers throughout South Dakota and the surrounding states, with
approximately 2,000 accounts active at any one time. In 1997, total
revenues from LAN/WAN services was approximately $1.8 million, representing
approximately 13% of the Company's total gross revenues. However, the
Company operated its DataNet subsidiary for only one month in 1997. In
1998, the Company anticipates that revenues from this source will increase
substantially as a percentage of its total gross revenues.
MAIN NETWORK OPERATIONS. The Company provides its local services and
related long distance services primarily over its own network. The Company
operates an advanced digital telecommunications network consisting of one
Lucent 5ESS switch with nine subtending 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
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management systems designed to optimize traffic routing. The Company's
network encompasses approximately 2,240 miles of copper trunk lines and
customer connections and about 10,000 fiber miles of fiber optic cabling.
The Company seeks to actively manage and improve its network. The
Company spent 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. The Company
currently plans to continue to expand its SONET network backbone in 1998.
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 Denver, Colorado, and Willow Springs,
Illinois (a southern suburb of Chicago). This gives the Company full
physical redundancy to the main MCI Communications Corporation ("MCI")
Internet backbone. 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 modems 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 Company uses a combination of coaxial
cable and optical fiber 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 ten communities with a single CATV head-end facility. The Company
anticipates that it will convert several additional systems over the next
several years. It is anticipated that the systems, which facilitate
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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 balance of the Company's cable systems currently operate on a
stand-alone basis with each community system supported by its own signal
processing center, known as a cable "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. The Company also currently plans to
install digital advertising insertion equipment in its central switching
center. This equipment would allow the Company to significantly enhance
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.
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. 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
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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) and the DataNet acquisition. These
additions have expanded the Company's product line and service abilities
and 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
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 four largest long distance providers: AT&T,
Sprint Corporation ("Sprint"), MCI Communications Corporation ("MCI") and
Worldcom, Inc. (formerly LDDS/Worldcom, Inc.) ("Worldcom"). These companies,
and many of the other long distance providers, 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
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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, LAN/WAN services and on-line services, is
extremely 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 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 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. 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
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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.
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
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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
Telecommunications Act of 1996 (the "1996 Act") are designed to increase
competition in the cable television industry.
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 direct
broadcast satellites ("DBS") that use high frequencies to transmit signals
that can be received by dish 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.
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The 1996 Act eliminated the statutory and regulatory restrictions that
prevented telephone companies from competing with cable operators for the
provision of video services. 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
discussed later in this Annual Report. 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
multi-channel, multi-point distribution systems ("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
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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
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.
LAN/WAN SERVICES. The markets in which the Company operates its
LAN/WAN integration business are also intensely competitive. Barriers to
entry are generally very low and many different types of technical service
providers are attempting to enter the PC network market. There competitors
include mainframe and mid-range computer manufacturers and outsourcers such
as Digital Equipment Corporation, Electronic Data Systems Corporation,
Hewlett-Packard Company, and IBM. Other competitors include regional Value
Added Resellers, systems integrators and third-party service companies. The
Company expects to face further competition from new market entrants and
possible alliances between competitors in the future. Most of these
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competitors have greater financial, technical, marketing and other resources
than the Company and are therefore able to respond more quickly to new or
emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their products
and services than the Company. There is no assurance that the Company will
be able to successfully compete against current and future competitors.
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
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; and (iv) 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
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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 appealed the ruling to the Supreme Court, which has accepted the case
for hearing. A decision is not expected before the end of 1998.
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. As of December 31, 1997, the FCC has rejected each of
those applications, however. The RBOCs can provide long distance services
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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
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
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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
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 universal service fund ("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 Company is a contributor to, and a recipient of, USF funds. The
Company currently anticipates that it will receive more from USF funding
than it will contribute.
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
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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
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 is continuing to review and
amend its rules in this area and there can be no assurance that the FCC
will not adopt rules that would have a material adverse effect on the
Company.
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
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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.
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 where appropriate, and at fair market value where
appropriate.
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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. 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.
LONG DISTANCE REGULATION. The FCC has classified the Company as a
non-dominant IXC for purposes of all long distance operations conducted
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
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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
rulemaking 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
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.
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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,
Dakota Wireless Systems, Inc. ("DWS"), had a Spectrum Agreement with US
WEST Communications, Inc. ("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 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. The Company has a total investment
of $255,956 in these licenses. 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.
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
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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
(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 private branch
exchanges ("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
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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 cable and
telecommunications services provided by the Company. The FCC has
undertaken, and continues to undertake, numerous rulemaking proceedings to
interpret and implement the provisions discussed below. It is not possible
at this time to predict the effects of such rulemaking 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.
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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 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,
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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 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
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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 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,
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.
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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 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
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non-affiliated broadcast stations by cable systems affiliated with a
broadcast network. Previous satellite master antenna television ("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
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 issue 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.
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
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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) was available, and the license fees for
additional channels and for increases in existing channels were no longer
subject to the aggregate cap. This optional approach for adding services
expired 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 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
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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
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.
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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 rulemaking 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.
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.
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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 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
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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
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
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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
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.
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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 December 31, 1997, the Company employed 161 employees, 142 of
whom were full-time employees and none of whom was subject to any
collective bargaining agreement.
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.
RECENT DEVELOPMENT
In December 1997, the Company and its wholly owned subsidiary DWS
entered into an agreement to acquire by merger Vantek Communications, Inc.
and Van/Alert, Inc., two South Dakota corporations (collectively,
"Vantek"). Vantek is a leading mobile radio operator and operates one of
the largest paging business in South Dakota. Under the terms of the merger
agreement, Vantek will be merged with and into DWS, which will continue its
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existence as a wholly owned subsidiary of the Company, operating both DWS'
current PCS business and Vantek's existing mobile radio and paging
business. The merger is subject to various conditions, including the
receipt of regulatory approval relating to license transfers. The Company
anticipates that, subject to the satisfaction of necessary conditions, the
merger will be completed in mid 1998.
ITEM 2. DESCRIPTION OF PROPERTY.
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 $25.4 million as of December 31, 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,
1996 and 1997:
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIXED ASSETS 1997 1996
------------ ---- ----
<S> <C> <C>
Telecommunications Plants $ 23,948 $ 16,923
Cable Systems 5,352 4,870
Other Equipment 4,327 2,510
Land and Buildings 3,014 1,604
Construction in Progress 289 354
</TABLE>
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
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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 Rural Telephone Finance Corporation
("RTFC").
The following property is owned in fee by the Company and its
subsidiaries:
Headquarters building - Irene, South Dakota
13,000 sq. ft., single story brick structure, with 11,800
sq. ft. for offices, 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.
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 - 100 ft.
wireless equipment tower with a 250 sq. ft. on a 2.5 acre
site.
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The following property is leased by the Company:
Beresford, South Dakota - 250 sq. ft. (office)
9th & Phillips site - Sioux Falls, South Dakota - approximately
5,500 sq. ft. (office).
DataNet office lease - Sioux Falls, South Dakota - approximately
7,175 sq. ft. (office).
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. All properties owned by the
Company are subject to liens for loans obtained in the ordinary course of
business.
ITEM 3. LEGAL PROCEEDINGS.
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 and the FCC. However, in the opinion of management, none of
these proceedings is material to the Company's consolidated financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the fourth quarter of the period covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information under the caption "Stock Information" on page S-36 of
the Registrant's Annual Report to Stockholders for the year ended December
31, 1997 is here incorporated by reference.
On December 1, 1997, the Company issued 320,000 shares of Common Stock
valued at the time at $4 million to the shareholders of DataNet, two
individuals who were existing shareholders of the Company, in connection with
the acquisition by the Company of all of the outstanding shares of capital
stock of DataNet. The Company relied on the exemption provided in Section
4(2) of the Securities Act of 1933, as amended, for this issuance.
On December 22, 1997, the Company sold 98,426 shares of Common Stock to
the Dakota Telecommunications Group, Inc. Employee Stock Ownership Plan
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("ESOP") for $1 million. Proceeds were provided by a loan secured by the ESOP
and guaranteed by the Company. The Company relied on the exemption provided
in Section 4(2) of the Securities Act of 1933, as amended, for this issuance.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The information under the caption "Management's Discussion and
Analysis or Plan of Operation" on pages S-7 through S-16, inclusive, of the
Registrant's Annual Report to Stockholders for the year ended December 31,
1997 is here incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS.
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and Independent Auditors' Report on pages S-17 through S-35,
inclusive, of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1997 are here incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company's Board of Directors is divided into three classes, which
are 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 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 51) 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.
Palmer O. Larson (age 74) 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 63) 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 67) 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 47) 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
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<PAGE>
the Cooperative prior to 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
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 he 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 40) 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.
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.
John A. Schaefer (age 72) 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.
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 Exchange
Carriers Association and currently serves as an outside director of that
organization.
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<PAGE>
As of the date of this report, directors and officers of the
Company and persons beneficially owning more than ten percent of the
outstanding shares of Common Stock were not subject to the reporting
obligations of Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows certain information concerning the
compensation paid to Thomas W. Hertz, President and Chief Executive
Officer of the Company, and Craig A. Anderson, Executive Vice President,
Chief Financial Officer and Treasurer of the Company, for services rendered
to the Company or the Cooperative, as applicable, during the years ended
December 31, 1997, 1996 and 1995. No other executive officer of the
Company or the Cooperative earned cash compensation in excess of $100,000
during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS
----------------------
ANNUAL COMPENSATION NUMBER OF SECURITIES ALL OTHER
-------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS<F1> UNDERLYING OPTIONS COMPENSATION<F2>
- --------------------------- ---- ------ ----- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Thomas W. Hertz 1997 $129,808 $15,000 123,980 $15,702
President and Chief 1996 118,940 -- -- 1,439
Executive Officer 1995 20,455 -- -- 72
Craig A. Anderson 1997 $ 96,154 $ 7,500 123,980 $ 7,105
Executive Vice President, 1996 28,725 -- -- 1,195
Chief Financial Officer
and Treasurer<F3>
_________________________________
<FN>
<F1> This column represents the cash value of shares of Common Stock awarded to the above individuals.
<F2> All other compensation represents (i) premiums paid by the Company or the Cooperative, as applicable, for life
insurance on Mr. Hertz ($1,445 in 1997) and Mr. Anderson ($1,445 in 1997), and (ii) Company or Cooperative
contributions to pension and 401(k) plans for Mr. Hertz ($14,257 in 1997) and Mr. Anderson ($5,660 in 1997).
<F3> Mr. Anderson began his employment with the Cooperative on September 15, 1996.
</FN>
</TABLE>
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<PAGE>
The following tables set forth information regarding stock options
granted to the named executive officers during the last fiscal year and
stock options held by the named executive officers at the end of the last
fiscal year. None of the named executive officers exercised any stock
options during 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN
NAME OPTIONS GRANTED<F1> FISCAL YEAR EXERCISE PRICE EXPIRATION DATE
- -------------- --------------------- ---------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Thomas W. Hertz 123,980 46.3% $ 6.19 12-31-2006
Craig A. Anderson 123,980 46.3% $ 6.19 12-31-2006
________________________________
<FN>
<F1> 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
Conversion and 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 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 percent of each
option became exercisable on July 25, 1997. Thereafter, an
additional 20 percent 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. Thus, 40 percent of the
options have become exercisable as of the date of this report.
Each option remains outstanding for ten years from the date it was
granted. The options are non-transferable.
-53-
<PAGE>
Under the terms of the stock option agreements, the options are not
incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (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 is
$6.19 per share.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END <F1>
---------------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Thomas W. Hertz 49,592 74,388 $ 312,925.57 $ 469,388.28
Craig A. Anderson 49,592 74,388 $ 312,925.57 $ 469,388.28
<FN>
<F1> Based on a market value of $12.50 per share at December 31, 1997, adjusted to reflect the two-for-one stock split.
</FN>
</TABLE>
During 1997, 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 special 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 in July 1997. In 1998, directors will also
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<PAGE>
be compensated at the rate of $250 for attendance by teleconference at
regular monthly board meetings.
Under the Company's 1997 Stock Incentive Plan, each director of the
Company who is not an employee of the Company (a "Non-Employee Director")
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 effect
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
ten years. The formula grant provisions for Non-Employee 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 Securities Exchange Act of 1934,
as amended (the "Exchange Act") or the rules thereunder. Non-Employee
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 five years on the Board of Directors of the Company
(including service as a director of the Cooperative) will receive a one-time
award of 2,000 shares (as adjusted to reflect the effect of the stock
split) of Common Stock. This award was payable on January 1, 1998 to
directors who had previously served five years, and will be payable on the
fifth anniversary of service to all other non-employee directors.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENTS. 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, Chief Financial Officer and Treasurer, 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. However, 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 current terms of the
Agreements are until December 31, 2000.
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 fifteen
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<PAGE>
percent 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 were paid 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
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 ten 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
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<PAGE>
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.
INDEMNITY AGREEMENTS. The Company has entered into indemnity
agreements with each director and executive officer of the Company
(collectively, "Leaders"). The indemnity agreements indemnify each Leader
against all expenses incurred in connection with any action or
investigation involving the Leader by reason of his or her position with
the Company (or with another entity at the Company's request). The Leader
will also be indemnified for costs, including judgments, fines and
penalties, indemnifiable under Delaware law or under the terms of any
current or future liability insurance policy maintained by the Company that
covers the Leaders. A Leader involved in a derivative suit will be
indemnified for expenses and amounts paid in settlement. Indemnification
is dependent in every instance on the Leader meeting the standards of
conduct set forth in the indemnity agreements. If a change in control or
potential change in control occurs, the Company will fund a trust to
satisfy its anticipated indemnification obligations.
STOCK PLAN PROVISIONS. The Company's 1997 Stock Incentive Plan
provides that, unless the Board or the Compensation Committee of the Board
of Directors determines otherwise, upon a "change in control" of the Company
as defined in that plan all outstanding stock option and other awards of
stock and restricted stock shall become immediately exercisable and fully
vested and nonforfeitable. In addition, upon a change in control of the
Company, the Compensation Committee may, in its discretion, determine that
some or all participants holding outstanding stock options shall receive cash
in lieu of some or all of the stock subject to such options in an amount equal
to the excess of the highest price per share actually paid in connection with
the change in control of the Company over the exercise price per share
under such options.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information concerning the number of
shares of Common Stock held by each stockholder who is known to the
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<PAGE>
Company's management to be the beneficial owner of more than five percent
of the outstanding Common Stock as of March 16, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF PERCENT
OF COMMON STOCK SHARES OF COMMON STOCK<F1><F2> OF CLASS<F3>
-------------------- ------------------------------- ------------
<S> <C> <C> <C>
Gery Baar 171,014 9.0%
c/o Dakota Telecommunications Group, Inc.
P.O. Box 66
Irene, South Dakota 57037-006
Douglas English 171,014 9.0%
c/o Dakota Telecommunications Group, Inc.
P.O. Box 66
Irene, South Dakota 57037-0066
Jeffrey G. Parker 120,326 6.3%
c/o Dakota Telecommunications Group, Inc.
P.O. Box 66
Irene, South Dakota 57037-0066
_______________________________
<FN>
Footnotes begin on page 41.
</FN>
</TABLE>
The following table sets forth information concerning the number of
shares of Common Stock held as of March 16, 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>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
OF COMMON STOCK<F1><F2>
------------------------------------------
SOLE SHARED
VOTING AND VOTING OR TOTAL PERCENT
DISPOSITIVE DISPOSITIVE BENEFICIAL OF
NAME OF BENEFICIAL OWNER POWER POWER<F4> OWNERSHIP CLASS<F3>
- ------------------------ ----------- --------- --------- -------------
<S> <C> <C> <C> <C>
Craig A. Anderson<F5> 56,044 --- 56,044 2.9%
Ross L. Benson<F6> 2,400 300 2,700 <F*>
Dale Q. Bye<F6> 2,664 --- 2,664 <F*>
Edward D. Christensen, Jr.<F6> 3,330 --- 3,330 <F*>
Jeffrey J. Goeman<F6> 2,400 1,642 4,042 <F*>
Thomas W. Hertz<F5> 57,256 --- 57,256 2.9%
James H. Jibben<F6> 2,912 --- 2,912 <F*>
Palmer O. Larson<F6> 2,586 --- 2,586 <F*>
Jeffrey G. Parker<F7> 120,326 --- 120,326 6.3%
John A. Roth<F6> 4,184 164 4,348 <F*>
John A. Schaefer<F6> 2,784 --- 2,784 <F*>
All directors and executive
officers as a group
(12 persons) 258,106 2,106 260,212 12.9%
_______________________________
<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 that, under applicable regulations, are
considered 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> In connection with the acquisitions by the Cooperative of
TCIC and Iway, the Cooperative entered into Standstill
Agreements (the "Standstill Agreements") with each of the
former shareholders of TCIC and Iway (collectively, the
"Sellers"). The Sellers received shares of Cooperative preferred
stock and warrants to purchase additional shares of Cooperative
preferred stock. 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 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.
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<PAGE>
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 described in the first
paragraph above apply for a period of five years beginning on
July 25, 1997. The provisions described in the second paragraph
above apply for three years after July 25, 1997. The Standstill
Agreements do not contain any specific termination provisions.
In connection with the DataNet acquisition, the Company entered
into Standstill Agreements with the former shareholders of DataNet.
The terms of these Standstill Agreements are substantially the same
as those of the Sellers' Standstill Agreements with the exception
that the various time periods, instead of running from July 25, 1997,
run from the date of the DataNet Standstill Agreements.
<F3> The percentages reflected in this column were computed with reference
to a total of 1,907,255 shares of the Company's Common Stock
outstanding as of March 16, 1998 plus, where applicable, options to
purchase shares of Common Stock currently outstanding that are
currently exercisable or that may be exercised within 60 days. The
number of shares outstanding does not include an aggregate of 593,262
shares of Common Stock that are issuable to former holders of
Cooperative common stock and capital credit accounts upon satisfaction
by them of the exchange and informational conditions to the issuance
of such shares.
<F4> 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
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<PAGE>
by spouses and children over whom the listed person may have influence
by reason of relationship.
<F5> The number of shares includes options to purchase shares of Common
Stock exercisable within 60 days held by the following persons:
NAME NUMBER OF SHARES
---- ----------------
Craig A. Anderson 52,832
Thomas W. Hertz 52,832
<F6> Includes (i) 2,000 shares awarded as outside director compensation
for serving as a director for five years or more, issued effective
January 1, 1998, and (ii) options to acquire 400 shares that are
immediately exercisable and were granted pursuant to the Company's
1997 Stock Incentive Plan.
<F7> Includes (i) shares acquired pursuant to the exercise of options
granted in connection with the acquisitions of TCIC and Iway, and
(ii) options to acquire 400 shares that are immediately exercisable
and were granted pursuant to the Company's 1997 Stock Incentive Plan.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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.
In connection with the Cooperative's acquisition of TCIC and Iway, the
Cooperative issued to 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 that were converted into warrants to
purchase an additional 77,912 (as adjusted for the stock split) shares of
Common Stock. These warrants were exercised in full in January 1998.
Jeffrey Parker, a director of the Company, was a shareholder of TCIC and
Iway 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 that
were converted into warrants to purchase an additional 24,668 (as adjusted
for the stock split) shares of Common Stock. Mr. Parker was also the
holder of the Company's promissory note in the principal amount of $45,000,
which note was paid in full in December 1997. In addition, Mr. Parker, as
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<PAGE>
a former shareholder of TCIC and Iway, guaranteed a $330,000 loan by
Norwest Bank to the Company that was made in connection with the
acquisitions of TCIC and Iway. This loan was paid in full in December 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following exhibits are filed as part of this 10-KSB:
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, as amended.
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, as amended. See Exhibit 3.2.
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
Registrant's Form S-4 Registration Statement that became
effective on June 13, 1997 (the "S-4 Registration Statement") and
here incorporated by reference.
4.5 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.
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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
Securities and Exchange Commission upon request.
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.
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<PAGE>
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 the 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.
10.11 Dakota Telecommunications Group, Inc. Employee Stock Ownership
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. Filed as Exhibit 10.12 to the Registrant's Form SB-2
Registration Statement (Registration Statement No. 333-43709)
filed February 4, 1998 (the "SB-2 Registration Statement").
Here incorporated by reference.
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<PAGE>
10.13 Merger Agreement dated October 10, 1997 by and among Futuristic,
Inc., Dakota Telecommunications Group, Inc., and DTG DataNet,
Inc. Filed as Exhibit 2 to the Registrant's Report on Form 8-K
dated December 9, 1997 and here incorporated by reference.
10.14 Merger Agreement dated December 5, 1997 by and among Dakota
Telecommunications Group, Inc., Dakota Wireless Systems, Inc.,
Vantek Communications, Inc. and Van/Alert, Inc. Filed as Exhibit
10.14 to the Registrant's Form SB-2 Registration Statement.
Here incorporated by reference.
13 Annual Report to Stockholders for the year ended December 31, 1997.
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
24 Limited Powers of Attorney.
27.1 Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for quarter ended September 30,
1997.
[FN]
<F*> Management contract or compensatory plan or arrangement.
</FN>
A copy of any exhibit listed above will be furnished to any stockholder of the
Company without charge upon written request. Requests should be directed to
Craig A. Anderson, Executive Vice President and Chief Financial Officer, Dakota
Telecommunications Group, Inc., P.O. Box 66, Irene, South Dakota 57037-0066.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
the fourth quarter of the period covered by this report.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(Registrant)
By /s/Thomas W. Hertz
Thomas W. Hertz
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
*/s/Ross L. Benson March 31, 1998
Ross L Benson, Director
*/s/Dale Q. Bye March 31, 1998
Dale Q. Bye, Director
*/s/Jeffrey J. Goeman March 31, 1998
Jeffrey J. Goeman, Director
*/s/James H. Jibben March 31, 1998
James H. Jibben, Chairman of the
Board and Director
*/s/Palmer O. Larson March 31, 1998
Palmer O. Larson, Director
*/s/Jeffrey G. Parker March 31, 1998
Jeffrey G. Parker, Director
*/s/John (Jack) A. Roth March 31, 1998
John (Jack) A. Roth, Director
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<PAGE>
*/s/John A. Schaefer March 31, 1998
John A. Schaefer, Director
/s/Thomas W. Hertz March 31, 1998
Thomas W. Hertz, Director, President
and Chief Executive Officer (Prinicipal
Executive Office)
/s/Craig A. Anderson March 31, 1998
Craig A. Anderson, Director, Executive
Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer)
<F*>By/s/Thomas W. Hertz
Thomas W. Hertz
Attorney-in-Fact
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<PAGE>
INDEX TO EXHIBITS
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, as amended.
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, as amended. See Exhibit 3.2.
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
Registrant's Form S-4 Registration Statement that became
effective on June 13, 1997 (the "S-4 Registration Statement") and
here incorporated by reference.
4.5 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.
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.
<PAGE>
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.
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.
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<PAGE>
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 the 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.
10.11 Dakota Telecommunications Group, Inc. Employee Stock Ownership
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. Filed as Exhibit 10.12 to the Registrant's Form SB-2
Registration Statement (Registration Statement No. 333-43709)
filed February 4, 1998 (the "SB-2 Registration Statement").
Here incorporated by reference.
10.13 Merger Agreement dated October 10, 1997 by and among Futuristic,
Inc., Dakota Telecommunications Group, Inc., and DTG DataNet,
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<PAGE>
Inc. Filed as Exhibit 2 to the Registrant's Report on Form 8-K
dated December 9, 1997 and here incorporated by reference.
10.14 Merger Agreement dated December 5, 1997 by and among Dakota
Telecommunications Group, Inc., Dakota Wireless Systems, Inc.,
Vantek Communications, Inc. and Van/Alert, Inc. Filed as Exhibit
10.14 to the Registrant's Form SB-2 Registration Statement.
Here incorporated by reference.
13 Annual Report to Stockholders for the year ended December 31,
1997.
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
24 Limited Powers of Attorney.
27.1 Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for quarter ended September 30,
1997.
_____________________
[FN]
<F*> Management contract or compensatory plan or arrangement.
</FN>
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<PAGE>
AS AMENDED THROUGH
March 16, 1998
EXHIBIT 3.2
BYLAWS
OF
DAKOTA TELECOMMUNICATIONS GROUP, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the
corporation shall be in the City of Wilmington, County of New Castle, State
of Delaware.
SECTION 2. OTHER OFFICES. The corporation may have offices
at such places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. TIMES AND PLACES OF MEETINGS. All meetings of the
stockholders shall be held, except as otherwise provided by statute, the
Certificate of Incorporation or these Bylaws, at such time and place as may
be fixed from time to time by the Board of Directors. Meetings of
stockholders may be held within or without the State of Delaware as shall
be stated in the notice of the meeting or in a duly executed waiver of
notice thereof.
SECTION 2. ANNUAL MEETINGS. Annual meetings of the
stockholders shall be held each year at such time and on such day as may be
designated by the Board of Directors. Annual meetings shall be held to
elect, by a plurality vote, successors to those members of the Board of
Directors whose terms expire at the meeting and to transact only such other
business as may be properly brought before the meeting in accordance with
these Bylaws.
SECTION 3. SPECIAL MEETINGS. Special meetings of the
stockholders may be called by an executive officer whenever directed by the
Board of Directors. Such request shall state the purpose of the proposed
meeting.
<PAGE>
SECTION 4. WRITTEN NOTICE. Written notice of all meetings of
stockholders, stating the place, date and hour, and in the case of a
special meeting, the purpose or purposes thereof, shall be given to each
stockholder entitled to vote thereat, not less than 10 nor more than 60
days before the date fixed for the meeting.
SECTION 5. WAIVER OF NOTICE. Whenever notice is required to
be given under the provisions of the statutes or of the Certificate of
Incorporation or by these Bylaws, a written waiver, signed by the person
entitled to notice, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a stockholder at a meeting
shall constitute a waiver of notice of such meeting, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or by these Bylaws.
SECTION 6. STOCKHOLDER LIST. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least 10
days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to
the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list
shall be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
SECTION 7. QUORUM. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise provided
by statute or by the Certificate of Incorporation. If, however, such
quorum shall not be present or represented at any meeting of the
stockholders, the officer of the corporation presiding as chairman of the
meeting shall have the power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall
be present or represented. At such adjourned meetings at which a quorum
shall be present or represented, any business may be transacted which might
have been transacted at the meeting as originally notified. Stock of the
corporation issuable to a former holder of common stock or capital credits of
Dakota Cooperative Telecommunications, Inc. shall not be considered to be
issued and outstanding stock for purposes of calculating a quorum unless and
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<PAGE>
until such former holder has properly executed and delivered to the corporation
transmittal materials in a form and condition reasonably acceptable to the
corporation. (As amended 3/16/98.)
SECTION 8. VOTE REQUIRED. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by
express provision of the statutes or of the Certificate of Incorporation a
different vote is required, in which case such express provision shall
govern and control the decision of such question.
SECTION 9. VOTING RIGHTS. Except as otherwise provided by
the Certificate of Incorporation or the resolution or resolutions of the
Board of Directors creating any class of stock, each holder of issued and
outstanding shares of stock shall, at every meeting of stockholders, be entitled
to one vote in person or by proxy for each share of the issued and outstanding
stock having voting power held by such stockholder. Stock of the corporation
issuable to the former holder of common stock or capital credits of Dakota
Cooperative Telecommunications, Inc. shall not be considered to be issued and
outstanding, and such a former holder shall not have the right to vote stock so
issuable as a stockholder, unless and until such former holder has properly
executed and delivered to the corporation transmittal materials in a form and
condition reasonably acceptable to the corporation. (As amended 3/16/98.)
SECTION 10. ACTION WITHOUT A MEETING. Unless otherwise
provided in the Certificate of Incorporation, no action required or
permitted to be taken at any annual or special meeting of stockholders of
the corporation may be taken by written consents without a meeting.
SECTION 11. CONDUCT OF MEETINGS. Meetings of stockholders
generally shall follow accepted rules of parliamentary procedure, subject
to the following:
(a) The chairman of the meeting shall have absolute
authority over matters of procedure and there shall be no appeal
from the ruling of the chairman. If, in his or her absolute
discretion, the chairman deems it advisable to dispense with the
rules of parliamentary procedure as to any one meeting of
stockholders or part thereof, the chairman shall so state and
shall clearly state the rules under which the meeting or
appropriate part thereof shall be conducted.
(b) If disorder should arise which, in the absolute
discretion of the chairman, prevents the continuation of the
legitimate business of the meeting, the chairman may quit the
chair and announce the adjournment of the meeting; and upon his
or her so doing, the meeting is immediately adjourned without the
necessity of any vote or further action of the stockholders.
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<PAGE>
(c) The chairman may ask or require anyone not a bona fide
stockholder of record on the record date, or a validly appointed
proxy of such a stockholder, to leave the meeting.
(d) The chairman may introduce nominations, resolutions or
motions submitted by the Board of Directors for consideration by
the stockholders without a motion or second. Except as the
chairman shall direct, a resolution or motion not submitted by
the Board of Directors shall be considered for vote only if
proposed by a stockholder of record on the record date or a
validly appointed proxy of such a stockholder and seconded by
such a stockholder or proxy other than the individual who
proposed the resolution or motion.
SECTION 12. INSPECTORS OF ELECTION. The Board of Directors
or, if they shall not have so acted, the Chief Executive Officer shall
appoint, prior to any meeting of stockholders, one or more inspectors (who
may be directors and/or employees of the corporation) to act at the meeting
and make a written report thereof. The corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to
the best of the inspector's ability.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM OF DIRECTORS. The number of
directors which shall constitute the whole Board shall be not less than
three and shall be determined from time to time by resolution of the Board
of Directors as provided in the Certificate of Incorporation. The
directors, other than those who may be elected by the holders of any class
or series of stock having a preference over Common Stock as to dividends or
upon liquidation, shall be divided into three classes, as nearly equal in
number as possible, with the term of office of one class expiring each
year. At each annual meeting of the stockholders, the successors of the
class of directors whose term expires at that meeting shall be elected to
hold office for a term expiring at the annual meeting of stockholders held
in the third year following the year of their election. Directors need not
be stockholders.
SECTION 2. POWERS. The business of the corporation shall be
managed by its Board of Directors, which may exercise all such powers of
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<PAGE>
the corporation and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation or by these Bylaws directed
or required to be exercised or done by the stockholders.
SECTION 3. VACANCIES. Vacancies and newly created
directorships resulting from any increase in the authorized number of
directors may be filled as provided in the Certificate of Incorporation.
SECTION 4. RESIGNATION AND REMOVAL. Any director may resign
at any time as provided in the Certificate of Incorporation. Any or all of
the directors may be removed, but only for cause, as provided in the
Certificate of Incorporation.
SECTION 5. COMPENSATION OF DIRECTORS. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, the Board
of Directors shall have the authority to fix the compensation of directors.
The directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for
attendance at each meeting of the Board or a stated salary as director. No
such payment shall preclude any director from serving the corporation in
any other capacity and receiving compensation therefor. Members of special
or standing committees may be allowed like compensation for attending
committee meetings.
SECTION 6. PLACE OF MEETINGS. The Board of Directors of the
corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
SECTION 7. FIRST MEETING OF NEWLY ELECTED BOARD. The first
meeting of each newly elected Board of Directors shall be held following
the annual meeting of stockholders and no notice of such meeting shall be
necessary to the newly elected directors legally to constitute the meeting,
provided a quorum shall be present. In the event such meeting is not held
immediately following the annual meeting of stockholders, the meeting may
be held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the Board of Directors or as
shall be specified in a written waiver signed by all of the directors.
SECTION 8. REGULAR MEETINGS. Regular meetings of the Board
of Directors may be held without notice at such time and at such place as
shall from time to time be determined by the Board.
SECTION 9. SPECIAL MEETINGS. Special meetings of the Board
of Directors may be called by the Chairman, Chief Executive Officer or
Secretary or by any two directors on two days' notice to each director,
either personally, by mail, by telegram or by facsimile transmission.
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<PAGE>
SECTION 10. PURPOSE NEED NOT BE STATED. Neither the business
to be transacted at nor the purpose of any regular or special meeting of
the Board of Directors need be specified in the notice of such meeting.
SECTION 11. QUORUM. At all meetings of the Board of Directors
a majority of the directors shall constitute a quorum for the transaction
of business and the acts of a majority of the directors present at any
meeting at which there is a quorum shall be acts of the Board of Directors
except as may be otherwise specifically provided by statute or by the
Certificate of Incorporation. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 12. ACTION WITHOUT A MEETING. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors
or of any committee thereof may be taken without a meeting, if a written
consent thereto is signed by all members of the Board or of such committee,
as the case may be, and such written consent is filed with the minutes of
the proceedings of the Board or committee.
SECTION 13. MEETING BY TELEPHONE OR SIMILAR EQUIPMENT. The
Board of Directors or any committee designated by the Board of Directors
may participate in a meeting of such Board or committee by means of
conference telephone or similar communications equipment by means through
which all persons participating in the meeting can hear each other and
participation in a meeting pursuant to this section shall constitute
presence in person at such meeting.
SECTION 14. WRITTEN NOTICE. Notices to directors shall be in
writing and delivered personally or mailed to the directors at their
addresses appearing on the books of the corporation. Notice by mail shall
be deemed to be given at the time when the same shall be mailed. Notice to
directors may also be given by telegram or by facsimile transmission, which
shall be deemed given at the time when the same shall be sent.
SECTION 15. WAIVER OF NOTICE. Whenever notice is required to
be given under the provisions of the statutes or of the Certificate of
Incorporation or by these Bylaws, a written waiver, signed by the person
entitled to notice, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except when a director
attends a meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the directors or members
of a committee of directors need be specified in any written waiver of
notice unless so required by the Certificate of Incorporation or by these
Bylaws.
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<PAGE>
SECTION 16. AGE LIMITATION. No person shall be appointed or
nominated for election or reelection to the Board of Directors after that
person has attained the age of 70. Any person serving as a director of the
corporation at the time he or she attains the age of 70 shall continue to
serve out his or her then remaining term. Notwithstanding the foregoing,
this Section 16 shall not apply to persons serving as directors of the
corporation on the date this Section 16 becomes effective. (As amended
1/27/98.)
SECTION 17. LIMITATION ON INSIDE/EMPLOYEE DIRECTORS. The
maximum number of directors of the corporation who are also active
employees of the corporation or any subsidiary or affiliate of the
corporation shall be two (2). (As amended 1/27/98.)
ARTICLE IV
COMMITTEES OF DIRECTORS
SECTION 1. EXECUTIVE COMMITTEE. The Board of Directors, by
resolution adopted by a majority of the directors present at any meeting at
which there is a quorum, may appoint an Executive Committee whose
membership shall consist of two or more members of the Board of Directors
as it may deem advisable from time to time to serve at the pleasure of the
Board. The Board of Directors may also appoint directors to serve as
alternates for members of the committee in the absence or disability of
regular members. The Board of Directors may fill any vacancies as they
occur. The Executive Committee shall have and may exercise the powers of
the Board of Directors in the management of the business affairs and
property of the corporation during the intervals between meetings of the
Board of Directors, subject to law and to such limitations and controls as
the Board of Directors may impose from time to time.
SECTION 2. AUDIT COMMITTEE. The Audit Committee, if there be
one, shall cause a suitable examination of the financial records and
operations of the corporation and its subsidiaries to be made by the
internal auditor of the corporation. The Audit Committee shall also
recommend to the Board of Directors the employment of independent certified
public accountants to examine the financial statements of the corporation
and its subsidiaries, review examination reports of the corporation and its
subsidiaries prepared by regulatory authorities and report to the Board of
Directors at least once each calendar year.
SECTION 3. COMPENSATION COMMITTEE. The Compensation Committee,
if there be one, shall review the personnel policies, plans and programs of
the corporation, including individual salaries of executive officers, and
submit recommendations to the Board of Directors. The Compensation
Committee shall also review the administration and results of operation of
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the corporation's pension plans, confer with and receive reports from the
actuaries and investment managers of the pension plans, make
recommendations related to such plans and review all material pension plan
changes. The Compensation Committee shall also recommend to the Board of
Directors the retainer and attendance fee for nonemployee directors.
SECTION 4. NOMINATING COMMITTEE. The Nominating Committee, if
there be one, shall develop and recommend to the Board of Directors
criteria for the selection of candidates for directors, seek out and
receive suggestions concerning possible candidates, review and evaluate the
qualifications of possible candidates and recommend to the Board candidates
for vacancies occurring from time to time and for the slate of directors to
be proposed on behalf of the Board of Directors at the annual meeting of
stockholders. The Nominating Committee will consider nominees recommended
by the stockholders as properly submitted to the Secretary of the
corporation.
SECTION 5. OTHER COMMITTEES. The Board of Directors may
designate such other committees as it may deem appropriate and such
committees shall exercise the authority delegated to them.
SECTION 6. COMMITTEE MEETINGS. Each committee provided for
above shall meet as often as its business may require and may fix a day and
time each week or at other intervals for regular meetings, notice of which
shall not be required. Whenever the day fixed for a meeting shall fall on
a holiday, the meeting shall be held on the business day following or on
such other day as the committee may determine. Special meetings of the
committees may be called by the chairman of the committee or any two
members other than the chairman and notice thereof may be given to the
members by telephone, telegram, letter or facsimile transmission. A
majority of its members shall constitute a quorum for the transaction of
the business of any committee. A record of the proceedings of each
committee shall be kept and presented to the Board of Directors.
SECTION 7. SUBSTITUTES. In the absence or disqualification
of a member of a committee, the members thereof present at a meeting and
not disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another member of the Board to act at a meeting in
place of such absent or disqualified member.
ARTICLE V
OFFICERS
SECTION 1.
(a) CENTRAL STAFF. The officers of the corporation shall
be chosen by the Board of Directors at its first meeting after
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the annual meeting of stockholders, or as soon as practicable
after the annual election of directors in each year, and shall
include a Chairman of the Board, a President, a Secretary and a
Treasurer. The Board of Directors may also appoint one or more
Vice Presidents, one or more Assistant Secretaries and Assistant
Treasurers, and such other officers as the Board may deem
necessary. The Chairman of the Board and President shall be
chosen from among the directors, but no other officer need be a
director. Either the Chairman of the Board or the President
shall also be designated as the Chief Executive Officer. Any two
of the above offices, except those of the President and Vice
President, may be held by the same person.
(b) DIVISIONAL OFFICERS. The Board of Directors or the
Chief Executive Officer may, as they shall deem necessary,
designate certain individuals as divisional officers. Any titles
so given to divisional officers may be withdrawn at any time with
or without cause by the Board of Directors or the Chief Executive
Officer.
SECTION 2. TERM OF OFFICE. Each officer shall hold office
at the pleasure of the Board. The Board of Directors may remove any
officer for cause or without cause. Any officer may resign his or her
office at any time, such resignation to take effect upon receipt of written
notice thereof by the corporation unless otherwise specified in the
resignation. If the office of any officer becomes vacant for any reason,
the vacancy may be filled by the Board.
SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board
shall, when present, preside at all meetings of the stockholders and at all
meetings of the Board of Directors, and shall have such other duties and
powers as may be imposed or given by the Board of Directors. In the case
of absence or inability to act of the President or Chief Executive Officer,
the Chairman of the Board shall exercise all of the duties and
responsibilities of such officer until the Board of Directors shall
otherwise direct.
SECTION 4. PRESIDENT. The President shall, subject to the
direction of the Board of Directors, see that all orders and resolutions of
the Board of Directors are carried into effect and shall perform all other
duties necessary or appropriate to the President's office, subject,
however, to his right (unless otherwise limited by the Board of Directors)
and the right of the directors to delegate any specific powers to any other
officer or officers of the corporation. In the case of absence or
inability to act of the Chairman of the Board or the Chief Executive
Officer, the President shall exercise all of the duties and
responsibilities of such officer until the Board of Directors shall
otherwise direct.
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SECTION 5. CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer, in addition to his duties as Chairman of the Board or President,
as the case may be, shall have final authority, subject to the control of
the Board of Directors, over the general policy and business of the
corporation and shall have the general control and management of the
business and affairs of the corporation. The Chief Executive Officer shall
have the power, subject to the control of the Board of Directors, to
appoint, suspend or discharge and to prescribe the duties and to fix the
compensation of such agents and employees of the corporation, other than
the officers appointed by the Board, as he or she may deem necessary.
SECTION 6. CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall, subject only to the control of the Board of Directors, have
general charge, control and supervision over the financial policy and
administration of the corporation and shall have such other duties and
powers as may be imposed or given by the Board of Directors. The Chief
Financial Officer shall report only and directly to the Board of Directors.
SECTION 7. CHIEF OPERATING OFFICER. There may be elected a
Chief Operating Officer who shall, if elected, have general charge, control
and supervision over the administration and operations of the corporation
and shall have such other duties and powers as may be imposed or given by
the Board of Directors. If no Chief Operating Officer is elected, the
duties and powers of the Chief Operating Officer shall be performed by the
Chief Executive Officer.
SECTION 8. VICE PRESIDENTS. The Vice President or Vice
Presidents shall perform such duties and have such powers as the Chief
Executive Officer or the Board of Directors may from time to time
prescribe. The Board of Directors may at its discretion designate one or
more of the Vice Presidents to be an Executive Vice President or Senior
Vice President. Any Vice President so designated shall have such duties
and responsibilities as the Board shall prescribe.
SECTION 9. SECRETARY. The Secretary shall attend all
meetings of the stockholders, and of the Board of Directors and the
Executive Committee, and shall preserve in the books of the corporation
true minutes of the proceedings of all such meetings. The Secretary shall
safely keep in his or her custody the seal of the corporation, if any, and
shall have authority to affix the same to all instruments where its use is
required or appropriate. The Secretary shall give all notices required or
appropriate pursuant to statute, the Certificate of Incorporation, Bylaws
or resolution. The Secretary shall perform such other duties as may be
delegated by the Board of Directors or by the Executive Committee.
SECTION 10. TREASURER. The Treasurer, who shall also be the
Chief Financial Officer, shall have custody of all corporate funds and
securities and shall keep in books belonging to the corporation full and
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accurate accounts of all receipts and disbursements. The Treasurer shall
deposit all moneys, securities and other valuable effects in the name of
the corporation in depositories as may be designated for that purpose by
the Board of Directors. The Treasurer shall disburse the funds of the
corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Chief Executive
Officer and directors at the regular meetings of the Board, and whenever
requested by them, an account of all his or her transactions as Treasurer
and of the financial condition of the corporation. If required by the
Board of Directors, the Treasurer shall deliver to the Chief Executive
Officer of the corporation and keep in force a bond in form, amount and
with a surety or sureties satisfactory to the Board of Directors,
conditioned for faithful performance of the duties of his or her office,
and for restoration to the corporation in case of his or her death,
resignation, retirement or removal from office, of all books, papers,
vouchers, money and property of whatever kind in his or her possession or
under his or her control belonging to the corporation.
SECTION 11. ASSISTANT SECRETARY AND ASSISTANT TREASURER.
There may be elected an Assistant Secretary and Assistant Treasurer who
shall, in the absence, disability or nonfeasance of the Secretary or
Treasurer, perform the duties and exercise the powers of such persons,
respectively.
SECTION 12. OTHER OFFICERS. All other officers, as may from
time to time be appointed by the Board of Directors, shall perform such
duties and exercise such authority as the Board of Directors shall
prescribe. All divisional officers, as may from time to time be appointed
by the Board of Directors or the Chief Executive Officer, shall perform
such duties and exercise such authority as the Board of Directors or the
Chief Executive Officer shall prescribe.
ARTICLE VI
INDEMNIFICATION
SECTION 1. INDEMNIFICATION OTHER THAN IN ACTIONS BY OR IN THE
RIGHT OF THE CORPORATION. Any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, or executive
officer of the corporation or, is or was a director or executive officer of
the corporation and is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
limited liability company, joint venture, trust or other enterprise,
whether for profit or not, shall be indemnified by the corporation against
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expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection
with such action, suit or proceeding if he or she acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe such conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, that the person had
reasonable cause to believe that such conduct was unlawful. Persons who
are not directors or executive officers of the corporation may be similarly
indemnified in respect of such service to the extent authorized at any time
by the Board of Directors, except as otherwise provided by law.
SECTION 2. INDEMNIFICATION IN ACTIONS BY OR IN THE RIGHT OF
THE CORPORATION. Any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director or executive
officer of the corporation, or is or was a director or executive officer of
the corporation and is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
limited liability company, joint venture, trust or other enterprise,
whether for profit or not, shall be indemnified by the corporation against
expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or
suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation.
Indemnification shall not be made for a claim, issue or matter in which the
person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery of the State of Delaware or
the court in which such action or suit was brought shall determine upon
application, that despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery of the
State of Delaware or such other court shall deem proper. Persons who are
not directors or executive officers of a corporation may be similarly
identified in respect of such service to the extent authorized at any time
by the Board of Directors, except as otherwise provided by law.
SECTION 3. EXPENSES. To the extent that a director, officer
or other person whose indemnification is authorized by the Board of
Directors, has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 1 or 2 of this Article,
or in defense of any claim, issue or matter therein, he or she shall be
indemnified against all expenses (including attorneys fees) actually and
reasonably incurred by him or her in connection therewith.
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SECTION 4. DETERMINATION OF RIGHT OF INDEMNIFICATION. Any
indemnification under Section 1 or 2 of this Article (unless ordered by a
court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification is proper in the
circumstances because the person has met the applicable standard of conduct
set forth in Sections 1 and 2. Such determination shall be made (a) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (b) if there are no such
directors, or if such directors so direct, by independent legal counsel
(who may be the regular counsel of the corporation) in a written opinion,
or (c) by the stockholders.
SECTION 5. ADVANCEMENT OF EXPENSES. Expenses incurred in
defending a civil or criminal action, suit or proceeding described in
Sections 1 or 2 of this Article shall be paid by the corporation in advance
of the final disposition of such action, suit or proceeding as authorized
by the Board of Directors in the manner provided in Section 4 upon receipt
of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount unless it shall ultimately be determined that he
or she is not entitled to be indemnified by the corporation as authorized
in this section.
SECTION 6. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The
indemnification and advancement of expenses provided by this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under the
Certificate of Incorporation, any Bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise, both as to action in the person's
official capacity and as to action in another capacity while holding such
office and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her
heirs, executors and administrators.
SECTION 7. INSURANCE. The corporation may purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, limited liability company, joint venture,
trust or other enterprise against any liability asserted against him or her
and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of this
Article.
SECTION 8. MERGERS. For the purposes of this Article,
references to the "corporation" include all constituent corporations
absorbed in a consolidation or merger, as well as the resulting or
surviving corporation, so that any person who is or was a director,
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officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, limited
liability company, joint venture, trust or other enterprise, whether for
profit or not, shall stand in the same position under the provisions of
this Article with respect to the resulting or surviving corporation if he
or she had served the resulting or surviving corporation in the same
capacity.
ARTICLE VII
SUBSIDIARIES
SECTION 1. SUBSIDIARIES. The Board of Directors, the Chief
Executive Officer or any executive officer designated by the Board of
Directors may vote the shares of stock owned by the corporation in any
subsidiary, whether wholly or partly owned by the corporation, in such
manner as they may deem in the best interests of the corporation,
including, without limitation, for the election of directors of any
subsidiary corporation, for any amendments to the charter or bylaws of any
such subsidiary corporation or for the liquidation, merger or sale of
assets of any such subsidiary corporation. The Board of Directors, the
Chief Executive Officer or any executive officer designated by the Board of
Directors may cause to be elected to the Board of Directors of any such
subsidiary corporation such persons as they shall designate, any of whom
may, but need not be, directors, executive officers or other employees or
agents of the corporation. The Board of Directors, the Chief Executive
Officer or any executive officer designated by the Board of Directors may
instruct the directors of any such subsidiary corporation as to the manner
in which they are to vote upon any issue properly coming before them as the
directors of such subsidiary corporation and such directors shall have no
liability to the corporation as the result of any action taken in
accordance with such instructions.
SECTION 2. SUBSIDIARY OFFICERS NOT EXECUTIVE OFFICERS. The
officers of any subsidiary corporation shall not, by virtue of holding such
title and position, be deemed to be officers of the corporation, nor shall
any such officer of a subsidiary corporation, unless such officer shall
also be a director or officer of the corporation, be entitled to have
access to any files, records or other information relating or pertaining to
the corporation, its business and finances or to attend or receive the
minutes of any meetings of the Board of Directors or any committee of the
corporation, except as and to the extent expressly authorized and permitted
by the Board of Directors or the Chief Executive Officer.
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ARTICLE VIII
CERTIFICATES OF STOCK
SECTION 1. FORM. Every holder of stock in the corporation
shall be entitled to have a certificate, signed by, or in the name of the
corporation by, the Chief Executive Officer, President or a Vice President
and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the corporation, certifying the number of shares
owned by such stockholder in the corporation.
SECTION 2. FACSIMILE SIGNATURE. Where a certificate is
signed (a) by a transfer agent or an assistant transfer agent, or (b) by a
transfer clerk acting on behalf of the corporation and a registrar, the
signature of any such Chief Executive Officer, President, Vice President,
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be a
facsimile. In case any officer, transfer agent or registrar who has
signed, or whose facsimile signature has been placed upon a certificate,
shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the
same effect as if the person were such officer, transfer agent or registrar
at the date of issue.
SECTION 3. LOST CERTIFICATES. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged
to have been lost or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost or
destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or the person's legal
representative, to give the corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost or destroyed.
SECTION 4. TRANSFERS OF STOCK. Upon surrender to the
corporation or the transfer agent of the corporation of a certificate for
shares duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
SECTION 5. FIXING OF RECORD DATE BY BOARD. For the purpose
of determining the stockholders entitled to notice of or to vote at any
meeting of stockholders, or any adjournment thereof, or to express consent
to or dissent from any corporate action in writing without a meeting, or
for the purpose of determining stockholders entitled to receive payments of
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any dividend or the distribution or allotment of any rights or evidences of
interests arising out of any change, conversion or exchange of capital
stock, or for the purpose of any other action, the Board of Directors may
fix, in advance, a date as the record date for any such determination of
stockholders. Such date shall not be more than 60 days nor less than 10
days before the date of any such meeting, nor more than 60 days prior to
effectuation of any other action proposed to be taken. Only stockholders
of record on a record date so fixed shall be entitled to notice of and to
vote at such meeting or to receive payment of any dividend or the
distribution or allotment of any rights or evidences of interests arising
out of any change, conversion or exchange of capital stock.
SECTION 6. ADJOURNMENTS. When a determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders has been made as provided in this Article, the determination
applies to any adjournment of the meeting, unless the Board fixes a new
record date for the adjourned meeting.
SECTION 7. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive rights of a person registered on its
books as the owner of shares to receive dividends and to vote as such owner
and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether
or not it shall have express or other notice thereof, except as otherwise
provided by the laws of Delaware.
ARTICLE IX
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors at any
regular or special meeting pursuant to law. Dividends may be paid in cash,
in property or in shares of capital stock, subject to the provisions of the
Certificate of Incorporation.
SECTION 2. RESERVES. Before payment of any dividends, there
may be set aside out of any funds of the corporation available for
dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve or reserves to meet
contingencies, for equalizing dividends, for repairing or maintaining any
property of the corporation or for such other purpose as the directors
shall think conducive to the interests of the corporation and the directors
may modify or abolish any such reserve in the manner in which it was
created.
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SECTION 3. CHECKS. All checks or demands for money and notes
of the corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
SECTION 4. FISCAL YEAR. The fiscal year of the corporation
shall be fixed by resolution of the Board of Directors.
SECTION 5. SEAL. The corporate seal, if any, shall have
inscribed thereon the name of the corporation, and the words "Corporate
Seal, Delaware." The seal may be used by causing it or a facsimile thereof
to be impressed, affixed, reproduced or otherwise.
ARTICLE X
AMENDMENTS
Subject to any provisions of the Certificate of Incorporation,
these Bylaws may be amended, altered, changed or repealed at any regular or
special meeting of the Board of Directors. Subject to any revisions of the
Certificate of Incorporation, these Bylaws may also be amended, altered,
changed or repealed at any regular or special meeting of stockholders
provided that notice that amendment of the Bylaws is a purpose of the
meeting, and the proposed amendment has been provided to the stockholders
as required under these Bylaws and applicable law.
ARTICLE XI
ADVISORY AND EMERITUS DIRECTORS
SECTION 1. INVITATIONS TO NON-DIRECTORS TO ATTEND MEETINGS OF
BOARD OF DIRECTORS. The President or Chairman of the Board may from time
to time invite one or more non-directors to attend meetings of the Board of
Directors for the purpose of (i) consulting with the officers and directors
of the corporation; and (ii) providing guidance (but not direction)
concerning the management and operation of the business of the corporation.
SECTION 2. DESIGNATION OF PERSONS AS ADVISORY OR EMERITUS
DIRECTORS. To the extent that the Board of Directors desires one or more
persons to regularly attend meetings of the Board of Directors, the Board
of Directors may confer upon any such person the honorary title of
"Advisory Director" or, if such person previously served as a director of
the corporation, the title of "Director Emeritus." Any person designated
as an Advisory Director or Director Emeritus may be invited to attend any
meeting of the Board of Directors of the corporation or any committee
meeting of the Board of Directors by the President or the Chairman of the
Board without further action by the Board of Directors.
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SECTION 3. ROLE OF ADVISORY AND EMERITUS DIRECTORS. The
business of the corporation shall remain solely under the direction of the
Board of Directors and any such person designated as Advisory Director or
Director Emeritus shall not by virtue of such designation or by virtue of
their willingness to provide consultation to the corporation be deemed to
have undertaken any duty to the corporation or its stockbrokers.
SECTION 4. INDEMNIFICATION. An Advisory Director or Director
Emeritus shall enjoy limitations of liability to the maximum extent
permissible under law and shall also be entitled to the protection of
Article XIV of the corporation's Certificate of Incorporation, Article VI
of the Bylaws of the corporation, and any other indemnification or
limitation of liability provisions that may exist from time to time with
respect to members of the Board of Directors, either in the Certificate of
Incorporation, Bylaws, minutes, agreements, or other documents of the
corporation or applicable law.
SECTION 5. COMPENSATION. An Advisory Director or Director
Emeritus shall be compensated in such manner and in such amounts as the
Board of Directors may from time to time determine.
SECTION 6. TERMINATION OF STATUS AS ADVISORY OR EMERITUS
DIRECTOR. Except as otherwise provided by agreement or resolution of the
Board of Directors, the Board of Directors may terminate the status as an
Advisory Director or Director Emeritus of any person so designated at any
time without any liability or obligation to such person whatsoever;
provided, however, that the obligation of the corporation to indemnify the
Advisory Director or Director Emeritus as provided in Section 4 above and
the obligation of the corporation to pay the Advisory Director or Director
Emeritus the full amount of compensation earned through the date of
termination as provided in Section 5 above shall continue notwithstanding
any such termination of status.
(Article XI as amended 1/27/98)
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[DTG LOGO]
DAKOTA TELECOMMUNICATIONS GROUP, INC.
1997
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC.
1997 Annual Report to Stockholders
CONTENTS PAGE
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To Our Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Looking Back and Looking Ahead . . . . . . . . . . . . . . . . . . . . S-2
Dakota Telecommunications Group, Inc. . . . . . . . . . . . . . . . . S-6
Management's Discussion and Analysis or Plan of Operation . . . . . . S-7
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . S-17
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . S-18
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . S-22
Stock Information . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Board of Directors and Senior Management . . . . . . . . . . . . . . . S-37
i
<PAGE>
TO OUR STOCKHOLDERS
This 1997 Annual Report to Stockholders contains our audited financial
statements, detailed financial review and all of the information that
regulations of the Securities and Exchange Commission (the "SEC") require
to be presented in annual reports to stockholders. For legal purposes,
this is the Dakota Telecommunications Group, Inc. 1997 annual report to
stockholders. Although attached to our proxy statement, this report is not
part of our proxy statement, is not considered to be soliciting material
and is not considered to be filed with the SEC except to the extent that it
is expressly incorporated by reference in a document filed with the SEC.
Stockholders who would like to receive even more detailed information than
that contained in this 1997 Annual Report to Stockholders are invited to
request our Annual Report on Form 10-KSB.
OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997,
INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, WILL
BE PROVIDED TO ANY STOCKHOLDER, WITHOUT CHARGE, UPON WRITTEN REQUEST TO MR.
CRAIG ANDERSON, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
DAKOTA TELECOMMUNICATIONS GROUP, INC., P.O. BOX 66, IRENE, SOUTH DAKOTA
57037-0066.
S-1
<PAGE>
LOOKING BACK AND LOOKING AHEAD
To Our Shareholders
===========================================================================
As our Company faces a new year, we are getting ready for all the
challenges that lie ahead. We are able to look forward with confidence
because of what we were able to accomplish in 1997. When we look back upon
1997, we are justifiably proud of the incredible array of changes that we
have lived through and accomplishments we have made. The individual
accomplishments are substantial, and taken together evidence the
construction of a broad, solid base for future growth and expansion. A
brief review:
OPERATIONS
WE EMBARKED UPON A COMPREHENSIVE OVERHAUL OF OUR ENTIRE NETWORK
INFRASTRUCTURE AND OUR OPERATIONAL AND ADMINISTRATIVE FACILITIES.
1. We designed and built a powerful new multi-million-dollar
switching center in the geographic center of our existing and
planned service territories. Located in Viborg, South Dakota,
this facility provides state-of-the-art telecommunications
services for voice, video and data, with sufficient capacity to
support over 100,000 customers.
2. We completed the most advanced fiber optic SONET network in the
State of South Dakota, with interlocking OC-48 redundant and
diversely routed rings supporting 2.4 Gigabits of capacity, with
substantial growth capacity in reserve.
3. We became the first facilities-based, competitive local exchange
company ("CLEC") in South Dakota, although considering the array
and diversity of the services offered, we prefer to call
ourselves an "Integrated Services Company" rather than just a
CLEC.
4. We designed, constructed and began operating a hybrid fiber optic
network that is the first of its kind in South Dakota and one of
the first of its kind in the United States. This network
provides a host of services, including video, voice and high
speed data over an integrated system with fiber optic technology
pushed far beyond mere transport, and deep into the network.
This "one wire" solution is the wave of the future in integrated
broadband services.
<PAGE>
5. We completed our Sundowner site on 57th Street in Sioux Falls,
South Dakota, establishing a fiber optic outpost on the edge of
the City of Sioux Falls, and providing an additional platform and
location for new and enhanced services within and surrounding the
Sioux Falls metro area.
6. We expanded our internal construction capabilities by adding
underground directional boring equipment and heavy construction
equipment, including a state-of-the art plow train for the
installation of underground cabling. We also added equipment and
experienced personnel to install, maintain and troubleshoot fiber
optic cabling and equipment. This improved both our capacity and
our quality of work, and made it possible for us to reach new
customers more quickly, and expand our network more economically.
7. We developed our own internal computer aided design mapping
department, with software, systems and dedicated personnel to
increase the efficiency and reliability of our network support
and maintenance, as well as dramatically decrease our turnaround
time on new projects.
S-2
<PAGE>
8. We totally remodeled our offices in Irene and Sioux Falls, and
added office space in Viborg, improving the ergonomics and the
professional atmosphere for our employees, as well as adding
needed space to accommodate our planned growth.
9. We laid the groundwork for comprehensive new personnel, salary
and benefits systems that will enable us to continue to recruit
and retain the best talent available.
10. Overall, we invested over $14 million to expand and modernize our
network. Our net investment in capital improvements within South
Dakota for 1997 tops that of most larger telecommunications
companies in the state.
MARKETING
WE DEVELOPED OUR OWN INTERNAL MARKETING CAPABILITIES AND PUT THEM TO
USE IMMEDIATELY.
1. We invented a Marketing Matrix analysis model that allows us to
tailor our product offerings to specific geographic, demographic
and economic markets. We also built our own internal market
research and analysis capabilities, incorporating data from
national, regional, state and local sources.
2. We designed and produced a comprehensive set of new Company
letterhead, brochures and product literature. We also developed
the ability to design and implement advertising and promotional
campaigns.
3. We built an internal person-to-person sales force and tested the
long distance small business market.
4. We started building detailed data bases to support our marketing
efforts, including files for Company history, accomplishments,
projects, services, capabilities, biographies and addresses.
ACQUISITIONS
WE CONTINUED THIS COMPANY'S LONG TRADITION OF EXPANSION THROUGH THE
ACQUISITION OF SUCCESSFUL HIGH-PERFORMANCE COMPANIES.
1. We merged with Iway Partners, Inc. of Sioux Falls. Iway is
now a wholly-owned subsidiary of the Company known as DTG
Internet Services, Inc. We are now about three times larger
than the second biggest Internet services provider in South
Dakota, and our technical support is second to none.
2. We merged with TCIC Communications, Inc., the well-known
regional long distance and operator services company in Sioux
<PAGE>
Falls. TCIC is now a wholly-owned subsidiary of the Company
known as DTG Communications, Inc. We now provide long distance
services in a six-state area, and we furnish contracted operator
services to 25 local exchange companies, a regional pay phone
provider, the State of South Dakota and thousands of hotels,
motels and other businesses.
3. We merged with Futuristic, Inc. dba DataNet of Sioux Falls.
DataNet is now a wholly-owned subsidiary of the Company known
as DTG DataNet, Inc. We are the largest local area network/
wide area network integrator in South Dakota and the leading
computer network design firm in this region. Started in
1981, DataNet now has 40 employees and 2,000 active customer
accounts.
S-3
<PAGE>
4. We signed an agreement to merge with Vantek Communications, Inc.
and Van/Alert, Inc. ("Vantek") of Sioux Falls. Started in 1978,
Vantek has grown into one of the area's leading mobile radio
operator and the second largest paging business in South Dakota.
Vantek's expertise will allow us to accelerate our Personal
Communications Service build-out strategy. The completion of
this merger is pending the approval of the wireless licenses by
the Federal Communications Commission (expected by June 1998).
FINANCIAL STRUCTURE
WE REVOLUTIONIZED OUR ENTIRE FINANCIAL STRUCTURE IN ORDER TO MEET NEW
THREATS, CHALLENGES AND OPPORTUNITIES PRESENTED BY PROFOUND CHANGES IN
REGULATION, TECHNOLOGY AND CONSUMER EXPECTATIONS.
1. We believe we were the first telephone cooperative in America to
convert to a public business corporation. Dakota's members and
shareholders (who are our customers) approved the conversion by
an overwhelming nine-to-one margin, giving us widespread support
for our business plans. The conversion gives us potential access
to the public equity markets.
2. We refinanced our entire outstanding Rural Utility Service debt,
freeing us to develop competitive facilities. We also raised $14
million in additional long-term financing for new business
developments, and have an established line of credit with the
Rural Telephone Finance Corporation.
3. We reduced our dependence on (soon-to-be-seriously-shrinking)
subsidized access revenues from 45% of gross revenues in 1996 to
an estimated 16% in 1998.
4. We financed a $1 million Employee Stock Ownership Plan
transaction. We also established an incentive stock option plan
and a bonus pay plan for every single one of our employees and
directors. (We rejected the idea, all-too-common in American
business today, that such plans should be reserved only for the
highest ranking and highest paid members of the organization.)
INTERNAL SYSTEMS
WE THOROUGHLY EXPANDED AND MODERNIZED OUR MANAGEMENT INFORMATION
SYSTEMS AND REPORTING SYSTEMS THROUGHOUT THE ENTIRE COMPANY IN ORDER TO
BETTER SERVE OUR RAPIDLY GROWING CUSTOMER BASE AND TO BETTER ENABLE US TO
BUILD OUR BUSINESS PROJECTIONS UPON ACCURATE, RELEVANT DATA.
1. We designed and implemented this Company's first comprehensive
budgeting system, a new corporate forecasting model that enables
us to manage the risks we want to take, and new management
<PAGE>
reports, including customer turnover reports, financial reports
and financial statement formats. We also implemented a new
cash disbursement system.
2. We selected and installed a new long distance billing system and
a new Internet backroom platform and billing system.
3. We installed an entirely new accounting system, giving us the
ability to report financial results for all of our companies on
both a part 32 basis (needed for the National Exchange Carriers
Association) and a Securities and Exchange Commission basis.
4. We researched and identified a new convergent billing system and
a new customer support system and began incorporating both of
them into our entire operation. Some of the modules of this
system came on line in late 1997, and the rest are on schedule
for early 1998.
S-4
<PAGE>
In a single year, as a result of all these accomplishments, we have
transformed this 96-year-old local business into a youthful growth company
with over 160 employees, over 25,000 customers in six states, and over $25
million in annualized revenues. We believe that with these changes we can
be competitive.
Where do we go from here? That depends on many things. Rapid
transformation is difficult. Change is difficult. The telecommunications
industry is being swept up in a wave of technological and regulatory
changes that show no signs of abating. We cannot guarantee success, but we
believe we have built a solid platform for future growth in a rapidly
changing industry. We believe that our efforts in the past year have moved
this Company from a static position in a previously monopolistic industry
to a leading position as an integrated services provider in our chosen,
regional markets. We believe that the best defense is a good offense, and
we have created the kind of company that can adapt rapidly, move quickly
and market successfully in a wide open game.
If the past is prologue, then 1998 should be an interesting year for
us. While other companies keep talking about the future, we are building
it -- together.
Sincerely,
/s/ Tom Hertz
Tom Hertz
President and Chief Executive Officer
S-5
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC.
Dakota Telecommunications Group, Inc. (the "Company") is a competitive
local exchange carrier ("CLEC") specializing in the design, construction
and operation of broadband telecommunications systems for small
communities in South Dakota and the surrounding states. The Company
currently operates 13 exchanges in southeastern South Dakota, four of
which were built in 1997, incorporating over 2,240 miles of copper plant,
300 miles of coaxial cable and approximately 10,000 fiber miles of fiber
optic lines. The Company also operates 13 additional cable television
systems located in neighboring communities. The Company currently plans
to systematically expand its backbone fiber network and continue to build
new hybrid fiber facilities in new communities in the region.
The Company provides a full range of bundled telecommunications
products and services to its customers, including switched local dial tone
and enhanced services, network access services, long distance calling
services, operator assisted calling services, telecommunications equipment
sale and leasing services, cable television services, data networking
services, Internet access and related services and local area network and
wide area network ("LAN/WAN") services. No other single competitor
currently offers all of these services in the Company's existing markets.
The Company's customer base includes approximately 6,100 local service
access lines, 5,500 cable television subscribers, 6,600 Internet users and
over 2,000 LAN/WAN business customers located primarily in South Dakota,
northwestern Iowa and southwestern Minnesota. The Company and its
predecessors have been engaged in the telecommunications business since
1903.
The telecommunications industry is in a period of great change.
Virtually every aspect of the industry is extremely competitive and subject
to rapid technological innovation. The industry is also heavily regulated
on both the federal and state level, and regulatory policies have changed
dramatically in the past several years. The Company believes that these
changes have opened several unique windows of opportunity, which serve as
the focus of the Company's strategic growth plan. These opportunities
include the deregulation of local service monopolies which now allows
the Company to expand into new markets, the development of new hybrid
fiber optic transmission technologies that provide a cost effective method
for this expansion, and the Company's existing and targeted markets which,
while growing, are located in small communities unlikely to immediately
attract large competitors.
To address these opportunities, in 1996 the Company began a major
reorganization and expansion program. This program included the redesign
and rebuilding of the Company's switching center and telecommunications
network, a project that was concluded in 1997, as well as the expansion of
the Company's operations through selected acquisitions. During 1996, the
Company purchased the assets of 19 cable television systems. In December
<PAGE>
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, now renamed DTG Communications, Inc. Also
in December 1996, in a similar transaction, the Company merged with Iway
Partners, Inc. ("Iway"), one of South Dakota's largest Internet service
providers, now renamed DTG Internet Services, Inc. In December 1997, the
Company merged with Futuristic, Inc. dba DataNet ("DataNet"), a leading
regional LAN/WAN integrator located in Sioux Falls, South Dakota, now
renamed DTG DataNet, Inc. All three companies continue to operate as
wholly-owned subsidiaries of the Company. Also in December 1997, the
Company signed a merger agreement with Vantek Communications, Inc. and
Van/Alert, Inc. (collectively, "Vantek"), a regional specialized mobile
radio ("SMR") and paging company in southeastern South Dakota. 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 proposed conversion of the Company from a
cooperative into a South Dakota business corporation (the "Conversion")
and the proposed merger of the resulting South Dakota business corporation
into the Company, then a wholly-owned Delaware subsidiary of the
cooperative (the "Merger"). At a special meeting of the members of the
cooperative on July 21, 1997, the Conversion was approved. The
Conversion was formalized on July 22, 1997, with the filing of the
S-6
<PAGE>
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. 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 public Delaware business corporation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is provided by management as its analysis of
the Company's financial condition and results of operations. This analysis
should be read in conjunction with the separate consolidated financial
statements of the Company and the notes thereto included in this Annual
Report.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results
of operations, and other sections of this Annual Report, contain
forward-looking statements that are based on management's beliefs,
assumptions, current expectations, estimates and projections about the
telecommunications industry, the economy, and about the Company itself,
such as information relating to the Company's ongoing development plans,
the effects of its July 1997 refinancing of its long-term debt, the impact
of year 2000 issues on the Company's computerized operating systems and
statements regarding the Company's anticipated future net losses. Words
such as "anticipates," "believes," "estimates," "expects," "forecasts,"
"intends," "is likely," "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 known and unknown risks and uncertainties as well as
assumptions ("Future Factors") that 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. Furthermore, the Company
undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events or
otherwise.
Future Factors include, but are not limited to, uncertainties related
to economic conditions, acquisitions and divestitures, government and
regulatory policies, the pricing and availability of equipment, materials,
inventories and software, technological developments and changes in the
competitive environment in which the Company operates; changes in interest
rates; demand for the Company's products and services; the degree of
competition by traditional and non-traditional competitors; changes in tax
<PAGE>
laws; changes in prices, levies and assessments; and the outcomes of
pending and future litigation and contingencies. These are representative
of the Future Factors that could cause a difference between an ultimate
actual outcome and a preceding forward-looking statement. Readers are
cautioned not to place undue reliance on the forward-looking statements
made below or elsewhere in this Annual Report.
OVERVIEW
The Company is a competitive local exchange carrier specializing in
the design, construction and operation of broadband telecommunications
systems for small communities in South Dakota and the surrounding states.
The Company provides a full range of bundled telecommunications products
and services to its customers, including switched local dial tone and
enhanced services, network access services, long distance telephone
services, operator assisted calling services, telecommunications equipment
sale and leasing services, cable television services, computer equipment
sales, Internet access and related services and LAN and WAN services.
In 1996 the Company began a major reorganization and expansion
program. This program included the conversion of the Company from
a stock cooperative into a publicly held Delaware business
corporation, the redesign and rebuilding of the Company's switching
center and telecommunications network, which was completed
S-7
<PAGE>
in 1997, and the expansion of the Company's operations through selected
acquisitions. During 1996, the Company purchased the assets of 19 cable
television systems. 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 transaction, the
Company merged with Iway, one of South Dakota's largest Internet service
providers. In December 1997, the Company merged with DataNet, a leading
regional LAN/WAN integrator located in Sioux Falls, South Dakota. These
companies continue to operate as wholly-owned subsidiaries of the Company
under the names DTG Communications, Inc., DTG Internet Services, Inc.,
and DTG DataNet, Inc., respectively. Also in December 1997, the Company
signed a merger agreement with Vantek, a regional specialized mobile radio
and paging company in southeastern South Dakota. The Company currently
anticipates that this transaction will be completed prior to June 1998,
pending Federal Communications Commission ("FCC") license transfer
approvals. 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.
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 and 1997, the Company incurred approximately $5.8
million and $13.6 million in new capital expenditures, respectively. The
Company anticipates spending substantial additional funds for its
continuing development programs. These expenditures have been, and future
expenditures are anticipated to be, financed through substantial increases
in the Company's long-term debt. These changes will combine to result in
substantially higher depreciation and interest expenses with a
corresponding reduction in the Company's net income. In addition, to
implement its growth plans, 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 161
employees at December 31, 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 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.
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
SELECTED BALANCE SHEET ITEMS
Cash and Temporary Cash Investments $ 4,597.9 $ 2,870.4
Accounts Receivable, Net 4,216.0 1,784.9
Materials and Supplies 1,109.2 694.1
Excess of Cost Over Net Assets Acquired 4,869.1 1,831.0
Other Investments 2,037.6 625.7
Property, Plant and Equipment, Net 25,408.3 14,441.1
Current Liabilities 6,921.8 1,594.8
SELECTED CASH FLOW ITEMS
Capital Expenditures $13,564.0 $ 5,751.6
Cash Provided From Operations 1,851.7 1,961.8
Cash Used for Investment 15,608.2 7,516.2
Cash Provided From Financing 15,933.0 1,353.0
SELECTED CAPITAL STRUCTURE ITEMS
Long-Term Debt $29,200.5 $15,338.4
Total Capital 38,394.5 22,448.3
Long-Term Debt to Total Capital 76% 68%
</TABLE>
S-8
<PAGE>
ANALYSIS OF MATERIAL CHANGES IN BALANCE SHEET ITEMS
Cash and Temporary Cash Investments increased from $2,870,400 at
December 31, 1996, to $4,597,900 at December 31, 1997, an increase of
$1,727,500. Approximately $200,000 of this increase was attributable to the
DataNet operation acquired by the Company in December 1997. The balance
represents long-term debt borrowings by the Company in late December 1997 in
anticipation of the repayment of the Company's $1,500,000 short-term
revolving loan from the Rural Telephone Finance Cooperative ("RTFC") in
early January 1998. See Note 4 to the Consolidated Financial Statements.
Net Accounts Receivable increased from $1,784,900 at December 31, 1996,
to $4,216,000 at December 31, 1997, an increase of $2,431,100. Of this
increase, $1,779,600 was attributable to net receivables from the DataNet
operation acquired in December 1997. The balance of this increase is
primarily related to additional funds due to the Company from final
adjustments to its access revenue requirements from its 1996 and 1997
telephone operation cost studies. See Note 1(M) to the Consolidated
Financial Statements.
Materials and Supplies inventories increased from $694,100 at December
31, 1996, to $1,109,200 at December 31, 1997, an increase of $415,100. Of
this increase, $187,000 was related to the inventories of goods held for
resale in the Company's DataNet operation. The balance represents
materials on hand to be used in the Company's planned 1998 development
projects.
Excess of Cost Over Net Assets Acquired increased from $1,831,000 at
December 31, 1996, to $4,869,100 at December 31, 1997, an increase of
$3,038,100. This increase is due to the Company's acquisition of DataNet
in December 1997, which was accounted for using the purchase method. See
Note 13 to the Consolidated Financial Statements.
Other Investments increased from $625,700 at December 31, 1996, to
$2,037,600 at December 31, 1997, an increase of $1,411,900. This increase
was primarily due to the purchase by the Company of RTFC subordinated
capital certificates in connection with the long-term financing agreement
reached with the RTFC in July 1997. These certificates bear no interest
and will be refunded to the Company upon retirement of the associated debt.
See the discussion of the RTFC financing agreement, below, and Note 6 to
the Consolidated Financial Statements. The Company anticipates making
further investments in RTFC capital certificates as it continues to borrow
additional long-term funds from the RTFC.
Net fixed assets increased from $14,441,100 at December 31, 1996, to
$25,408,300 at December 31, 1997, a net increase of $10,967,200. This
increase primarily represents additional telecommunications plant assets
constructed by the Company in 1997. See Note 3 to the Consolidated
Financial Statements. The Company currently plans to make substantial
<PAGE>
additional investments in new telecommunications facilities and accordingly
expects net fixed assets to significantly increase in future years as these
facilities are constructed.
Current Liabilities increased from $1,594,800 at December 31, 1996, to
$6,921,800 at December 31, 1997, an increase of $5,327,000. Approximately
$1,500,000 of this increase was attributable to normal current liabilities
associated with the DataNet operation acquired by the Company in December
1997. These liabilities included approximately $569,300 in floor plan
financing arrangements. See Note 5 to the Consolidated Financial
Statements. An additional $1,500,000 of the increase represents amounts
due under the Company's short-term revolving loan arrangement with the
RTFC, which was repaid in full in early January 1998. See Note 4 to the
Consolidated Financial Statements. The current portion of the Company's
long-term debt increased $692,300 due to the overall increase in the
Company's total long-term debt. The remaining increase related primarily
to current amounts due suppliers and contractors in connection with the
Company's 1997 development projects.
Long-Term Debt increased from $15,338,400 at December 31,
1996, to $29,200,500 at December 31, 1997. At December 31, 1997,
this debt consisted of approximately $29,600,000 under a series of
loans from the RTFC and $1,000,000 in long-term financing from
Home Federal Savings Bank associated with the guarantee by
S-9
<PAGE>
the Company of long-term debt incurred by the Company's Employee Stock
Ownership Plan to fund the acquisition of Company stock in December 1997,
net of $1,390,000 in associated current maturities. See Note 6 to the
Consolidated Financial Statements. On June 24, 1997, the Company entered
into a long-term loan arrangement with the RTFC in the aggregate amount of
$28,421,000. Of this amount, $13,092,089 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 $1,000,000 in debt
assumed by the Company in the TCIC and Iway acquisitions and to cover the
Company's 1997 capital expenditures program. Substantially all of the
Company's 1997 capital expenditures were financed by the RTFC.
Total Stockholders' Equity increased from $6,412,200 at December 31,
1996, to $7,804,100 at December 31, 1997, an increase of approximately
$1,400,000. This increase was primarily caused by the issuance of stock
in connection with the DataNet merger, reduced by the Company's 1997
operating loss. The presentation of the Stockholders' Equity account
structure changed substantially during 1997 due to the conversion of the
Company from a South Dakota stock cooperative into a Delaware business
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, by itself, did not change overall total
equity. The Conversion process is discussed in more detail above and in
Notes 2, 7 and 15 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it has adequate internal resources available
to finance its ongoing operating requirements. Net Cash Provided From
Operations was $1,851,700 in 1997, down slightly from $1,961,800 in 1996.
See the Consolidated Statement of Cash Flows included in the Company's
Consolidated Financial Statements. This decrease was attributable
primarily to additional employee costs in 1997. In addition, the Company
maintains a $1,500,000 revolving line of credit with the RTFC, all of which
was available as of March 1, 1998. The Company has also arranged an
additional $4,000,000 secured line of credit from the RTFC in March 1998.
Finally, the Company uses a combination of the floor plan financing
arrangements described above and an $800,000 working capital line of credit
to fund inventory holding costs in its DataNet operation. At March 1, 1998,
there were no amounts drawn under this line of credit.
While the Company can finance its day-to-day operations using internal
funds, it will need additional long-term financing to complete additional
network construction programs. The Company's primary long-term lender is
the RTFC which, as described above, refinanced the Company's outstanding
long-term debt in July 1997 and provided additional funds for the Company's
1997 construction projects. While there is no assurance that additional
<PAGE
funds will be made available to the Company, the Company and its
subsidiaries expect the RTFC and other sources to continue to be available
for future borrowings.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
--------- --------
<S> <C> <C>
SUMMARY OF CONSOLIDATED OPERATIONS
Total Operating Revenues $13,729.0 $8,101.3
Depreciation and Amortization 3,448.1 2,434.4
Other Costs and Expenses 12,039.6 5,589.1
--------- --------
Operating Income (Loss) (1,758.7) 77.9
Other Income (Expense) (846.6) (413.8)
Income Tax Expense (Benefit) (118.5) (175.7)
--------- --------
Net Loss $(2,486.8) $ (160.2)
</TABLE>
In 1997, revenues increased substantially to $13,729,000, up from
$8,101,300 in 1996, an increase of $5,627,700 or 69.5%. Of this increase,
$1,481,000, $1,021,000, and $1,788,100 was attributable to revenues from
S-10
<PAGE>
the Company's TCIC, Iway and DataNet operations, respectively. The balance
of the increase represents primarily revenues from access rate increases
put into effect by the Company during 1996.
Depreciation and Amortization expense increased from $2,434,400 in 1996
to $3,448,100 in 1997, an increase of approximately $1,000,000 or 41%.
Approximately $133,300 of this increase is attributable to the amortization
of the excess of cost over the net assets acquired in the merger transactions
with TCIC and Iway in December 1996 and with DataNet in December 1997. The
balance represents additional depreciation for assets placed in service
during 1997.
Other Costs and Expenses increased to $12,039,600 in 1997, up from
$5,589,100 in 1996, an increase of $6,450,500 or 115%. Of this increase,
$1,214,100, $2,170,100, and $1,732,700 represent additional costs and
expenses associated with the Iway, TCIC and DataNet operations, respectively.
An additional $611,342 of this increase represents one-time, nonrecurring
charges associated with the Conversion and Merger in July 1997. These
reorganization expenses do not arise from and are not representative of the
Company's ongoing business. See Note 2 to the Consolidated Financial
Statements. The balance of the increase is primarily due to increased
employee costs in the Company's telephone and cable operations.
Other Income and Expense consists primarily of interest and dividend
income and interest expense. Interest expense in 1997 was $1,122,807
(total interest expense of 1,294,607 net of $171,800 that was capitalized
as construction period interest related to the Company's 1997 developments)
compared to $723,778 in 1996, an increase of $399,029 or 55%. The increase
in interest expense was caused primarily by increased long-term borrowings
used by the Company to finance its 1997 construction projects.
On a pro forma basis, assuming that all shares issuable in the
reorganization were outstanding for all of 1997, and assuming all capital
stock and capital credits were converted into shares of Common Stock at a
rate of $2.50 per share at the beginning of 1996, loss per share would have
been $1.19 for 1997 and $.09 for 1996. Also on a pro forma basis, assuming
that only those shares that were actually issued and outstanding as of
March 16, 1998, had been outstanding for all of 1997, loss per share for
1997 would have been $1.30.
RESULTS OF BUSINESS SEGMENT OPERATIONS
The Company currently operates with three major business segments:
telephone operations, which includes all operations other than cable
television and computer networking operations; cable television operations;
and the computer networking services acquired by the Company in the DataNet
transaction in December 1997. Because of the technological convergence of
computer services, telephone and cable systems which allow these services
to be offered through a single network, the Company believes that business
segment reporting will not be appropriate in future years.
<PAGE>
The following sections discuss the operating results for these three
segments in 1997 and 1996.
S-11
<PAGE>
TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
--------- --------
<S> <C> <C>
Local Service $ 1,221.8 $1,058.7
Long Distance Toll Service 3,478.7 1,996.3
Access Service 4,176.7 3,267.0
Internet Services 1,021.3 72.4
Other Revenues 149.8 357.8
--------- --------
Total Revenue $10,048.3 $6,752.2
Depreciation and Amortization 2,728.0 2,011.0
Other Costs and Expenses 8,703.6 4,287.1
--------- --------
Operating Income (Loss) $(1,383.3) $ 454.1
</TABLE>
Local service revenues are earned by providing customers with local
service to connecting points within the local exchange boundaries and, in
certain cases, to nearby local exchanges under extended area service
("EAS") plans that eliminate long distance charges to the neighboring
exchanges. Local service revenues for 1997 were $1,221,800 compared to
$1,058,700 in 1996, an increase of 15%. This 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 1998. The Company's
local service rates are not currently regulated by the FCC or the South
Dakota Public Utilities Commission, although certain regulatory policies of
both agencies indirectly impact local rate levels.
Long distance toll revenues rose from $1,996,300 in 1996 to $3,478,700
in 1997, an increase of $1,482,400 or 74%. This increase was primarily due
to long distance revenues from the TCIC long distance reselling operation
acquired by the Company in December 1996.
Access revenues are received by local exchange companies ("LECs") for
intrastate and interstate exchange services provided to long distance
carriers (generally referred to as interexchange carriers or "IXCs") which
enable IXCs to provide long distance service to end users in the local
exchange network. Access revenues are determined, in the case of interstate
calls, according to rules issued by the FCC and administered by the National
Exchange Carrier Association ("NECA") and, in the case of intrastate calls,
by state regulatory agencies. A relatively small portion of the Company's
access revenues are derived from subscriber line fees determined by the FCC
and billed directly to end users for access to long distance carriers. The
<PAGE>
balance of the Company's interstate access revenues are received from NECA,
which collects payments from IXCs and distributes settlement payments to
LECs based on a number of factors, including the cost of providing service
and the amount of time the local network is utilized to provide long
distance services. A variety of factors, including increased subscriber
counts, cultural and technological changes and rate reductions by IXCs,
have resulted in a consistent pattern of increasing use of the nation's
telephone network since 1984. This growth has produced higher revenues for
NECA and increased settlements for its participating LECs. Access revenues
increased from $3,267,000 in 1996 to $4,176,700 in 1997, an increase of
$909,700 or 27.8%. The Company reassesses its access rates and underlying
cost studies annually and adjusts its tariff rate filings and participation
in NECA and Universal Service Fund revenue pools accordingly. In late 1996,
the Company received approval from the South Dakota Public Utilities
Commission to increase its intrastate access rates approximately 20%, which
increase, combined with increased settlements from the NECA pool, primarily
accounts for the overall increase in access revenue in 1997.
Internet service revenue rose from $72,447 in 1996 to $1,021,344 in
1997, an increase of $951,897 or 1,314% due to the inclusion of revenues
from the Iway Internet operations acquired in December 1996 and internal
growth in revenues from the Company's Internet operations.
S-12
<PAGE>
Other revenue decreased from $357,800 in 1996 to $149,800 in 1997, a
decrease of $208,000 or 58%. Most of this decrease is due to the transfer
of the Company's unregulated customer premises equipment business from its
Telephone Operations segment to its Cable Television Operations segment in
January 1997.
Depreciation and amortization expenses rose from $2,011,000 in 1996 to
$2,728,000 in 1997, an increase of $717,000 or 36% as a result of the
Company's additional capital expenditures for the year and the amortization
of costs associated with its acquisitions of TCIC and Iway. See Note 13 to
the Consolidated Financial Statements.
Other costs and expenses were $8,703,600 in 1997 compared to
$4,287,100 in 1996, an increase of $4,416,500 or 103%. Of this increase,
$1,214,100 and $2,170,100 represent additional costs and expenses
associated with the Internet and long distance operations acquired in
December 1996. An additional $611,342 of this increase represents one-
time, nonrecurring charges associated with the Conversion and Merger in
July 1997. These reorganization expenses do not arise from and are not
representative of the Company's ongoing business. See Note 2 to the
Consolidated Financial Statements. The balance of the increase is
primarily due to increased employee expense.
CABLE TELEVISION OPERATIONS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Cable Service Revenue $1,517.0 $1,300.5
Other Revenue 375.6 48.7
-------- --------
Total Revenue 1,892.6 1,349.2
Depreciation and Amortization 702.8 423.4
Other Costs and Expenses 1,620.5 1,302.0
-------- --------
Operating Income (Loss) $ (430.7) $ (376.2)
</TABLE>
The Company's cable service revenues increased from $1,300,500 in 1996
to $1,517,000 in 1997, an increase of $216,500 or 17%. This increase
primarily reflects additional revenues for the entire year of 1997 from the
19 cable systems purchased by the Company during 1996.
Other revenue increased from $48,700 in 1996 to $375,600 in 1997, an
increase of $326,900 or 6,713%. This increase was due to the transfer of
the Company's unregulated customer premises equipment business from its
<PAGE>
Telephone Operations segment to its Cable Television Operations segment in
January 1997.
Depreciation and amortization expenses were $702,800 in 1997 compared
to $423,400 in 1996, an increase of $279,400 or 66%. This increase was
primarily due to the depreciation of additional assets used to operate the
19 cable systems added by the Company in 1996 for the entire year of 1997.
Other costs and expenses were $1,620,500 in 1997 compared to
$1,302,000 in 1996, an increase of $318,500 or 24%. This increase
primarily reflects additional expenses for the entire year of 1997 from the
operation of the 19 cable systems purchased by the Company during 1996.
COMPUTER NETWORKING OPERATIONS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
-------- -------
<S> <C> <C>
Computer Network Sales Revenue $1,778.1 $ ---
Other Costs and Expenses 1,722.7 ---
-------- -------
Operating Income $ 55.4 $ ---
</TABLE>
S-13
<PAGE>
The Computer Networking Operations segment operating results reflect
the operations of the Company's DataNet subsidiary for the month of
December 1997. The Company acquired DataNet on December 1, 1997. See Note
13 to the Consolidated Financial Statements.
INCOME TAXES
The Company historically operated as a stock cooperative and was
granted tax-exempt status under Section 501(c)(12) of the Internal Revenue
Code of 1986, as amended. Accordingly, income tax expense was related only
to certain ancillary operations, such as the Company's cable television
operations. Beginning with the Company's conversion from a cooperative to
a Delaware business corporation in July 1997, all of the Company's
operations became taxable. However, because of the Company's consolidated
net losses, the Company has accumulated significant income tax loss
carryovers. See Note 11 to the Consolidated Financial Statements for a
full discussion of the Company's income tax issues.
EFFECTS OF INFLATION
The Company is subject to the effects of inflation upon its operating
costs. The Company's local exchange telephone companies are subject to the
jurisdiction of the South Dakota Public Utilities Commission with respect
to a variety of matters, including rates for intrastate access services and
the conditions and quality of service. Rates for local telephone service
are not established directly by regulatory authorities, but their authority
over other matters limits the Company's ability to implement rate
increases. In addition, the regulatory process inherently restricts the
Company's ability to immediately pass cost increases along to customers
unless the cost increases are anticipated and the rate increases are
implemented prospectively.
All of the Company's long-term debt from the RTFC bears interest on a
floating rate set by the RTFC on a monthly basis. This variable rate was
6.65% at December 31, 1997. The Company has the option to fix the interest
rate on all or a portion of these loans on a quarterly basis. Should
inflation rates significantly exceed the Company's expectations, interest
rates could increase and the Company's debt service expenses could increase
beyond acceptable limits or make the RTFC or any other lender unwilling to
extend additional credit to the Company.
COMPETITION
In February 1996, President Clinton signed into law the Telecommunica-
tions Act of 1996 (the "1996 Act"). The new law represents the biggest
change in the rules governing local telephone service since Congress imposed
federal regulation and established the FCC in 1934. Under the 1996 Act,
the monopoly on local service enjoyed by local exchange companies ("LECs")
is eliminated and LECs must allow competitors access to their local
<PAGE>
network facilities. The Company does not know to what extent it will be
subject to local competition in the markets it serves under the new rules.
The final results of the changes made by the new law will not be known
until new rulemaking by the FCC and state regulatory agencies has
been completed. The Company is monitoring developments regarding the new
regulatory climate closely and expects its operations may be materially
affected by the new rules, but the Company cannot predict what effect the
new rules will have on its business.
The Company is presently the only provider of local telephone service
in its historical nine local service exchanges and directly competes with
the incumbent local service company in the four exchanges it built in 1997.
Technological developments in competing technologies, such as cellular
telephone, digital microwave, coaxial cable, fiber optics and other
wireless and wired technologies, may result in new forms of competition to
the Company's landline services. The Company and many other members of the
local exchange carrier industry are seeking to maintain a strong,
universally affordable public telecommunications network through policies
and programs that are sensitive to the needs of small communities and rural
areas served by the Company. There is no assurance that the Company will be
able to continue to do so in the future.
S-14
<PAGE>
All of the Company's cable television franchises are non-exclusive.
In addition to competition from off-air television, other technologies also
supply services provided by cable television. These include low power
television stations, multi-point distribution systems, over-the-air
subscription television and direct broadcast satellites. The Company
believes that cable television presently offers a wider variety of
programming at lower cost than any competing technology. However, the
Company is unable to predict the effect current or developing sources of
competition may have on its cable business.
The Company's unregulated Internet, long distance, operator services
and computer network services businesses are subject to intense competition
from many different companies, many of which have substantially greater
resources than the Company.
YEAR 2000 COMPUTER SOFTWARE ISSUES
The Company is highly dependent upon advanced computer systems and
specialized software for the conduct of its business. These systems
include switching and network operations, billing and customer care,
accounting and reporting and Internet operating systems, as well as a wide
assortment of personal computer productivity software. In 1997, as part of
its reorganization plan, the Company installed new accounting and reporting
systems and began the installation of a new billing and customer service
system, currently scheduled for completion in 1998. The Company also
rebuilt its Internet operating systems and installed a new switching platform
and software system in 1997.
As part of its systems replacement process, the Company addressed an
issue that is facing all users of automated information systems. The issue
is that many computer systems that process date sensitive information based
on two digits representing the year of the event may recognize a date using
"00" as the year 1900 rather than the year 2000. The inability to correctly
recognize "00" as the year 2000 could affect a wide variety of automated
information systems, such as mainframe applications, invoicing and
receivables tracking systems, event scheduling systems, personal computers
and communication systems, in the form of software failure, errors or
miscalculations.
The Company's software suppliers have assured the Company that its
new systems will not experience year 2000 problems. However, given the
complexity of the specialized software used by the Company and the relative
newness of the year 2000 problem, there can be no assurance that the
Company's new or remaining systems will not experience some problems as
these systems begin to operate using year 2000 dates. While the Company will
continue to monitor and test its systems for potential problems, failure of
key software systems to properly recognize and handle year 2000 dates could
result in material and wide-spread failures in the Company's operations,
possibly leading to severe service outages and customer complaints. Such
<PAGE>
failures, were they to occur, would have severe adverse effects on the
Company's results of operations, liquidity and capital resources.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financing Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This
pronouncement, effective for calendar year 1998 financial statements,
requires reporting segment information consistent with the way executive
management of an entity disaggregates its operations internally to assess
performance and make decisions regarding resource allocations. Among
information to be disclosed, SFAS 131 requires an entity to report a
measure of segment profit or loss, certain specific revenue and expense
items and segment assets. SFAS 131 also requires reconciliations of total
segment revenues, total segment profit or loss and total segment assets to
the corresponding amounts shown in the entity's consolidated financial
statements. The Company expects that the adoption of SFAS 131 will reduce
the number or designation of reportable segments currently disclosed in its
consolidated financial statements due to the increasing convergence of its
computer, telephone and cable television businesses.
No other recently issued accounting pronouncements are expected to
have a significant effect on future financial statements.
S-15
<PAGE>
ENVIRONMENTAL MATTERS
Management is not currently aware of any environmental matters which
in the aggregate would have a material adverse effect on the financial
condition or results of operations of the Company.
S-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dakota Telecommunications Group, Inc.
and Subsidiaries
Irene, South Dakota
We have audited the accompanying consolidated balance sheet of Dakota
Telecommunications Group, Inc. (incorporated in Delaware and formerly
Dakota Cooperative Telecommunications, Inc.) and subsidiaries as of
December 31, 1997, and 1996, 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
Telecommunications Group, Inc. and subsidiaries as of December 31, 1997, and
1996, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting
principles.
St. Paul, Minnesota s/ Olsen Thielen & Co., Ltd.
January 30, 1998 Olsen Thielen & Co., Ltd.
S-17
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
===========================================================================
<CAPTION>
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,297,938 $ 2,121,444
Temporary Cash Investments 300,000 749,000
Accounts Receivable, Less Allowance for
Uncollectibles of $298,700 and $152,300 4,216,025 1,784,895
Deposits - 274,889
Income Taxes Receivable 62,987 248,500
Materials and Supplies 1,109,226 694,097
Prepaid Expenses 275,567 168,078
----------- -----------
Total Current Assets 10,261,743 6,040,903
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired 4,869,096 1,830,959
Other Intangible Assets 809,843 509,559
Other Investments 2,037,571 625,722
Deferred Charges 653,373 56,628
----------- -----------
Total Investments and Other Assets 8,369,883 3,022,868
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 25,408,266 14,441,104
----------- -----------
TOTAL ASSETS $44,039,892 $23,504,875
=========== ===========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 1,390,000 $ 697,700
Note Payable 1,500,000 -
Accounts Payable 2,290,727 399,694
Payable Under Floor Plan Arrangements 569,287 -
Other Current Liabilities 1,171,772 497,388
----------- -----------
Total Current Liabilities 6,921,786 1,594,782
----------- -----------
LONG-TERM DEBT 29,200,469 15,338,395
----------- -----------
DEFERRED CREDITS 113,565 159,482
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock - 1,172,000
Common Stock 8,523,870 26,185
Treasury Stock at Cost (12,325) -
Capital Credits - 4,732,723
Other Capital 2,298,006 -
Retained Earnings (Deficit) (2,005,479) 481,308
Unearned Employee Stock Ownership Plan Shares (1,000,000) -
----------- -----------
Total Stockholders' Equity 7,804,072 6,412,216
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,039,892 $23,504,875
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
S-18
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
===========================================================================
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Local Network $ 1,221,788 $ 1,058,667
Network Access 4,176,695 3,266,969
Long Distance Network 3,478,721 1,996,301
Cable Television Service 1,517,028 1,300,512
Computer Network Sales 1,788,104 -
Internet Service 1,021,344 72,447
Other 525,312 406,446
----------- -----------
Total Operating Revenues 13,728,992 8,101,342
----------- -----------
COSTS AND EXPENSES:
Plant Operations 4,082,624 2,406,766
Cost of Goods Sold 1,465,885 -
Depreciation and Amortization 3,448,109 2,434,416
Customer 1,465,735 500,802
General and Administrative 4,215,257 1,817,869
Other Operating Expenses 810,041 863,639
----------- -----------
Total Operating Expenses 15,487,651 8,023,492
----------- -----------
OPERATING INCOME (LOSS) (1,758,659) 77,850
----------- -----------
OTHER INCOME AND (EXPENSES):
Interest and Dividend Income 276,204 309,982
Interest Expense (1,122,807) (723,778)
----------- -----------
Net Other Income and (Expenses) (846,603) (413,796)
----------- -----------
LOSS BEFORE INCOME TAXES (2,605,262) (335,946)
INCOME TAX BENEFIT (118,475) (175,712)
----------- -----------
<PAGE>
NET LOSS $(2,486,787) $ (160,234)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE
(since reorganization) $ (1.35)
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
S-19
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
==================================================================================================================================
<CAPTION>
UNEARNED
EMPLOYEE
RETAINED STOCK
PREFERRED COMMON TREASURY CAPITAL OTHER EARNINGS OWNERSHIP
STOCK STOCK STOCK CREDITS CAPITAL (DEFICIT) PLAN SHARES TOTAL
------------ ---------- --------- ------------ ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 1,172,000 26,185 - 4,732,723 - 481,308 - 6,412,216
Net Loss (2,486,787) (2,486,787)
Issuance of Common
Stock in Exchange
for Preferred
Stock, Capital
Credits and
Capital Stock (1,172,000) 3,471,770 (4,597,776) 2,298,006 -
Retirement of
Capital Credits (134,947) (134,947)
Common Stock
Issued, Net 4,025,915 (12,325) 4,013,590
Employee Stock
Ownership Plan
Shares Purchased 1,000,000 (1,000,000) -
----------- ---------- -------- ----------- ---------- ----------- ----------- ----------
BALANCE on December
31, 1997 $ - $8,523,870 $(12,325) $ - $2,298,006 $(2,005,479) $(1,000,000) $7,804,072
=========== ========== ======== =========== ========== =========== =========== ==========
</TABLE>
<PAGE>
The accompanying notes are an integral part of the consolidated financial
statements.
S-20
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
===========================================================================
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,486,787) $ (160,234)
Adjustments to Reconcile Net Loss to Net
Cash Provided By Operating Activities:
Depreciation and Amortization 3,448,109 2,469,873
Deferred Charges 67,060 208,248
Deposits 274,889 274,889
Receivables (1,296,894) (155,521)
Income Taxes Receivable 185,513 (248,500)
Prepaid Expenses (101,777) (52,618)
Accounts Payable 1,464,361 (379,143)
Accrued Income Taxes - (260,655)
Other Current Liabilities 370,819 206,778
Deferred Credits (73,589) 58,719
------------ -----------
Net Cash Provided By Operating Activities 1,851,704 1,961,836
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment (13,564,024) (5,751,604)
Deposits - 107,822
Sale of Temporary Cash Investments 649,000 -
Purchase of Temporary Cash Investments (200,000) (749,000)
Purchase of Other Investments (1,473,754) (532,977)
Purchase of Other Intangible Assets (279,832) (541,300)
Deferred Charges (663,805) (8,885)
Acquisition Costs, Net of Cash Acquired (75,812) (40,295)
------------ -----------
Net Cash Used In Investing Activities (15,608,227) (7,516,239)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-Term Debt 33,912,727 4,399,270
Principal Payments of Long-Term Debt (20,241,444) (2,844,967)
Proceeds from Issuance of Note Payable 1,500,000 -
Construction Contracts Payable (116,909) (182,912)
Retirement of Capital Credits (134,947) (14,915)
<PAGE>
Other - (3,513)
Issuance of Common Stock 1,025,915 -
Purchase of Treasury Stock (12,325) -
------------ -----------
Net Cash Provided by Financing Activities 15,933,017 1,352,963
------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,176,494 (4,201,440)
CASH AND CASH EQUIVALENTS at Beginning of Year 2,121,444 6,322,884
------------ -----------
CASH AND CASH EQUIVALENTS at End of Year $ 4,297,938 $ 2,121,444
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
S-21
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, 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 sales, long-distance telephone
services, operator assisted calling services, telecommunications and
computer equipment sale and leasing services, cable television services,
Internet access, computer network services 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. No single customer accounted for a significant
amount of revenues and accounts receivable.
Local service rates charged to telephone customers are established by the
Company and are not subject to regulation. 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 Telecommunications Group, Inc. (formerly
Dakota Cooperative Telecommunications, Inc.) and its wholly-owned
subsidiaries, Dakota Telecom, Inc., DTG Internet Services, Inc. (formerly
IWAY, Inc.), DTG Communications, Inc. (formerly TCIC Communications, Inc.),
Dakota Telecommunications Systems, Inc. (and its wholly-owned subsidiary,
Dakota Wireless Systems, Inc.), DTG DataNet, Inc. (formerly Futuristic,
Inc. d/b/a DataNet) and DTG Community Telephone, 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. DEFERRED CHARGES - Deferred Charges include the cost of computer
software that is being developed for internal use. These costs will be
amortized over three years when the software is completed and placed into
service.
<PAGE>
E. 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.
F. 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.
S-22
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. MATERIALS AND SUPPLIES - Materials and supplies are recorded at average
unit cost and inventory held for resale is valued at the lower of first-in,
first-out cost or market. Balances as of December 31, 1997, and 1996 are:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C> <C>
Materials and Supplies $ 797,521 $528,546
Inventory 311,705 165,551
---------- --------
Total $1,109,226 $694,097
========== ========
</TABLE>
H. 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.
I. 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 $150,030 and $10,032 at
December 31, 1997, and 1996.
J. OTHER INTANGIBLE ASSETS - Other intangible assets consist of customer
lists ($628,026 and $541,300 as of December 31, 1997, and 1996) and is being
expensed equally over fifteen years and shown net of accumulated
amortization of $73,193 and $31,741 at December 31, 1997, and 1996. Other
intangible assets also include the cost ($255,010) of a Broadband Personal
Communications Service System license at December 31, 1997.
K. OTHER INVESTMENTS - Other investments are recorded at cost.
<PAGE>
L. CAPITAL CREDITS - The Company operated as a cooperative until July 21,
1997. Amounts received from the furnishing of telephone service, interest
income and other nonoperating operations in excess of costs and expenses
were assigned to telephone patrons on a patronage basis to the extent they
were not needed to offset prior losses.
M. 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.
S-23
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
N. INCOME TAXES - Until July 21, 1997, the Parent Company operated as a
cooperative and had been granted tax exempt status under Section 501(c)12
of the Internal Revenue Code; therefore the Parent Company income was not
taxable. The State of South Dakota does not have an income tax.
After July 21, 1997, the Parent Company became subject to federal income
taxes and files a consolidated return with its wholly-owned subsidiaries,
which are subject to federal income taxes and Minnesota and Iowa income
taxes 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. Temporary differences are primarily depreciation and net
operating losses carryforwards.
O. 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 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.
P. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - The Company includes in
its telecommunication and cablevision plant accounts an average cost of
debt used for the construction of the plant, and excludes the amounts from
interest expense on the statement of operations. The amount capitalized
for 1997 was $171,800.
Q. RECLASSIFICATIONS - Certain reclassifications have been made to the
1996 financial statements to conform to the 1997 presentation. These
reclassifications had no effect on net income.
<PAGE>
NOTE 2 - REORGANIZATION
At a special meeting of the stockholders on July 21, 1997, an amendment to
the Company's articles of incorporation was approved 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.
S-24
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 2 - REORGANIZATION (CONTINUED)
General and administrative expenses for the year ended December 31, 1997,
includes $611,342 of costs relating to the reorganization of the Company.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment are as
follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Land $ 101,573 $ 101,573
Buildings 20-33 years 2,669,620 1,486,491
Leasehold Improvements 5 242,886 15,677
Machinery and Equipment 5-10 2,250,495 1,499,518
Furniture and Fixtures 3-20 2,076,192 1,010,234
Telecommunications Plant 4-20 23,947,827 16,922,589
Cable Television Plant 8-12 5,352,431 4,869,851
Construction In Progress - 288,504 354,025
----------- -----------
36,929,528 26,259,958
Less Accumulated
Deprecation 11,521,262 11,818,854
----------- -----------
Total $25,408,266 $14,441,104
=========== ===========
</TABLE>
Depreciation included in costs and expenses was $3,265,650 in 1997 and
$2,392,643 in 1996.
The Company intends to add new construction in 1998 of approximately
$37,000,000 which is expected to be financed through additional long-term
financing.
<PAGE>
NOTE 4 - NOTE PAYABLE
The Company has a line of credit arrangement for $1.5 million with RTFC
which expires in 2002. Interest is payable quarterly at variable monthly
rates determined by RTFC with a cap at prime 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. The $1.5 million outstanding note balance was paid in full
January 1998.
S-25
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 4 - NOTE PAYABLE (CONTINUED)
The Company has a line of credit arrangement for $800,000, at the prime
rate, with Norwest Bank, South Dakota, N. A. which expires January 31,
1998. This arrangement was obtained through acquisition of a new
subsidiary in 1997. No amounts were outstanding as of December 31, 1997.
NOTE 5 - PAYABLE UNDER FLOOR PLAN ARRANGEMENT
The Company has floor plan agreements with Deutsche Financial Services and
IBM Credit Corporation under which it may borrow up to 100% of the cost of
qualified purchases. The agreement with Deutsche Financial Services has a
$1,400,000 credit limit with no interest for up to 30 days and 15% interest
after 30 days. The agreement with IBM Credit Corporation has a $350,000
credit limit with no interest for up to 30 days, 8.85% for 30-45 days and
9.2% after 45 days. The amount borrowed under these agreements must be
repaid when the financed items are sold or disposed of in any manner. The
agreements are secured by all the assets of the Company's subsidiary, DTG
DataNet, Inc. and include various covenants which have been approved by
RTFC.
NOTE 6 - LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Rural Telephone Finance Cooperative (RTFC) Mortgage Note,
matures 2012, variable
interest rate (6.65% at December 31, 1997) $28,184,830 $ -
Rural Telephone Finance Cooperative (RTFC) Mortgage Note,
matures 2006, variable
interest rate (6.65% at December 31, 1997) 1,405,639 1,537,537
Home Federal Savings Bank, matures 2007,
variable interest rate (9.5% at December 31, 1997)
(ESOP loan guaranteed by the Company) 1,000,000 -
<PAGE>
Rural Utilities Service (RUS) mortgage notes:
2% payable in quarterly installments - 2,595,175
5% payable in monthly installments - 10,756,343
Norwest Bank South Dakota, N.A., variable
interest rate (prime plus one percent) - 980,469
Other - 166,571
----------- -----------
30,590,469 16,036,095
Amount Due Within One Year (1,390,000) (697,700)
----------- -----------
Total Long-Term Debt $29,200,469 $15,338,395
=========== ===========
</TABLE>
S-26
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 6 - LONG-TERM DEBT (CONTINUED)
The Company received loans of $14,737,000 and $13,684,000 from 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 RTFC. In order to obtain financing
from RTFC, the loans include borrowings of $1,449,185 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.
Unadvanced loan funds of $94,181 are available to the Company on loan
commitments from RTFC. Loan proceeds will be used to finance future
construction. The RTFC loans, maturing in 2012, are collateralized by all
assets, 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 loan from Home Federal Savings Bank is guaranteed by the Company and is
payable by the Company's ESOP in ten equal installments beginning in 1998.
Approximate annual principal payments on the existing debt for the next
five years are: 1998 - $1,390,000; 1999 - $1,491,000; 2000 - $1,595,000;
2001 - $1,706,000 and 2002 - $1,825,000.
S-27
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 7 - CAPITAL STOCK
<TABLE>
<CAPTION>
PREFERRED COMMON TREASURY UNEARNED
----------------------- ------------------------ ------------------ ESOP SHARES
ISSUED ISSUED ISSUED -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- --------- ---------- ------ -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE -
December 31, 1995 $ 5,225 $ 26,125 $ $
Issued 1,172 1,172,000 456 2,280
Redeemed (444) (2,220)
------ ----------- --------- ----------
BALANCE -
December 31, 1996 1,172 1,172,000 5,237 26,185
Issuance of Common
Stock in Exchange
for Capital Credits
and Capital Stock 459,954 2,299,770
Issuance of Common
Stock in Exchange
for Preferred Stock (1,172) (1,172,000) 94,727 1,172,000
Issuance of Common
Stock to Purchase
Futuristic, Inc.
(/d/b/a DataNet) 160,000 4,000,000
Issuance of Common
Stock to ESOP 49,213 1,000,000 (49,213) (1,000,000)
Issuance of Common
Stock to Employees 2,043 25,915
Repurchase of Common
Stock 493 (12,325)
Two-for-One Stock
Split 771,174 493 (49,213)
------ ----------- --------- ---------- --- -------- ------- -----------
BALANCE -
December 31, 1997 - $ - 1,542,348 $8,523,870 986 $(12,325) (98,426) $(1,000,000)
====== =========== ========= ========== === ======== ======= ===========
</TABLE>
<PAGE>
On December 16, 1997, the Board of Directors declared a two-for-one common
stock split pursuant to a share dividend paid to common stockholders of
record on January 1, 1998. All common stock share amounts shown below have
been adjusted for the stock split.
As of December 31, 1996, the Company's common stock had a par value of $5
per share. There were 15,000 shares authorized. No person could own more
than one share of common stock and each holder of common stock had one vote
in the affairs of the Company.
Nonvoting preferred stock had a par value of $100 per share and there were
63,000 shares authorized. The preferred stock is shown on the balance
sheet at its redemption value of $1,000 per share. Preferred shareholders
were entitled to a Non-Liquidity Fee of $80 per share payable semi-annually
in cash or preferred stock at the discretion of the Company. Preferred
shareholders also were granted warrants which entitle them to purchase
additional preferred stock at $1,000 per share.
S-28
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
======================================================================
NOTE 7 - CAPITAL STOCK (CONTINUED)
At December 31, 1996, and 1997, there were warrants outstanding which may be
exercised through January 21, 1998, to purchase 482 shares of preferred
stock which were converted to 77,912 shares of common stock. These
warrants were exercised on January 21, 1998. Effective January 1, 1997,
the Company granted management options to purchase up to 1,534 shares of
preferred stock at $1,000 a share which were replaced with common stock
under the Executive Stock Option Plan.
As of December 31, 1997, the Company has 5,000,000 shares of no par common
stock authorized and 1,542,348 shares are issued and outstanding. 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 is outstanding as of December 31, 1997.
Former holders of Cooperative common stock and capital credit accounts are
entitled to receive shares of common stock of the Company, without any
further consideration, upon receipt by the Company of properly executed
transmittal documents in acceptable form. If all such persons had
satisfied the conditions to receive shares at December 31, 1997, a total of
911,320 additional shares of the Company's common stock would have been
issued and outstanding at that date. Other capital includes that amount of
stockholders equity which would have been included in common stock if those
shares had been issued and outstanding at December 31, 1997.
On July 22, 1997, the Board of Directors adopted a leveraged employee stock
ownership plan ("ESOP"). The ESOP purchased 98,426 shares of common stock
for $1,000,000 in December 1997. The purchase price per share is
approximately the same as fair value per share at December 31, 1997, based
upon an appraisal. Under the terms of the Plan, employees who are not part
of a collective bargaining unit, a leased employee or a nonresident alien
and have completed at least 1,000 hours of service become eligible to
participate in the plan. The Company determines the amount of
contributions that will be made each year. The contribution is allocated
among eligible participants based on compensation in proportion to total
compensation paid to all eligible participants. Any dividends earned will
be allocated to the participant's account based on allocated shares. A
participant becomes fully vested after five years of service or upon normal
retirement date. No contributions were made to the ESOP in 1997.
<PAGE>
On July 22, 1997, the Board of Directors declared a dividend of one right
for each outstanding share of common stock to common stockholders of record
on August 5, 1997. Each right allows the holder 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.
In July 1997, the Company adopted the 1997 Stock Incentive Plan that
provides for stock options, stock appreciation rights, restricted stock,
stock awards and tax benefit rights for key employees and provides for
automatic awards of stock options to nonemployee directors of the Company
which expire ten years after being granted. The Company has reserved
350,000 shares of common stock for this plan.
In November 1997, the Company adopted the Director Stock Plan of 1997 that
provides that stock may be awarded to outside directors upon their fifth
anniversary of service as an outside director. The Company has reserved
40,000 shares of common stock for this plan.
S-29
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 7 - CAPITAL STOCK (CONTINUED)
In November 1997, the Company adopted the Executive Stock Option Plan of
1997 that provides that options for 247,960 shares of common stock may be
awarded to officers and other key employees of the Company which expire ten
years after being granted. Options for 247,960 shares of common stock were
granted under this plan to replace preferred stock options for 1,534 shares
at $1,000 per share.
At December 31, 1997, there were options for 285,640 shares outstanding
which were granted during 1997. Exercise prices of outstanding stock
options are 267,640 shares at $6.19 and 18,000 shares at $12.50 per share.
The average exercise price is $6.59 per share. The average remaining life
of outstanding stock options at December 31, 1997, was 6.12 years. Options
exercisable at December 31, 1997, are 53,528 shares at $6.19 and 6,480
shares at $12.50 per share.
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", but applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees" for measurement and recognition
of stock-based transactions with its employees. If the Company had elected
to recognize compensation cost for its stock based transactions using the
method prescribed by SFAS No. 123, net loss and loss per share since
reorganization would have been $(1,782,202) and $(1.47).
The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 30%, a risk free interest rate of
5.70% to 6.33%, an expected holding period of seven years and no dividend
yield. Pro forma stock-based compensation cost was $150,000 in 1997.
The Company approved an offering of 400,000 shares of common stock at a
purchase price of $12.50 per share to shareholders and employees as of
January 27, 1998. The offering expires on March 11, 1998.
<PAGE>
NOTE 8 - 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 at December 31, 1997, is estimated to
be approximately equal to the carrying value of $29,200,469. The fair
value of the Company's long-term debt at December 31, 1996, after deducting
current maturities, is estimated to be $12,905,145, compared to carrying
values of $15,338,395. 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.
S-30
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 9 - DEPOSITS
On December 7, 1994, the Company and its wholly-owned subsidiary, Dakota
Telecommunications Systems, Inc., entered into an agreement with U S 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 had 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, which was received in 1997. In addition,
the Company expensed $275,252 of related acquisition costs in 1996.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH PAYMENTS (REFUNDS), NET FOR:
Interest $1,287,837 $ 730,633
Income Taxes $ (215,056) $ 283,415
NONCASH INVESTING AND FINANCING ACTIVITY:
Acquisitions
Fair Value of Assets $4,796,848 $2,607,631
Liabilities 721,036 1,389,208
---------- ----------
Net Assets Acquired 4,075,812 1,218,423
Less: Common Stock Issued for Acquisitions 4,000,000 1,172,000
Cash Acquired - 6,128
---------- ----------
Acquisition Costs, Net of Cash Acquired $ 75,812 $ 40,295
========== ==========
</TABLE>
<PAGE>
NOTE 11 - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current $ (29,543) $(225,740)
Deferred (88,932) 50,028
--------- ---------
Total $(118,475) $(175,712)
========= =========
</TABLE>
Federal and state income tax operating loss carryovers as of December 31,
1997, were $2,749,000 and will expire in 2012.
S-31
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 11 - INCOME TAXES (CONTINUED)
Deferred tax assets and (liabilities) as of December 31, 1997, and 1996
relate to the following:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Accelerated Depreciation $(251,684) $(88,932)
Loss Carryforward 875,057
Other 165,610
Valuation Allowance (788,983)
--------- --------
Total $ - $(88,932)
========= ========
</TABLE>
At December 31, 1997, the Company had net deferred tax assets primarily as
a result of the net operating losses. The full amount of the net deferred
tax asset was offset by a valuation allowance due to uncertainties relating
to the full future utilization of these net operating losses.
The differences between the statutory federal rate and the effective tax
rate were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Consolidated (Loss) Before Income Taxes $(2,605,262) $(335,946)
Less Tax Exempt (Income) Loss 570,910 (100,729)
----------- ---------
Taxable Loss $(2,034,352) $(436,675)
=========== =========
Statutory Tax Rate 35.0% 35.0%
Valuation Allowance (34.4) -
Effect of Graduated Rates and Other 5.2 5.2
----------- ---------
Effective Tax Rate 5.8% 40.2%
=========== =========
</TABLE>
<PAGE>
NOTE 12 - 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 1997 and 1996 were $218,673 and $150,220.
S-32
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 13 - ACQUISITIONS
In December 1997, the Company acquired Futuristic, Inc., a South Dakota
Corporation doing business as DataNet, Inc. ("DataNet"), in exchange for
320,000 (after the two-for-one split) shares of common stock valued at
$4,000,000. The acquisition was accounted for as a purchase. The excess
of the aggregate purchase price and liabilities assumed exceed the fair
value of the assets by $3,178,136 and is being expensed equally over
fifteen years. Operations of the Company acquired are included in the
consolidated statement of operations subsequent to its purchase.
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. The total purchase price was $3,858,704. Customer
lists acquired for $541,300 are being expensed equally over 15 years.
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 unaudited consolidated pro forma information assumes the
acquisitions had occurred at the beginning of each of the following years:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Total Revenues $27,251,152 $24,729,339
Net Loss For the Year (2,383,332) (493,496)
Net Loss Per Share (Since Reorganization) (1.30)
</TABLE>
<PAGE>
The Company has entered into a merger agreement to purchase the outstanding
stock of Vantek Communications, Inc. and Van/Alert, Inc. in exchange for
stock, cash and notes valued at $1,100,000. The purchase is pending FCC
approval.
NOTE 14 - 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.
S-33
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 14 - CHANGE IN ACCOUNTING ESTIMATE (CONTINUED)
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.
NOTE 15 - LOSS PER SHARE
Basic loss per share was computed by dividing the net loss of $(1,632,202)
for only the period since the reorganization (July 21, 1997, to December 31,
1997) by the weighted average number of common shares outstanding
(1,213,442 shares) during the period since the reorganization adjusted for
the two-for-one stock split. Shares issued as a result of the
reorganization were considered outstanding for the entire period. Net
loss of $(854,585) for the period prior to the reorganization was not
considered in the loss per share calculation.
Options, rights and warrants have not been considered in the computation of
diluted loss per share since their effect would be anti-dilutive because of
the net loss. If the 911,320 shares issuable at December 31, 1997, to former
holders of Cooperative common stock and capital credit accounts upon
satisfaction by such holders of conditions to issuance, which have not been
issued as a result of the reorganization, were considered issued for the
entire period, the loss per share would have been ($.77).
NOTE 16 - SEGMENT INFORMATION
The Company operates in three businesses: telecommunications, cable
television and computer network sales. Industry segment information is as
follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Telecommunications $10,048,303 $ 6,752,185
Cable Television 1,892,585 1,349,157
Computer Network Sales 1,788,104 -
----------- -----------
$13,728,992 $ 8,101,342
=========== ===========
Operating Income (Loss):
Telecommunications $(1,383,297) $ 454,097
Cable Television (430,730) (376,247)
Computer Network Sales 55,368 -
----------- -----------
$(1,758,659) $ 77,850
=========== ===========
Identifiable Assets:
Telecommunications $29,075,590 $18,246,345
Cable Television 9,217,881 5,258,530
Computer Network Sales 5,746,421 -
----------- -----------
$44,039,892 $23,504,875
=========== ===========
</TABLE>
S-34
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 16 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Depreciation and Amortization Expense:
Telecommunications $ 2,727,991 $ 2,011,046
Cable Television 702,778 423,370
Computer Network Sales 17,340 -
----------- -----------
$ 3,448,109 $ 2,434,416
=========== ===========
Capital Expenditures:
Telecommunications $10,204,443 $ 1,930,389
Cable Television 2,887,753 3,821,215
Computer Network Sales 471,828 -
----------- -----------
$13,564,024 $ 5,751,604
=========== ===========
</TABLE>
S-35
<PAGE>
STOCK INFORMATION
ABSENCE OF TRADING MARKET
No public trading market currently exists for shares of the Company's
common stock, no par value ("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 a brokerage firm to 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.
RECORD HOLDERS OF COMMON STOCK
As of March 16, 1998, there were approximately 4,299 holders of record
of shares of the Company's Common Stock, representing 1,907,255 shares. An
additional 3,818 holders of common stock and capital credit accounts issued
by the cooperative are eligible to receive an aggregate of 593,262
additional shares of Common Stock upon satisfaction by those holders of the
exchange and informational conditions under the Company's cooperative
conversion plan.
CASH DIVIDENDS
Since its formation in 1997, the Company has not paid cash dividends
on 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. 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. Under these
agreements, the RTFC must authorize distributions other than in shares of
stock unless these 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.
S-36
<PAGE>
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
BOARD OF DIRECTORS
CRAIG A. ANDERSON
Executive Vice President, Chief Financial Officer and Treasurer of the
Company
ROSS L. BENSON
Agribusiness (farm) owner and operator
DALE Q. BYE
Semi-retired agribusiness (farm) owner and operator
JEFFREY J. GOEMAN
President and Owner of Goeman Auction Service and Real Estate, Inc.
(real estate brokerage and appraisal and auction firm)
THOMAS W. HERTZ
Chief Executive Officer and President of the Company
JAMES H. JIBBEN
Chairman of the Board of Directors of the Company and an agribusiness
(farm) owner and operator
PALMER O. LARSON
Semi-retired agribusiness (farm) owner and operator
JEFFREY G. PARKER
President and Chief Executive Officer of Parker Transfer and Storage,
Inc. (transportation and storage company) and President of Slip and
Trip, Inc. (service provider to Parker Transfer and Storage, Inc.)
JOHN (JACK) A. ROTH
Retired agent for State Farm Insurance (insurance company)
JOHN A. SCHAEFER
Retired agribusiness (farm) owner and operator
DIRECTOR EMERITUS
EDWARD D. CHRISTENSEN, JR.
Semi-retired agribusiness (farm) owner and operator
<PAGE>
CORPORATE EXECUTIVE OFFICERS
THOMAS W. HERTZ
Chief Executive Officer and President
CRAIG A. ANDERSON
Executive Vice President, Chief Financial Officer and Treasurer
TIMOTHY DUPIC
Secretary and Vice President of Operations
S-37
EXHIBIT 21
SUBSIDIARIES OF
DAKOTA TELECOMMUNICATIONS GROUP, INC.
NAME STATE OF INCORPORATION OR ORGANIZATION
---- --------------------------------------
Dakota Telecom, Inc. South Dakota
Dakota Telecommunications Systems, Inc. South Dakota
Dakota Wireless Systems, Inc. South Dakota
DTG Communications, Inc. (formerly
TCIC Communications, Inc.) South Dakota
DTG Internet, Inc. (formerly Iway, Inc.) South Dakota
DTG DataNet, Inc. (formerly Futuristic, Inc.) South Dakota
DTG Community Telephone, Inc. South Dakota
OLSEN THIELEN & CO., LTD.
===============================================================================
Certified Public Accountants & Consultants
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements Nos. 333-44063 (Form S-8; Executive Stock Option Plan of
1997), 333-43709 (Form SB-2; Offering of 400,000 shares of Common
Stock), 333-43545 (Form S-8; Director Stock Plan of 1997) and 333-40811
(Form S-8; 1997 Stock Incentive Plan) of Dakota Telecommunications
Group, Inc. of our report dated January 30, 1998, appearing in this Annual
Report on Form 10-KSB of Dakota Telecommunications Group, Inc. and its
subsidiaries for the year ended December 31, 1997.
/s/ Olsen Thielen and Co., Ltd.
St. Paul Minnesota Olsen Thielen and Co., Ltd.
March 30, 1998
Associated World-wide with Jeffreys Henry International Inc.
223 Little Canada Road, St. Paul, Minnesota 55117-1376
612 482 4521 FAX 612 483 2467
6640 Shady Oak Road, Eden Prairie, Minnesota 55344-7709 612 941 9242
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: March 26, 1998 /s/ CRAIG A. ANDERSON
(Signature)
CRAIG A. ANDERSON
(Print Name)
-1-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: March 26, 1998 /s/ T. W. HERTZ
(Signature)
THOMAS W. HERTZ
(Print Name)
-2-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 27, 1998 /S/ ROSS L. BENSON
(Signature)
ROSS LESTER BENSON
(Print Name)
-3-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 27, 1998 /S/ DALE Q. BYL
(Signature)
DALE Q. BYL
(Print Name)
-4-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 27, 1998 /S/ EDWARD D. CHRISTENSEN
(Signature)
EDWARD D. CHRISTENSEN
(Print Name)
-5-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 27, 1998 /S/ JEFFREY J. GOEMAN
(Signature)
JEFFREY J. GOEMAN
(Print Name)
-6-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 27, 1998 /S/ JAMES H. JIBBEN
(Signature)
JAMES H. JIBBEN
(Print Name)
-7-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 29, 1998 /S/ PALMER O. LARSON
(Signature)
PALMER O. LARSON
(Print Name)
-8-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 27, 1998 /S/ JEFFREY G. PARKER
(Signature)
JEFFREY G. PARKER
(Print Name)
-9-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 27, 1998 /S/ JOHN A. ROTH
(Signature)
JOHN A. ROTH
(Print Name)
-10-
<PAGE>
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; CRAIG A. ANDERSON; TRACY T. LARSEN; and
JEFFREY A. OTT, or any of them, his or her attorneys or attorney, with full
power of substitution, to execute in his or her name an Annual Report of
Dakota Telecommunications Group, Inc. on Form 10-KSB for its fiscal year
ended December 31, 1997, and any amendments to that report, and to file it
or them with the Securities and Exchange Commission. Each attorney shall
have power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act to be done in the
premises as fully and to all intents and purposes as the undersigned could
do in person, and the undersigned hereby ratifies and approves the acts of
such attorneys.
Date: January 28, 1998 /S/ JOHN A. SCHAEFER
(Signature)
JOHN A. SCHAEFER
(Print Name)
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DAKOTA AND SUBSIDIARIES FORM 10-K FOR THE PERIOD ENDED
DECEMBER 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,297,938
<SECURITIES> 0
<RECEIVABLES> 4,514,728
<ALLOWANCES> 298,700
<INVENTORY> 1,109,226
<CURRENT-ASSETS> 10,261,743
<PP&E> 36,929,528
<DEPRECIATION> 11,521,262
<TOTAL-ASSETS> 44,039,892
<CURRENT-LIABILITIES> 6,921,786
<BONDS> 29,200,469
<COMMON> 8,511,545
0
0
<OTHER-SE> 2,298,006
<TOTAL-LIABILITY-AND-EQUITY> 44,039,892
<SALES> 0
<TOTAL-REVENUES> 13,728,992
<CGS> 0
<TOTAL-COSTS> 15,487,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,122,807
<INCOME-PRETAX> 2,605,262
<INCOME-TAX> 118,475
<INCOME-CONTINUING> 2,486,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,486,787
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS
OF OPERATIONS OF DAKOTA TELECOMMUNICATIONS GROUP, INC. AND
SUBSIDIARIES FOR THE PERIOD ENDED SEPTEMBER 30, 1997, INCLUDED
IN ITS FORM 10-QSB, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,801,176
<SECURITIES> 0
<RECEIVABLES> 1,814,754
<ALLOWANCES> 343,000
<INVENTORY> 1,383,644
<CURRENT-ASSETS> 6,911,554
<PP&E> 37,257,050
<DEPRECIATION> 13,941,963
<TOTAL-ASSETS> 34,198,137
<CURRENT-LIABILITIES> 3,598,439
<BONDS> 25,715,348
<COMMON> 0
0
5,637,855
<OTHER-SE> 179,666
<TOTAL-LIABILITY-AND-EQUITY> 34,198,137
<SALES> 0
<TOTAL-REVENUES> 8,440,667
<CGS> 0
<TOTAL-COSTS> 9,717,047
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 791,920
<INCOME-PRETAX> (1,827,791)
<INCOME-TAX> (292,880)
<INCOME-CONTINUING> (1,534,911)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,534,911)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
