<PAGE>
As filed with the Securities and Exchange Commission on February 4, 1998
Registration No. 333-43709
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 4813 91-1845100
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classifica- Identification No.)
Organization) tion Code Number)
29705 453RD AVENUE
IRENE, SOUTH DAKOTA 57037-0066
(605) 263-3301
(Address and Telephone Number of Principal Executive Offices)
THOMAS W. HERTZ PLEASE SEND COPIES OF COMMUNICATIONS TO:
CRAIG A. ANDERSON TRACY T. LARSEN
29705 453RD AVENUE GORDON R. LEWIS
IRENE, SOUTH DAKOTA 57037-0066 WARNER NORCROSS & JUDD LLP
(605) 263-3301 900 OLD KENT BUILDING
(Name, Address and Telephone 111 LYON STREET, N.W.
Number of Agents for Service) GRAND RAPIDS, MICHIGAN 49503-2487
(616) 752-2000
Approximate date of commencement of proposed sale of the
securities to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT
BECOMES EFFECTIVE.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
_________________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________________
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of Each Dollar Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Offering Registration Fee
To be Registered Registered Per Unit Price
<S> <C> <C> <C> <C> <C>
Common Stock, $5,000,000 $12.50 $5,000,000 $1,475.00
no par value
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===========================================================================
<PAGE>
PROSPECTUS
DAKOTA TELECOMMUNICATIONS GROUP, INC.
[DAKOTA TELECOMMUNICATIONS GROUP LOGO]
400,000 SHARES
COMMON STOCK, NO PAR VALUE
AT
$12.50 PER SHARE
DAKOTA TELECOMMUNICATIONS GROUP, INC., A DELAWARE CORPORATION (THE
"COMPANY"), IS A DIVERSIFIED TELECOMMUNICATIONS SERVICES COMPANY WHICH
PROVIDES WIRELINE LOCAL AND NETWORK ACCESS SERVICES, LONG DISTANCE
TELEPHONE SERVICES, OPERATOR ASSISTED CALLING SERVICES, TELECOMMUNICATIONS
EQUIPMENT SALE AND LEASING SERVICES, CABLE TELEVISION SERVICES, DATA
NETWORKING SERVICES, INTERNET ACCESS AND RELATED SERVICES AND LOCAL AND
WIDE AREA NETWORK ("LAN" AND "WAN") SERVICES. (SEE "THE COMPANY--
BUSINESS" AND "THE COMPANY--RECENT DEVELOPMENT")
THE COMPANY IS OFFERING FOR SALE UP TO 400,000 SHARES OF ITS COMMON
STOCK, NO PAR VALUE ("COMMON STOCK"). THE COMPANY IS OFFERING THESE SHARES
OF COMMON STOCK ONLY TO STOCKHOLDERS OF RECORD ("STOCKHOLDERS") OF THE
COMPANY AND DIRECTORS, OFFICERS AND EMPLOYEES ("EMPLOYEES") OF THE COMPANY
AT THE CLOSE OF BUSINESS ON JANUARY 27, 1998 (THE "RECORD DATE") WHO ARE
RESIDENTS OF THE STATES OF SOUTH DAKOTA, IOWA, MINNESOTA AND CERTAIN OTHER
SPECIFIED STATES. (SEE "PROSPECTUS SUMMARY--OFFEREES.") ALL SHARES OF
COMMON STOCK ARE BEING SOLD BY THE COMPANY. THIS OFFERING WILL EXPIRE ON
MARCH 11, 1998, AT 5:00 P.M. LOCAL CENTRAL STANDARD (THE "EXPIRATION DATE"),
UNLESS EXTENDED OR TERMINATED EARLIER IN THE SOLE DISCRETION OF THE
COMPANY.
THE COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A CERTAIN AMOUNT
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
===========================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO PUBLIC DISCOUNTS AND PROCEEDS TO COMPANY<F2>
COMMISSIONS<F1>
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ 12.50 None $ 12.50
Total Maximum $5,000,000 $5,000,000
===========================================================================
<FN>
<F1> NO UNDERWRITER IS INVOLVED IN THIS OFFERING. THE COMPANY IS OFFERING
THE COMMON STOCK DIRECTLY TO STOCKHOLDERS AND EMPLOYEES, THROUGH ONE OR
MORE DIRECTORS, OFFICERS OR OTHER EMPLOYEES. NONE OF SUCH PERSONS WILL
RECEIVE, DIRECTLY OR INDIRECTLY, ANY COMMISSION OR OTHER REMUNERATION
FOR SOLICITING SALES OF SHARES OF COMMON STOCK. THERE IS NO MINIMUM
PURCHASE REQUIREMENT IN THIS OFFERING.
<F2> BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$100,000; ASSUMING THE SALE OF THE ENTIRE OFFERING.
</FN>
</TABLE>
This Prospectus is dated February 6, 1998.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION
AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
The Company is a diversified telecommunications services company
which, directly or through wholly owned subsidiaries, provides wireline
local and network access services, long distance telephone services,
operator assisted calling services, telecommunications equipment sale and
leasing services, cable television services, data networking services,
Internet access and related services and LAN and WAN services. (See "THE
COMPANY--Business" and "THE COMPANY--Recent Development")
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.
The numbers of shares of Common Stock discussed in this Prospectus
have been adjusted to reflect the results of a two-for-one stock split
pursuant to a share dividend paid to persons who were stockholders of record
on January 1, 1998 (the "Stock Split").
THE OFFERING
Common Stock Offered . . . . . . 400,000 shares (the "Shares") of
Common Stock (the "Offering") are
offered by the Company. There is no
minimum offering amount.
Offerees . . . . . . . . . . . . Shares are offered only to (i) holders
of record of Common Stock as of the
close of business on the Record Date
("Stockholders") and (ii) directors,
officers and employees of the Company
as of the close of business on the
Record Date ("Employees"). If the
Offering is fully subscribed by
Stockholders, Employees will not be
entitled to purchase Shares. (See
<PAGE>
"THE OFFERING.") A person who is both
a Stockholder and an Employee will be
treated as a Stockholder. Only those
Stockholders and Employees who are
legal residents of the states of South
Dakota, Iowa, Minnesota, and certain
other states may purchase Shares in the
Offering.
Shares Outstanding. . . . . . As of the Record Date, the Company had
2,483,562 shares of Common Stock
issued and outstanding, and 285,640
shares of Common Stock subject to
outstanding options to purchase.
Assuming full subscription, the
Company would have 2,883,562 shares of
Common Stock issued and outstanding
upon completion of the Offering.
Purchase Price . . . . . . . . . $12.50 per Share (the "Purchase
Price"). (See "DETERMINATION OF
OFFERING PRICE.")
Allocation of Shares
to Stockholders. . . . . . . . Each Stockholder may subscribe for as
few as one Share or as many Shares as
the Stockholder would like to
purchase. If the Offering is
oversubscribed by Stockholders, Shares
will be allocated to Stockholders in
proportion to the number of shares of
the Company's Common Stock held by
each subscribing Stockholder as of the
Record Date. If the Offering is
oversubscribed and Shares are
allocated to Stockholders, any
Stockholder who has subscribed for
fewer Shares than the Stockholder
would be entitled to purchase under
the allocation procedure will be
permitted to purchase all Shares
subscribed for. Each Stockholder who
subscribes for 40 or fewer Shares
will, in any event, be entitled to
purchase all Shares subscribed for.
Subscriptions by Employees . . . Shares remaining, if any, after
subscriptions by Stockholders
("Remaining Shares") will be available
2
<PAGE>
for purchase by Employees. Each
Employee will be entitled to subscribe
for as few as one Share or as many
Shares as the Employee would like to
purchase. If the Offering is not
fully subscribed by Stockholders but
Remaining Shares are oversubscribed by
Employees, Remaining Shares will be
allocated per person, with each
Employee entitled to purchase the same
maximum number of Remaining Shares.
Each Employee who subscribes for a
number of Shares equal to or less than
such maximum number of Remaining
Shares shall be entitled to purchase
all Remaining Shares subscribed for
and each Employee who subscribes for
more Remaining Shares than such
maximum number shall be entitled to
purchase such maximum number of
Remaining Shares.
Record Date . . . . . . . . . January 27, 1998.
Offering Expiration Date. . . March 11, 1998, at 5:00 p.m. Central
Standard time (the "Expiration Date")
unless extended or terminated
earlier.
Non-transferability of
Subscription Rights. . . . . . The right to subscribe for and
purchase Shares in the Offering is
uncertificated and is not
transferable.
Fractional Shares. . . . . . . . The Company will not issue any
fractional Shares. The Company will
round to the nearest whole number any
partial Share resulting from the
allocation of Shares.
Manner of Subscribing. . . . . . Stockholders and Employees may
subscribe for Shares by properly
completing and executing a
subscription agreement in the form
included with this Prospectus (a
"Subscription Agreement") and
delivering it to the Company, prior to
the Expiration Date, along with
3
<PAGE>
payment of the Purchase Price for all
Shares that the Stockholder or
Employee subscribes to purchase.
The Subscription Agreement and payment
of the Purchase Price must be
delivered to Dakota Telecommunications
Group, Inc., attn: Mr. Craig A.
Anderson, P.O. Box 66, 29705 453rd
Avenue, Irene, South Dakota 57037-0066
on or before the Expiration Date.
Funds for Shares not purchased will be
returned by the Company as soon as
practicable after the Expiration Date.
Any such payment will be made by
Company check mailed to the record
address of the subscribing Stockholder
or Employee, or such other address as
may be specified in the Subscription
Agreement.
Conditions . . . . . . . . . . . The Offering is not conditioned on
the subscription for or sale of any
minimum number of Shares. Once a
Stockholder or Employee has subscribed
for Shares, such subscription may not
be revoked. Accordingly, Stockholders
and Employees who subscribe for Shares
will not have a right to return of
their funds (except for Shares not
purchased, as described above), unless
the Company terminates the Offering.
The Company reserves the right at any
time prior to the Expiration Date to
terminate or extend the Offering for
any reason.
Issuance of Common Stock . . . . The Company will deliver certificates
representing Shares purchased in this
Offering as soon as practicable after
the Expiration Date.
ABSENCE OF TRADING MARKET
No public trading market currently exists for shares of the Company's
Common Stock. However, the Company intends to ask one or more regional
brokerage firms to act as a market maker for shares of the Company's Common
Stock. In addition, the Company intends to apply to have shares of its
4
<PAGE>
Common Stock quoted for trading on The Nasdaq Stock Market. There can be no
assurance that the Company will be successful in finding brokerage a 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. The Purchase Price
was determined by the Board of Directors in its discretion and was not
determined with reference to actual prices at which shares of the Company's
Common Stock have traded in the public markets. (See "DETERMINATION OF
OFFERING PRICE.")
CASH DIVIDENDS
Since its formation in July 1997, the Company has not paid cash
dividends on the Common Stock.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial information has been
derived from the consolidated financial statements of the Cooperative for
each of the years in the five-year period ended December 31, 1996, which
were audited by Olsen Thielen & Co., Ltd., and the nine months ended September
30, 1996 and 1997, which have not been audited. The selected historical
financial information should be read in conjunction with "THE COMPANY--
Management's Discussion and Analysis or Plan of Operation" and the
Consolidated Financial Statements and related notes included as Appendix A
and Appendix B to this Prospectus. In the opinion of management of the
Company, the unaudited information for the nine months ended September 30,
1996 and 1997 includes all adjustments, consisting only of normal recurring
adjustments, necessary for fair presentation of the information. The
results for the nine-month periods are not necessarily indicative of full
year performance.
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
HISTORICAL
---------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 4,817,571 $ 4,822,235 $ 5,335,351 $ 6,115,529 $ 7,808,842
Costs and Expenses 3,508,881 3,797,835 3,807,320 5,273,657 7,730,992
Operating Income (Loss) 1,308,690 1,024,400 1,528,031 841,872 77,850
Other Income
(Expenses), Net<F1><F2> (308,276) (479,404) (85,654) 593,449 (413,796)
Income (Loss) Before
Income Taxes 1,000,414 544,996 1,442,377 1,435,321 (335,946)
Income Taxes Benefit -- 4,909 11,666 301,859 (175,712)
Net Income (Loss) 1,000,414 540,087 1,430,711 1,133,462 (160,234)
NET (Loss) Per Share<F3> -- -- -- -- --
BALANCE SHEET DATA:
Working Capital $ 2,764,772 $ 3,146,402 $ 5,641,071 $ 7,242,678 $ 4,946,121
Property, Plant and
Equipment - Net 11,365,290 11,760,785 11,241,422 11,041,284 14,441,104
Total Assets 15,828,294 16,871,076 18,494,208 20,121,675 23,504,875
Long-Term Debt 12,584,682 12,918,003 13,028,945 13,504,725 15,338,395
Stockholders' Equity 2,272,614 2,827,100 4,257,396 5,415,305 6,412,216
Book Value
Per Share<F3> -- -- -- -- --
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
- -------------------------------
HISTORICAL
- -------------------------------
1996 1997
- ----------- -----------
<S> <C>
$ 5,284,114 $ 8,440,667
5,316,045 9,717,047
(31,931) (1,276,380)
(300,226) (551,411)
(332,157) (1,827,791)
(47,087) (292,880)
(285,070) (1,534,911)
-- (.78)
$ 5,393,661 $ 3,313,115
14,132,689 23,315,087
22,133,032 34,198,137
15,575,120 25,715,348
5,165,813 4,763,918
-- 2.42
<FN>
<F1> Gains on sale of cellular investments were $240,811 in 1994 and
$686,336 in 1995.
<F2> Income (Loss) from cellular partnerships were:
1992 $ 77,881
1993 (33,404)
1994 125,377
1995 168,788
8
<PAGE>
<F3> Loss per share and book value per share were computed by dividing
net loss and shareholders' equity, respectively, by the number of
shares of Common Stock outstanding as of September 30, 1997
(1,970,432 shares, as adjusted to reflect the effects of the Stock
Split). Options have not been considered since their effect is
anti-dilutive.
</FN>
</TABLE>
GLOSSARY
The following list of definitions includes terms which are defined in
this Prospectus and used principally in the "RISK FACTORS" and "THE
COMPANY--Business," "--Competition" and "--Regulation" sections of this
Prospectus. This Glossary is intended merely to aid in the readability of
this Prospectus:
TERM DEFINITION
- ---- ----------
1984 Cable Act Cable Communications Policy Act of 1984
1992 Cable Act Cable Television Consumer Protection and
Competition Act of 1992
1996 Act Telecommunications Act of 1996
America Online America Online, Inc.
AT&T AT&T Corp.
AT&T Divestiture Decree AT&T divestiture decree, which required the
divestiture by AT&T of its 22 Bell operating
companies and divided the country into 201
LATAs
ATM Asynchronous Transfer Mode
BBN BBN Corporation
BST basic tier of cable service
CATV Community Antenna Television (Cable)
CCL Carrier Common Line
CommNet CommNet Cellular, Inc.
CompuServe CompuServe Corporation
Copyright Act Copyright Revision Act of 1976
CPST cable programming service tier
DataNet Futuristic, Inc. (d/b/a DataNet), now renamed
DTG DataNet, Inc.
DBS direct broadcast satellites
DSI Dakota Systems, Inc. (DSI is not affiliated
with the Company.)
DWS Dakota Wireless Systems, Inc., a wholly owned
subsidiary of the Company
Employees Directors, officers and employees of the
Company as of the close of business on the
Record Date
9
<PAGE>
TERM DEFINITION
- ---- ----------
EPA United States Environmental Protection Agency
Expiration Date March 11, 1998
FCC Interconnection Order First Report and Order in the Matter of
Implementation of the Local Competition
Provisions
FCC United States Federal Communications Commission
GTOCs GTE Corporation Operating Companies
HSDs home satellite dishes
Iway Iway, Inc., a wholly owned subsidiary of the
Company, now renamed DTG Internet Services,
Inc.
IXCs national and regional interexchange carriers
LAN local area network
LATA Local Access and Transport Area
LECs local exchange companies
LFAs local franchising authorities
MATV Master Antenna Television
MCI MCI Communications Corporation
MMDS multi-channel, multi-point distribution
systems
MTA Major Trade Areas
NAPs Internet National Access Points
NECA National Exchange Carrier Association
NETCOM NETCOM On-Line Communication Services, Inc.
OVS open video system
PCS Broad Band Personal Communications Services
PEG public, educational and government access
PSI PSINet Inc.
Purchase Price $12.50 per Share
RBOCs Regional Bell Operating Companies
Record Date January 27, 1998
Remaining Shares Shares remaining, if any, after subscriptions
by Stockholders are fully satisfied
ROR rate-of-return
RTFC Rural Telephone Finance Cooperative
RUS Rural Utilities Service of the United States
Department of Agriculture
SFLP Sioux Falls Cellular Limited Partnership
Shares Shares of Common Stock offered in the Offering
SMATV Satellite MATV
SONET Synchronous Optical Network
Sprint Sprint Corporation
SS7 Signaling System 7 Common Channel Signaling
Stockholders Holders of record of Common Stock as of the
close of business on the Record Date
10
<PAGE>
TERM DEFINITION
- ---- ----------
TCIC TCIC Communications, Inc., a wholly owned
subsidiary of the Company. TCIC has been
renamed DTG Communications, Inc.
TCP/IP Transmission Control Protocol/Internet
Protocol
USF Universal Service Fund
US WEST US West Communications, Inc.
UUNET UUNET Technologies, Inc.
Vantek Vantek Communications, Inc. and Van/Alert,
Inc.
WAN wide area network
11
<PAGE>
RISK FACTORS
The following factors should be considered carefully in evaluating the
Company and its business, in addition to the other information contained in
this Prospectus. In this Prospectus, the term "Company" means the
Cooperative and its subsidiaries before the Conversion, DTG and its
subsidiaries after the Conversion and the Company and its subsidiaries
after the Conversion and the Merger.
FORWARD-LOOKING STATEMENTS
This Prospectus, particularly under the headings "RISK FACTORS,"
"THE COMPANY--Business," "--Competition," "--Regulation" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
contains forward-looking statements relating to the Company's future
development plans, the effects of future regulation and competition and
other matters. These forward-looking statements are based on management's
beliefs, assumptions, current expectations, estimates and projections about
the telecommunications industry, the economy and the Company itself. Words
such as "anticipates," "attempts," "believes," "estimates," "expects,"
"forecasts," "intends," "is likely," "objectives" "plans," "predicts,"
"projects," variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks and
uncertainties, including but not limited to uncertainties relating to
economic conditions, acquisitions and divestitures, government and
regulatory policies, the pricing and availability of equipment, materials,
inventories and programming, technological developments and changes in the
competitive environment in which the Company operates. These risks and
uncertainties are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements, whether as a result of new information,
future events or otherwise.
COMPETITION
GENERAL. The Company faces intense competition in providing
telecommunications and cable television services both within and outside of
its local exchanges. The Company competes with AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI"), Sprint Corporation ("Sprint") and other
national and regional interexchange carriers ("IXCs"), where permissible.
Other potential competitors include cable television companies, wireless
telephone companies, electric utilities, microwave carriers and private
networks of large end-users. Most of these companies have substantially
greater market share and financial, technical, marketing and other
resources than the Company and some of them are the source of the tele-
communications network capacity used by the Company to provide a portion
of its own long distance services. (See "THE COMPANY--Competition.")
12
<PAGE>
LOCAL TELEPHONE SERVICE. Historically, the Company's local telephone
operations have not experienced significant competition. As a result of
the enactment of the federal Telecommunications Act of 1996 (the "1996
Act"), the Company anticipates that its local telephone operations will
experience increased competition from various sources, including resellers
of the Company's local exchange services, large end-users installing their
own networks, IXCs, satellite transmission services, cellular
communications providers, cable television companies, radio-based personal
communications companies, competitive access providers and other systems
capable of completely or partially bypassing the local telephone
facilities. (See "THE COMPANY--Regulation.") In 1996, the South Dakota
Public Utilities Commission approved numerous applications to provide and
resell local exchange services, including applications made by the Company
to enter other local exchanges. Many such applications are pending and the
Company anticipates that additional filings will be made by other
companies. The Company has received two formal interconnection requests
under the 1996 Act from two cellular service companies operating in its
local service areas. The Company cannot predict the specific effects of
competition on its local telephone business at this time. An increase in
such competition could have a material adverse effect on the Company's
business, financial condition and results of operations.
LONG DISTANCE TELECOMMUNICATIONS SERVICES. The United States long
distance telecommunications industry is highly competitive and is
significantly influenced by the marketing and pricing decisions of larger
industry participants. The industry has relatively insignificant barriers
to entry, numerous entities competing for the same customers and high
attrition rates (customer turnover) because customers frequently change
long distance providers in response to offers by competitors of lower rates
or promotional incentives. Most of the Company's competitors are
significantly larger, have substantially greater financial, technical,
marketing and other resources and have larger networks than the Company.
In October 1995, the United States Federal Communications Commission
(the "FCC") reclassified AT&T as a "non-dominant" carrier for domestic
interstate services, which substantially reduced the regulatory constraints
on AT&T. This reclassification may make it easier for AT&T to compete
directly with the Company for long distance subscribers. AT&T was
reclassified as a "non-dominant" carrier for international services on May
14, 1996. The Company also currently competes with US WEST, a Regional Bell
Operating Company, and other local exchange companies ("LECs") in the
provision of "short haul" toll calls completed within a local access and
transport area ("LATA") (or intra-LATA calls). In addition, as a result of
the 1996 Act, the Regional Bell Operating Companies ("RBOCs") and the GTE
Corporation Operating Companies ("GTOCs") will be allowed to compete for
the provision of "long haul" inter-LATA toll calls upon receipt of all
necessary regulatory approvals and the satisfaction of applicable
conditions. The FCC has not yet finalized all of the rules necessary to
13
<PAGE>
implement the 1996 Act and certain of those rules have been, and are
expected to continue to be, the subject of judicial challenge. Therefore
it is unclear at this time what impact the 1996 Act and the rules under the
1996 Act will have on the Company. Depending on the exact nature and
timing of GTOC and RBOC entry into the long distance market and the impact
on access rates, such entry could have a material adverse effect on the
Company's local telephone and long distance business, and its overall
results of operations and financial condition. Certain of the RBOCs have
already taken steps to provide in-region inter-LATA long distance services
and have filed applications with the FCC seeking authority to provide such
services in certain states. The Company expects that most or all of the
RBOCs will file applications for inter-LATA long distance service
authority. (See "THE COMPANY--Regulation.") To date, the FCC has rejected
each of those applications, however.
The ability of the Company to compete effectively in long distance
telecommunications services will depend upon, among other factors, its
continued ability to provide high quality services at competitive prices,
and there can be no assurance that the Company will be able to compete
successfully in the future in its markets. The Company's competitors may
reduce rates or offer incentives to existing and potential customers of the
Company, whether as a result of general competitive pressures or the entry
of the RBOCs, GTOCs and other LECs into the long distance market. Since
the Company believes that to maintain its competitive position it must be
able to reduce its prices to meet reductions in rates by others, a decrease
in the rates for long distance services charged by others could have a
material adverse effect on the Company's business, results of operations
and financial condition. The Company expects price competition to continue
to increase, which could have a material adverse effect on the Company's
business, financial condition and results of operations, including a
reduction in the Company's response rates and higher customer attrition.
The Company also expects to encounter increasing competition from the
development of new technologies and the increased availability of domestic
and international transmission capacity. For example, even though fiber
optic networks, such as the Company's new system, are now widely used for
long distance transmission, it is possible that the desirability of such
networks could be adversely affected by changes in technology. The
telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings
and increasing satellite and fiber optic transmission capacity for services
similar to those provided by the Company. The Company cannot predict which
of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
INTERNET-RELATED SERVICES. The market for data communications
services, including Internet access and on-line services, is extremely
14
<PAGE>
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company
believes that its ability to compete successfully depends on a number of
factors, including: (i) market presence in smaller regional markets;
(ii) the ability to execute a rapid expansion strategy; (iii) the capacity,
reliability and security of its network infrastructure; (iv) ease of access
to and navigation of the Internet; (v) the pricing policies of its
competitors and suppliers; (vi) the timing of the introduction of new
products and services by the Company and its competitors; (vii) the
Company's ability to meet industry standards for technology and service;
and (viii) industry and general economic trends. The success of the
Company in this market will depend heavily upon its ability to provide high
quality Internet connectivity and value-added Internet services at
competitive prices.
The Company's current and potential competitors generally may be
divided into three groups: (i) telecommunications companies, such as AT&T,
MCI, Sprint, the RBOCs, @Home (a joint venture between Tele-Communications,
Inc. and a venture capital firm) and various other cable companies; (ii)
other Internet access providers, such as UUNET Technologies, Inc.
("UUNET"), BBN Corporation ("BBN"), NETCOM On-Line Communication Services,
Inc. ("NETCOM"), PSINet Inc. ("PSI") and other national and regional
providers, including electric utility companies offering internet services;
and (iii) on-line services providers, such as America Online, Inc.
("America Online"), CompuServe Corporation ("CompuServe"), Intuit
Inc., Microsoft Corp. and Prodigy Services Company. Most of these
competitors have greater market presence, engineering and marketing
capabilities, and financial, technological, personnel and other resources
than those available to the Company and some provide services relied upon
by the Company in its Internet business. As a result, these companies may
be able to develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or emerging
technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily and devote greater
resources to the marketing and sale of their services than can the
Company.
The Company expects that all of the major on-line services providers
and telecommunications companies will expand their current services to
compete fully in the Internet access market. The Company also anticipates
that new competitors, including large computer hardware, software, media
and other technology and telecommunications companies, will enter the
Internet access market, resulting in even greater competition. Certain
companies, including America Online, AT&T, UUNET, BBN and PSI, have
obtained or expanded their Internet access products and services as a
result of acquisitions and strategic investments. Such acquisitions and
investments may permit the Company's competitors to devote greater
resources to the development and marketing of new competitive products and
services and the marketing of existing competitive products and services.
15
<PAGE>
The Company expects these acquisitions and strategic investments 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 announced by AT&T and MCI, could place the Company at a
competitive disadvantage.
As a result of increased competition in the Internet services
industry, the Company expects that it will continue to encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of its Internet services. The
Company previously has reduced prices on certain of its Internet access
options and may do so in the future. There can be no assurance that the
Company will be able to offset the effects of any such price reductions
with an increase in the number of its customers, higher revenues from
enhanced services, cost reductions or otherwise. In addition, the Company
believes that the data communications business, and in particular the
Internet access and on-line services businesses, are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in the industry. Increased price or other competition
could result in erosion of the Company's market share and could have a
material adverse effect on the Company's Internet business, financial
condition and results of operations. There can be no assurance that the
Company will have the financial resources, technical expertise, marketing
and support capabilities or expansion and acquisition possibilities to
continue to compete successfully.
CABLE TELEVISION SERVICES. Cable television providers compete for
customers in local markets with other providers of entertainment, news and
information. The competitors in these local markets include broadcast
television and radio, newspapers, magazines and other printed material,
motion picture theaters, video cassettes and other sources of information
and entertainment, including directly competitive cable television
operations. The extent to which the Company's cable television service is
competitive depends upon its ability to provide, on a cost-effective basis,
an even greater variety of programming than that available off-air or
through other alternative delivery sources.
Regulatory changes also impact competition in the cable industry.
(See "THE COMPANY--Regulation.") Both the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and the 1996
Act are designed to increase competition in the cable television industry.
These regulatory changes have encouraged the development and deployment of
alternative methods of distributing the same or similar video programming
offered by cable television systems. These technologies include: (i)
medium power and higher power direct broadcast satellites ("DBS") using
high frequencies to transmit signals that can be received by dish antennas
much smaller in size than traditional home satellite dishes ("HSDs"); (ii)
multi-channel, multi-point distribution systems ("MMDS") that deliver
16
<PAGE>
programming services over microwave channels received by subscribers with
special antennas; and (iii) Master Antenna Television ("MATV") systems and
Satellite MATV ("SMATV") systems that provide multi-channel program
services directly to hotel, motel, apartment, condominium and similar
multi-unit complexes. The Company already has experienced competition in
its cable system territories from MMDS and DBS companies.
Within the cable television industry, cable operators may compete with
other cable operators or others seeking franchises for competing cable
television systems at any time during the terms of existing franchises or
upon expiration of such franchises in the expectation that an existing
franchise will not be renewed. The 1992 Cable Act promotes the grant of
competitive franchises. (See "THE COMPANY--Regulation.") In addition, an
increasing number of cities are exploring the feasibility of owning their
own cable systems in a manner similar to city-provided utility services.
The 1996 Act eliminated the statutory and regulatory restrictions that
prevented telephone companies from competing with cable operators for the
provision of video services through any means. The 1996 Act also allows
local telephone companies, including RBOCs, to compete with cable
television operators both inside and outside of their telephone service
areas. (See "THE COMPANY--Regulation.") The Company expects that it will
face substantial competition from telephone companies in the provision of
video services, whether through the acquisition of cable systems, the
provision of wireless cable or the provision of upgraded telephone
networks. The Company assumes that all major telephone companies have
already entered or soon will enter the business of providing video
services. Most major telephone companies have greater financial resources
than the Company and the 1992 Cable Act ensures that telephone companies
and other providers of video services will not be precluded from providing
significant cable television programming services. Additionally, the 1996
Act eliminates certain federal restrictions on utility holding companies
and thus permits utility companies to provide cable television services.
The Company expects that utility companies could become another source of
competition in the delivery of video services. (See "THE COMPANY--
Regulation.")
REGULATORY AND LEGISLATIVE
GENERAL. Regulations, regulatory actions and court decisions have
had, and in the future may have, both positive and negative effects on the
Company and its ability to compete. The recent trend in federal and state
regulation of telecommunications service providers has been toward lessened
regulation. However, the general recent trend toward lessened regulation
also has given AT&T, the largest long distance carrier in the United
States, increased pricing flexibility that has permitted it to compete more
effectively with smaller companies, such as the Company. In addition, the
1996 Act opened the Company's local service and cable markets to increased
competition. The 1996 Act and regulations adopted by the FCC implementing
17
<PAGE>
the Act are currently the subject of extensive litigation. There can be no
assurance that future regulatory, judicial and legislative changes will not
have a material adverse effect on the Company.
TELECOMMUNICATIONS SERVICES. The Company's local and long distance
businesses are subject to varying degrees of federal, state, local and
international regulation. This regulatory environment varies substantially
by jurisdiction and is in rapid change due to legislative and technological
changes. In the United States, the Company is most heavily regulated by
the various states, in particular the South Dakota Public Utilities
Commission, especially in the provision of local exchange services. The
Company must be separately certified in each state to offer local exchange
and intrastate long distance services in that state.
The 1996 Act substantially changed the regulatory environment for
telecommunications services. The 1996 Act (i) permits RBOCs to provide
domestic and international long distance services to customers located
outside of the RBOCs' home regions; (ii) permits a petitioning RBOC to
provide domestic and international long distance service to customers
within its home region upon a finding by the FCC that the RBOC has
satisfied certain criteria for opening up its local exchange network to
competition and that its provision of long distance services would further
the public interest; and (iii) removes existing barriers to entry into
local service markets, including the Company's local exchanges.
Additionally, there have been significant changes in the manner in which
carrier-to-carrier arrangements are regulated at the federal and state
level, the procedures to revise universal service standards and the
penalties for unauthorized switching of customers. The 1996 Act also
substantially changes the regulation of cable television systems. The FCC
and the South Dakota Public Utilities Commission, as well as many other
state public utilities commissions, have instituted proceedings to
investigate the changes needed in state regulation necessary to comply
with the 1996 Act.
On March 8, 1996, the FCC initiated a rulemaking proceeding and
established a Federal-State Joint Board to recommend changes to the
existing mechanisms for universal service support. On November 8, 1996,
the Joint Board released its recommended decision, and on May 8, 1997, the
FCC released a Report and Order substantially adopting the Joint Board's
recommendations. Appeals of the FCC's Report and Order have been
consolidated before the United States Court of Appeals for the Fifth
Circuit and currently are pending. The FCC also issued a further notice of
proposed rulemaking to establish a universal service support mechanism for
non-rural carriers based on the forward-looking economic cost of
constructing and operating the network used to provide the supported
services. The FCC has further indicated its intent to commence a separate
proceeding by October 1998 to establish forward-looking economic cost
mechanisms for rural carriers. Non-rural carriers would begin to receive
support based on forward-looking economic cost on January 1, 1999, whereas
18
<PAGE>
rural carriers would shift to such an approach beginning no sooner than
January 1, 2001. Modifications to the existing universal service support
mechanism could adversely affect the amounts the Company receives under the
current Universal Service Fund ("USF") rules. The Company cannot predict
the outcome of these proceedings or whether the FCC's actions will have a
material adverse effect on its operations, although the Company
historically has not received a significant portion of its revenue from the
current universal support funds (less than two percent of gross revenue in
1996).
On August 8, 1996, the FCC released its First Report and Order in the
Matter of Implementation of the Local Competition Provisions in the 1996
Act (the "FCC Interconnection Order"). In the FCC Interconnection Order,
the FCC established nationwide rules designed to encourage new entrants to
participate in the local service markets through interconnection with the
incumbent local exchange carriers, including the Company, and resale of the
local exchange carriers' retail services and unbundled network elements.
The Company cannot predict the effect such legislation or the implementing
regulations will have on its operations or the industry. Motions to stay
implementation of the FCC Interconnection Order were filed with the FCC and
federal courts of appeal. Appeals challenging, among other things, the
validity of the FCC Interconnection Order were filed in several federal
courts of appeal and consolidated before the United States Circuit Court of
Appeals for the Eighth Circuit for disposition. The Eighth Circuit has
stayed the pricing provisions of the FCC Interconnection Order, and the
United States Supreme Court denied an application to vacate the stay. On
July 18, 1997, the Eighth Circuit overturned substantial parts of the FCC
Interconnection Order, as it related to the ability of the FCC to set
interconnection rates. The FCC has appealed this decision to the Supreme
Court, which has accepted the appeal for hearing. The Company cannot
predict either the outcome of the appeals or the eventual effect on its
business or the industry in general.
On December 24, 1996, the FCC initiated a rulemaking proceeding to
address the reform of access charges. Access charges are a principal
component of the Company's local telephone exchange operating revenues as
well as its long distance business line cost expense. On May 16, 1997, the
FCC released its First Report and Order adopting changes to the existing
access charge structure. With limited exceptions, those modifications
apply only to price cap incumbent LECs, which generally are the nation's
largest telephone companies. In the First Report and Order, the FCC also
stated its intention to issue a subsequent Report and Order to provide
additional rules to implement access charge reform, and to initiate
separate proceedings to examine historical cost recovery issues and access
charge reform for rate-of-return carriers, such as the Company. Appeals of
the FCC's First Report and Order have been consolidated before the Eighth
Circuit and currently are pending. The Company cannot predict whether the
result of these proceedings will have a material impact upon its
operations.
19
<PAGE>
FCC approval is required for the operation of the Company's
international long distance services. The Company believes that it has all
the necessary FCC authorizations for its current operations. There can be
no assurance, however, that the Company will receive all authorizations or
licenses necessary for new communications services or that delays in the
licensing process will not adversely affect the Company's business.
INTERNET SERVICES. The Company's Internet-related services are not
currently subject to direct regulation by the FCC or any other United
States agency, other than regulation applicable to businesses generally.
The FCC recently requested comments on a petition filed by the America's
Carriers Telecommunication Association which requests that the FCC regulate
certain voice transmissions over the Internet as telecommunications
services. In its access charge reform proceeding, the FCC also concluded
that incumbent LECs may not assess interstate access charges on information
service providers, but stated that it planned to address issues relating to
information service providers' use of the public switched network as part
of a broader set of issues under review in a related proceeding. Changes
in the regulatory environment relating to the telecommunications or
Internet-related services industry could have an adverse effect on the
Company's Internet-related services business. The 1996 Act may permit
telecommunications companies, RBOCs or others to increase the scope or
reduce the cost of their Internet access services. The Company cannot
predict the effect that the 1996 Act or any future legislation, regulation
or regulatory changes may have on its Internet business.
CABLE SERVICES. The operation of cable television systems is
extensively regulated through a combination of federal legislation and FCC
regulations, by a number of state governments and by most local government
franchising authorities such as municipalities and counties. The 1996 Act,
which alters federal, state and local laws and regulations regarding
telecommunications providers and cable television service providers, can be
expected to have a profound effect on the regulation of cable television
operations. The Cable Communications Policy Act of 1984 (the "1984 Cable
Act") and the 1992 Cable Act also extensively regulated the cable
television industry and much of that regulation remains unchanged by the
1996 Act. In addition, because cable television systems use local streets
and rights-of-way, cable systems are generally licensed or franchised by
local municipal or county governments and, in some cases, by centralized
state authorities. These franchises are granted for fixed periods of time
subject to extension or renewal and, while the Company believes that its
relationships with its franchising authorities are good, there can be no
assurance that its franchise agreements will be extended or renewed, or
that any extension or renewal will be on substantially similar terms and
conditions.
The regulation of cable television systems at the federal, state and
local levels is subject to the political process and has been in constant
20
<PAGE>
flux over the past decade. Material changes in the law and regulatory
requirements must be anticipated and there can be no assurance that the
Company's business will not be affected adversely by future legislation,
new regulation or deregulation. (See "THE COMPANY--Regulation.")
RAPID TECHNOLOGICAL CHANGES; DEPENDENCE UPON PRODUCT DEVELOPMENT
The telecommunications industry is subject to rapid and significant
changes in technology. While the Company does not believe that, for the
foreseeable future, these changes will materially and adversely affect the
continued use of fiber optic cable or materially hinder its ability to
acquire necessary technologies, the effect of technological changes,
including changes relating to emerging wireline and wireless transmission
and switching technologies, on the Company's businesses cannot be
predicted.
The market for the Company's Internet-related products and services
is particularly characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new product and
service introductions. There can be no assurance that the Company will
successfully identify new product and service opportunities and develop and
introduce new products and services to the market in a timely manner. The
Company is also at risk resulting from fundamental changes in the way
Internet access services are marketed and delivered. The Company's
Internet service strategy assumes that the Transmission Control
Protocol/Internet Protocol ("TCP/IP"), utilizing fiber optic or copper-
based telecommunications infrastructures, will continue to be the primary
protocol and transport infrastructure for Internet-related services.
Emerging transport alternatives include wireless access services, cable
modems and satellite delivery of Internet information; alternative open
protocol and proprietary protocol standards have been or are being
developed. The Company's pursuit of technological advances may require
substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet services business to
alternate access devices, conduits and protocols.
DEPENDENCE UPON TECHNOLOGY
The Company's business is dependent upon its ability to procure
technology that will permit it to offer existing and new services that are
competitive with other entities in its various markets. The Company
currently does not engage in any independent research and development and
may not have the resources necessary to acquire the best available or
necessary technology in the future. The Company's competitors also could
have proprietary rights in technology that the Company could require in the
future, which could cause such technology to be unavailable to the Company
or available only at a high cost. The inability of the Company to procure
or develop required technology in the future could have a material adverse
21
<PAGE>
effect on the Company's business, financial condition and results of
operations.
SIGNIFICANT CAPITAL REQUIREMENTS
The development of the Company's businesses and the expansion and
integration of its telephone and cable networks require significant capital
expenditures. During 1996, the Company's capital expenditures, which were
primarily for the acquisition of Community Antenna Television (Cable)
("CATV") system assets and for construction of networks and the purchase of
related equipment, were approximately $5,700,000. In 1997, the Company
rebuilt its network using SONET fiber rings, built a new centralized
switching and CATV head end facility and overbuilt four of its existing
CATV systems using new hybrid fiber coax ("HFC") technology which allows
the same system to carry both cable television and telephone signals.
Total expenditures for these projects were approximately $15 million. The
Company is currently developing plans for its 1998 construction
initiatives. These initiatives involve expanding the Company's fiber optic
network, accelerating central office interconnection and integration with
its cable television systems, deploying additional switches, providing
high-speed local Internet access and acquiring complementary businesses,
technologies or products. Expenditures for these initiatives will be
subject to the Company's assessment of a number of factors, including the
cost of any additional capital required, technological developments,
regulatory requirements and market conditions. In addition, each
initiative may be implemented in whole or in part, and independently of any
other initiative, ensuring that the Company retains maximum financial and
operating flexibility. The Company will need to finance these capital
expenditures through outside sources including both additional long
term debt and equity placements. There can be no assurance that
increased capital expenditures will result in enhanced profitability.
The Company historically has utilized low interest government loans
from the Rural Utilities Service (the "RUS") to finance its capital
expenditure programs. In July 1997, the Company refinanced these loans
through the Rural Telephone Finance Cooperative (the "RTFC"), which also
provided the funds for the Company's 1997 capital expenditures. There is
no assurance, however, that such loans or other normal commercial loans
will be available to cover the Company's anticipated plans. In such event,
the Company may have to raise additional equity, possibly at prices which
could result in substantial dilution to the Company's existing stockholders
and investors in this Offering. Failure to have access to sufficient funds
for capital expenditures may require the Company to delay or abandon some
of its future expansion or expenditures. Delay or abandonment of its future
expansion would make it impossible for the Company to expand into new
markets, which could have a material adverse effect on the Company's growth
and future business, financial condition and results of operations. The
delay or abandonment of its future expansion would have no impact on the
Company's current operations and markets.
22
<PAGE>
FINANCIAL LEVERAGE; DEBT SERVICE, INTEREST RATE FLUCTUATIONS, POSSIBLE
REDUCTION IN LIQUIDITY
At December 31, 1996, the Company reported $15,300,000 of long-term
debt (including capital leases and excluding current maturities) and a
long-term debt-to-equity ratio of 2.4 to 1. At September 30, 1997, long-term
debt had increased to $25,700,000. Borrowings under existing long-term
credit facilities are primarily at variable interest rates, although a
small portion of such borrowings are at fixed rates. The Company may lock
into fixed rates at any time. The Company anticipates that any borrowings
that may be required for future capital expenditures would likely bear
interest at variable rates. Increases in interest rates, economic
downturns and other adverse developments, which include many factors beyond
the Company's control, could impair the Company's ability to service its
indebtedness. In addition, the cash flow required to service the Company's
debt may reduce its ability to fund internal growth, additional
acquisitions and capital improvements.
DIVIDEND RESTRICTIONS AND OTHER RESTRICTIVE COVENANTS
In March 1997, the Company received loan commitments from the RTFC in
the aggregate amount of approximately $28,421,000. The loan terms provide
that the Company must on a consolidated basis maintain a minimum annual
debt coverage service ratio (total net income or margins plus depreciation
and interest on long-term debt for a year divided by principal and interest
on long-term debt payable in that year) and a minimum average ratio of net
income to total interest expense on long-term debt. In addition, the loan
subjects the Company to certain minimum net worth requirements, and in some
cases requires the Company to obtain prior written consent from the RTFC in
order to pay any dividends or distributions to stockholders or incur
additional indebtedness.
OPERATING LOSSES
A substantial portion of the expenditures related to the development
of the Company's business, the installation and expansion of its telephone
and cable networks and the recently proposed linking of these networks
through the acquisition or construction of facilities, will be incurred
before the Company realizes revenues from these expenditures. These
expenditures, together with the associated up-front operating expenses,
will result in negative cash flows until an adequate customer base is
established. The Company reported net losses of approximately $160,234 for
the year ended December 31, 1996 and $1,534,911 for the nine-month period
ended September 30, 1997. Although its gross revenues increased in 1996 and
during the first three quarters of 1997, the Company has incurred significant
increases in expenses associated with the acquisition of new cable systems
23
<PAGE>
and the development and expansion of its cable and fiber optic networks,
services and customer base. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the significant expenses associated with the expansion
and development of its networks and services, the Company's operating
results could vary significantly from period to period. Additional factors
contributing to variability of operating results include the pricing and
mix of services and products sold by the Company, customer terminations of
service, the timing and costs of the expansion of the Company's network
infrastructure, the timing and costs of marketing and advertising efforts
and the timing and costs of any acquisitions of businesses, products or
technologies. Accordingly, these revenues and expenses are likely to
fluctuate from period to period.
ACQUISITION STRATEGY
In furtherance of its current business strategy, the Company has
entered and may continue to enter into strategic alliances with, acquire
assets or businesses from or make investments in companies that are
complementary to its current operations. Except as described under the
heading "THE COMPANY--Recent Development," the Company has no present
commitments or agreements with respect to any such strategic alliance,
investment or acquisition. However, effective December 1, 1997, the Company
acquire by merger Futuristic, Inc. (d/b/a DataNet), now renamed DTG DataNet,
Inc. ("DataNet"), a LAN and WAN integrator located in Sioux Falls, South
Dakota. (See "THE COMPANY--Business.") Any future strategic alliances,
investments or acquisitions would be accompanied by the risks commonly
encountered in such transactions. Such risks include, among other things,
the difficulty of assimilating the operations and personnel of the companies,
the potential disruption of the Company's ongoing business, costs associated
with the development and integration of such operations, the inability of
management to maximize the financial and strategic position of the Company by
the successful incorporation of licensed or acquired technology into the
Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management. In addition, the Company may
experience higher customer attrition with respect to customers obtained
through acquisitions. There can be no assurance that products, technologies
or businesses of acquired companies will be effectively assimilated into the
business or product offerings of the combined company. In addition, the
Company may incur significant expense to complete acquisitions and to support
the acquired products and businesses. There can be no assurance that any
acquired products, technologies or businesses will contribute to the
Company's revenues or earnings to any material extent or, due to the factors
noted above, that they will not adversely affect the Company's business,
financial condition and results of operations.
24
<PAGE>
NETWORK EXPANSION AND IMPLEMENTATION
The Company is continually engaged in the expansion and development of
its networks and services. This expansion will depend on, among other
things, the Company's ability to access markets, design fiber optic network
backbone routes, install facilities and obtain rights-of-way, building
access and any required government authorizations and/or permits, all in a
timely manner, at reasonable costs and on satisfactory terms and
conditions. In addition, this expansion will depend on the Company's
ability to expand, train and manage its growing employee base. Such
expansion has placed, and is expected to continue to place, significant
demands on the Company's management and operational and financial
resources. As a result, there can be no assurance that the Company will be
able to expand its existing networks or install new networks. If the
Company is not able to expand its networks or install or acquire new
networks, there likely would be a material adverse effect on the Company's
growth and there may be a materially adverse effect on the Company's
business, financial condition and results of operation.
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES
Most telephone calls made by the Company's long distance customers are
connected via transmission lines leased by the Company from transmission
facilities-based long distance carriers. These carriers, such as AT&T, US
WEST and WorldCom, Inc., compete with the Company. The Company's
profitability will continue to depend, in part, on its ability to obtain
and utilize leased capacity on a cost-effective basis. The Company leases
its capacity pursuant to agreements with terms ranging from one to 36
months. Accordingly, the Company is vulnerable to changes in its lease
arrangements, such as price increases and service cancellations. Although
the Company believes that it has and will continue to enjoy favorable
relationships with the transmission facilities-based long distance carriers
from which the Company leases transmission lines, there can be no assurance
that leased capacity will continue to be available at cost-effective rates.
Due to the possibility of unforeseen changes in industry conditions, the
continued availability of leased transmission facilities at historical
rates cannot be assured. The Company has, from time to time, experienced
delays in receiving leased telecommunications services, especially from US
WEST, and there can be no assurance that the Company will be able to obtain
such services on the scale and within the time frames required by the
Company at an affordable cost, or at all. Any failure to obtain such
services or additional capacity on a timely basis and at an affordable
cost, or at all, could have a material adverse effect on the Company's
business, financial condition and results of operations.
25
<PAGE>
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY
RISKS
The success of the Company in marketing its services to business and
government users requires that the Company provide superior reliability,
capacity and security via its network infrastructure. The Company's
telephone and cable networks are subject to physical damage, power loss,
capacity limitations, software defects, breaches of security (by computer
virus, break-ins or otherwise) and other factors, certain of which have
caused, and will continue to cause, interruptions in service or reduced
capacity for the Company's customers. Similarly, the Company's Internet
business relies on the availability of its network infrastructure for the
provision of Internet access services. Interruptions in service, capacity
limitations or security breaches could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY FOR INTERNET
OPERATIONS
The Company relies on other companies to supply certain key components
of its Internet network infrastructure, including telecommunications
services and networking equipment, which, in the quantities and quality
demanded by the Company, are available only from sole or limited sources.
The Company has, from time to time, experienced delays in receiving these
products and services, and there can be no assurance that the Company will
be able to obtain such services on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any failure to
obtain such services or additional capacity on a timely basis and at an
affordable cost, or at all, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's Internet business also is dependent on its suppliers' abilities
to provide necessary products and components that comply with various
Internet and telecommunications standards, interoperate with products and
components from other vendors and function as intended when installed as
part of the network infrastructure. Any failure of the Company's sole or
limited source suppliers to provide products or components that comply with
Internet standards, interoperate with other products or components used by
the Company in its network infrastructure or by its customers or fulfill
their intended function as a part of the network infrastructure could have
a material adverse effect on the Company's business, financial condition
and results of operations.
EXPANSION OF SALES AND MARKETING ACTIVITIES
As part of its growth strategy, the Company intends to seek to further
develop and expand its sales and marketing activities, primarily by
expanding its direct sales force. The Company has historically focused
primarily on providing local telephone and cable services to residential
26
<PAGE>
and business customers in its local exchanges and its marketing efforts
have primarily relied upon direct mail marketing and advertising. The
Company's future success will depend upon, among other things, the
Company's ability to build an effective direct sales force, including its
ability to attract, retain and train effective direct sales marketing
personnel, and to offer competitively-priced services that are attractive
to its customers. The Company expects to incur significant expenses and
negative operating cash flows as it expands its direct sales force and
builds its customer base. Although certain members of management have
experience in direct sales marketing, the Company itself does not have
experience in this distribution channel or market segment. There can be no
assurance that expansion costs will not exceed the Company's budgeted
amounts, that the Company will be able to successfully expand its sales and
marketing efforts or that any such expansion will prove profitable.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the
continued contributions of its management team, as well as its technical,
marketing and sales personnel. The Company's businesses are managed by a
number of key executive officers, the loss of certain of whom, particularly
Thomas W. Hertz, the Company's President and Chief Executive Officer and
Craig A. Anderson, the Company's Executive Vice President-Marketing, Chief
Financial Officer and Treasurer, could have a material adverse effect on the
Company. While certain of the Company's employees, including Messrs. Hertz
and Anderson, have entered into employment agreements with the Company, the
Company's employees may voluntarily terminate their employment with the
Company at any time. The Company's success also will depend on its ability
to continue to attract and retain qualified management, marketing,
technical and sales personnel. The process of locating such personnel with
the combination of skills and attributes required to effectuate the
Company's strategies can be lengthy. Competition for qualified employees
and personnel in the telecommunications industry is intense and, from time
to time, there are a limited number of persons with knowledge of and
experience in particular sectors of the telecommunications industry. There
can be no assurance that the Company will be successful in attracting and
retaining such executives and personnel. The loss of the services of key
personnel, or the inability to attract additional qualified personnel,
could have a material adverse effect on the Company's results of
operations, development efforts and ability to expand.
POTENTIAL LIABILITY OF ON-LINE SERVICE PROVIDERS
The law in the United States relating to the liability of on-line
services providers and Internet access providers for information carried
on, disseminated through or hosted on their systems is currently unsettled.
Several private lawsuits seeking to impose liability on such providers are
currently pending. In one case brought against an Internet access
27
<PAGE>
provider, RELIGIOUS TECHNOLOGY CENTER V. NETCOM ON-LINE COMMUNICATION
SERVICES, INC., the United States District Court for the Northern District
of California ruled in a preliminary phase that under certain circumstances
Internet access providers could be held liable for copyright infringement.
The case has been settled by the parties.
The 1996 Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. On June 12, 1996, however, a panel of three federal judges
granted a preliminary injunction barring enforcement of this portion of the
1996 Act, to the extent that enforcement is based upon allegations other
than obscenity or child pornography, as an impermissible restriction on the
First Amendment's right of free speech. On June 26, 1997, the United
States Supreme Court held the provisions unconstitutional. In addition,
Congress, in consultation with the United States Patent and Trademark
Office and the Clinton Administration's National Information Infrastructure
Task Force, is currently considering legislation to address the liability
of on-line service providers and Internet access providers, and numerous
states have adopted or are currently considering similar types of
legislation. The imposition upon Internet access providers or Web hosting
sites of potential liability for materials carried on or disseminated
through their systems could require the Company to implement measures to
reduce its exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain product or service
offerings. The Company believes that it is currently unsettled whether the
1996 Act prohibits and imposes liability for any services provided by the
Company should the content or information transmitted be subject to the
statute.
The law relating to the liability of on-line service providers and
Internet access providers in relation to information carried, disseminated
or hosted also is being discussed by the World Intellectual Property
Organization in the context of ongoing consideration of updating existing,
and adopting new, international copyright treaties. Similar developments
are ongoing in the United Kingdom and other jurisdictions. The scope of
authority of various regulatory bodies in relation to on-line services is
at present uncertain. The Office of Telecommunications in the United
Kingdom recently published a consultative document setting forth a number
of issues for discussion, including the roles of traditional
telecommunications and broadcasting regulators with respect to on-line
services. The Securities Investment Board in the United Kingdom is
investigating the status of on-line services and the transmission of
investment information over networks controlled by access providers. Such
transmissions may make an access provider liable for any violation of
securities and other financial services legislation and regulations.
Decisions regarding regulation, enforcement, content liability and the
availability of Internet access in other countries may significantly affect
28
<PAGE>
the ability to offer certain services worldwide and the development and
profitability of companies offering Internet and on-line services in the
future. For example, CompuServe recently removed certain content from its
services worldwide in reaction to law enforcement activities in Germany,
and it has been reported that an Internet access provider in Germany has
been advised by prosecutors that it may have liability for disseminating
neo-Nazi writings by providing access to the Internet where these materials
are available.
The increased attention focused upon liability issues as a result of
these lawsuits, legislation and legislative proposals could affect the
growth of Internet use. Any costs incurred as a result of liability or
asserted liability for information carried on or disseminated through its
systems could have a material adverse effect on the Company's business,
financial condition and results of operations.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions which may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company without the approval of
the Company's Board of Directors. (See "DESCRIPTION OF THE COMPANY'S
CAPITAL STOCK--Other Provisions Affecting Control of the Company.") Such
provisions also may render the removal of directors and management more
difficult. Among other things, the Company's Certificate of Incorporation
and/or Bylaws: (i) provide for a classified Board of Directors serving
staggered three-year terms; (ii) impose restrictions on who may call a
special meeting of stockholders; (iii) include a requirement that
stockholder action be taken only by unanimous written consent or at
stockholder meetings; (iv) specify certain advance notice requirements for
stockholder nominations of candidates for election to the Board of
Directors and certain other stockholder proposals; and (v) impose certain
restrictions and supermajority voting requirements in connection with
specified business combinations not approved in advance by the Company's
Board of Directors. In addition, the Company's Board of Directors, without
further action by the stockholders, may cause the Company to issue up to
250,000 shares of preferred stock ("Preferred Stock") on such terms and
with such rights, preferences and designations as the Board of Directors
may determine. Issuance of such Preferred Stock, depending upon the
rights, preferences and designations thereof, may have the effect of
delaying, deterring or preventing a change in control of the Company.
(See "ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock Purchase Rights
Plan.") Further, certain provisions of the Delaware General Corporation
Law (the "Delaware Law") impose restrictions on the ability of a third
party to effect a change in control of the Company and may be considered
disadvantageous by a stockholder. (See "DESCRIPTION OF THE COMPANY'S
CAPITAL STOCK--Statutory Provisions Affecting Control of the Company.")
Finally, the Company has enacted a stockholder rights plan to protect
29
<PAGE>
stockholders of the Company against unsolicited attempts to acquire control
of the Company in a manner that does not offer a fair price to all
stockholders. (See "ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock
Purchase Rights Plan.") Certain federal and state regulations requiring
prior approval of transfers of control may also have the effect of
delaying, deterring or preventing a change in control of the Company. (See
"RISK FACTORS--Regulatory and Legislative" and "THE COMPANY--Regulation.")
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
There was no public market for the Cooperative's securities and there
currently is no public market for the Company's Common Stock. Although the
Company intends to apply to have shares of its Common Stock quoted for
trading on The Nasdaq Stock Market, there can be no assurance that a
trading market would develop or be maintained or, if it did, that it would
provide the Company's stockholders a meaningful opportunity to liquidate
their equity interests in the Company at a fair value. The public trading
price of shares of the Company's Common Stock would be determined by
trading among the Company's stockholders and the Company would not have
control over these trades. The market price of the Company's stock may be
highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new products or
services by the Company or its competitors, changes in the regulatory
framework or in the cost of long distance service or other operating costs
and changes in general market conditions may have a significant effect on
the market price of the stock, should a market for the Company's Common
Stock ever develop. The Purchase Price was determined by the Board of
Directors in its discretion and was not determined with reference to actual
prices at which shares of the Company's Common Stock have traded in the
public markets. (See "DETERMINATION OF OFFERING PRICE.")
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation provides for a substantial
number of authorized shares of Common Stock and Preferred Stock which could
be issued upon resolution of the Board of Directors without any additional
stockholder action or approval. The Company's current plans include a number
of programs which, if implemented, will require additional capital. Issuance
of additional Common or Preferred Stock as part of the financing arrangements
for these projects is contemplated. However, the dates, amounts, terms and
purposes of such issuances are not now known.
Future sales of substantial numbers of shares of the Company's stock
in the public market or otherwise (including in connection with acquisi-
tions), or the perception that such sales could occur, could adversely
affect the market price of the stock and make it more difficult for the
Company to raise funds through equity offerings in the future and, if such
sales are made, could dilute the relative equity interests of the
stockholders of the Company. Several principal stockholders hold a
significant portion of the outstanding shares of the Company's Common
30
<PAGE>
Stock, or a right to acquire a significant portion of such shares, and a
decision by one or more of these stockholders to sell their shares, under
Rule 144 issued under the Securities Act or otherwise, could materially
and adversely affect the market price of the stock. (See "ADDITIONAL
SECURITIES OF THE COMPANY--Stock Options.") As of the Record Date, there
were 2,483,562 shares of the Company's Common Stock outstanding and an
additional 285,640 shares subject to stock options. All of these shares are
freely tradeable without restriction or further registration under the
Securities Act, except for any shares held by "affiliates" of the Company or
persons who had been "affiliates" within the three months preceding
consummation of the Conversion and the Merger and shares subject to certain
existing standstill agreements. (See "ADDITIONAL SECURITIES OF THE
COMPANY--Standstill Agreements.") In addition, in November 1997 the Company
filed a Registration Statement on Form S-8 under the Securities Act to
register approximately 350,000 (as adjusted for the Stock Split) shares of the
Company's Common Stock issuable under the Company's 1997 Stock Incentive
Plan.
CERTAIN STANDSTILL AGREEMENTS
In connection with the Cooperative's acquisition of TCIC
Communications, Inc. ("TCIC") and I-Way Partners, Inc. (renamed "Iway,
Inc.") ("Iway"), the Cooperative issued to the former shareholders of TCIC
and Iway (collectively, the "Sellers") shares of Cooperative preferred
stock which automatically upon consummation of the Merger were converted
into 94,727 shares of Common Stock and, after the Stock Split, are now
189,454 shares of Common Stock. In addition, the Sellers collectively
received warrants which were converted into warrants to purchase an
additional 38,956 shares of Common Stock and, after the Stock Split, were
warrants to purchase 77,912 shares of Common Stock. These warrants were
exercised in full in January 1998.
In addition, in connection with the Company's acquisition of DataNet,
the Company issued 320,000 shares (as adjusted for the Stock Split) of
Common Stock to the two former shareholders of DataNet, both of whom are
former shareholders of Iway. As a result of these transactions, the Sellers
collectively own approximately 23.7% of the outstanding Common Stock of the
Company.
In connection with the issuance of the Cooperative preferred stock
and warrants to the Sellers, the Cooperative entered into standstill
agreements (the "Standstill Agreements") with the Sellers. Pursuant to
the Standstill Agreements, the Sellers are restricted in their ability to
dispose of shares of the Company's Common Stock and have agreed to refrain
from certain other actions related to Company Common Stock. For a
description of these restrictions, see "ADDITIONAL SECURITIES OF THE
COMPANY--Standstill Agreements." Due to the restrictions contained in
the Standstill Agreements, the Standstill Agreements could affect the
development of a market for Company Common Stock by limiting the sale of
31
<PAGE>
or trading in the Common Stock of the Company owned by the Sellers and may
have the effect of delaying, deterring or preventing a change in control of
the Company by limiting the Sellers' abilities to initiate or participate
in any transaction that might result in a change in control. The former
shareholders of DataNet also entered into similar Standstill Agreements
with respect to shares of Common Stock issued in connection with the
DataNet acquisition.
CERTAIN CREDIT RISKS
In the ordinary course of its business, the Company maintains
substantial cash balances at various depository institutions. At times
such deposits may exceed federally insured limits. While the Company has
not experienced any losses as a result of such deposits, the insolvency or
failure of such a financial institution could result in a substantial loss
for the Company, depending on the size of the uninsured portion of the
deposit.
THE OFFERING
The Company is offering 400,000 Shares of Common Stock at a Purchase
Price of $12.50 per Share to Stockholders and Employees of record as of the
close of business on January 27, 1998 (the "Record Date"). Stockholders
and Employees of the Company on the Record Date are entitled to subscribe
for the Shares offered in this Offering subject to the conditions and in
accordance with the procedures described below. Only those Stockholders
and Employees who are legal residents of the states of South Dakota, Iowa,
Minnesota and certain other states may purchase Shares in the Offering.
(See "THE OFFERING--Subscription.") There is no minimum offering amount
or subscription amount.
OFFEREES
The Company offers the Shares only to (i) holders of record of Common
Stock as of the close of business on the Record Date ("Stockholders") and
(ii) directors, officers and employees of the Company as of the close of
business on the Record Date ("Employees"). Subscribing Stockholders will
be entitled to purchase Shares before Employees. To the extent that the
Offering is fully subscribed by Stockholders, Employees will not be
entitled to purchase Shares, as further described below. For purposes of
the Offering, a person who is both a Stockholder and an Employee will be
treated as a Stockholder only.
EXPIRATION DATE
This Offering will expire on March 11, 1998, at 5:00 p.m. Central
Standard time (the "Expiration Date"). The Company will not be obligated
to accept any purported subscriptions received after the Expiration Date,
regardless of when the documents relating to that subscription were sent.
32
<PAGE>
ALLOCATION OF OVERSUBSCRIBED SHARES BY STOCKHOLDERS
If the aggregate number of Shares subscribed for by all Stockholders
who submit valid subscriptions is greater than 400,000 Shares, Shares will
be allocated to subscribing Stockholders in proportion to the number of
shares of the Company's Common Stock held by each subscribing Stockholder
as of the Record Date. To that end, management of the Company will compute
an allocation factor (the "Allocation Factor") which shall be that number
which, in the judgment of management, best achieves all of the following
allocation objectives:
- Each subscribing Stockholder who subscribes for a
number of Shares greater than the product obtained by
multiplying the Allocation Factor by the number of
shares held of record by that Stockholder as of the
Record Date shall receive a number of Shares equal to
the product obtained by multiplying the Allocation
Factor by the number of shares held of record by the
Stockholder as of the Record Date.
- Each Stockholder who subscribes for a number of Shares
less than the product obtained by multiplying the
Allocation Factor by the number of shares held of
record by the Stockholder as of the Record Date shall
receive the number of Shares subscribed for.
- Each Stockholder who subscribes for 40 or fewer Shares
shall receive the number of Shares subscribed for.
- The number of Shares issued in the Offering, after
taking into account allocation and rounding of
fractional Shares, shall not in any event exceed
400,000 Shares.
REMAINING SHARES
Shares remaining, if any, after subscriptions by Stockholders are
fully satisfied ("Remaining Shares") will be available for purchase by
Employees. Each Employee may subscribe for as few as one Remaining Share
or as many Remaining Shares as the Employee would like to purchase. If the
Offering is not fully subscribed by Stockholders but Remaining Shares are
oversubscribed by Employees, Remaining Shares will be allocated per person,
with each Employee entitled to purchase the same maximum number of
Remaining Shares. To that end, management of the Company will compute a
maximum number (the "Maximum Number") which shall be that number which, in
the judgment of management, best achieves the following objectives:
33
<PAGE>
- Each Employee who subscribes a number of Shares equal to or
less than the Maximum Number of Remaining Shares shall be
entitled to purchase all Remaining Shares subscribed for.
- Each Employee who subscribes for more Remaining Shares than
the Maximum Number shall be entitled to purchase such
Maximum Number of Remaining Shares.
FRACTIONAL SHARES
The Company will not issue any fractional Shares in the Offering. The
Company will round to the nearest whole number any partial Share resulting
from the allocation of Shares.
NOMINEE STOCKHOLDERS
For purposes of this Offering, the Company will extend the right to
subscribe to the beneficial owners of shares of Common Stock held of record
by any broker, bank, depository or other nominee (a "Nominee Stockholder").
Nominee Stockholders may subscribe on behalf of their beneficial owners.
Thus, each Nominee Stockholder should contact the beneficial owners of such
shares as soon as practicable to ascertain the beneficial owners'
intentions and to obtain instructions with respect to the Offering.
In the event the Offering is oversubscribed by Stockholders, Nominee
Stockholders who subscribe on behalf of beneficial owners of Common Stock
may be required to certify to the Company as to the aggregate number of
Shares subscribed to be purchased by each beneficial owner and as to the
eligibility of each beneficial owner to subscribe in the Offering. Nominee
Stockholders may, at their option, complete a single Subscription Agreement
for all beneficial owners of Common Stock or a separate Subscription
Agreement for each beneficial owner of Common Stock.
PURCHASE PRICE
The Purchase Price is $12.50 per Share subscribed to be purchased.
The Purchase Price is payable in cash by check or bank money order, all as
more completely described under "THE OFFERING--Subscription."
CONDITIONS
The Offering is not conditioned on the subscription for or sale of any
minimum number of Shares. Once a Stockholder or Employee has subscribed
for Shares, such subscription may not be revoked. Accordingly,
Stockholders and Employees who subscribe for Shares will not have a right
to return of their funds (except for unpurchased Shares, as described
below), unless the Company terminates the Offering. Any subscription
34
<PAGE>
rights not exercised before the Expiration Date will expire and become
worthless. The Company reserves the right at any time prior to the
Expiration Date to terminate or extend the Offering for any reason.
SUBSCRIPTION
A Stockholder or Employee may subscribe by properly completing and
signing a Subscription Agreement and delivering it to the Company, prior to
the Expiration Date, along with payment of the total Purchase Price for the
Shares that the Stockholder or Employee subscribes to purchase. A
Subscription Agreement is included with this Prospectus. The form of
Subscription Agreement is also included as Appendix C to this Prospectus.
Photocopies of the Subscription Agreement may be used.
Until such time as the Company delivers certificates to the
subscribers representing Shares purchased in the Offering, all funds
received by the Company in payment of the Purchase Price will be held by
the Company and invested at the discretion of the Company. Earnings on
such funds will be retained by the Company regardless of whether or not the
Offering is consummated.
The method of delivery of the Subscription Agreement and payment of
the Purchase Price to the Company will be at the election and risk of
subscribing Stockholders and Employees. All questions concerning the
timeliness, validity, form and eligibility of subscriptions will be
determined by the management of the Company, whose determinations will be
final and binding. The Company, in its sole discretion, may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within
such time as it may determine, or reject the purported exercise of any
subscription. Subscription Agreements will not be deemed to have been
received or accepted until all irregularities have been waived or cured
within such time as the Company determines, in its sole discretion. The
Company is under no duty to notify any Stockholder or Employee of any defect
or irregularity in connection with the submission of Subscription Agreements,
or to incur any liability for failure to give such notification.
Subscription Agreements and payment of the Purchase Price must be
delivered to Dakota Telecommunications Group, Inc., attn: Mr. Craig A.
Anderson, Post Office Box 66, 29705 453rd Avenue, Irene, South Dakota
57037-0066 on or before the Expiration Date. Payment may be made by check
or bank money order, payable to Dakota Telecommunications Group, Inc. The
Purchase Price will be deemed to have been received by the Company upon (i)
clearance of any uncertified check or (ii) receipt by the Company of any
certified check or cashier's check or of any bank money order. Return of a
check unpaid for insufficient funds or any other reason may invalidate a
subscription.
Funds for Shares not purchased will be returned by the Company as
soon as practicable after the Expiration Date. Any such payment will be
35
<PAGE>
made by Company check mailed to the record address of the subscribing
Stockholder or Employee, or such other address as may be specified in the
Subscription Agreement.
Any questions or requests for assistance concerning any method of
subscribing and any requests for additional copies of this Prospectus,
should be directed to Mr. Craig A. Anderson, Executive Vice President-
Marketing, Chief Financial Officer and Treasurer, Dakota Telecommunications
Group, Inc., Post Office Box 66, 29705 453rd Avenue, Irene, South Dakota
57037-0066, (telephone (605) 263-3301).
ISSUANCE OF COMMON STOCK; VOTING AT ANNUAL MEETING OF STOCKHOLDERS
The Company will deliver certificates representing Shares purchased in
this Offering to subscribers as soon as practicable after the Expiration
Date and after the Company has made all prorations and adjustments
contemplated by the terms of the Offering. Because the Expiration Date will
occur near in time to the record date for the Company's 1998 annual meeting
of stockholders, Shares purchased in the Offering will not be issued and
outstanding as of the record date and will not be entitled to vote at the
1998 annual meeting.
UNDERWRITERS AND DEALERS
No underwriter is involved in this Offering, and no commissions, fees
or discounts will be paid or allowed to any underwriter, dealer, finder or
other party in connection with the Offering. The Company is offering the
Shares through its directors, officers and employees. None of such persons
will receive, directly or indirectly, any remuneration for soliciting sales
of Shares.
SALES OF SHARES TO COMPANY ESOP
Shares, if any, remaining after subscriptions by Stockholders and
Employees may be offered and sold to the Company's Employee Stock Ownership
Plan (the "ESOP"), subject to certain conditions, including the approval of
such sale by the Trustees of the ESOP. In December 1997, the ESOP purchased
49,213 shares of Common Stock. As a result of the Stock Split, the ESOP now
owns 98,426 shares of Common Stock.
DETERMINATION OF OFFERING PRICE
The Company was reorganized as a Delaware business corporation in July
1997. To date, there has been no well established public trading market
for the Company's Common Stock, trading activity has been infrequent, and
price information has not been regularly published.
The Purchase Price was determined by the Board of Directors of the
Company in the Board's discretion. In choosing the Purchase Price, the
36
<PAGE>
Board of Directors considered the Company's pro forma book value per share,
the Company's pro forma earnings per share, multiples of book value per
share and earnings per share at which shares of more or less comparable
telecommunications companies are traded in the public markets, and the
general plans, prospects and risks of the Company as perceived by the Board
of Directors. The Purchase Price was determined by the Board of Directors
in its discretion and was not determined with reference to actual prices at
which shares of the Company's Common Stock have traded in the public
markets.
NO BOARD RECOMMENDATION
Each Stockholder and Employee must evaluate his or her own best
interests and financial circumstances to determine whether to invest in the
Shares. The Board of Directors of the Company makes no recommendation to
Stockholders or Employees regarding whether they should subscribe for
Shares or Remaining Shares.
USE OF PROCEEDS
The Company will receive approximately $5 million in cash (prior to
deduction of all expenses of the Offering) if the Offering is fully
subscribed.
The Company intends to use the proceeds of the Offering for general
operating purposes. These purposes may include selective acquisitions of
capital assets to be used in the Company's business, acquisitions of other
companies engaged in the same businesses as the Company, or acquisitions of
businesses which the Company considers to be complimentary to its core
businesses. However, as of the date of this Prospectus, no specific assets
or businesses have been identified for acquisition and the costs of such
acquisitions, if any, cannot be estimated. Pending such uses, the net
proceeds will be invested in short-term investment securities.
CAPITALIZATION
The following table sets forth as of September 30, 1997: (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale by the Company of the 400,000 shares
offered hereby (at the price to existing shareholders of $12.50 per share)
and the application of the estimated net proceeds therefrom. (See "USE OF
PROCEEDS.") This table should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Prospectus.
37
<PAGE>
CAPITALIZATION TABLE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term Debt:
Current maturities of long-term debt $ 2,081,000 $ 2,081,000
----------- -----------
Long-term Debt, net of current maturities 25,715,348 25,715,348
----------- -----------
Shareholders' Equity:
Common Stock, no par value, 5,000,000 shares
authorized, 1,970,432 shares issued and
outstanding; 2,370,432 shares issued and
outstanding as adjusted <F1> 5,637,855 10,537,855
Preferred Stock, no par value, 250,000 shares
authorized, 0 shares issued and
outstanding <F2>
Other Capital <F3> 179,666 179,666
Accumulated deficit (1,053,603) (1,053,603)
----------- -----------
Total shareholders' equity 4,763,918 9,663,918
----------- -----------
Total capitalization $32,560,266 $37,460,266
=========== ===========
<FN>
<F1> The number of shares of Common Stock has been adjusted to reflect the
effects of the Stock Split and does not include shares of Common Stock
issuable upon exercise of outstanding options.
<F2> 15,000 shares of Preferred Stock are designated as Series A Junior
Participating Preferred Stock.
<F3> Consists of capital credits in the Company that had been allocated
to members and patrons that the Company was unable to locate at the
time of the Conversion and Merger.
</FN>
</TABLE>
38
<PAGE>
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The Company's authorized capital stock consists of 5,000,000 shares of
Common Stock, and 250,000 shares of Preferred Stock. As of the Record Date,
a total of 2,483,562 shares of Common Stock were outstanding, held by 8,157
stockholders of record, and no shares of Preferred Stock were
outstanding.
COMMON STOCK. Holders of Common Stock are entitled to dividends out
of funds legally available for that purpose if, as and when declared by the
Board of Directors of the Company. Certain covenants in existing loan
agreements between the Company and the RTFC limit the circumstances under
which Company would be permitted to pay dividends or make other
distributions to Company stockholders. Under these agreements, the RTFC
must authorize distributions other than in shares of stock unless certain
financial ratio requirements are met. The dividend rights of the Company's
Common Stock also are subject to the rights of any Company Preferred Stock
which has been or may be issued. As of the date of this Prospectus, since
the formation of the Company in 1997, the Company has not paid cash
dividends on Common Stock.
Each holder of the Company's Common Stock is entitled to one vote for
each share held on each matter presented for stockholder action. Company
Common Stock has no preemptive rights, cumulative voting rights, conversion
rights or redemption provisions.
In the case of any liquidation, dissolution or winding up of the
affairs of the Company, holders of the Company's Common Stock would be
entitled to receive, pro rata, any assets distributable to common
stockholders in respect of the number of shares held by them. The
liquidation rights of the Company's Common Stock would be subject to the
rights of holders of any Company Preferred Stock which could be issued in
the future.
All outstanding shares of the Company's Common Stock are fully paid
and nonassessable.
PREFERRED STOCK. The Company is authorized to issue, without further
stockholder approval, up to 250,000 shares of the Company's Preferred Stock
from time to time in one or more series with such designations, powers,
preferences and relative voting, distribution, dividend, liquidation,
transfer, redemption, conversion and other rights, preferences,
qualifications, limitations or restrictions as may be provided for the
issue of such series by resolution adopted by Company's Board of Directors.
Such Preferred Stock could have priority over Common Stock as to dividends
and as to the distribution of the Company's assets upon any liquidation,
dissolution or winding up of the Company.
39
<PAGE>
The Board of Directors has implemented a Preferred Stock Purchase
Rights Plan. In connection with such plan, the Company's Certificate of
Incorporation designates 15,000 shares of Preferred Stock as Series A
Junior Participating Preferred Stock for use in connection with such plan.
(See "ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock Purchase Rights
Plan.")
STOCK OPTIONS>
Upon the consummation of the Merger, stock options and warrants to
purchase an aggregate of 162,936 (prior to the Stock Split) shares (or
approximately 13% of the stock outstanding on such date on a fully
diluted basis) of the Company's Common Stock were outstanding. (See
"ADDITIONAL SECURITIES OF THE COMPANY--Stock Options.") As of the
Record Date, and taking into account the effects of the Stock Split,
stock options to purchase an aggregate of 285,640 shares of Common Stock
were outstanding.
STATUTORY PROVISIONS AFFECTING CONTROL OF THE COMPANY
Section 203 of the Delaware Law prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years following the time that such person becomes an
"interested stockholder" unless certain requirements are met or unless
certain exceptions apply. The term "business combination" generally
includes (i) any merger or consolidation of the corporation or any
majority-owned subsidiary of the corporation with (A) the interested
stockholder, or (B) with any other corporation or other entity if the
merger or consolidation is caused by the interested stockholder and as a
result of the merger or consolidation Section 203 is not applicable to the
surviving entity; (ii) with certain exceptions, any sale, lease or other
disposition to or with the interested stockholder of assets of the
corporation or of any majority-owned subsidiary of the corporation where
the assets have an aggregate market value equal to 10% or more of either
the aggregate market value of all the assets of the corporation determined
on a consolidated basis or the aggregate market value of all the
outstanding stock of the corporation; (iii) any transaction which results
in the issuance or transfer by the corporation or by any majority-owned
subsidiary of the corporation of any stock of the corporation or of such
subsidiary to the interested stockholder, with certain exceptions; (iv) any
transaction involving the corporation or any majority-owned subsidiary of
the corporation which increases the proportionate share of the stock which
is owned by the interested stockholder; or (v) any receipt by the
interested stockholder of the benefit, directly or indirectly (except
proportionately as a stockholder of the corporation), of any loans,
advances, guarantees, pledges or other financial benefits (with certain
exceptions) provided by or through the corporation or any majority-owned
subsidiary.
40
<PAGE>
An "interested stockholder" is generally defined as any person (other
than the corporation or a majority-owned subsidiary) that (i) owns 15% or
more of the outstanding voting stock of the corporation, or (ii) is an
affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
past three years and the affiliates and associates of such person. Among
the exceptions from the definition of "interested stockholder" is any
person whose ownership of shares in excess of the 15% limit was the result
of action taken solely by the corporation, unless that such person
thereafter acquired additional shares of voting stock of the corporation
(except as a result of further corporate action not caused, directly or
indirectly, by such person).
There are a number of exceptions to the prohibitions of Section 203.
The first exception applies where, prior to the time that the interested
stockholder became an interested stockholder, the board of directors
approved either the business combination or the transaction which resulted
in the stockholder becoming an interested stockholder.
The second exception is where, upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
those shares owned (i) by persons who are directors and also officers and
(ii) certain employee stock plans. The third exception is where, at or
subsequent to the time the person became an interested stockholder, the
business combination was approved by the board of directors and authorized
at an annual or special meeting of stockholders (and not by written
consent) by the affirmative vote of at least 66 2/3 percent of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 also does not apply: (i) if the corporation's original
certificate of incorporation contains a provision expressly electing not to
be governed by Section 203; (ii) if the stockholders adopt an amendment to
the certificate of incorporation or bylaws expressly electing not to be
governed by Section 203; (iii) if the corporation does not have a class of
voting stock that is (A) listed on a national securities exchange, (B)
authorized for quotation on The Nasdaq Stock Market, or (C) held of record
by more than 2,000 stockholders, unless any of the foregoing results from
action taken by an interested stockholder or from a transaction in which a
person becomes an interested stockholder; (iv) if a stockholder becomes an
interested stockholder inadvertently and (A) as soon as practicable divests
itself of ownership of sufficient shares so that the stockholder ceases to
be an interested stockholder; and (B) would not, at any time within the
three-year period immediately prior to a business combination between the
corporation and such stockholder, have been an interested stockholder but
for the inadvertent acquisition of ownership; (v) pursuant to the
"competitive bidding" exception; or (vi) if the business combination is
41
<PAGE>
with an interested stockholder who became an interested stockholder at a
time when the restrictions contained in Section 203 did not apply (with
certain exceptions).
The "competitive bidding exception" referred to above provides that
(assuming the satisfaction of certain criteria) any person, including one
about to become and one who is an interested stockholder, may propose a
transaction free from the restrictions of Section 203 in certain
situations. The basic policy behind this exception is that once the board
of directors has decided to sell the corporation or a majority of its
assets or has approved (or not opposed) a tender or exchange offer for 50%
or more of the corporation's outstanding stock, the stockholders are
benefitted by the promotion of bidding contests. Subsequent bidders are
excepted from Section 203 if certain conditions are met. This exception
allows a bidder who announces a transaction after the announcement of a
management-approved transaction and prior to the completion or abandonment
of the management-approved transaction to be free of the provisions of
Section 203.
Under this exception, the corporation must give at least 20 days'
notice to all interested stockholders prior to the consummation of (i) a
merger or consolidation of the corporation (except for those mergers or
consolidations where no stockholder vote is required), (ii) a sale, lease
or other disposition of assets of the corporation or a majority-owned
subsidiary having an aggregate market value at least equal to 50% of either
the aggregate market value of all of the corporation's assets (determined
on a consolidated basis) or the aggregate market value of 50% of the
corporation's outstanding stock, or (iii) a proposed tender or exchange
offer for 50% or more of the corporation's outstanding stock. This notice
requirement ensures that an interested stockholder will have the
opportunity to decide whether to bid against a management-approved
transaction prior to the time that the transaction is approved by the
stockholders.
There are three prerequisites to the application of the "competitive
bidding exception." First, there must be board approval of one of the
three types of transactions described above. The second necessary element
is the approval of (or lack of opposition to) a proposed transaction with a
person who was not an interested stockholder during the preceding three
years or who became an interested stockholder with board approval. The
third prerequisite is that the potentially triggering transaction must
either be approved or not opposed by a majority of the members of the board
who were directors before any person became an interested stockholder in
the preceding three years. Alternatively, directors approving or not
opposing the transaction may include those who were elected or recommended
by a majority of the continuing directors to succeed such continuing
directors.
42
<PAGE>
OTHER PROVISIONS AFFECTING CONTROL OF THE COMPANY
Some provisions of the Company's Certificate of Incorporation may have
an anti-takeover impact and may make tender offers, proxy contests and
certain mergers more difficult to consummate.
PROVISIONS REGARDING THE BOARD OF DIRECTORS.
CLASSIFIED BOARD. The Company's Certificate of Incorporation
classifies the Board of Directors into three classes serving staggered,
three-year terms. Classification of the Board could have the effect of
extending the time during which the existing Board of Directors could
control the operating policies of the Company even though opposed by the
holders of a majority of the outstanding shares of Common Stock.
NOMINATION OF DIRECTORS. Under the Company's Certificate of
Incorporation, all nominations for directors by stockholders would be
required to be delivered to the Company in writing at least 120 days prior
to the notice of an annual meeting of stockholders or, in the case of a
special meeting of stockholders at which a director or directors would be
elected, at least seven days after the notice of the special meeting. A
nomination that is not received prior to these deadlines would not be
placed on the ballot. The Board believes that advance notice of
nominations by stockholders would afford a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent
deemed necessary or desirable by the Board of Directors, would provide an
opportunity to inform stockholders about such qualifications. Although
this nomination procedure would not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of
directors, the nomination procedure could have the effect of precluding a
nomination for the election of directors at a particular meeting if the
proper procedures were not followed.
REMOVAL OF DIRECTORS. Under the Company's Certificate of
Incorporation, subject to the rights of any class of stock then
outstanding, any director could be removed from office, but only for cause,
and only by stockholder action. Generally, the vote for removal would
require the affirmative vote of a majority of shares entitled to vote at an
election of directors. However, if less than the entire board was to be
removed, no single director could be removed if the votes cast against the
director's removal would be sufficient to elect the director if then
cumulatively voted at an election of the class of directors of which the
director is a part. "Cause" for removal could only be present in the
circumstances specified in the Company's Certificate of Incorporation.
"Cause" is present when: (i) the director whose removal is proposed has
been convicted of a felony by a court of competent jurisdiction and such
conviction is no longer subject to direct appeal; (ii) the director has
been adjudicated by a court of competent jurisdiction to be liable for
43
<PAGE>
negligence, or misconduct, in the performance of such person's duty to
the Company in a matter of substantial importance to the Company and
such adjudication is no longer subject to a direct appeal; (iii) the
director has become mentally incompetent, whether or not so adjudicated,
which mental incompetency directly affects such person's ability as a
director of the Company; or (iv) the director's actions or failure to
act have been in derogation of the director's duties, as provided in the
Company's Bylaws or otherwise provided by law. Any proposal for removal
pursuant to (iii) or (iv) that is initiated by the Board of Directors for
submission to the stockholders would require the affirmative vote of at
least two-thirds of the total number of directors then in office, excluding
the director who is the subject of the removal action and who shall not be
entitled to vote thereon.
QUALIFICATION OF DIRECTORS. Under the Company's Certificate of
Incorporation, no person who has asserted or asserts any "Claim" (defined
below) against the Company or any subsidiary (a "Plaintiff"), and no
person who was or became associated or affiliated with any Plaintiff (a
"Related Person"), would be eligible to be elected or to serve as a director
until the Claim was "Finally Resolved" (defined below). A director who was
validly nominated and elected as a director and who thereafter became a
Plaintiff or Related Person would continue as a director for the remainder of
the term for which the director was elected or until the director's
resignation or removal. A director who was or became a Plaintiff or a
Related Person would be required to either (i) promptly take all steps
necessary to cause the director to be neither a Plaintiff nor Related Person
or (ii) if the director cannot do so and the Claim has not been Finally
Resolved within the "Resolution Period" (defined below), resign as a director,
effective immediately, at or before the end of such Resolution Period.
A "Claim" means any claim, cross-claim, counterclaim or third-party
claim pled in any action, suit or proceeding before any court, governmental
agency or instrumentality, arbitrator or similar body or authority.
However, certain claims are excluded, including: (i) one which, when
aggregated with all other claims asserted by the Plaintiff or any Related
Person of such Plaintiff against the Company or any subsidiary that
have not been Finally Resolved, could not, if decided adversely to the
Company or a subsidiary, along with all other aggregated claims, cross-
claims, counterclaims and third-party claims, result in liability in excess
of 10% of the consolidated current assets of the Company as of the most
recent quarter or render the Company insolvent; (ii) one arising pursuant
to a contract between the Company and the pertinent Plaintiff or
Related Person that was approved by a majority of the Continuing Directors
(as defined below), including without limitation, claims arising under
any indemnity or employment contract; and (iii) claims asserted in
the right of the Company (i.e., derivative actions).
44
<PAGE>
The term "Finally Resolved" means that a final order has been rendered
with respect to the Claim and all available appeals from such order have
been exhausted or the time for seeking such review has expired. The term
"Resolution Period" means the 30-day period beginning on the earlier of
(i) the date on which a director of the Company notifies the Board that
the director has become a Plaintiff or Related Person or (ii) the date on
which the Board determines that a director has become a Plaintiff or
Related Person. However, the Board could (but would not be required to)
extend a Resolution Period by up to 15 days if the director establishes to
the Board's satisfaction a reasonable likelihood that the Claim would be
Finally Resolved or such director would cease to be both a Plaintiff and a
Related Person during that extra 15-day period.
The Board of Directors would not nominate any person for election as a
director unless (i) the prospective nominee has provided the Board with
(A) all information necessary or appropriate to enable the Board to
determine whether the nominee is a Plaintiff or a Related Person and (B) a
signed statement that the prospective nominee is not aware of any reason
not disclosed to the Board why the prospective nominee would or might be
considered a Plaintiff or Related Person and (ii) after receipt of the
items the Board determines that the prospective nominee is not a Plaintiff
or Related Person.
Any stockholder who is uncertain whether any person the stockholder
desires to nominate for election as a director is a Plaintiff or Related
Person could request a determination from the Board concerning that matter,
upon delivering to the Board certain information and other items and
complying with certain deadlines. Within 10 days after receiving a
properly submitted request (or, if it is impossible or impracticable to do
so during such period, as soon as practicable thereafter), the Board would
be required to consider the request and determine whether or not the
candidate is a Plaintiff or Related Person who could not be nominated for
election to the Board.
If a candidate who was the subject of a proper and timely submitted
request was determined not to be a Plaintiff or Related Person and the
request was submitted at least five days in advance of the last date on
which the requesting stockholder otherwise would have been entitled to give
notice of intent to nominate the candidate, then the Board's determination
would operate as a waiver of the time limits otherwise applicable to the
giving of such notice of intent to the extent, if any, necessary to afford
the stockholder a period of five days after receipt of the Board's notice
within which to give notice of intent to nominate the candidate.
If the Board determined that the candidate was a Plaintiff or Related
Person and the request was submitted at least five days in advance of the
last date on which the requesting stockholder otherwise would have been
entitled to give notice of intent to nominate, then the Board's
determination would operate as a waiver of the time limits otherwise
45
<PAGE>
applicable to the giving of notice of intent to nominate to the extent, if
any, necessary to afford the requesting stockholder a period of 15 days
after receipt of the Board's notice within which to give notice of intent
to nominate another person in lieu of the ineligible candidate.
Whenever any stockholder was afforded an additional time period within
which to give notice of intention to nominate, the Board may afford the
other stockholders of the Company a comparable additional period of
time within which to give such notice.
While the Board of Directors believes that these provisions ensure
that directors and nominees for election as directors will not have
significant conflicts of interest with the Company, they may have the
effect of making stockholder nominations of director candidates more
difficult.
BOARD EVALUATION OF CERTAIN OFFERS. The Company's Certificate of
Incorporation provides that the Board of Directors would not initiate,
approve, adopt or recommend any offer of any person or entity (other than
the Company) to make a tender or exchange offer for any of the Company's
Common Stock or Preferred Stock, to merge or consolidate the Company with
any other entity, or to purchase or acquire all or substantially all of the
Company's assets, unless and until the Board has evaluated the offer and
determined that it would be in compliance with all applicable laws and that
the offer is in the best interests of the Company and its stockholders. In
doing so, the Board could rely on an opinion of legal counsel who is
independent from the offeror, and/or may test such legal compliance in
front of any court or agency that may have appropriate jurisdiction over
the matter.
In making its determination as to whether the transaction would be in
the best interests of the Company and its stockholders, the Board would
be required to consider all factors it deemed relevant, including but not
limited to: (i) the adequacy and fairness of the consideration to be
received by the Company and/or its stockholders, considering historical
trading prices of the Company's Common Stock, the price that could be
achieved in a negotiated sale of the Company as a whole, past offers to
other corporations and the future prospects of the Company; (ii) the
possible social and economic impact of the proposed transaction on the
Company, its employees, customers and suppliers; (iii) the potential social
and economic impact of the proposed transaction on the communities in which
the Company and its subsidiaries operate or are located; (iv) the business
and financial condition and earnings prospects of the offering party; (v)
the competence, experience and integrity of the offering party and its
management; and (vi) the intentions of the offering party regarding the use
of the assets of the Company to finance the transaction.
46
<PAGE>
"BLANK CHECK" PREFERRED STOCK AND PREFERRED STOCK RIGHTS PLAN. The
Company's Certificate of Incorporation authorizes the Board of Directors to
issue up to 250,000 shares of the Company's Preferred Stock from time to
time in one or more series with such designations, powers, preferences and
relative voting, distribution, dividend, liquidation, transfer, redemption,
conversion and other rights, preferences, qualifications, limitations or
restrictions as may be provided for the issue of such series by resolution
adopted by the Company's Board of Directors. The Certificate of
Incorporation also designates 15,000 shares as Series A Junior
Participating Preferred Stock for possible issuance in connection with a
Preferred Stock Purchase Rights Plan which the Board of Directors of the
Company enacted following the consummation of the Merger. No stockholder
vote was taken in connection with the implementation of that plan. (See
"ADDITIONAL SECURITIES OF THE COMPANY--Preferred Stock Purchase Rights
Plan.")
SUPERMAJORITY VOTE PROVISIONS. The Company's Certificate of
Incorporation contains certain provisions that impose a supermajority vote
requirement to approve certain "business combinations" involving an
"interested stockholder." Article X provides that, in addition to any vote
required by law or other provisions of the Certificate of Incorporation,
the affirmative vote of not less than 80% of the outstanding shares of
"voting stock" (which is defined as all shares of the Company's
stock that are entitled to vote generally in the election of directors,
voting as a single class) would be required for the approval of certain
"business combinations" between the Company or a subsidiary and any
"interested stockholder."
A "business combination" is generally defined for purposes of Article
X as including mergers, sales of all or substantially all of the assets of
the Company and certain other transactions. An "interested stockholder"
is defined as a person (other than the Company, its majority-owned
subsidiaries or their employee benefit plans), who, alone or together
with affiliated persons, beneficially owns 10% or more of the voting stock
of the Company, as well as certain other persons that are affiliated with
an interested stockholder.
These requirements would not apply when the transaction was approved
by a majority of the "continuing directors," which are directors who are
not affiliated with an interested stockholder and who were either (i)
elected to the Board prior to the time that the interested stockholder
became an interested stockholder or (ii) designated, before their initial
election as directors, as continuing directors by a majority of the
then-continuing directors. The term excludes, however, certain persons that
became directors as a result of election contests within the meaning of
Rule 14a-11 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or other types of proxy solicitations.
47
<PAGE>
In addition, Article XII provides that, in addition to any vote
required by law or other provisions of the Certificate of Incorporation,
the affirmative vote of at least 80% of the shares held by persons who are
not interested stockholders (as defined in Article X) would be required to
approve business combinations (as defined in Article X) of the Company
or a majority owned subsidiary with any interested stockholder. This
requirement would not apply if (i) the business combination was approved by
a majority of the continuing directors (as defined in Article X) or (ii)
certain other detailed conditions are satisfied.
RESTRICTIONS ON AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE COMPANY. Several provisions of the Company's Certificate of
Incorporation require a greater-than-majority vote to be amended.
Specifically, Article XV(A) provides that no amendment to the Certificate
of Incorporation could alter, modify or repeal any or all of the provisions
of Article XII (supermajority vote/fair price requirement for certain
business combinations) or Article XV(A), unless the amendment is adopted by
the affirmative vote of not less than 80% of the outstanding shares of
voting stock held by stockholders who are not interested stockholders.
Also, Article XV(B) of the Company's Certificate of Incorporation
provides that no amendment shall alter, modify or repeal any or all of the
provisions of Articles VII (powers of the Board of Directors), VIII (Board
of Directors classification, nomination, qualification, etc.), IX
(stockholder action by written consent), X (supermajority vote required for
certain business combinations), XI (non-stockholder constituency provision)
or XIII (limitation of certain director liability), and the stockholders
would not have the right to alter, modify or repeal any or all provisions
of the Bylaws of the Company, unless such amendment, alteration,
modification or repeal is adopted by the affirmative vote of the holders of
not less than 80% of the outstanding shares of voting stock. However, the
provisions of Article XV(B) would not apply to, and such 80% vote would not
be required for, any amendment, alteration, modification or repeal which
has first been approved by (i) the affirmative vote of 80% of the entire
Board of Directors, including the affirmative vote of at least one director
of each class of the Board of Directors and (ii) the affirmative vote of
two-thirds of the continuing directors.
STANDSTILL AGREEMENTS. In connection with the Cooperative's
acquisition of TCIC and Iway, the Cooperative entered into the Standstill
Agreements with the Sellers. In addition, in connection with the Company's
acquisition of DataNet, the Company entered into Standstill Agreements with
the former shareholders of DataNet. These Standstill Agreements restrict
the Sellers' and the former DataNet shareholders' abilities to dispose of
shares of the Company's Common Stock and require them to refrain from certain
other actions related to the Company's Common Stock. For a description of
these restrictions, see "ADDITIONAL SECURITIES OF THE COMPANY--Standstill
Agreements." The Standstill Agreements could have the effect of delaying,
deterring or preventing a change in control of the Company.
48
<PAGE>
THE COMPANY
The following description of the Company should be considered
carefully in evaluating the Company and its business. In this Prospectus,
the term "Company" means the Cooperative and its subsidiaries before the
Conversion, DTG and its subsidiaries after the Conversion and the Company
and its subsidiaries after the Conversion and the Merger.
BUSINESS
The Cooperative was incorporated as a stock cooperative in South
Dakota on April 3, 1952, and has operated since that date in Irene, South
Dakota. The Cooperative was formed to consolidate several small
independent telephone companies in Southeastern South Dakota. The Company
and its predecessors have been engaged in the telecommunications business
since 1903. From the date of formation through 1979, the Company operated
principally as a telephone company. Today, the Company continues these
operations and has expanded into cable television and other related
telecommunications services. In 1979, the Company expanded into CATV by
building cable systems in its local markets. In the mid-1980s, the Company
expanded into the cellular market through partnerships with cellular
companies serving the Company's market area. The Company sold its rural
cellular operations in 1994 and its Sioux Falls, South Dakota operations in
1995, in an effort to focus on new personal communication service ("PCS")
technology. The Company expanded its cable operations in 1995 and 1996,
and further expanded with the acquisitions in 1996 of TCIC (long distance
and operator services) and Iway (Internet services), as described below.
Today, the Company is a diversified telecommunications services
company. The Company provides wireline local and network access service,
long distance telephone service, operator-assisted calling services,
telecommunications equipment sale and leasing services, cable television
service, data networking services and Internet access and related
services.
The Company's local exchange services in South Dakota provide a
majority of the Company's revenues and income. In 1996, the Company made
the strategic decision to expand its operations into related
telecommunications businesses, including expansion of its cable television
services. During 1996, the Company acquired the assets of 19 additional
community cable television systems that were sold by three companies that
provided cable services for various communities in addition to the systems
purchased by the Company. In December 1996, the Company, through a wholly
owned subsidiary, merged with TCIC, a South Dakota-based provider of long
distance and operator services. Also in December 1996, in a similar
transaction, a wholly owned subsidiary of the Company merged with Iway,
South Dakota's largest Internet service provider. Both TCIC (now renamed
DTG Communications, Inc.) and Iway (now renamed DTG Internet Services,
Inc.) continue to operate as wholly owned subsidiaries of the Company.
49
<PAGE>
Effective December 1, 1997, the Company acquired by merger Futuristic, Inc.
(d/b/a DataNet) ("DataNet"), a LAN and WAN integrator located in Sioux Falls,
South Dakota. DataNet (now renamed DTG DataNet, Inc.) is the largest LAN/WAN
integrator in South Dakota and is now a wholly owned subsidiary of the
Company. In addition, as described under the heading "THE COMPANY--Recent
Development," the Company has entered into an agreement to acquire a mobile
radio and paging business. The Company intends to continue to explore
expansion through strategic acquisitions and business alliances in an effort
to facilitate the growth of the Company.
The telecommunications services industry is in the process of
substantial change, providing significant opportunities and risks to
its participants. Evolving and newly-developed technology, emerging
significant competition in the market for long distance and local
telecommunications services, as well as the increasing desire of customers
to have a majority or all of their various communication needs fulfilled by
one supplier, are causing many companies, including the Company, that offer
services primarily in one part of the communication services market to seek
to offer, either directly or through alliances with others, new services to
complement their primary service offerings.
A key growth strategy for the Company is to provide integrated
telecommunications services for its customers. These integrated services
include long distance, wireless, cable television, data and local telephone
service, as well as selected products and services that the Company will
remarket to customers as a single source provider. The Company is in the
process of substantially upgrading its network and supporting facilities to
provide these integrated telecommunications services. The Company is
committed to attempting to grow through expansion of its existing
businesses, the development of value-added products and services and
selected acquisitions, although there can be no assurance that the Company
will be successful in attaining the profitable growth that is desired.
(See "RISK FACTORS.")
TELECOMMUNICATIONS INDUSTRY OVERVIEW. From the formation of the
telephone industry in the late 1800s until the breakup of AT&T in 1984, the
telecommunications industry was largely dominated by AT&T through its
ownership and operation of the Bell operating companies. Rural areas which
provided little market share for AT&T were left to be served by small
independent telephone companies like the Company and its predecessors. In
1984, the structure of the industry was significantly changed by the AT&T
divestiture decree, which required the divestiture by AT&T of its 22 Bell
operating companies and divided the country into 201 LATAs (the "AT&T
Divestiture Decree"). The Bell operating companies were combined into
seven Regional Bell Operating Companies ("RBOCs") and were permitted to
provide local telephone service, local access service to long distance
carriers and long distance ("intra-LATA") service within the LATAs.
However, the Bell operating companies were prohibited from providing
inter-LATA long distance service, or service between LATAs.
50
<PAGE>
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 FCC regulations require most LECs to provide carriers
with access to local exchange service that is "equal in type, quality and
price" to that provided by AT&T and to allow customers to select their
preferred long distance service provider. As a result, a large number of
companies specializing in long distance services entered the market.
For each long distance call, the originating and terminating LECs
charge an access fee to the long distance carrier. The long distance
carrier charges its customers a fee for its transmission of the call, a
portion of which covers the cost of the access fees charged by the LECs.
Access charges represent a significant portion of the Company's gross
revenues from its local exchange operations as well as a significant
portion of the Company's cost of providing long distance services.
Generally, the FCC and the states regulate such access charges. The FCC
has undertaken a comprehensive review of its regulation of LEC access
charges to better account for increasing levels of local competition. (See
"RISK FACTORS--Regulatory and Legislative" and "THE COMPANY--Regulation.")
In February 1996, President Clinton signed the 1996 Act. The 1996
Act significantly changed the telecommunications industry by (among other
things) removing certain of the restrictions concerning the provision of
long distance service by the RBOCs. The RBOCs, however, are required to
obtain specific FCC approval and satisfy other conditions, including a
checklist of interconnection and other requirements applicable to LECs,
prior to providing long distance service in the regions in which the LECs
provide local exchange service. (See "RISK FACTORS--Competition" and
"--Regulatory and Legislative.") In addition, the 1996 Act opened local
service telecommunications markets to competition by preempting state and
local laws to the extent that such laws prevent competition in the
provision of any telecommunications service, and by imposing a variety of
new duties on LECs to promote competition in local exchange services.
Among other requirements, all LECs, including the Company, are required, on
a non-discriminatory basis, to permit resale of their telecommunications
services without unreasonable restrictions or conditions. The law and its
accompanying regulations will enable the Company, upon receipt of all
necessary regulatory approvals, to resell local telecommunications services
in exchanges outside of the Company's traditional service territories in
addition to its existing long distance services. The 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.
51
<PAGE>
BUSINESS STRATEGY. The Company's business strategy is to attempt to
achieve continued growth by developing and marketing a broad array of
competitively priced telecommunications services. The Company's primary
objectives in pursuing this strategy are to:
(i) develop new and enhanced products and services through
upgrading the Company's existing network and expanding 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. (See "RISK FACTORS.")
LOCAL TELECOMMUNICATIONS SERVICES. The Company's local telecommuni-
cations services are provided directly by the Company. As of December 31,
1997, the Company provided services to approximately 6,100 access lines
located in nine counties in Southeastern South Dakota. The Company's
service area is generally rural, covering approximately 1,100 square miles,
with an average of 5.4 access lines per square mile. The Company is
classified as a "rural company" under the 1996 Act and receives Universal
Service Fund monies, although such funds constituted less than two percent
of the Company's gross revenues in 1996.
The Company's local telecommunications services include: (i) local
dial tone; (ii) local private line and public telephone services (including
dial tone service for pay telephones owned by the Company and other pay
phone providers); (iii) data transmission services; (iv) the sale,
installation and maintenance of customer premise equipment; and (v) related
services such as directory listing services. In connection with the
Company's continuing strategy to provide a greater selection of value-added
products, the Company has also introduced advanced services such as Caller
ID, distinctive ringing, call waiting, call forwarding and three-way
calling. The Company also introduced its new Distance Learning program,
52
<PAGE>
which the Company currently anticipates by the fall of 1998 will link 14
local schools with the University of South Dakota's School of Education to
allow these local schools to share interactive televised classroom
sessions. The Company desires to implement a similar system to link
hospitals and medical clinics throughout rural communities in Southeastern
South Dakota.
In addition to providing local telephone service, the Company also
provides network access services to IXCs. Network access service refers to
the link provided by LECs between a customer's premises and the
transmission facilities of other telecommunications carriers, generally
inter-LATA long distance carriers. Examples of exchange access services
include switched access and special access services. Network access
revenues are billed directly to long distance carriers based on the number
of conversation minutes generated by their customers located in the
Company's exchanges. The interstate portion of these revenues is based on
switched, common-line and special access tariffs approved by the FCC. The
tariffs imposed by the FCC include end-user access charges to residential
and business customers. State access is based on similar rate structures
that are subject to approval by the South Dakota Public Utilities
Commission. Unlike many LECs, the Company does not provide billing or
collection services for interexchange long distance carriers operating in
the Company's local exchanges.
In addition to its current local service business, the Company also
is attempting to position itself to resell local exchange services in
exchanges where it currently does not operate 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 telecommuni-
cations 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 1996, revenues from local services
were approximately $4.3 million, representing approximately 55% of the
Company's aggregate revenues. The Company currently anticipates that these
revenues will continue to account for a substantial portion of the
Company's revenues in the future, subject to possible regulatory change.
(See "THE COMPANY--Regulation.") Although network bypass and alternative
local access telephone service providers are potential competitive threats
to the Company, no significant competition has occurred to date.
53
<PAGE>
LONG DISTANCE TELECOMMUNICATION SERVICES. The Company provides a wide
range of long distance telecommunications services to both residential and
commercial customers. These services include: (i) basic long distance
calling service; (ii) voice and data services; (iii) dedicated private line
services; (iv) collect calling, operator assistance and calling card
services, including prepaid calling cards; (v) toll free or 800 services;
and (vi) switched and dedicated Internet access services. The Company
offers these services individually and in combinations. Through combined
offerings, the Company is able to provide customers with added benefits
such as single billing, unified services for multi-location companies and
customized calling plans.
The Company operates its own switches, develops and implements its own
products, monitors and deploys its transmission facilities and prepares and
designs its own billing and reporting systems. All of the Company's
customers are identified by their telephone number, dedicated trunk or
validated access code, and have a rating which is used to determine the
price per minute that they pay on their outbound or inbound long distance
calls. Rates typically vary by the type of service, the volume of usage,
the distance of the calls, the time of day that calls are made, the region
that originates the call and whether the product is being provided on a
promotional basis. In 1996, long distance revenues were approximately
$1,900,000, representing 31% 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 Services, Inc.
WIRELESS SERVICES. The Company is exploring the possibility of
expanding its existing telecommunications services by providing PCS. PCS
is, from a customer standpoint, similar to existing cellular radio services
("cell phones"). The primary difference between PCS and cell phones is
that PCS is a digital service rather than an analog service (although
current cellular providers are moving to digital service as well) using
different technology and a different licensed portion of the frequency
spectrum. The FCC has, between December 1994 and January 1997, auctioned
six blocks of frequency for PCS that will compete with the two existing
cellular licensees in each of the FCC-designated markets.
54
<PAGE>
On December 13, 1996, the FCC adopted rules to permit geographic
partitioning and spectrum disaggregation for all broadband PCS licensees.
These rules will give the existing licensees and potential new entrants
greater flexibility to determine how much spectrum they will need for the
geographic areas in which they provide service. The Company entered
negotiations with the winners of the A- and B-Block auctions for the
Minneapolis, Minnesota and the Des Moines, Iowa Major Trade Areas ("MTA")
to partition or disaggregate portions of the blocks that cover areas of
interest to the Company in Southeastern South Dakota, Northwestern Iowa and
Southwestern Minnesota. These negotiations have not reached a definitive
point, and there are no existing financial or other commitments between the
parties.
The Company has an agreement to share frequency with US WEST Wireless
for participation in the PCS D- and E-Block auction. This auction
concluded on January 14, 1997, with US WEST Wireless being the successful
bidder on BTA-421 (Sioux City) for the E-Block at $2.44 per population
point. The Company's agreement covers 104,900 population points in the
Company's area of interest in Southeastern South Dakota and Northwestern
Iowa outside of the municipal boundaries of Sioux City. 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.
55
<PAGE>
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 6,600 users.
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 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.
More recently, the development of World Wide Web technology and
associated easy-to-use software has made the Internet easier to navigate
56
<PAGE>
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. The Company
believes that this geographic diversity reduces its exposure to adverse
economic, competitive and regulatory factors in any particular community.
57
<PAGE>
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 does hold all other
necessary licenses to operate its systems. The number of channels provided
by the Company varies by service area. The sources of the Company's cable
television programming consist of the signals received from national
television networks, local and other independent television stations that
operate in or near the Company's service areas, satellite-delivered
non-broadcast channels and public service channels and announcements.
The Company provides programming to its subscribers pursuant to
contracts with programming suppliers. The Company generally pays a flat
monthly fee per subscriber for programming on its basic and premium
services. A number of programming suppliers provide volume discount
pricing structures and/or offer marketing support to the Company through
the Company's participation in a purchasing pool with other small cable
system operators. The Company's programming contracts generally are for
fixed periods of time ranging from three to 10 years and are subject to
negotiated renewal. The costs to the Company to provide cable programming
have increased in recent years and are expected to continue to increase due
to additional programming being provided to basic subscribers, increased
costs to produce or purchase cable programming, inflationary increases and
other factors. Effective in May 1994, the FCC's rate regulations under the
1992 Cable Act permitted operators to pass through to customers increases
in programming costs in excess of the inflation rate. Management believes
that the Company will continue to have access to programming services at
reasonable price levels, although there can be no assurance that the
Company can in the future maintain its access at reasonable price levels.
(See "THE COMPANY--Regulation.")
Monthly fees for cable services vary depending on the nature and type
of service. The Company offers a basic cable service package (primarily
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
service fee for premium channels is $7.95 per channel. Also, the Company
generally assesses a nonrecurring installation charge of up to $35.00.
58
<PAGE>
Customers are free to discontinue service at any time without penalty. The
Company currently does not offer Pay-TV or "pay-per-view" services, but
currently anticipates doing so in the future as it upgrades the capacity of
its systems.
The Company's cable television business is dependent to a large extent
on its ability to obtain and renew its franchise agreements with local
government authorities on acceptable terms. The Company believes that it
has maintained good relations with its local franchise authorities. The
Company has never had a franchise revoked and as of the date of this
Prospectus all of its franchises have been renewed or extended at their
expirations. Most of the Company's present franchises had initial terms of
approximately 10 to 15 years. As of the date of this Prospectus, all of
the Company's franchises have been renewed or extended, generally at or
prior to their stated expirations and on terms which are acceptable to the
Company. In this regard, during 1996, the Company completed negotiations
with 19 communities resulting in franchise renewals. Federal law,
including the 1984 Cable Act and the 1992 Cable Act, limits the power of
the franchising authorities to impose certain conditions upon cable
television operators as a condition of the granting or renewal of a
franchise. The Company has 26 franchises, three of which are up for
franchise renewal within the next three years. No one cable television
franchise accounts for more than 10% of the Company's total 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
date of the 1984 Cable Act, at a price determined in accordance with the
terms of the franchise, if any.
59
<PAGE>
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.
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 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.
60
<PAGE>
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 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.
** 1 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 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
61
<PAGE>
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. (See "THE COMPANY--Regulation.") New technology is continuing
to expand the types of available communications services and equipment and
the number of competitors offering such services. The Company faces actual
and potential competition in all of its businesses. Most of the Company's
competitors are large companies which have considerably greater financial,
technological, marketing and other resources than the Company.
The Company believes that the factors critical to a customer's choice
of a telecommunications services provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography and network
size. The Company's objective is to be one of the most responsive service
providers in the telecommunications industry, particularly when providing
customized communications services. The Company recognizes that it must
grow to be able to compete effectively in the changing telecommunications
industry and to avail itself of greater economies of scale and increased
scope in its transport and local access requirements and in its back office
operations. It is for this reason that the Company expanded its business
through the purchase of additional cable television systems and the
acquisition of companies in the long distance and Internet long distance
industries (i.e., TCIC and Iway), and the DataNet acquisition. These
additions have expanded the Company's product line and service abilities
which should enhance its ability to compete more effectively in its
changing business and regulatory environment.
LOCAL SERVICE COMPETITION. Historically, the Company's local telephone
operations have not experienced significant competition. The Company's
local telephone operations may experience increased competition from
various sources, including resellers of the Company's local exchange
services, large end-users installing their own networks, IXCs, satellite
transmission services, cellular communications providers, cable television
companies, radio-based personal communications service companies,
competitive access providers and other systems capable of completely or
62
<PAGE>
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 three largest long distance providers: AT&T,
MCI and Sprint. In 1996, AT&T, MCI and Sprint generated an aggregate of
approximately 80% of the nation's long distance revenue of $79.3 billion.
Behind these providers, four other companies had annual revenues of $430
million to $2.2 billion each in 1996. In addition, during the same year
there were more than 300 companies with annual revenues of less than $430
million each, the majority with revenues below $50 million each. Most of
these companies surpass the Company in size and available financial,
technological, marketing and other resources. All of these companies
potentially can compete with the Company in the long distance and operator
services markets in which the Company currently operates.
In addition, the 1996 Act permits RBOCs to provide long distance
telecommunications services internationally and domestically in territories
outside of the RBOCs' respective local service regions. RBOCs also may
provide long distance telecommunications services that are incidental to
certain other services, such as wireless and video services, in their local
regions. The authority to provide long distance telecommunications
services originating outside of the RBOCs' respective regions does not
currently include calls that terminate in-region, such as private line
services, 800 services or any equivalent service, and allows the contacted
party to choose the inter-LATA carrier. RBOCs are prohibited from
providing a full range of long distance telecommunication services in their
local regions until certain important conditions are met. RBOCs own
extensive facilities in their regions and have long-standing customer
relationships and substantial capital resources, which permit them to
expend funds on technological and marketing improvements. The Company
believes that in the future RBOCs will become substantial competitors for
long distance telecommunications services, especially in their local
regions.
INTERNET COMPETITION. The market for data communications services,
including Internet access and on-line services, is extremely competitive.
63
<PAGE>
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, NETCOM, PSI and other national and regional
providers; and (iii) on-line services providers, such as America Online,
CompuServe, Intuit Inc., Microsoft Corp. and Prodigy Services Company.
Most of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological, personnel and other
resources than those available to the Company. As a result, they may be
able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and
changes in customer requirements, take advantage of acquisition and other
opportunities more readily and devote greater resources to the marketing
and sale of their services.
The Company expects that most of the major on-line services providers
and telecommunications companies will expand their current services to
compete fully in the Internet access market. The Company believes that new
competitors, including large computer hardware, software, media and other
technology and telecommunications companies, will enter the Internet access
market, resulting in even greater competition to the Company. Certain
companies, including America Online, AT&T, BBN and PSI, have obtained or
expanded their Internet access products and services as a result of
acquisitions and strategic investments. Such acquisitions or investments
may permit these companies to devote greater resources to the development
and marketing of new competitive products and services and the marketing of
existing competitive products and services. The Company expects
acquisitions and strategic investments by its competitors to increase, thus
creating significant new competitors. In addition, the ability of some of
the Company's competitors to bundle other services and products with
Internet access services, such as the Internet service offerings recently
offered by AT&T and MCI, could place the Company at a further competitive
disadvantage.
64
<PAGE>
As a result of increased competition in the Internet access and
on-line services industry, the Company expects that it will continue to
encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of its Internet
services. The Company previously has reduced prices on certain of its
Internet access options and may consider doing so in the future. There can
be no assurance that the Company will be able to offset the effects of any
such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the data communications business, and
in particular the Internet access and on-line services businesses, are
likely to encounter consolidation in the near future, which could result in
increased price and other competition in the industry. Increased price or
other competition could erode the Company's market share and could have a
material adverse effect on its business, financial condition and results of
operations. There can be no assurance that the Company will have the
financial resources, technical expertise, marketing and support
capabilities or the expansion and acquisition possibilities to continue to
compete successfully in this or any market.
CABLE TELEVISION COMPETITION. Cable television competes for customers
in local markets with other providers of entertainment, news and
information. The competitors in these markets include broadcast television
and radio, newspapers, magazines and other printed material, motion picture
theaters, video cassettes and other sources of information and
entertainment, including directly competitive cable television operations.
Cable television service initially was offered as a means of improving
television reception in markets where terrain factors or distance from
major cities limited the availability of off-air television. In some of
the areas served by cable television systems, a substantial variety of
television programming can be received off-air, including low-power UHF
television stations, which have increased the number of television signals
in the country and provided off-air television programs to limited local
areas. The extent to which cable television service is competitive depends
upon a cable television system's ability to provide, on a cost-effective
basis, a greater variety of programming than that available off-air or
through other alternative delivery sources. Regulatory changes also impact
competition in the cable industry. Both the 1992 Cable Act and the 1996
Act are designed to increase competition in the cable television industry.
(See "THE COMPANY--Regulation.")
There are alternative methods of distributing the same or similar
video programming offered by cable television systems. Further, these
technologies have been encouraged by Congress and the FCC to offer services
in direct competition with existing cable systems. A significant
competitive impact is expected from medium power and higher power DBSs that
use high frequencies to transmit signals that can be received by dish
antennas much smaller in size than traditional home satellite dishes
65
<PAGE>
("HSDs"). There are multiple DBS providers offering services in the United
States, and at least one additional provider has announced plans to provide
DBS service in the future. These services are generally available
throughout the continental U.S., including areas in which the Company
operates its cable systems.
DBS has both advantages and disadvantages as an alternative means of
distributing video signals to a customer's home. Among the advantages are
that (i) the capital investment (although initially high) for the satellite
and uplinking segment of a DBS system is fixed and does not increase with
the number of subscribers receiving satellite transmissions, (ii) DBS is
not currently subject to local regulation of service and prices or required
to pay franchise fees and (iii) the capital costs for the ground segment of
a DBS system (the reception equipment) are directly related to, and limited
by, the number of service subscribers. DBS's disadvantages presently
include (i) limited ability to tailor the programming package to the
interests of different geographic markets, such as providing local news,
other local origination services and local broadcast stations, (ii) signal
reception being subject to line-of-sight angles and (iii) intermittent
interference from atmospheric conditions and terrestrially generated radio
frequency noise.
Although the effect of competition from DBS services cannot be
specifically predicted, there has been significant growth in DBS
subscribers and the Company anticipates that such DBS competition will
increase in the future as developments in technology continue to increase
satellite transmitter power, decrease the cost and size of equipment needed
to receive these transmissions and enable DBS to overcome the disadvantages
discussed above. Further, the extensive national advertising of DBS
programming packages, including certain sports packages not currently
available on cable television systems, will likely continue the rapid
growth in DBS subscribers.
The 1996 Act eliminated the statutory and regulatory restrictions that
prevented telephone companies from competing with cable operators for the
provision of video services. (See "THE COMPANY--Regulation.") The 1996
Act allows local telephone companies, including RBOCs, to compete with
cable television operators both inside and outside of their telephone
service areas. The Company expects that it may face substantial
competition from telephone companies for the provision of video services,
whether it is through the acquisition of cable systems, the provision of
wireless cable or the provision of upgraded telephone networks. Most major
telephone companies have greater financial resources than the Company, and
the 1992 Cable Act ensures that telephone company providers of video
services will be able to acquire significant cable television programming
services. The specific manner in which telephone company provision of
video services will be regulated is described in "THE COMPANY--Regulation."
Additionally, the 1996 Act eliminates certain federal restrictions on
utility holding companies and thus permits all utility companies to provide
66
<PAGE>
cable television services. The Company expects that the elimination of
these federal restrictions could result in another source of significant
competition in the delivery of video services.
Another alternative method of distributing cable television is MMDS,
which deliver programming services over microwave channels received by
subscribers with special antennas. MMDS systems are less capital
intensive, are not required to obtain local franchises or pay franchise
fees and are subject to fewer regulatory requirements than cable television
systems. The 1992 Cable Act also ensures that MMDS systems have the
ability to provide all significant cable television programming services.
Although there are relatively few MMDS systems in the United States
currently in operation, virtually all markets have been licensed or
tentatively licensed.
The FCC has taken a series of actions intended to facilitate the
development of wireless cable systems as an alternative means of
distributing video programming, including reallocating the use of certain
frequencies to these services and expanding the permissible use of certain
channels reserved for educational purposes. The FCC's actions enable a
single entity to develop MMDS systems with a potential of up to 35
channels, which permits the MMDS systems to compete more effectively
with cable television. Developments in compression technology will
significantly increase the number of channels that MMDS can offer.
Further, in 1995, several large telephone companies acquired significant
ownership in numerous MMDS companies. This infusion of capital into the
MMDS industry can be expected to accelerate its growth and its competitive
impact. Recently, the Company has experienced increased competition from
an MMDS provider operating in several of the Company's existing cable
system communities.
Within the cable television industry, cable operators may compete with
other cable operators or other entities seeking franchises for competing
cable television systems at any time during the terms of existing
franchises or upon expiration of such franchises in the expectation that an
existing franchise will not be renewed. The 1992 Cable Act promotes the
grant of competitive franchises. Furthermore, an increasing number of
cities are exploring the feasibility of owning their own cable systems in a
manner similar to city-provided utility services.
Although there is no legal prohibition preventing long distance
telephone companies from providing video services, historically they have
not provided such services in competition with cable systems. However,
such companies may prove to be a source of competition in the future. The
long distance companies are expected to expand into local markets with
local telephone and other offerings (including video services) in
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.
67
<PAGE>
In addition to competition for subscribers, the cable television
industry competes for advertising revenue with broadcast television, radio,
print media and other sources of information and entertainment. As the
cable television industry has developed additional programming, its
advertising revenue has increased. Cable operators sell advertising spots
primarily to local and regional advertisers. To date, the Company's
advertising efforts have been limited to local public service announcements
due to the limited capabilities of its existing systems. The Company
currently intends to expand its advertising efforts as it completes the
upgrade of many of its systems.
The Company has no basis upon which to estimate the number of cable
television companies and other entities with which it competes or may
potentially compete. There are a large number of individual and multiple
system cable television operators in the United States that are capable of
competing with the Company and that have substantially greater financial,
technological, marketing and other resources.
The full extent to which other media or home delivery services will
compete with cable television systems may not be known for some time and
there can be no assurance that existing, proposed or as yet undeveloped
technologies will not become dominant in the future.
REGULATION
OVERVIEW. The Company operates in a highly regulated industry and its
services are subject to varying degrees of federal, state and local
regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent that
they involve the provision, origination or termination of interstate or
international communications. The FCC also regulates many aspects of the
Company's cable television operations. The South Dakota Public Utilities
Commission retains jurisdiction over the Company's telecommunications
operations in South Dakota while other state public utilities commissions
regulate the intrastate aspects of the Company's long distance business in
their state. Finally, certain cities and municipal governments regulate by
franchise the Company's cable television operations within their
jurisdiction.
The regulation of the telecommunications industry is changing rapidly
and the regulatory environment varies substantially from state to state.
There can be no assurance that recent or future regulatory changes will not
have a material adverse impact on the Company. Recent developments
include, without limitation (i) enactment of the 1996 Act which modifies
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
68
<PAGE>
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
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.
69
<PAGE>
Second, the 1996 Act contains a number of provisions that are intended
to reduce barriers to entry and promote competition in a variety of
telecommunications markets, including both long distance and local exchange
operations. As a part of this effort, the 1996 Act provides a framework
under which RBOCs may enter the interexchange communications business from
which they were barred under the terms of the AT&T Divestiture Decree.
Under this framework, an RBOC may provide long distance services in the
states where it provides telephone service upon demonstrating to the
affected state regulatory authority and to the FCC that: (i) it faces
competition for local telephone service from at least one facilities-based
competitor and (ii) that it satisfies a 14 point checklist that would
purport to show that the affected RBOC's local exchange operations are open
to competition. The 1996 Act establishes deadlines within which both the
affected state regulatory agency and the FCC must act upon applications
filed by an RBOC to enter the long distance business. Certain of the RBOCs
already have taken steps to provide in-region long distance services, and
have filed applications with the FCC seeking authority to provide such
services in certain states. The Company expects that most or all of the
RBOCs will file applications for authority to provide in-region long
distance service. To date, the FCC has rejected each of those
applications, however. The RBOCs can provide long distance services
immediately in other states, and also with certain restrictions, cellular,
video and incidental services.
Third, although the 1996 Act generally prohibits long distance
companies from marketing their services jointly with local telephone
services provided by an RBOC (at least until that RBOC is permitted to
enter the long distance business), it contains an exception for companies,
such as the Company, that serve less than five percent of the nation's
presubscribed access lines. Thus, the 1996 Act permits the Company to
continue to market its long distance services jointly with local telephone
services whether provided by the Company or provided by an RBOC or non-
affiliated company.
Finally, the 1996 Act modifies many of the regulations governing the
Company's cable television operations and addresses some of the issues
arising out of the combination of cable and telephone service.
The Company cannot predict the effect that this legislation and the
FCC's implementing regulations, many of which are still forthcoming or
subject to judicial challenges, will have on the Company or the industry as
a whole. However, the Company believes that it is positioned to pursue
business opportunities in the rapidly changing telecommunications market.
LOCAL SERVICE REGULATION. Historically, the Company's local telephone
operations have been governed by regulation and oversight of the South
Dakota Public Utilities Commission. The South Dakota Public Utilities
Commission has had primary jurisdiction over various matters including
70
<PAGE>
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 telecommunica-
tions carriers (including competing telecommunications carriers); (ii)
unbundling of services into network elements; (iii) repricing of their
services at wholesale rates for the purpose of permitting resale of those
services; (iv) allowing other telecommunications carriers physically to
collocate their equipment on the premises of the incumbent LEC; and (v)
requiring telecommunications carriers to compensate each other based on
their own costs for the transport and termination of calls on the other
carriers' networks.
As a rural telephone company, the Company is currently exempt from
certain of the foregoing obligations unless, in response to a bona fide
request, the South Dakota Public Utilities Commission removes that
exemption. The Company, by petitioning the South Dakota Public Utilities
Commission, also may qualify for exemption from certain other obligations
under the 1996 Act. In addition, pursuant to the 1996 Act, the FCC
instituted and referred to a federal-state joint board a proceeding to
recommend changes to the current method of subsidizing universal service to
assure the availability of quality telephone services at just, reasonable
and affordable rates. The federal-state joint board released an initial
"recommended decision" on November 8, 1996, and on May 8, 1997, the FCC
released a Report and Order substantially adopting the Joint Board's
recommendations. Appeals of the FCC's Report and Order have been
consolidated before the United States Court of Appeals for the Fifth
Circuit and currently are pending. On July 18, 1997, the FCC issued a
further notice of proposed rulemaking to establish a universal service
support mechanism for non-rural carriers based on the forward-looking
economic cost of constructing and operating the network used to provide the
supported services. The FCC has further indicated its intent to commence a
separate proceeding by October 1998 to establish forward-looking economic
cost mechanisms for rural carriers. Non-rural carriers would begin to
receive support based on forward-looking economic cost on January 1, 1999,
whereas rural carriers would shift to such an approach beginning no sooner
than January 1, 2001. The Company cannot predict the terms or the effect
71
<PAGE>
that the FCC's actions will have on the Company or on the industry as a
whole. However, the Company believes that it is taking proper steps to
reduce its exposure to potential declines in universal service support.
The 1996 Act requires that all telecommunications providers (including
cable operators that provide telecommunications services) contribute
equitably to a USF, although the FCC may exempt an interstate carrier or
class of carriers if their contribution would be minimal under the USF
formula. The 1996 Act allows states to determine which intrastate
telecommunications providers contribute to the USF. The purpose of the USF
is to provide consumers in all regions, including low-income consumers and
those consumers in rural, insular and high-cost areas, access to
telecommunications and information services that are reasonably comparable
to those services in urban areas at reasonably comparable rates.
The 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
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
72
<PAGE>
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
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.
73
<PAGE>
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.
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
74
<PAGE>
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
interstate and international services. The Company also has obtained FCC
authority to provide international services through the resale of switched
services of various carriers. On March 21, 1996, the FCC initiated a rule-
making proceeding in which it proposed to eliminate the requirement that
non-dominant interstate carriers, such as the Company, maintain tariffs on
file with the FCC for domestic interstate services. On October 29, 1996,
the FCC announced that, following a nine-month transition period, long
distance carriers were no longer required to file tariffs for interstate
domestic long distance service, and that the relationship between carriers
and their customers would be governed by individual contracts. Carriers
also had the option immediately to cease filing tariffs. The Company did
not elect to cease filing interstate tariffs. Following a judicial stay of
the FCC's detariffing order, the FCC on March 6, 1997 released a public
notice stating that the tariffing rules in place prior to December 22, 1996
are once again in effect. Thus, nondominant carriers providing interstate,
domestic interexchange services, such as the Company, continue to be
required to file tariffs pursuant to the FCC's rules.
The FCC also imposes prior approval requirements on transfers of
control and assignments of operating authorizations. The FCC has the
authority to generally condition, modify, cancel, terminate or revoke
operating authority for failure to comply with federal laws and/or the
rules, regulations and policies of the FCC. Fines or other penalties also
may be imposed for such violations. Although the Company believes that it
has complied in all material respects with applicable laws and regulations,
there can be no assurance that the FCC or third parties will not raise
75
<PAGE>
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.
At the present time, the Company is authorized to provide originating
long distance services to customers in all states except Alaska and Hawaii.
Those services may terminate in any state in the United States and may also
terminate in countries abroad. Only 31 states have public utility
commissions that actively assert regulatory oversight over intrastate
services such as those currently offered by the Company. Like the FCC,
many of these regulating jurisdictions are relaxing the regulatory
restrictions currently imposed on telecommunications carriers for
intrastate service. While some of these states restrict the offering of
intra-LATA services by the Company and other IXCs, the general trend is
toward opening up these markets to the Company and other IXCs. Those
states that permit the offering of intra-LATA services by IXCs generally
require that end-users desiring to access these services dial special
access codes which place the Company and other IXCs at a disadvantage as
compared to LEC intra-LATA toll service which generally requires no access
code.
WIRELESS SERVICES. The Company, through its wholly owned subsidiary,
DWS, had a Spectrum Agreement with US WEST Wireless for participation in
the FCC's PCS D- and E-Block spectrum auction. This auction concluded on
January 14, 1997, with US WEST Wireless being the successful bidder on
BTA-421 (Sioux City) for the E-Block at $2.44 per population point. The
Company's agreement covers 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.
76
<PAGE>
On December 13, 1996, the FCC adopted rules to permit geographic
partitioning and spectrum disaggregation for all broadband PCS licensees.
These rules give the existing licensees and potential new entrants greater
flexibility to determine how much spectrum they will need for the
geographic areas in which they provide service. The Company has entered
negotiations with the winners of the FCC's A- and B-Block auctions for the
Minneapolis, Minnesota and the Des Moines, Iowa MTAs to partition or
disaggregate portions of the blocks that cover areas of interest to the
Company in Southeastern South Dakota, Northwestern Iowa and Southwestern
Minnesota. These negotiations have not reached a definitive point, and
there are no existing financial or other commitments between the parties.
There can be no assurance that these negotiations will be successful for
the Company.
Since there will be up to six PCS licensees competing with up to two
established cellular licensees in each market area, the Company expects the
wireless service market to be highly competitive. The Company initially
plans to focus on the use of its PCS services to provide fixed wireless
services in non-metropolitan areas, and to use the wireless services as a
complement and supplement to other services offered by the Company. There
can be no assurance that the Company will be able to make wireless services
a profitable part of its overall business.
The licensing, construction, operation, acquisition and sale of PCS
networks, as well as the number of PCS, cellular and other wireless
licensees permitted in each market, are regulated by the FCC. Federal law
prohibits the states from regulating the rates charged by wireless
telecommunications carriers (including PCS and cellular). Although some
states have petitioned the FCC for authority to regulate wireless rates,
thus far no such petitions have been successful. Federal law also
expressly prohibits the states from regulating the entry of wireless
carriers. However, to the extent not otherwise preempted, the states are
permitted to regulate any other terms and conditions of wireless services,
including but not limited to customer billing information and practices;
consumer protection matters; bundling of service and equipment;
availability of wholesale capacity; and facilities siting issues. There
can be no assurance that state agencies having jurisdiction over the
Company's business will not adopt regulations, impose taxes on PCS licenses
or take other actions that would adversely affect the business of the
Company. Federal and state regulators also will determine important
aspects of the Company's operations, such as technical aspects of and
payments for interconnection with landline and other wireless networks.
On July 26, 1996, the FCC released a report and order establishing
timetables for making emergency 911 services available by PCS and other
mobile services providers, including "enhanced 911" services that provide
the caller's telephone number, location and other useful information. By
late 1997, PCS providers must be able to process and transmit 911 calls
77
<PAGE>
(without call validation), including those from callers with speech or
hearing disabilities. Assuming a cost recovery mechanism is in place, by
mid-1998 such providers must have completed actions enabling them to relay
a caller's automatic number identification and cell site, and by 2001 they
must be able to identify the location of a 911 caller within 125 meters in
67 percent of all cases. State actions incompatible with these FCC rules
are subject to preemption. Various parties have petitioned the FCC to
reconsider certain requirements imposed in the order.
On August 1, 1996, the FCC released a report and order expanding the
flexibility of PCS and other commercial mobile radio services to provide
fixed as well as mobile services. Such fixed services include, but need
not be limited to, "wireless local loop" services, for example for services
to apartment and office buildings, and wireless backup of PBXs and local
area networks, to be used in the event of interruptions due to weather or
other emergencies. A petition for reconsideration or clarification of
aspects of the FCC's order presently is pending.
PCS licenses are granted for a 10-year period, at the end of which
period the licensee may apply for renewal. The Company must obtain a
number of approvals, licenses and permits for the operation of its PCS
business, including land use regulatory approvals and licenses from the
Federal Aviation Administration in connection with its PCS towers.
Additionally, the wireless telecommunications industry is subject to
certain state and local governmental regulations. Operating costs also are
affected by other government actions that are beyond the Company's control.
There is no assurance that the various federal, state and local agencies
responsible for granting such licenses, approvals and permits will do so or
that, once granted, those agencies will not revoke or fail to renew them.
Failure to obtain such licenses, approvals and permits would adversely
affect, delay commencement of or prohibit certain business operations
proposed by the Company.
CABLE TELEVISION REGULATION. The operation of cable television
systems is extensively regulated through a combination of federal
legislation and FCC regulations, by some state governments and by most
local government franchising authorities such as municipalities and
counties. The 1996 Act also is expected to have a profound effect on the
regulation of cable television operations. This new law will alter federal,
state and local laws and regulations regarding telecommunications providers
and cable television service providers, including the Company. The
discussion below summarizes the relevant provisions of the 1996 Act and
reviews the pre-existing federal cable television regulation as revised by
the 1996 Act.
THE TELECOMMUNICATIONS ACT OF 1996. The following is a summary
of certain provisions of the 1996 Act which could materially affect
the growth and operation of the cable television industry and the
78
<PAGE>
cable and telecommunications services provided by the Company. The
FCC has undertaken, and continues to undertake, numerous rule-making
proceedings to interpret and implement the provisions discussed below.
It is not possible at this time to predict the effects of such rule-
making proceedings on the Company.
CABLE RATE REGULATION. Rate regulation of the Company's cable
television services is divided between the FCC and local units of
government, primarily the local municipalities in which the Company
provides services. The FCC's jurisdiction extends to the cable
programming service tier ("CPST"), which consists largely of
satellite-delivered programming (excluding basic tier programming and
programming offered on a per-channel or per-program basis). Local
units of government (commonly referred to as "local franchising
authorities" or "LFAs") are primarily responsible for regulating rates
for the basic tier of cable service ("BST"), which typically will
contain at least the local broadcast stations and public access,
educational and government ("PEG") channels. Equipment rates are also
regulated by LFAs. The FCC retains appeal jurisdiction from LFA
decisions. Cable services offered on a per-channel or per-program-
only basis remain unregulated. By virtue of its small size, the
Company is currently exempt from these regulations.
Because of the Company's rate structure and small size, there is
no CPST regulation of the Company's rates at the current time. If the
Company's cable operations were to increase above the thresholds
established in 1996 or if the Company were to change its rate
structure with respect to cable services, additional regulations may
apply. Those additional regulations would include CPST rate
regulations, which would be triggered only by an LFA complaint. An
LFA complaint must be based upon more than one subscriber complaint.
Prior to the 1996 Act, a FCC review of CPST rates could be occasioned
by a single subscriber complaint to the FCC. The 1996 Act does not
disturb existing or pending CPST rate settlements between the Company
and the FCC. The Company's BST rates remain subject to LFA regulation
under the 1996 Act. Existing law precludes rate regulation wherever a
cable operator faces effective competition. The 1996 Act expands the
definition of effective competition to include any franchise area
where a LEC (or affiliate) provides video programming services to
subscribers by any means other than through direct broadcast satellite
service. There is no penetration minimum for the LEC to qualify as an
effective competitor, but it must provide comparable programming
services (12 channels including some broadcast channels) in the
franchise area. By virtue of its small size, the Company is currently
exempt from most of the regulations under the 1996 Act.
Under the 1996 Act, the Company will be allowed to aggregate on a
franchise, system, regional or company level its equipment costs into
79
<PAGE>
broad categories, such as converter boxes, regardless of the varying
levels of functionality of the equipment within each such broad
category. The 1996 Act will allow the Company to average together
costs of different types of converters including non-addressable,
addressable and digital. The statutory changes will also facilitate
the rationalizing of equipment rates across jurisdictional boundaries.
These cost-aggregation rules do not apply to the limited equipment
used by "BST-only" subscribers.
CABLE UNIFORM RATE REQUIREMENTS. The 1996 Act immediately
relaxes the uniform rate requirements of the 1992 Cable Act by
specifying that such requirements do not apply where the operator
faces effective competition, and by exempting bulk discounts to
multiple dwelling units, although complaints regarding predatory
pricing may be made to the FCC. Upon a prima facie showing that there
are reasonable grounds to believe that the discounted price is
predatory, the cable system operator will have the burden of proving
otherwise.
SYSTEM SALES. The 1996 Act changes the definition of a cable
system so that competitive providers of video services will only be
regulated and franchised as a cable system if they use public rights-
of-way.
CABLE POLE ATTACHMENTS. Under the 1996 Act, investor-owned
utilities must make poles and conduits available to cable systems
under delineated terms. Electric utilities are given the right to
deny access to particular poles on a nondiscriminatory basis for lack
of capacity, safety, reliability and generally accepted engineering
purposes. On March 14, 1997, the FCC released a notice of proposed
rulemaking to amend its rules and policies governing pole attachments.
In its notice, the FCC proposed a new formula for determining rates
applicable to attachments on poles, within ducts, conduit or rights-
of-way by both cable systems and telecommunications carriers until a
separate methodology is proposed for telecommunications carriers. In
the 1996 Act, Congress directed the FCC to issue a new pole attachment
formula relating to telecommunications carriers within two years of
the effective date of the 1996 Act, to become effective five years
after enactment. On August 12, 1997, the FCC released a notice of
proposed rulemaking seeking comment on the implementation of a
methodology for determining pole attachment rates for
telecommunications carriers. Those rules will result in higher pole
rental rates for cable operators. Any increases pursuant to this
formula may not begin for five years and will be phased-in in equal
increments over the fifth through the tenth years. This new FCC
formula does not apply in states which certify that they regulate pole
rents. Pole owners must impute pole rentals to themselves if they
offer telecommunications or cable services. Cable operators need not
80
<PAGE>
pay future make-ready on poles currently contracted if the make-ready
is required to accommodate the attachments of another user, including
the pole owner.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Act declares that
no state or local laws or regulations may prohibit or have the effect
of prohibiting the ability of any entity to provide any interstate or
intrastate telecommunications service. States are authorized to
impose competitively neutral requirements regarding universal service,
public safety and welfare, service quality and consumer protection.
The 1996 Act further provides that cable operators and affiliates
providing telecommunications services are not required to obtain a
separate franchise from LFAs for such services. The 1996 Act
prohibits LFAs from requiring cable operators to provide
telecommunications service or facilities as a condition of a grant of
a franchise, franchise renewal or franchise transfer, except that LFAs
can seek institutional networks as part of such franchise
negotiations. The 1996 Act clarifies that traditional cable franchise
fees may only be based on revenues related to the provision of cable
television services. However, when cable operators provide
telecommunications services, LFAs may require reasonable,
competitively neutral compensation for management of the public
rights-of-way.
To facilitate the entry of new telecommunications providers
(including cable operators), the 1996 Act imposes interconnection
obligations on all telecommunications carriers. All carriers must
interconnect their networks with other carriers and may not deploy
network features and functions that interfere with interoperability.
Existing LECs also have the following obligations: (i) good faith
negotiation with carriers seeking interconnection; (ii) unbundling,
equal access and non-discrimination requirements; (iii) resale of
services, including resale at wholesale rates (with an exception for
certain low-priced residence services to business customers); (iv)
notice of changes in the network that would affect interconnection and
interoperability; and (v) physical collocation unless the LEC
demonstrates that practical technical reasons, or space limitations,
make physical collocation impractical. The 1996 Act also directs the
FCC, within one year of enactment, to adopt regulations for existing
LECs to share infrastructure with qualifying carriers, and the FCC
released those regulations on February 7, 1997. Under the 1996 Act,
individual interconnection rates must be just and reasonable, based on
cost, and may include a reasonable profit. Cost of interconnection
will not be determined in an ROR proceeding. Traffic termination
charges shall be mutual and reciprocal. The 1996 Act contemplates
that interconnection agreements will be negotiated by the parties and
submitted to a state public utilities commission for approval. A
public utilities commission may become involved, at the request of
81
<PAGE>
either party, if negotiations fail. If the state regulator refuses to
act, the FCC may determine the matter. If the public utilities
commission acts, an aggrieved party's remedy is to file a case in
federal district court.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Act
allows telephone companies to compete directly with cable operators by
repealing the previous telephone company/cable cross-ownership ban and
the FCC's video dialtone regulations. This will allow LECs, including
the RBOCs, to compete with cable operators both inside and outside of
their telephone service areas. If a LEC provides video via radio
waves, it is subject to broadcast jurisdiction. If a LEC provides
common carrier channel service it is subject to common carrier
jurisdiction. An LEC providing video programming to subscribers is
otherwise regulated as a cable operator (including franchising, leased
access and customer service requirements), unless the LEC elects to
provide its programming via an open video system. LEC owned
programming services will also be fully subject to program access
requirements.
The 1996 Act replaces the FCC's video dialtone rules with an open
video system ("OVS") plan by which LECs can provide cable service in
their telephone service area. LECs complying with the FCC OVS
regulations will receive relaxed oversight. The 1996 Act requires the
FCC to act on any such OVS certification within 10 days of its filing.
Only the program access, negative option billing prohibition,
subscriber privacy, EEO, PEG, must-carry and retransmission consent
provisions of the Communications Act of 1934, as amended, will apply
to LECs providing OVS. Franchising, rate regulation, consumer service
provisions, leased access and equipment compatibility will not apply.
Cable copyright provisions will apply to programmers using OVS. LFAs
may require OVS operators to pay franchise fees only to the extent
that the OVS provider or its affiliates provide cable services over
the OVS. OVS operators will be subject to LFA general right-of-way
management regulations. Such fees may not exceed the franchise fees
charged to cable operators in the area, and the OVS provider may pass
through the fees as a separate subscriber bill item.
The FCC has adopted regulations prohibiting an OVS operator from
discriminating among programmers, and ensuring that OVS rates, terms
and conditions for service are reasonable and nondiscriminatory.
Further, the FCC has adopted regulations prohibiting an LEC-OVS
operator, or its affiliates, from occupying more than one-third of the
system's activated channels when demand for channels exceeds supply,
although there are no numeric limits. The 1996 Act also mandates OVS
regulations governing channel sharing, extending the FCC's sports
exclusivity, network nonduplication and syndicated exclusivity
regulations and controlling the positioning of programmers on menus
82
<PAGE>
and program guides. The 1996 Act does not require LECs to use
separate subsidiaries to provide incidental inter-LATA video or audio
programming services to subscribers or for their own programming
ventures. The validity of the FCC's rules currently is under review
in consolidated cases pending before the United States Court of
Appeals for the Fifth Circuit.
While there remains a general prohibition on LEC buyouts of cable
systems (any ownership interest exceeding 10%), cable operator buyouts
of LEC systems and joint ventures between cable operators and LECs in
the same market, the 1996 Act provides exceptions to this prohibition.
A rural exception permits buyouts where the purchased system serves an
area with fewer than 35,000 inhabitants outside an urban area. Where
an LEC purchases a cable system, that system, in addition to any other
system in which the LEC has an interest, may not serve 10% or more of
the LEC's telephone service area. Additional exceptions are also
provided for similar buyouts. The 1996 Act also provides the FCC with
the power to grant waivers of the buyout provisions in cases where (i)
the cable operator or LEC would be subject to undue economic distress,
(ii) the system or facilities would not be economically viable or
(iii) the anticompetitive effects of the proposed transaction are
clearly outweighed by the effect of the transaction in meeting
community needs. The LFA must approve any such waiver.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION.
The 1996 Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act.
Electric utilities must establish separate subsidiaries, known as
exempt telecommunications companies, and must apply to the FCC for
operating authority. The Company anticipates that large utility
holding companies will become significant competitors to both cable
television and other telecommunications providers as a result of the
1996 Act.
CROSS-OWNERSHIP AND MUST CARRY. The 1996 Act eliminates
broadcast/cable cross-ownership restrictions (including broadcast
network/cable restrictions), but leaves in place FCC regulations
prohibiting local cross-ownership between television stations and
cable systems. The FCC is empowered by the 1996 Act to adopt rules to
ensure carriage, channel positioning and non-discriminatory treatment
of non-affiliated broadcast stations by cable systems affiliated with
a broadcast network. Previous SMATV and MMDS cable cross-ownership
restrictions have been eliminated for cable operators subject to
effective competition. By virtue of its small size, the Company is
currently exempt from these regulations. The 1996 Act preserves local
television broadcasters' rights to signal carriage on cable systems
("must-carry"), and clarifies that the geographic scope of must-carry
83
<PAGE>
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.
84
<PAGE>
The 1992 Cable Act greatly expanded federal and local regulation
of the cable television industry. Certain of the more significant
areas of regulation imposed by the 1992 Cable Act are discussed below.
REGULATION OF PROGRAM LICENSING. The 1992 Cable Act directed the
FCC to promulgate regulations regarding the sale and acquisition of
cable programming between multichannel video program distributors
(including cable operators) and programming services in which a cable
operator has an attributable interest. The legislation and the
implementing regulations adopted by the FCC preclude most exclusive
programming contracts (unless the FCC first determines the contract
serves the public interest) and generally prohibit a cable operator
that has an attributable interest in a programmer from improperly
influencing the terms and conditions of sale to unaffiliated
multichannel video program distributors. Further, the 1992 Cable Act
requires that such cable affiliated programmers make their programming
services available to cable operators and competing video technologies
such as MMDS and DBS, and to telephone company providers of video
services, on terms and conditions that do not unfairly discriminate
among such competitors.
REGULATION OF CARRIAGE OF PROGRAMMING. Under the 1992 Cable Act,
the FCC adopted regulations prohibiting cable operators from requiring
a financial interest in a program service as a condition to carriage
of such service, coercing exclusive rights in a programming service or
favoring affiliated programmers so as to restrain unreasonably the
ability of unaffiliated programmers to compete.
REGULATION OF CABLE SERVICE RATES. The 1992 Cable Act subjected
the Company's cable systems to rate regulation, except in those cases
where they face "effective competition." The FCC was required to
establish standards and procedures governing regulation of rates for
basic cable service, equipment and installation, which were then to be
implemented by state and local franchising authorities. The 1992
Cable Act also required the FCC, upon complaint from a franchising
authority or a cable subscriber, to review the reasonableness of rates
for CPSTs. The 1996 Act amended the 1992 Cable Act to allow only LFAs
to file complaints. Services offered on an individual basis, such as
pay television and pay-per-view services, were not subject to rate
regulation.
On April 1, 1993, the FCC adopted rate regulations governing
virtually all cable systems, which were revised on February 22, 1994.
Under these regulations, existing basic and CPST service rates
typically are evaluated against benchmark rates established by the FCC
and are subject to mandatory reductions. Equipment and installation
charges are regulated based on actual costs. As noted above, the 1996
Act provides that rate regulation of the CPST automatically sunsets on
March 31, 1999.
85
<PAGE>
The FCC also allowed cable operators to elect to justify rates
under cost-of-service rules, which allow high cost systems to
establish rates in excess of the benchmark level. The FCC's interim
cost-of-service rules allowed a cable operator to recover through
rates for regulated cable services its normal operating expenses plus
a rate of return equal to 11.25% on the rate base. However, the FCC
significantly limited the inclusion in the rate base of acquisition
costs in excess of the book value of tangible assets. As a result,
the Company pursued cost-of-service justifications in only a few
cases. On December 15, 1995, the FCC adopted slightly more favorable
cost-of-service rules.
The FCC's rate regulations generally permit cable operators to
adjust rates to account for inflation and increases in certain
external costs, including programming costs, to the extent such
increases exceed the rate of inflation. However, a cable operator may
pass through increases in the cost of programming services affiliated
with such cable operator to the extent such costs exceed the rate of
inflation only if the price charged by the programmer to the
affiliated cable operator reflects either prevailing prices offered in
the marketplace by the programmer to unaffiliated third parties or the
fair market value of the programming. The FCC's revised regulations
confirm that increases in pole attachment fees ordinarily will not be
accorded external cost treatment. The FCC recently adopted a method
for recovering external costs and inflation on an annual basis. The
new method minimizes the need for frequent rate adjustments and the
regulatory lag problems associated with the previous rate adjustment
methodology.
The regulations also provide mechanisms for adjusting rates when
regulated tiers are affected by channel additions or deletions.
Additional programming costs resulting from channel additions can be
accorded the same external treatment as other program costs increases,
and cable operators presently are permitted to recover a mark-up on
their programming expenses. Under one option, operators were allowed
a flat fee increase ($.20) per channel added to an existing CPST, with
an aggregate cap on such increases ($1.20) plus a license fee reserve
($.30) through 1996. In 1997, an additional flat fee increase ($.20)
is available, and the license fees for additional channels and for
increases in existing channels are no longer subject to the aggregate
cap. This optional approach for adding services 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
86
<PAGE>
substantial upgrade of the cable system. The FCC provided additional
rate relief for small operators, including the Company, and to any
additional systems that the Company acquires to the extent that the
systems are already eligible for this favorable treatment.
REGULATION OF CUSTOMER SERVICE. As required by the 1992 Cable
Act, the FCC has adopted comprehensive regulations establishing
minimum standards for customer service and technical system
performance. Local franchising authorities are allowed to enforce
stricter customer service requirements than the FCC standards.
REGULATION OF CARRIAGE OF BROADCAST STATIONS. The 1992 Cable Act
granted commercial broadcasters a choice of must-carry rights or
retransmission-consent rights, and gave noncommercial educational
broadcasters must-carry rights. By October 1993, cable operators were
required to secure permission from broadcasters that elected
retransmission-consent rights before retransmitting the broadcasters'
signals. Local and distant broadcasters can require cable operators
to make a payment as a condition to carriage of such broadcasters'
stations on a cable system. Established superstations were not
granted such rights.
The 1992 Cable Act also imposed obligations to carry local
broadcast stations for such stations which chose a must-carry right,
as distinguished from the retransmission-consent right described
above. The 1992 Cable Act and the rules adopted by the FCC generally
provided for mandatory carriage by cable systems of all local full-
power commercial television broadcast signals selecting must-carry,
including the signals of stations carrying home-shopping programming
and, depending on a cable system's channel capacity, non-commercial
television broadcast signals. On March 31, 1997, the United States
Supreme Court upheld the constitutionality of the must-carry
provisions of the 1992 Cable Act.
OWNERSHIP REGULATIONS. The 1992 Cable Act required the FCC to:
(i) promulgate rules and regulations establishing reasonable limits on
the number of cable subscribers which may be served by a single
multiple system cable operator or entities in which it has an
attributable interest; (ii) prescribe rules and regulations
establishing reasonable limits on the number of channels on a cable
system that will be allowed to carry programming in which the owner of
such cable system has an attributable interest; and (iii) consider the
necessity and appropriateness of imposing limitations on the degree to
which multichannel video programming distributors (including cable
operators) may engage in the creation or production of video
programming. On September 23, 1993, the FCC adopted regulations
establishing a 30% limit on the number of homes nationwide that a
cable operator may reach through cable systems in which it holds an
87
<PAGE>
attributable interest (attributable for these purposes is defined as a
five percent or greater ownership interest or the existence of any
common directors), with an increase to 35% if the additional cable
systems are minority controlled. However, the FCC stayed the
effectiveness of its ownership limits pending the appeal of a
September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found
unconstitutional the provision of the 1992 Cable Act requiring the FCC
to establish such ownership limits. On appeal, however, the United
States Court of Appeals for the District of Columbia Circuit upheld
the provision. As a result, the Company's ability to acquire
interests in additional cable systems may be affected.
On September 23, 1993, the FCC also adopted regulations limiting
carriage by a cable operator of national programming services in which
that operator holds an attributable interest (using the same
attribution standards as discussed above) to 40% of the first 75
activated channels on each of the cable operator's systems. The rules
provide for the use of two additional channels or a 45% limit,
whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also
grandfather existing carriage arrangements which exceed the channel
limits, but require new channel capacity to be devoted to unaffiliated
programming services until the system achieves compliance with the
regulations. Channels beyond the first 75 activated channels are not
subject to such limitations, and the rules do not apply to local or
regional programming services.
In the same rule-making proceeding, the FCC concluded that
additional restrictions on the ability of multichannel distributors to
engage in the creation or production of video programming presently
are unwarranted.
Under the 1992 Cable Act and the FCC's regulations, a cable
operator could not hold a license for MMDS and DBS systems within the
same geographic area in which it provides cable service. The 1996 Act
would allow such ownership if effective competition exists in that
geographic area.
The 1992 Cable Act contains numerous other provisions which,
together with the 1984 Cable Act, create a comprehensive regulatory
framework. Violation by a cable operator of the statutory provisions
or the rules and regulations of the FCC can subject the operator to
substantial monetary penalties and other significant sanctions such as
suspension of licenses and authorizations, issuance of cease and
desist orders and imposition of penalties. Many of the specific
obligations imposed on the operation of cable television systems under
these laws and regulations are complex, burdensome and increase the
Company's cost of doing business.
88
<PAGE>
COPYRIGHT REGULATIONS. The Copyright Revision Act of 1976 (the
"Copyright Act") provides cable television operators with a compulsory
license for retransmission of broadcast television programming without
having to negotiate with the stations or individual copyright owners
for retransmission consent for the programming. The availability of
the compulsory license is conditioned upon the cable operators'
compliance with applicable FCC regulations, certain reporting
requirements and payment of appropriate license fees, including
interest charges for late payments, pursuant to the schedule of fees
established by the Copyright Act and regulations issued thereunder.
The Copyright Act also empowers the Copyright Office to periodically
review and adjust copyright royalty rates based on inflation and/or
petitions for adjustments due to modifications of FCC rules. The FCC
has recommended to Congress the abolition of the compulsory license
for cable television carriage of broadcast signals, a proposal that
has received substantial support from members of Congress. Any
material change in the existing statutory copyright scheme could
significantly increase the costs of programming and be adverse to the
business interests of the Company.
PRIVACY. The 1984 Cable Act imposes a number of restrictions on
the manner in which cable system operators can collect and disclose
data about individual system customers. The statute also requires
that the system operator must periodically provide all customers with
written information about its policies regarding the collection and
handling of customer data, their privacy rights under federal law and
their enforcement rights. In the event that a cable operator is found
to have violated the customer privacy provisions of the 1984 Cable
Act, it could be required to pay damages, attorneys' fees and other
costs. Under the 1992 Cable Act, the privacy requirements are
strengthened to require that cable operators take such actions as are
necessary to prevent unauthorized access to personally identifiable
information.
STATE AND LOCAL REGULATION. Because cable television systems use
local streets and rights-of-way, cable television systems are
generally licensed or franchised by local municipal or county
governments and, in some cases, by centralized state authorities with
such franchises being given for fixed periods of time subject to
extension or renewal largely at the discretion of the issuing
authority. The specific terms and conditions of such franchises vary
significantly depending on the locality, population, competitive
services and a number of other factors. While this variance takes
place among systems of essentially the same size in the same state,
franchises generally are comprehensive in nature and impose
requirements on the cable operator relating to all aspects of cable
service including franchise fees, technical requirements, channel
capacity, subscriber rates, consumer and service standards, access
89
<PAGE>
channel and studio facilities, insurance and penalty provisions.
Local franchise authorities generally control the sale or transfer of
cable systems to third parties. The franchising process, like the
federal regulatory climate, is highly politicized and no assurances
can be given that the Company's franchises will be extended or renewed
or that other problems will not be encountered at the local level. In
connection with the franchise renewal process, LFAs commonly request
the provision of enhanced cable system technology as a condition of
franchise renewal. The 1984 Cable Act grants certain protective
procedures in connection with renewal of cable franchises, which
procedures were further clarified by the renewal provisions of the
1992 Cable Act.
PROPOSED CHANGES IN REGULATION. The regulation of cable
television systems at the federal, state and local levels is subject
to the political process and has been in constant flux over the past
decade. Material changes in the law and regulatory requirements must
be anticipated and there can be no assurance that the Company's
business will not be affected adversely by future legislation, new
regulation or deregulation. Legislative, administrative and/or
judicial action may change all or portions of the foregoing statements
relating to competition and regulation.
CABLE PROVISION OF INTERNET SERVICES. Transmitting indecent
material via the Internet is made criminal by the 1996 Act. However,
on-line access providers are exempted from criminal liability for
simply providing interconnection service; they are also granted an
affirmative defense from criminal or other action where in "good
faith" they restrict access to indecent materials. The 1996 Act
further exempts on-line access providers from civil liability for
actions taken in good faith to restrict access to obscene, excessively
violent or otherwise objectionable material. On June 26, 1997, the
United States Supreme Court held unconstitutional the provisions of
the 1996 Act criminalizing indecent online transmissions.
REGULATION OF INTERNET SERVICES. Internet-related services are not
currently subject to direct regulation by the FCC or any other United
States agency, other than regulation applicable to businesses generally.
The FCC recently requested comments on a petition filed by the America's
Carriers Telecommunication Association which requests that the FCC regulate
certain voice transmissions over the Internet as telecommunications
services. Changes in the regulatory environment relating to the
telecommunications or Internet-related services industry could have an
adverse effect on the Company's Internet-related services business. The
1996 Act may permit telecommunications companies, RBOCs or others to
increase the scope or reduce the cost of their Internet access services.
In its recent access charge reform proceeding, the FCC concluded that
incumbent LECs may not assess interstate access charges on information
90
<PAGE>
service providers, but stated that it planned to address issues relating to
information service providers' use of the public switched network as part
of a broader set of issues under review in a related proceeding. Given the
present unsettled nature of the regulation of Internet services, the
Company cannot predict the effect that the 1996 Act or any future
legislation, regulation or regulatory changes may have on its business.
In addition to the regulatory uncertainties, the law relating to the
liability of on-line services providers and Internet access providers for
information carried on, disseminated through or hosted on their systems is
currently unsettled. Several private lawsuits seeking to impose such
liability are currently pending. In one action brought against an Internet
access provider, RELIGIOUS TECHNOLOGY CENTER V. NETCOM ON-LINE
COMMUNICATION SERVICES, INC., the United States District Court for the
Northern District of California ruled in a preliminary phase that under
certain circumstances Internet access providers could be held liable for
copyright infringement. The case has been settled by the parties.
The 1996 Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. On June 12, 1996, however, a panel of three federal judges
granted a preliminary injunction barring enforcement of this portion of the
1996 Act to the extent that enforcement is based upon allegations other
than obscenity or child pornography as an impermissible restriction on the
First Amendment's right of free speech. That decision was appealed to the
United States Supreme Court, which held the provisions unconstitutional.
In addition, Congress, in consultation with the United States Patent and
Trademark Office and the Clinton Administration's National Information
Infrastructure Task Force, is currently considering legislation to address
the liability of on-line service providers and Internet access providers,
and numerous states have adopted or are currently considering similar types
of legislation. The imposition upon Internet access providers or Web
hosting sites of potential liability for materials carried on or
disseminated through their systems could require the Company to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources or the discontinuation of certain
product or service offerings. The Company believes that it is currently
unsettled whether the 1996 Act prohibits and imposes liability for any
services provided by Iway should the content or information transmitted be
subject to the 1996 Act.
The law relating to the liability of on-line service providers and
Internet access providers in relation to information carried, disseminated
or hosted also is being discussed by the World Intellectual Property
Organization in the context of ongoing consideration of updating existing,
and adopting new, international copyright treaties. Similar developments
are ongoing in the United Kingdom and other jurisdictions. The scope of
91
<PAGE>
authority of various regulatory bodies in relation to on-line services is
currently uncertain.
The Office of Telecommunications in the United Kingdom recently has
published a consultative document setting out a number of issues for
discussion, including the roles of traditional telecommunications and
broadcasting regulators with respect to on-line services. The Securities
Investment Board in the United Kingdom is investigating the status of on-
line services and the transmission of investment information over networks
controlled by access providers. Such transmissions may make an access
provider liable for any violation of securities and other financial
services legislation and regulations. Decisions regarding regulation,
enforcement, content liability and the availability of Internet access in
other countries may significantly affect the ability to offer certain
services worldwide and the development and profitability of companies
offering Internet and on-line services in the future. For example, it has
been reported that CompuServe recently removed certain content from its
services worldwide in reaction to law enforcement activities in Germany,
and it has been reported that an Internet access provider in Germany has
been advised by prosecutors that it may have liability for disseminating
neo-Nazi writings by providing access to the Internet where these materials
are available.
The increased attention focused upon liability issues as a result of
these lawsuits, legislation and legislative proposals could affect the
growth of Internet use. Any costs incurred as a result of liability or
asserted liability for information carried on or disseminated through its
systems could have a material adverse effect on the business, financial
condition and results of operations of the Company.
SUMMARY ONLY. The foregoing is only a summary of some of the present
and proposed federal, state and local regulations and legislation relating
to the Company's businesses. Other existing federal regulations, copyright
licensing and, in many jurisdictions, state and local regulatory
requirements, currently are the subject of a variety of judicial
proceedings, legislative hearings and administrative and legislative
proposals which could change, in varying degrees, the manner in which the
Company operates. Neither the outcome of these proceedings nor their impact
upon the Company can be predicted at this time.
EMPLOYEES
As of December 31, 1997, the Company employed 161 employees, 142 of
whom are full-time employees and none of whom was subject to any collective
bargaining agreements.
92
<PAGE>
ENVIRONMENTAL AND OTHER MATTERS
Except for site-specific issues, environmental issues tend to impact
members of the telecommunications industry in consistent ways. The United
States Environmental Protection Agency ("EPA") and other agencies regulate
a number of chemicals and substances that may be present in facilities used
in the provision of telecommunications services. These include
preservatives which may be present in certain wood poles, asbestos which
may be present in certain underground duct systems, and lead which may be
present in certain cable sheathing. Components of the Company's network
may include one or more of these chemicals or substances. The Company
believes that in their present uses, none of such facilities of the Company
poses any significant environmental or health risk that derives from EPA
regulated substances. If EPA regulation of any such substance is
increased, or if any facilities are disturbed or modified in such a way as
to require removal of the substance(s), special handling, storage and
disposal may be required for any such facilities removed from use. At this
time the Company is not subject to any environmental litigation.
PROPERTIES
The tangible assets of the Company include a substantial investment
in telecommunications and cable equipment. The net book value of the
Company's fixed assets was $23.3 million at September 30, 1997. No single
property represents 10% or more of the Company's total assets.
The principal properties of the Company do not lend themselves to
simple description by character and location. The Company's investment in
property, plant and equipment consisted of the following at December 31,
1995 and 1996:
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(IN THOUSANDS)
<CAPTION>
FIXED ASSETS 1996 1995
- ------------ ---- ----
<S> <C> <C>
Telecommunications Plant $16,923 $15,452
Cable Systems 4,870 1,355
Other Equipment 2,510 2,100
Land and Buildings 1,604 1,581
Other 354 462
</TABLE>
93
<PAGE>
Telecommunications plant consists of switching equipment, transmission
equipment and related facilities, aerial cable, underground cable, conduit
and wiring. Cable systems consist of head-end, distribution and subscriber
equipment. Other equipment consists of public telephone instruments and
telephone equipment (including PBXs) used or leased by the Company in its
operations, poles, furniture, office equipment, vehicles and other work
equipment. Land and buildings consist of land owned in fee and
improvements thereto, principally central office buildings. Other property
consists primarily of plant under construction, capital leases and
leasehold improvements.
The Company's rights-of-way for its telecommunications and cable
transmission systems are typically held under leases, easements, licenses
or governmental permits. All other major equipment and physical facilities
are owned in fee and are operated, constructed and maintained pursuant to
rights-of-way, easements, permits, licenses or consents on or across
properties owned by others.
The Company believes that standard practices prevailing in the
telephone industry are followed by the Company's telephone operating
subsidiaries in the construction and maintenance of plant and facilities,
and that all properties presently being used for operations of the Company
are suitable, well maintained and adequately equipped for the purposes for
which they are used. Substantially all of the Company's properties are
subject to mortgage liens held by RTFC.
The following property is owned in fee by the Company:
Headquarters building - Irene, South Dakota
13,000 sq. ft., single story brick structure, with 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.
94
<PAGE>
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.
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. This list of properties does
not include properties owned or leased by subsidiaries of the Company, none
of which is material. All properties owned by the Company are subject to
liens for loans obtained in the ordinary course of business.
LEGAL PROCEEDINGS
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.
CERTAIN AGREEMENTS AFFECTING CAPITAL STOCK
95
<PAGE>
STOCK OPTIONS. As part of its executive compensation of Thomas W.
Hertz, Chief Executive Officer and General Manager, and Craig A. Anderson,
Executive Vice President-Marketing, Chief Financial Officer and Treasurer, the
Board of Directors of the Cooperative granted to each of Messrs. Hertz and
Anderson stock options to purchase 767 shares of Cooperative preferred
stock, which automatically became options to purchase 123,980 (as adjusted to
reflect the effects of the Stock Split) shares of the Company's Common Stock
at an exercise price of $6.19 (as adjusted to reflect the effects of the
Stock Split) per share when the Merger was completed. (See "ADDITIONAL
SECURITIES OF THE COMPANY--Stock Options.")
STANDSTILL AGREEMENTS. In connection with the issuance of shares of
Preferred Stock to the TCIC Sellers and Iway Sellers, the Cooperative
entered into the Standstill Agreements with each of such persons that
restrict the abilities of the TCIC Sellers and Iway Sellers from selling
such stock and taking various other actions, as specified in the Standstill
Agreements. The restrictions embodied in the Standstill Agreements
continue to be applicable to shares of the Company's Common Stock issuable
to the TCIC Sellers and Iway Sellers. (See "ADDITIONAL SECURITIES OF THE
COMPANY--Standstill Agreements.") The Company entered into similar
Standstill Agreements with the former shareholders of DataNet in
connection with the DataNet acquisition.
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 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is provided by the Company's management
as its analysis of the Company's financial condition and results of
operations. This analysis should be read in conjunction with the separate
historical financial statements of the Company and notes thereto included
elsewhere in this Prospectus.
96
<PAGE>
OVERVIEW
In 1996 the Company began a major reorganization and expansion
program. This program includes the redesign and rebuilding of the
Company's switching center and telecommunications network, a project which
concluded in 1997, as well as expansion of the Company's operations through
selected acquisitions. During 1996, the Company purchased the assets of
nineteen cable television systems from three companies that provided cable
services to various communities in addition to the assets purchased by the
Company. In December 1996, the Company, through a wholly owned subsidiary,
merged with TCIC, a South Dakota-based provider of long distance and
operator services, to operate DTG Communications, Inc. Also in December
1996, in a similar transaction, the Company merged with I-way, one of
South Dakota's largest Internet service providers, to create DTG Internet
Services, Inc. In December 1997, the Company merged with DataNet, a large
LAN/WAN systems integrator, to form DTG DataNet, Inc. All three companies
continue to operate as wholly owned subsidiaries of the Company. The
Company currently anticipates that additional acquisitions will form a part
of its continuing expansion plans, though no final agreements have been
concluded at this time, except as set forth under the heading "THE COMPANY--
Recent Development."
As part of its reorganization plans, the Company also changed its
form of conducting business from a South Dakota cooperative into a public
Delaware business corporation. On February 19, 1997, the Company filed a
Registration Statement on Form S-4 (Registration Statement No. 333-22025)
with respect to the Conversion and the Merger. At a special meeting of the
members of the Cooperative convened on July 21, 1997, the Conversion was
approved. Immediately following the special meeting of the Cooperative
members, a special meeting of the shareholders of the resulting South
Dakota business corporation was convened on July 21, 1997 and held open
until July 25, 1997. At that meeting, the shareholders voted to approve an
Agreement and Plan of Merger pursuant to which the South Dakota business
corporation would be merged with and into the Company. The Merger became
effective on July 25, 1997. As a result, the Company now operates as a
publicly held Delaware corporation.
The Company's reorganization and expansion plans have had, and will
continue to have, significant impacts on the Company's financial condition
and results of operations. As part of its network rebuilding project, in
1995 the Company reassessed the remaining useful life of its old
facilities. In 1996, the Company incurred approximately $5.8 million in
new capital expenditures and in 1997 invested an additional $15 million
for its network construction program. These expenditures have been, and
those currently planned for 1998 will be, financed through substantial
increase in long term debt. These changes will combine to result in sub-
stantially higher depreciation and interest expenses with a corresponding
reduction in the Company's net income. In addition, to implement its
97
<PAGE>
growth plans, in 1996 the Company completed the acquisitions described
above and increased its employee base from 34 employees at December 31,
1995, to 76 employees at December 31, 1996 and to 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 through 1999 as it completes
its new facilities and markets new services, the resultant higher expense
levels from a combination of higher depreciation, amortization and interest
expense, as well as additional employee expenses, will likely cause the
Company to recognize and report net after-tax losses in those years.
DECEMBER 31, 1995 TO DECEMBER 31, 1996
<TABLE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Capital Expenditures 1,554.1 $ 5,751.6
Cash Provided From Operations 1,950.2 1,961.8
Cash Used for Investment 725.7 7,516.2
Cash Provided From Financing 103.3 1,353.0
Long-Term Debt Incurred 342.0 4,399.3
Total Capital Structure $19,049.1 $22,448.3
Percent of Debt to Total Capital 72% 71%
</TABLE>
The Company's total capital structure was $22,448,300 at December 31,
1996, compared to a total capital structure of $19,049,100 at December 31,
1995. The increase in total capital in 1996 of $3,399,200 consisted
primarily of additional outstanding long-term debt of $2,284,000 and
$1,172,000 in additional capital from the issuance of preferred stock to
acquire TCIC and Iway in December 1996.
Cash provided from operations was $1,962,000 in 1996 compared to
$1,951,000 in 1995, largely unchanged. Cash used in investing activities
was $7,516,000 in 1996, up from $725,700 in 1995. This increase is
primarily due to increased capital expenditures in 1996 as the Company
began rebuilding its transmission network. Investing activities for 1995
also included cash totaling $1,142,000 that was received from the sale of
the Company's investment in certain cellular operations. Cash provided
from financing activities was $1,353,000 in 1996, up from $103,300 in 1995.
The increase in 1996 was primarily attributable to increased long-term
borrowings to finance the Company's 1996 capital expenditures program. The
Company believes that it has adequate internal and external resources
available to finance its ongoing operating requirements, but will need
98
<PAGE>
additional long-term financing to complete additional network construction
programs. See "RISK FACTORS--Significant Capital Requirements,"
"--Competition" and "--Dividend Restrictions and Other Restrictive
Covenants."
During 1996, the Company and its subsidiaries increased long-term debt
by $4,399,000, compared to a $342,000 increase in 1995. Approximately
$3,300,000 of the 1996 increase was related to the acquisition of the
assets of 19 additional cable television systems and was obtained from the
RTFC. The balance of the 1996 loans and the 1995 borrowings were obtained
from the RUS. In July 1996, the Company refinanced all of its outstanding
RUS loans using proceeds of a new loan from the RTFC. The Company and its
subsidiaries expect the RTFC and other sources to continue to be available
for future borrowings, though there can be no assurance that the RTFC or
other lenders would remain so available or that the Company could continue
borrowing on terms similar to its present financing. See "RISK FACTORS--
SIGNIFICANT CAPITAL REQUIREMENTS."
RESULTS OF OPERATIONS
<TABLE>
SUMMARY OF CONSOLIDATED OPERATIONS
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Total Revenues $6,115.5 $7,808.8
Depreciation and Amortization 1,701.0 2,434.4
Other Costs and Expenses 3,572.6 5,296.5
-------- --------
Operating Income (Loss) 841.9 77.9
Other Income (Expense) 593.5 (413.8)
Income Tax Expense (Benefit) 301.9 (175.7)
-------- --------
Net Income (Loss) $1,133.5 $ (160.2)
</TABLE>
In 1996, revenues increased to $7,809,000, up from $6,116,000 in 1995.
This represents an increase of 28 percent in 1996 compared to 1995. This
increase reflects the addition of 19 new cable systems during 1996 as well
as rate increases for the Company's local telephone services. Total costs
and expenses increased to $7,731,000, up from $5,274,000 in 1995. This
represents an increase of 47 percent in 1996 compared to 1995. The
increase in 1996 expenses reflects the additional operating expense
associated with the new cable assets purchased during that year as well as
an increase in depreciation and amortization expense and employee costs for
the Company's telephone operations. The Company's consolidated net income
or loss for 1996 was a loss of $160,000, compared to net income of
$1,133,000 in 1995, a decrease of 114 percent in 1996 compared to 1995.
99
<PAGE>
The 1995 results include a one-time pre-tax net gain in the amount of
$686,000 related to the sale of a cellular investment made by the Company.
Other income and expense consists primarily of interest and dividend
income, interest expense and gains and losses from the disposition of
non-operating assets and investments. Other income decreased $1,000,000, or
170 percent, in 1996 primarily due to the unusual net after-tax increase in
1995 from the one-time sale of the Company's investment in cellular
telephone operations. The 1996 decrease also reflects additional interest
expense from the Company's increased long-term debt over 1995.
RESULTS OF BUSINESS SEGMENT OPERATIONS
The Company currently operates within two major business segments:
telephone operations, which includes all operations other than cable
television; and cable television operations. Because of the technological
convergence of telephone and cable systems which allow both types of
services to be offered through a single network, the Company believes that
business segment reporting may not be appropriate in future years, although
it will remain appropriate for 1997. The following sections discuss the
operating results for these two segments in 1995 and 1996.
<TABLE>
TELEPHONE OPERATIONS
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Local Service $ 856.1 $1,058.7
Long Distance Toll Service 1,931.7 1,996.3
Access Service 2,761.8 3,267.0
Other Revenues 34.5 140.8
-------- --------
Total Revenue 5,584.1 6,462.7
Depreciation and Amortization 1,632.2 2,011.0
Other Costs and Expenses 3,220.0 3,997.6
-------- --------
Operating Income $ 731.9 $ 454.1
Access Lines 5,935 5,973
</TABLE>
Local service revenues increased $202,600, or 24 percent, in 1996
compared to 1995. The 1996 increase was due primarily to a local service
rate increase approved by the Board of Directors in December 1995 and
implemented in February and July 1996. There are no local rate requests
currently pending for the Company nor does the Company currently anticipate
any local rate increases during 1997. The Company's local service rates
100
<PAGE>
are not currently regulated by the FCC or the South Dakota Public Utilities
Commission.
Long distance toll revenues increased $64,600, or three percent, in
1996 compared to 1995. These changes primarily reflect fluctuations in
minutes of use by the Company's customers.
Access revenues increased $505,200, or 18 percent, in 1996 compared to
1995. The Company reassesses its access rates and underlying cost studies
annually and adjusts its tariff rate filings and participation in NECA and
USF revenue pools accordingly. In late 1996, the Company received approval
from the South Dakota Public Utilities Commission to increase its
intrastate access rates approximately 20 percent.
Depreciation and amortization expenses increased by $378,800, or 23
percent, in 1996 as a result of the Company's additional capital
expenditures for the year, changes in the estimated useful lives of certain
assets and the amortization of costs associated with its acquisitions of
TCIC and Iway. Approximately $75,000 of this increase was due to a change
in the Company's estimate of the useful life of certain of its central
office and other telecommunications equipment. See Note 12 to the
Company's Consolidated Financial Statements contained in Appendix A to this
Prospectus.
Other telephone costs and expenses increased $777,600, or 24 percent,
for 1996, primarily due to the expense of $550,000 of costs associated with
the abandonment of the acquisition of eight wireline telephone exchanges.
The other expense increase of $227,600 in 1996 was primarily due to an
increase in network repair maintenance activities which were postponed in
earlier years.
<TABLE>
CABLE TELEVISION OPERATIONS
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Cable Service Revenue $469.4 $1,300.5
Other Revenue 61.9 45.6
------ --------
Total Cable Revenue 531.3 1,346.1
Depreciation and Amortization 68.8 423.4
Other Costs and Expenses 352.6 1,298.9
------ --------
Operating Income (Loss) $110.0 $ (376.2)
Subscribers 1,740 5,474
</TABLE>
101
<PAGE>
The Company's cable service revenues increased $831,000, or 177
percent, in 1996 due to the purchase of the assets of 19 additional cable
systems during the year.
Depreciation and amortization expenses increased by $354,600, or 515
percent, in 1996 as a result of the Company's purchase of additional cable
system assets during the year, with $113,900 primarily due to the Company's
reassessment of the remaining useful life of its existing cable system
assets. See Note 12 to the Company's Consolidated Financial Statements
contained in Appendix A to this Prospectus.
Other costs and expenses increased $946,400, or 268 percent, in 1996
compared to 1995. Operating expenses increased in 1996 primarily due to
the increased level of all expenses associated with the operation of the
additional assets purchased in 1996.
<TABLE>
INTEREST EXPENSE
<CAPTION>
Dollars in Thousands FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Interest Expense $592.1 $723.8
</TABLE>
Interest expense increased $131,700, or 22 percent, in 1996 due to the
addition of long-term borrowings to finance the Company's 1996 capital
expenditures and the purchase of additional cable system assets and the
business operations of TCIC and Iway. The Company borrowed substantial
additional long-term funds in 1997 to finance its network rebuilding
project and, accordingly, anticipates that future interest expense will
increase significantly.
INCOME TAXES
The Company historically operated as a stock cooperative and was
granted tax exempt status under Section 501(c)(12) of the Code.
Accordingly, income tax expense has been related only to certain ancillary
operations, such as the Company's cable television operations and its prior
investments in cellular operations. Income tax expense decreased $477,500,
or 158 percent, in 1996 due to net operating losses in those operations.
As a result of the Conversion, the Company is no longer tax exempt.
102
<PAGE>
SEPTEMBER 30, 1997
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
Accounts Receivable decreased from $1,784,895 at December 31, 1996 to
$1,471,754 at September 30, 1997 due to stricter collection policies
implemented by the Company in 1997. Materials and Supplies increased from
$694,097 at December 31, 1996 to $1,383,644 at September 30, 1997, primarily
due to materials on hand to be used to complete the Company's 1997
construction projects. The offsetting changes in these two asset items
accounted for most of the increase in current assets from $6,540,903 at
December 31, 1996 to $6,911,554 at September 30, 1997.
Investments and Other Assets increased from $2,522,868 at December 31,
1996 to $3,971,496 at September 30, 1997. This increase was primarily due to
the purchase by the Company of approximately $1.2 million in RTFC
Subordinated Capital Certificates in connection with the $28,421,000
long-term loan agreement entered into between the Company and RTFC in July
1997. See the discussion of the RTFC financing, below, and Note 3 to the
Consolidated Financial Statements contained in Appendix B to this Prospectus.
An additional $238,000 of this increase is attributable to the recognition of
a deferred income tax asset during 1997. See Note 4 to the Consolidated
Financial Statements contained in Appendix B.
Net Fixed Assets increased from $14,441,104 at December 31, 1996 to
$23,315,087 at September 30, 1997, representing primarily additional plant
assets constructed by the Company during 1997 as part of its network upgrade
program.
The Company's total capital structure, consisting of Stockholders' Equity
and Long-Term Debt, was $32,560,266 at September 30, 1997 compared to
$22,448,311 at December 31, 1996. The increase in total capital structure at
September 30, 1997 of $10,111,935 was composed primarily of additional
outstanding long-term debt of $11,760,253 used to finance the Company's
network rebuilding program less accumulated net losses from the Company's
operations from January 1, 1997 through September 30, 1997 (see discussion of
Results of Operations, below).
The presentation of the Stockholders' Equity account structure changed
substantially during the third quarter of 1997 due to the conversion of the
Company from a South Dakota stock cooperative into a Delaware public
corporation in July, 1997. The primary change was the reclassification of the
capital accounts from preferred stock and cooperative capital credits into
common stock. The Conversion did not change overall total equity. The
Conversion process is discussed in more detail above and in Notes 6 and 7 to
the Consolidated Financial Statements contained in Appendix B.
103
<PAGE>
The Company believes that it has adequate internal financial resources to
finance its ongoing day-to-day operating requirements. Operating cash flow for
the nine-month period ended September 30, 1997, totaled $844,858, consisting of
the Company's net loss of $1,534,911 plus its noncash depreciation and
amortization expenses of $2,379,769. Adjusted for the one time, nonrecurring
reorganization expenses of $585,438 associated with the Conversion and Merger
(see Note 5 to the Consolidated Financial Statements contained in Appendix B),
operating cash flow for the period totaled $1,430,296, approximately equal to
the $1,492,773 in operating cash flow for the comparative period of 1996
(consisting of the 1996 net loss of $285,070 plus depreciation and
amortization expense of $1,777,843). See Results of Operations, below, for
additional information.
While the Company has adequate financial and additional equity
offerings resources to fund its day-to-day operations, it must rely on the
availability of additional long-term debt and additional equity offering to
finance its capital expenditures program. At September 30, 1997, the
Company's long-term debt consisted of approximately $26.2 million under a
series of loans from the RTFC, approximately $577,000 owed to various
contractors in connection with the Company's construction projects, and $1
million in long-term financing associated with the acquisitions of TCIC and
Iway (see Note 2 to the Company's Consolidated Financial Statements contained
in Appendix B). On June 24, 1997, the Company entered into a long-term loan
arrangement with RTFC in the aggregate amount of $28,421,000. Of this
amount, $13,092,089.25 was used to refinance the then outstanding long-term
debt from the Rural Utilities Service on July 15, 1997. The remaining
amounts are allocated to refinance the $1 million in debt assumed by the
Company in the TCIC and Iway acquisitions and to cover the Company's 1997
capital expenditures program. Approximately $10.5 million of the Company's
$11.1 million of capital expenditures through September 30, 1997, were
financed by the RTFC. The balance represents amounts owed to contractors for
the project. As of September 30, 1997, the Company's construction projects
were on schedule and within budget. Accordingly, the Company currently
believes that the balance of the RTFC loan facility will be adequate to
cover all of its remaining 1997 capital expenditures. The Company further
expects that the RTFC and other long-term financing sources will continue to
be available to fund future capital expenditures and developments, though
there is no assurance that this would be so. See "RISK FACTORS--SIGNIFICANT
CAPITAL REQUIREMENTS."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Revenues increased from $5,284,114 during the first nine months of 1996
to $8,440,667 in the first nine months of 1997, an increase of $3,156,553, or
approximately 60%. Approximately $875,442 of this increase reflects the
impact of rate increases in the Company's telephone operations put into
effect during 1996. The remaining increase reflects additional revenues from
104
<PAGE>
the 19 new cable systems purchased by the Company during 1996, and additional
revenues of $1,053,143 and $767,512 from the TCIC and Iway operations,
respectively. Revenues from the Iway operations are included in Other
Revenue in 1997 and account for a majority of the increase in Other Revenue
during the first nine months of 1997 compared to the same period in 1996.
Plant Operations expense increased from $1,278,642 during the first nine
months of 1996 to $2,672,679 in the first nine months of 1997, an increase of
$1,394,037, or approximately 109%. Approximately $657,035 and $363,839 of
this increase was due to the additional costs and expenses from the
operations of TCIC and Iway, respectively. The remaining increase is
primarily due to increased operating costs associated with the 19 additional
cable systems purchased by the Company during 1996.
Depreciation and Amortization expense increased from $1,777,843 in the
first nine months of 1996 to $2,379,769 during the first nine months of 1997,
an increase of $601,926 or approximately 34%. Approximately $168,188 of this
increase was due to the amortization of the excess of cost over net assets
acquired in the acquisitions of TCIC and Iway and the depreciation of assets
used in those operations. The balance of this increase is due primarily to
the depreciation of additional assets used to operate the 19 cable systems
acquired in 1996 and assets installed by the Company during the first nine
months of 1997 as part of its network construction program.
Other costs and expenses, including Customer, General and Administrative
and Other Operating Expenses, increased from $2,259,560 during the first nine
months of 1996 to $4,664,599 in the first nine months of 1997, an increase of
$2,405,039 or approximately 106%. Of this increase, $585,438 is due to the
inclusion of one-time, nonrecurring charges associated with the Conversion
and Merger of the Company described above. These reorganization expenses do
not arise from and are not representative of the Company's ongoing business.
See Note 5 to the Company's Consolidated Financial Statements contained in
Appendix B. Approximately $771,449 and $406,778 of this increase is due to
the additional costs and expenses from the operations of TCIC and Iway,
respectively. The remaining increase is primarily due to increased employee
costs in the Company's telephone and cable television operations.
Interest Expense increased from $522,971 for the first nine months of 1996
to $791,920 during the first nine months of 1997, an increase of $268,949, or
approximately 51%. Approximately $65,000 of this increase was attributable to
the long-term debt assumed by the Company in its acquisitions of TCIC and Iway
in December 1996. The balance of this increase is primarily due to the
increase in long-term debt incurred by the Company to acquire the assets of
19 cable television systems in 1996, to refinance its RUS loans in July 1997,
and to fund its 1996 and 1997 capital expenditures.
105
<PAGE>
FINANCIAL STATEMENTS
The audited consolidated financial statements of Dakota Cooperative
Telecommunications, Inc. for the years ended December 31, 1996 and 1995,
together with the notes thereto and the report of Olsen Thielen & Co., Ltd.
dated January 18, 1997, are included as Appendix A to this Prospectus. The
unaudited consolidated financial statements of Dakota Telecommunications
Group, Inc. for the nine months ended September 30, 1997 and 1996,
together with the notes thereto, are included as Appendix B to this
Prospectus.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is divided into three classes, which
will be as nearly equal in number as possible. Each class of directors
serves a successive three-year term of office. Biographical information
concerning the persons who are directors or executive officers of the
Company is presented below. Except as otherwise indicated, all of the
named individuals have had the same principal employment for over five
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. Mr. Hertz's law
firm provided services to the Cooperative during 1995 in the amount of
$68,708 while Mr. Hertz was a shareholder in that firm. Mr. Hertz's
proportionate interest in such fees was $41,225.
Palmer O. Larson (age 73) was a director of the Cooperative from 1976
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Larson is a semi-retired agribusiness (farm) owner
and operator.
John (Jack) A. Roth (age 66) was a director of the Cooperative from
1970 until the Merger and has been a director of the Company since its
formation (February 1997). Mr. Roth retired as an agent for State Farm
Insurance in Parker, South Dakota, after working as an insurance agent for
33 years.
106
<PAGE>
DIRECTORS WITH TERMS EXPIRING IN 1999
Ross L. Benson (age 62) was a director of the Cooperative since 1980
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Benson is an agribusiness (farm) owner and operator.
Dale Q. Bye (age 66) was a director of the Cooperative from 1975 until
the Merger and has been a director of the Company since its formation
(February 1997). Mr. Bye is a semi-retired agribusiness (farm) owner and
operator.
James H. Jibben (age 46) was a director of the Cooperative from 1988
until the Merger and its Chairman of the Board from 1995 until the Merger
and has been a director and Chairman of the Board of Directors of the
Company since its formation (February 1997). Mr. Jibben was President of
the Cooperative prior to the Conversion and the Merger. Mr. Jibben is an
agribusiness (farm) owner and operator.
DIRECTORS WITH TERMS EXPIRING IN 1998
Craig A. Anderson (age 42) has been a director and Executive Vice
President, Chief Financial Officer and Treasurer of the Company since its
formation (February 1997) and was Executive Vice President - Marketing and
Chief Financial Officer of the Cooperative from January 1, 1997 until the
Merger. Prior to January 1, 1997, Mr. Anderson was Vice President -
Marketing of the Cooperative from September 1996 to January 1, 1997. From
January 1994 until September 1996, Mr. Anderson was an independent business
consultant and from May 1994 until December 1995 attended the University of
South Dakota, earning a Masters of Business Administration and Masters in
Professional Accounting. From November 1992 until January 1994, Mr.
Anderson was a director and Vice President - Chief Financial Officer and
Secretary of the Austad Company (a catalog retailer of golf equipment).
From July 1989 to September 1992, Mr. Anderson served as a director and
Vice President - Chief Financial Officer, General Counsel and Secretary of
Dial-Net, Inc. (a long distance reseller).
Jeffrey J. Goeman (age 39) was a director of the Cooperative from 1988
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Goeman is President of and has owned and operated
Goeman Auction Service and Real Estate, Inc. in Lennox, South Dakota (a
real estate brokerage and appraisal and auction firm) since 1980.
Edward D. Christensen, Jr. (age 71) was a director of the Cooperative
from 1975 until the Merger and has been a director of the Company since its
formation (February 1997). Mr. Christensen is a semi-retired agribusiness
(farm) owner and operator.
107
<PAGE>
John A. Schaefer (age 71) was a director of the Cooperative from 1974
until the Merger and has been a director of the Company since its formation
(February 1997). Mr. Schaefer is retired. He formerly was an agribusiness
(farm) owner and operator.
Jeffrey G. Parker (age 51) has been a director of the Company since
July 1997. Mr. Parker's principal occupation is as the President and Chief
Executive Officer of Parker Transfer and Storage, Inc., a transportation
and storage company with which he has been associated since 1969. Mr.
Parker also serves as President of Slip and Trip, Inc., a service provider
to Parker Transfer and Storage, Inc. and as a director of HF Financial Corp.
Mr. Parker served as Vice President of TCIC from 1990 until 1996 and as
President of TCIC during 1996.
OTHER EXECUTIVE OFFICERS.
Timothy Dupic (age 43) is the Secretary of the Company, a position he
has held since July 1997. Mr. Dupic also serves as Vice President of
Operations of the Company, a position he has held since January 1996.
Prior to that time, Mr. Dupic worked in management of the National
Exchange Carriers Association and currently serves as an outside director of
that organization.
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth information concerning the number of
shares of Common Stock held by each stockholder who is known to the
Company's management to be the beneficial owner of more than 5% of the
Common Stock as of January 27, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES OF
BENEFICIAL OWNER COMMON STOCK PERCENT<F1>
- ---------------- ------------ -----------
<S> <C> <C>
Gery Baar 171,014 6.6
4401 E. Tomar Road
Sioux Falls, South Dakota 57105
Douglas English 171,014 6.6
909 E. Plum Creek Road
Sioux Falls, South Dakota 57105
- ----------------------------------
108
<PAGE>
<FN>
<F1> The percentages reflected in this column were computed with reference
to a total of 2,593,242 shares of the Company's Common Stock
outstanding, representing 2,483,562 shares of the Company's Common
Stock and options to purchase no more than 109,680 shares of Common
Stock currently outstanding that are currently exercisable or that may
be exercised within 60 days.
</FN>
</TABLE>
The following table shows certain information concerning the number of
shares of the Company's Common Stock held as of January 27, 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.
<TABLE>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP<F1><F2>
<CAPTION>
SOLE SHARED
VOTING AND VOTING OR TOTAL PERCENT
DISPOSITIVE DISPOSITIVE BENEFICIAL OF
NAME OF BENEFICIAL OWNER POWER POWER<F3> OWNERSHIP CLASS<F4>
- ------------------------ ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Craig A. Anderson<F5> 50,824 --- 50,824 2.0
Ross L. Benson<F6> 2,400 300 2,700 <F*>
Dale Q. Bye<F6> 2,664 --- 2,664 <F*>
Edward D. Christensen, Jr.<F6> 2,930 --- 2,930 <F*>
Timothy Dupic 200 --- 200 <F*>
Jeffrey J. Goeman<F6> 2,400 1,642 4,042 <F*>
Thomas W. Hertz<F5> 53,248 --- 53,248 2.1
James H. Jibben<F6> 2,912 --- 2,912 <F*>
Palmer O. Larson<F6> 2,586 --- 2,586 <F*>
Jeffrey G. Parker<F7> 120,226 --- 120,226 4.6
John A. Roth<F6> 4,184 164 4,348 <F*>
John A. Schaefer<F6> 2,784 --- 2,784 <F*>
109
<PAGE>
All directors and executive
officers as a group 247,358 2,106 249,464 9.6
_______________________________
<FN>
<F*>Less than one percent
<F1> The numbers of shares stated are based on information furnished by
each person listed and include shares personally owned of record by
that person and shares which under applicable regulations are deemed
to be otherwise beneficially owned by that person. Under these
regulations, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting power or
dispositive power with respect to the security. Voting power includes
the power to vote or to direct the voting of the security.
Dispositive power includes the power to dispose or to direct the
disposition of the security. A person also will be considered the
beneficial owner of a security if the person has a right to acquire
beneficial ownership of the security within 60 days.
<F2> The numbers of shares of Common Stock reflected include those that
were issued in the Conversion and Merger. Prior to the Conversion and
the Merger, the persons set forth above owned no more than one (1)
share of Cooperative common stock.
<F3> These numbers include shares over which the listed person is legally
entitled to share voting or dispositive power by reason of joint
ownership, trust or other contract or property right, and shares held
by spouses and children over whom the listed person may have
substantial influence by reason of relationship.
<F4> The percentages reflected in this column were computed with reference
to a total of 2,593,242 shares of the Company's Common Stock
outstanding, representing 2,483,562 shares of the Company's Common
Stock and options to purchase no more than 109,680 shares
of Common Stock currently outstanding that are currently exercisable
or that may be exercised within 60 days.
<F5> The number of shares includes options to purchase shares
of Common Stock exercisable within 60 days held by the following
persons:
NAME NUMBER OF SHARES
---- ----------------
Craig A. Anderson 49,612
Thomas W. Hertz 49,612
110
<PAGE>
<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 TCIC and Iway acquisitions 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>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
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-
Marketing, 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.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS<F1> UNDERLYING OPTIONS<F2> COMPENSATION<F3>
- --------------------------- ---- ------ ----- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas W. Hertz 1997 $129,808 $15,000 124,080 $ 15,702
President and Chief 1996 118,940 0 -- 1,439
Executive Officer 1995 20,455 -- -- 72
Craig A. Anderson 1997 $ 96,154 $ 7,500 124,080 $ 7,105
Executive Vice President 1996 28,725 0 -- 1,195
-Marketing, Chief Financial
Officer and Treasurer<F4>
_____________________________
<FN>
<F1> This column represents the cash value of shares of Common Stock
awarded to the above individuals.
111
<PAGE>
<F2> See "ADDITIONAL SECURITIES OF THE COMPANY--Stock Options."
<F3> 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), (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).
<F4> Mr. Anderson began his employment with the Cooperative in _________, 1996.
</FN>
</TABLE>
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
PERCENT OF TOTAL
OPTIONS GRANTED
NUMBER OF SECURITIES TO EMPLOYEES IN
NAME UNDERLYING OPTIONS FISCAL YEAR EXERCISE PRICE EXPIRATION DATE
- ----------------- -------------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Thomas W. Hertz 124,080 43% $6.19<F1> 12-31-2006<F1>
Craig A. Anderson 124,080 43% $6.19<F1> 12-31-2006<F1>
<FN>
<F1> 100 of these options have an option price of $12.50 per share and
expire December 31, 2007.
</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 and Conversion in July 1997.
Under the Company's 1997 Stock Incentive Plan, each nonemployee
director of the Company will be entitled to receive semi-annually, on June
30 and December 31 of each year, stock options to purchase 400 (as adjusted
to reflect the effects of the Stock Split) shares of Common Stock at 100
percent of the market value on the date of grant. The stock options will be
issued for a term of 10 years. The formula grant provisions for nonemployee
directors may be amended by the Board of Directors not more than once every
six months, other than to comport with changes in the Code, the Exchange Act
or the rules thereunder. Nonemployee directors may pay the exercise price
112
<PAGE>
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 (as adjusted to reflect the effects of the Stock Split) shares of
Common Stock. This award was payable on January 1, 1998 to directors who had
previously served 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
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 Agreement
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 15% of the
increase, if any, in corporate net income over prior year net income. "Net
income," for purposes of the bonus calculations, is pre-tax net income
before depreciation, amortization and other non-cash expenses, before
annual bonuses under the two Agreements and after eliminating the effect of
extraordinary items. Under the formula, no bonuses 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
113
<PAGE>
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 10 days' opportunity to cure any occurrence
constituting Good Reason.
"Severance Pay" under the Agreements consists of continuation of the
Executive's salary, bonus and benefits for the unexpired employment term
under the Agreements at the time of the termination (with a minimum annual
bonus each year equal to that of the year before the termination),
reasonable out-placement services and immediate vesting of all restricted
stock and stock option rights. Severance Pay is not reduced by any post-
termination employment or other income of the Executive. If the Executive
dies while entitled to receive Severance Pay, the remaining Severance Pay
is to be paid to the Executive's estate. If a termination entitling the
Executive to Severance Pay occurs after a Change in Control, or if the
Company defaults on Severance Pay obligations, the monthly salary and bonus
payments are accelerated and become payable immediately in a lump sum.
The Agreements prohibit the Executive from competing with the Company
during his employment, and after his employment while he is receiving
Severance Pay. The Executive may end the post-employment noncompetition
period at any time by renouncing any right to further Severance Pay.
The Agreements provide for payment of the Executive's reasonable legal
fees and expenses incurred in seeking to enforce the Executive's rights
under the Agreements, to the extent the Executive is successful in his
claims, with payment made contemporaneously but with the Executive required
to repay any amount to which he is ultimately found not to be entitled.
The Agreements also provide that the Company will make the Executive whole
for any taxes, interest or penalties incurred by the Executive on account
of the characterization of any payment to which the Executive is entitled
from the Company as an "excess parachute payment" under Section 280G of the
Code or any successor provision of the Code, so that the net payments to
the Executive after all such taxes, interest and penalties will be the same
as if no such characterization had occurred.
114
<PAGE>
TRANSACTIONS WITH DIRECTORS AND OFFICERS
Directors and officers of the Company, businesses they own or
represent, and members of their immediate families purchase services from
the Company and its subsidiaries in the ordinary course of business. Rates
and charges for these services are the same as those available to the
general public.
In connection with the Cooperative's acquisition of TCIC and Iway,
the Cooperative issued to the former shareholders of TCIC and Iway
(collectively, the "Sellers") shares of Cooperative preferred stock which
automatically upon consummation of the Merger were converted into 189,454 (as
adjusted for the Stock Split) shares of Common Stock. In addition, the
Sellers collectively received warrants which were converted into warrants to
purchase an additional 77,912 (as adjusted for the Stock Split) shares of
Common Stock. 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
which were converted into warrants to purchase an additional 24,668 (as
adjusted for the Stock Split) shares of Common Stock. (See "RISK FACTORS--
Certain Standstill Agreements" and "THE COMPANY--Certain Agreements Affecting
Capital Stock.") In addition, Mr. Parker was 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 a former shareholder of
TCIC and Iway, guaranteed certain loans by Norwest Bank. See Note 4 to the
consolidated financial statements attached to this Prospectus as Appendix A
and Note 3 to the consolidated financial statements attached to this
Prospectus as Appendix B. This loan was paid in full in December 1997.
ADDITIONAL SECURITIES OF THE COMPANY
PREFERRED STOCK PURCHASE RIGHTS
On July 22, 1997, the Board of Directors of the Company declared a
dividend of one Preferred Stock Purchase Right (the "Rights") on each
outstanding share of Common Stock, of the Company to stockholders of record
on August 5, 1997. Due to the Stock Split, each currently outstanding share
of Common Stock would have one-half of a Right. Each Right will entitle
the holder thereof until August 4, 2007 (or, if earlier, until the redemption
of the Rights), to buy one one-hundredth of a share (a "Unit") of Series A
Junior Participating Preferred Stock at an exercise price of $100 per Unit,
subject to certain antidilution adjustments. The Rights will be represented
by certificates for Common Stock and will not be exercisable or transferable
apart from the Common Stock until the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated
persons acquired, or obtained the right to acquire, beneficial ownership of
115
<PAGE>
15% or more of the outstanding shares of Common Stock (such person being
referred to as an "Acquiring Person" and the date upon which such person
becomes an Acquiring Person being referred to as the "Stock Acquisition
Date"), (ii) 10 business days following the commencement or announcement of
an intention to commence a tender or exchange offer, the consummation of
which would result in beneficial ownership by a person of 15% or more of
the outstanding shares of Common Stock, or (iii) 10 business days after
the Company's Board of Directors determines, pursuant to certain criteria
set forth in the Rights Agreement, that a person beneficially owning 10%
or more of the outstanding shares of Common Stock is an "Adverse Person"
(the earlier of such dates being called the "Distribution Date").
Separate certificates representing the Rights will be mailed to record
holders of Common Stock as of the Distribution Date. The Rights will
first become exercisable on the Distribution Date, unless earlier redeemed,
and could then begin trading separately from the Common Stock. Until a right
is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company with respect to the shares for which the right is
exercisable, including the right to vote or to receive dividends. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A., as
Rights Agent (the "Rights Agent").
Each share of Preferred Stock purchasable upon exercise of the Rights
will have a minimum preferential quarterly dividend rate of $10 per share but
will be entitled to an aggregate dividend of 100 times the dividend declared
on the shares of Common Stock. In the event of liquidation, the holders of
Preferred Stock will receive a minimum preferred liquidation payment of $100
per share but will be entitled to receive an aggregate liquidation payment
equal to 100 times the payment made per share of Common Stock. Each share of
Preferred Stock will have 100 votes, voting together with the Common Stock.
In the event of any merger, consolidation or other transaction in which
shares of Common Stock are exchanged, each share of Preferred Stock will be
entitled to receive 100 times the amount received per share of Common Stock.
The rights of the holders of Preferred Stock as to dividends, liquidation and
voting, and in the event of mergers and consolidations, are protected by
customary antidilution provisions. Because of the nature of the Preferred
Stock's dividend, liquidation and voting rights, the value of the interest in
a share of Preferred Stock purchasable upon the exercise of each Right should
approximate the value of one share of Common Stock.
In the event that, any time following the Stock Acquisition Date, the
Company were acquired in a merger or other business combination transaction
or in the event 50% or more of its assets or earning power is sold, proper
provision will be made so that each holder of a Right shall thereafter have
the right to receive, upon the exercise thereof at the then current exercise
price of the Right, that number of shares of common stock of the acquiring
Company which at the time of such transaction would have a market value of
two times the exercise price of the Right. Alternatively, in the event that,
any time following the Distribution Date, the Company were the surviving
116
<PAGE>
corporation in a merger with an Acquiring Person and its Common Stock was not
changed or exchanged, or an Acquiring Person were to engage in certain
specified self-dealing transactions with the Company, or an Acquiring Person
becomes the beneficial owner of more than 15% of the then outstanding shares
of Common Stock, or a person had been or was designated as an Adverse Person
by the Company's Board of Directors in accordance with the criteria set forth
in the Rights Agreement, proper provision shall be made so that each holder of
a Right, other than the Acquiring Person, Adverse Person and certain related
parties (whose Rights will thereafter be void), will thereafter have the right
to receive upon exercise of a Right that number of shares of Common Stock
having a market value of two times the exercise price of such Right.
The Rights are redeemable, in whole but not in part, at a price of $.01
per Right at any time prior to the designation of a person as an Adverse
Person under the Rights Plan or the fifteenth day after the Stock Acquisition
Date. Immediately upon the action of the Board of Directors ordering
redemption of the Rights, the Rights will terminate and thereafter, the only
right of holders of the Rights will be to receive the redemption price. The
Rights will expire on August 4, 2007 (unless earlier redeemed).
The purchase price payable, and the number of one one-hundredths of a
share of Preferred Stock or other securities or property issuable, upon
exercise of the Rights is subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Preferred Stock, (ii) as a result of
the grant to holders of the Preferred Stock of certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the
current market price of the Preferred Stock, or (iii) upon the distribution
to holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular periodic cash dividends) or of subscription rights or
warrants (other than those referred to above). With certain exceptions, no
adjustment in the purchase price will be required until cumulative
adjustments require an adjustment of at least 1% in such purchase price.
Other than those provisions relating to the principal economic terms of
the Rights, any of the provisions of the Rights Agreement may be amended by
the Board of Directors of the Company prior to the Distribution Date. After
the Distribution Date, the provisions of the Rights Agreement may be amended
by the Board in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights, or to shorten or
lengthen any time period under the Rights Agreement, so long as no amendment
to adjust the time period governing redemption shall be made at a time when
the Rights are not redeemable.
As of August 5, 1997, there were 985,216 shares of Common Stock
outstanding. One Right was distributed to stockholders of the Company for
each share of Common Stock owned of record by them on August 5, 1997. As a
result of the Stock Split, each share of Common Stock has one-half of a
Right associated with it. As long as the Rights are attached to the Common
117
<PAGE>
Stock, the Company will issue one-half of a Right with each new share of
Common Stock issued. The Company's Board of Directors has reserved for
issuance upon exercise of the Rights 15,000 shares of Preferred Stock.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's Board of Directors, except
pursuant to an offer conditioned on the Rights being redeemed. The Rights
should not interfere with any merger or other business combination approved
by the Board of Directors prior to the fifteenth day after the Stock
Acquisition Date since the Rights may be redeemed by the Company at $.01 per
Right prior to such time.
STOCK OPTIONS
EXECUTIVE OPTIONS. To provide an incentive for Thomas W. Hertz, Chief
Executive Officer and General Manager of the Cooperative, and Craig A.
Anderson, Executive Vice President - Marketing and Chief Financial Officer
of the Cooperative (collectively, the "Optionees"), to operate the
Cooperative to promote the Cooperative's long-term growth and profitability
and to help align their economic interests with those of the Cooperative's
members and security holders, effective as of January 1, 1997, the Board of
Directors of the Cooperative adopted stock option agreements granting options
to each Optionee to purchase up to an aggregate of 767 shares of Cooperative
preferred stock at a price of $1,000 per share. Upon consummation of the
Merger, these options automatically became options to purchase Common Stock
(converted on an approximately 80.8-to-1 basis). Thus, Mr. Anderson and
Mr. Hertz each now hold options to acquire 123,980 shares of Common Stock at
a price of $6.19 per share.
The options call for delayed vesting so that 20% of each option
becomes exercisable at the earlier of (i) 90 days after the date the
preferred stock is converted into Common Stock or (ii) January 1, 1998.
Thereafter, an additional 20% of each option becomes exercisable on each
anniversary date of the stock option agreements if the Optionees are then
employed by the Company until the total number of shares subject to each
option become exercisable. Thus, 40% of the options have become exercisable
as of the date of this Prospectus. Each option remains outstanding for 10
years from the date it was granted. The options are non-transferable.
Under the terms of the stock option agreements, the options are not
incentive stock options under Section 422 of the Code. The options were
not subject to tax when they were granted. Upon exercise, the Optionee
will recognize compensation income in the amount of the spread between the
market value of the options and the option exercise price. The Company
will receive a corresponding deduction. The option price must be paid in
cash or shares of stock of the Company, valued at the market value on the
date of exercise.
118
<PAGE>
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.
EMPLOYEE OPTIONS. Pursuant to the 1997 Stock Incentive Plan, and at
the recommendation of the Board of Directors' Compensation Committee, the
Board approved the grant of stock options to acquire 100 shares of the
Company's Common Stock at $12.50 per share to each employee of the Company
on December 31, 1997. On January 1, 1998, 20% of each option (or the right to
purchase 20 shares) became immediately exercisable. An additional 20% will
become exercisable on each successive January 1 until all of the options have
vested. Each option remains outstanding until December 31, 2007, or until 60
days after the employee's employment with the Company terminates. All
options are nontransferable.
A total of 144 employees accepted these options, including Mr. Hertz
and Mr. Anderson (who each received options to purchase 100 shares), and
options were issued in January 1998 for a total of 14,400 shares. The
options are not incentive stock options under Section 422 of the Code. The
options were not subject to tax when they were granted. Upon exercise, each
optionee will recognize compensation income in the amount of the spread
between the market value of the options and the option exercise price of
$12.50 per share The Company will receive a corresponding deduction. The
option price must be paid in cash on the date of exercise.
DIRECTOR OPTIONS. Pursuant to the terms of the 1997 Stock Incentive
Plan as approved by the shareholders in July 1997, each nonemployee director
is entitled to receive semi-annually, on June 30 and December 31 of each
year, stock options to purchase 200 shares of Common Stock (400 shares as
adjusted for the Stock Split) at 100% of the market value on the date of
grant. Under this plan, the nine nonemployee directors serving on the Board
at December 31, 997 each received options to acquire 400 shares of the
Company's Common Stock at an exercise price of $12.50 per share. The options
were issued for a term of 10 years.
STANDSTILL AGREEMENTS
In connection with the Cooperative's acquisition of TCIC and Iway, the
Cooperative entered into the Standstill Agreements with each of the former
shareholders of TCIC and Iway (as previously defined, collectively, the
"Sellers"). The Sellers received shares of Cooperative preferred stock and
warrans to purchase additional shares of Cooperative preferred stock. See
"THE COMPANY--Certain Agreements Affecting Capital Stock."
119
<PAGE>
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.
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
120
<PAGE>
last day specified in the Tender Offer on which the offeror may accept
shares of the Company's Common Stock for payment or exchange. If the
Company fails to exercise its Tender Offer Option, then the Sellers can
sell their shares in the Tender Offer, but at a price not less than that
specified in the notice of the Tender Offer Option.
The provisions of the Standstill Agreements that prevent the Sellers
from acquiring additional shares of the Company's Common Stock, seeking to
acquire control of the Company, etc. (all of which are described above)
apply for a period of five years beginning on the "Conversion Date," which
is defined in the Standstill Agreements as the date on which the Sellers'
Cooperative preferred stock was converted into Common Stock. The
provisions that prevent the Sellers from disposing of any shares of the
Company's Common Stock (all of which are described above) apply for three
years following the Conversion Date. The Standstill Agreements do not
contain any specific termination provisions.
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 the "Conversion Date," run from the date
of the DataNet Standstill Agreements.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware Law permits corporations to adopt a provision in their
certificate of incorporation eliminating, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of the director's fiduciary duty as a director.
Under the Delaware Law, a corporation may not eliminate or limit director
monetary liability for (i) breaches of the director's duty of loyalty to
the corporation or its stockholders, (ii) acts or omissions not in good
faith or involving intentional misconduct or a knowing violation of law,
(iii) unlawful dividends, stock repurchases or redemptions, or
(iv) transactions from which the director received an improper personal
benefit. This provision also may not limit a director's liability for
violation of, or otherwise relieve a corporation or its directors from the
necessity of complying with, federal or state securities laws, or affect
the availability of non-monetary remedies such as injunctive relief or
rescission. The Company's Certificate of Incorporation contains a
provision stating that directors shall not be personally liable for
monetary damage to the Company, except to the extent required by the
Delaware Law.
The Delaware Law provides that a corporation may indemnity any person
who is or was a party, or is threatened to be made a party, to any
121
<PAGE>
proceeding by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another entity, against expenses (including attorney fees), judgments fines
and amounts paid in settlement actually and reasonably incurred by the
person in the proceeding, so long as the person acted in good faith and in
a manner that he or she reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to criminal actions,
had no reasonable cause to believe his or her conduct was unlawful. The
termination of a proceeding by judgment, order, settlement, conviction or
plea of NOLO CONTENDERE does not by itself create a presumption that the
person did not meet these standards.
The Delaware Law generally permits indemnification of expenses
incurred in the defense or settlement of a derivative or third-party
action, provided that there is a determination by a majority vote of
disinterested directors (even though less than a quorum) or, if there are
no such directors, or if such directors so direct, by independent legal
counsel in a written opinion or by the stockholders, that the person
seeking indemnification acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to a criminal proceeding, which the person
had no reasonable cause to believe the person's conduct was unlawful.
Without court approval, however, no indemnification may be made in respect
of any derivative action in which the person is adjudged liable to the
corporation. The Delaware Law requires indemnification of expenses when
the individual being indemnified has successfully defended the action on
the merits or otherwise.
The Company's Certificate of Incorporation provides that directors and
executive officers shall be indemnified to the full extent provided by the
Delaware Law. As to other persons who are not directors or executive
officers but who may be eligible for indemnification, the Certificate of
Incorporation provides that such persons may be indemnified by the Company
to the extent permissible by law and the Certificate and authorized by the
Board of Directors. The Certificate further provides that the Company may
purchase and maintain insurance to cover such expenses, whether or not
indemnification would be permissible under the Delaware Law in the absence
of insurance.
As an additional measure to strengthen the protection afforded the
directors and executive officers of the Company, the Company entered into
an indemnity agreement (the "Indemnity Agreement") with each of its
directors and executive officers ("Business Leaders"). Set forth below is
a summary of certain key provisions of the Indemnity Agreement.
The Indemnity Agreement establishes a presumption that a Business
Leader has met the applicable standard of conduct required for
122
<PAGE>
indemnification under the Delaware Law. Under the Indemnity Agreement,
a Business Leader will be indemnified unless a majority of a quorum of
disinterested directors or, in the event of a Change in Control (as defined
below) of the Company or if a quorum of disinterested directors cannot be
obtained, independent legal counsel, determines that the applicable
standard of conduct has not been met. The burden of proof is on the Board
of Directors or independent counsel, as the case may be, to overcome the
presumption that a Business Leader is entitled to indemnification. If the
Board of Directors or independent legal counsel determines that a Business
Leader did not meet the standard of conduct required for indemnification,
the Indemnity Agreement allows the Business Leader to petition a court for
an independent determination of whether the Business Leader is entitled to
indemnification under the Indemnity Agreement. In such a proceeding, the
Company has the burden of proving that the Business Leader did not meet the
applicable standard of conduct.
The Indemnity Agreement also provides that litigation and
investigation expenses will be advanced to a Business Leader upon the
Business Leader's request, provided that the Business Leader undertakes to
repay amounts advanced if it is ultimately determined that the Business
Leader is not entitled to indemnification for such expenses.
The Indemnity Agreement further provides that the Company will
indemnify a Business Leader for costs, including the satisfaction of a
judgment, fine or penalty incurred in, or any amount paid in settlement of,
any proceeding, including a proceeding brought by or in the name of the
Company (such as a stockholder derivative suit), if such expenses and costs
(i) would have been covered under the liability insurance policy presently
covering the Business Leader or under any future policy maintained by the
Company or (ii) are indemnifiable under the Delaware Law, as that law may
change or be interpreted from time to time.
Without limiting a Business Leader's right to indemnification under
any other provisions of the Indemnity Agreement, the Indemnity Agreement
provides that a Business Leader involved in a derivative suit shall be
indemnified for expenses and amounts paid in settlement unless (i) the
Board of Directors or independent legal counsel, as the case may be,
determines that the Business Leader did not act in good faith or acted in a
manner opposed to the best interests of the Company or (ii) the Business
Leader was adjudged liable to the Company, in which case any
indemnification must be authorized by a court. If the Board of Directors
or independent legal counsel finds that the Business Leader did not meet
the applicable standard of conduct, the Business Leader may petition a
court to make an independent determination of whether the Business Leader
is entitled to indemnification under the Indemnity Agreement.
The Indemnity Agreement also provides for partial indemnification of
costs and expenses in the event a Business Leader is not entitled to full
123
<PAGE>
indemnification under the terms of the Indemnity Agreement. Under the
Indemnity Agreement, a Business Leader is automatically entitled to
indemnification for expenses incurred in successfully defending against
any claim, whether on the merits or otherwise.
In addition, the Indemnity Agreement provides that, in the event of a
Change in Control or a potential Change of Control of the Company as
described below, the Company must establish, upon a Business Leader's
request, a trust funded in an amount sufficient to satisfy the Company's
anticipated indemnification obligations to the Business Leader. Thus, each
Business Leader who will be the beneficiary of the trust will determine
whether the trust will be established or funded. The trust is to be used
to advance expenses to a Business Leader and to pay any amount subject to
indemnification under the Indemnity Agreement. The amount or amounts to be
deposited in the trust will be determined by a majority vote of a quorum of
disinterested directors, the Executive Committee of the Board of Directors
or the Chief Executive Officer of the Company, or, if none of those
individuals is disinterested, by independent legal counsel.
Funds placed into such a trust will revert to the Company if (i) a
Change in Control has not occurred and (ii) the Executive Committee of the
Board of Directors or the Chief Executive Officer determines that the need
for the trust no long exists. Prior to a Change in Control of the Company,
a Business Leader may not be indemnified in connection with an action, suit
or proceeding initiated by the Business Leader against the Company or other
Business Leaders unless the Company consents to such action or joins in it.
The term "Change in Control" as used in the Indemnity Agreement means
the following: (i) the failure of the "Continuing Directors" at any time
to constitute at least a majority of the members of the Board of Directors;
(ii) the acquisition by any "person" (as defined in Section 13(d) and
14(d)(2) of the Exchange Act), other than the Company, its subsidiaries or
their employee benefit plans, of beneficial ownership of 20 percent or more
of the outstanding Common Stock or the combined voting power of the
Company's securities entitled to vote generally in the election of
directors; (iii) the approval by the stockholders of the Company of a
reorganization, merger or consolidation, unless with or into certain
permitted successor entities; or (iv) the approval by the stockholders of a
complete liquidation or dissolution of the Company or the sale or
disposition of all or substantially all of the Company's assets, other than
to certain permitted successor entities. For purposes of this definition,
the term "Continuing Directors" means the persons who are directors at the
time the Indemnity Agreement is signed, as well as subsequent directors
whose election or nomination as a director was approved by two-thirds of
the then-Continuing Directors. The term excludes certain persons that
became directors as a result of election contests within the meaning of
Rule 14a-11 under the Exchange Act or other types of proxy
solicitations.
124
<PAGE>
A Business Leader's rights under the Indemnity Agreement are not
exclusive of any other rights that the Business Leader may have under the
Delaware Law, the Company's Certificate of Incorporation or Bylaws, any
other agreement or any vote of stockholders or disinterested directors.
The Indemnity Agreement does prevent, however, double payment and
specifically provides that if the Company pays a Business Leader pursuant
to the Indemnity Agreement, the Company will be subrogated to the Business
Leader's rights to recover from third parties.
In accordance with Article XIV of the Company's Certificate of
Incorporation, the Indemnity Agreement is designed to provide the maximum
protection allowed by law. The indemnification required under the
Indemnity Agreement could include indemnification for liabilities arising
under the Securities Act. Although the enforceability of the provisions of
the Indemnity Agreement has not been tested in court and remains subject to
public policy considerations, the Board of Directors believes that such
provisions are permitted under the Delaware Law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the Shares of Common Stock offered hereby will be
passed upon for the Company by Warner Norcross & Judd LLP, Grand Rapids,
Michigan.
EXPERTS
The financial statements of the Company included in Appendix A to this
Prospectus have been audited by Olsen, Thielen & Co. Ltd., independent public
accountants, as indicated in their report with respect thereto. Such
financial statements and their report have been included herein in reliance
upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange
Act. Reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following Regional
Offices of the Commission: Chicago Regional Office, Suite 1400, Citicorp
125
<PAGE>
Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661; and
New York Regional Office, 7 World Trade Center, 13th Floor, Suite 1300, New
York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission also
maintains a Web site (http://www.sec.gov) that contains reports and other
information regarding the Company.
This Prospectus constitutes a part of a registration statement on Form
SB-2 (the "Registration Statement") filed by the Company with the
Commission under the Securities Act. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission, and reference is hereby made to the Registration Statement and
to the exhibits relating thereto for further information with respect to
the Company and the Common Stock. Any statements contained herein
concerning the provisions of any documents are not necessarily complete,
and, in each instance, reference is made to the copy of such document filed
as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such
reference.
126
<PAGE>
APPENDIX A
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
IRENE, SOUTH DAKOTA
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH INDEPENDENT
AUDITORS' REPORT
DECEMBER 31, 1996
OLSEN THIELEN & CO., LTD.
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
A-1
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONTENTS
===========================================================================
PAGE
----
INDEPENDENT AUDITORS' REPORT A-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet A-4
Consolidated Statement of Operations A-5
Consolidated Statement of Stockholders' Equity A-6
Consolidated Statement of Cash Flows A-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A-8-15
A-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dakota Cooperative Telecommunications, Inc.
and Subsidiaries
Irene, South Dakota
We have audited the accompanying consolidated balance sheet of Dakota
Cooperative Telecommunications, Inc. (a South Dakota Cooperative) and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dakota
Cooperative Telecommunications, Inc. and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/OLSEN THIELEN & CO., LTD.
St. Paul, Minnesota
January 18, 1997 OLSEN THIELEN & CO., LTD.
A-3
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,121,444 $ 6,322,884
Temporary Cash Investments 1,249,000 --
Accounts Receivable, Less Allowance for
Uncollectibles of $152,300 and $80,700 1,784,895 1,223,123
Deposits 274,889 719,708
Income Taxes Receivable 248,500 --
Materials and Supplies 694,097 417,709
Prepaid Expenses 168,078 110,136
----------- -----------
Total Current Assets 6,540,903 8,793,560
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired 1,830,959 --
Other Intangible Assets 509,559 --
Deposit 61,905 --
Other Investments 63,817 30,840
Deferred Charges 56,628 255,991
----------- -----------
Total Investments and Other Assets 2,522,868 286,831
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 14,441,104 11,041,284
----------- -----------
TOTAL ASSETS $23,504,875 $20,121,675
=========== ===========
</TABLE>
A-4
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 697,700 $ 579,100
Accounts Payable 399,694 449,384
Accrued Income Taxes -- 260,655
Other Current Liabilities 497,388 261,743
----------- -----------
Total Current Liabilities 1,594,782 1,550,882
----------- -----------
LONG-TERM DEBT 15,338,395 13,054,725
----------- -----------
DEFERRED CREDITS 159,482 100,763
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 26,185 26,125
Preferred Stock 1,172,000 --
Capital Credits 4,732,723 4,643,909
Retained Earnings 481,308 745,271
----------- -----------
Total Stockholders' Equity 6,412,216 5,415,305
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,504,875 $20,121,675
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-5
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUES:
Local Network $1,058,667 $ 856,133
Network Access 3,266,969 2,761,839
Long Distance Network 1,996,301 1,931,722
Cable Television Service 1,300,512 469,440
Other 186,393 96,395
---------- ----------
Total Operating Revenues 7,808,842 6,115,529
---------- ----------
COSTS AND EXPENSES:
Plant Operations 2,114,266 1,472,697
Depreciation and Amortization 2,434,416 1,701,020
Customer 500,802 405,673
General and Administrative 1,817,869 1,325,025
Other Operating Expenses 863,639 369,242
---------- ----------
Total Operating Expenses 7,730,992 5,273,657
---------- ----------
OPERATING INCOME 77,850 841,872
---------- ----------
OTHER INCOME AND (EXPENSES):
Interest and Dividend Income 309,982 330,395
Interest Expense (723,778) (592,070)
Income From Cellular Investments -- 168,788
Gain on Sale of Cellular Investments -- 686,336
---------- ----------
Net Other Income and (Expenses) (413,796) 593,449
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (335,946) 1,435,321
INCOME TAX EXPENSE (BENEFIT) (175,712) 301,859
---------- ----------
NET INCOME (LOSS) $ (160,234) $1,133,462
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-6
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
COMMON PREFERRED CAPITAL RETAINED
STOCK STOCK CREDITS EARNINGS TOTAL
------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE on December 31, 1994 $25,835 $ -- $4,049,248 $ 182,421 $4,257,504
Net Income 570,612 562,850 1,133,462
Common Stock Issued, Net 290 290
Retirement of Capital
Credits to Estates (16,772) (16,772)
Excise Tax Refund 40,821 40,821
------- ---------- ---------- --------- ----------
BALANCE on December 31, 1995 26,125 -- 4,643,909 745,271 5,415,305
Net Income (Loss) 103,729 (263,963) (160,234)
Common Stock Issued, Net 60 60
Preferred Stock Issued
(1,172 Shares) 1,172,000 1,172,000
Retirement of Capital
Credits to Estates (14,915) (14,915)
------- ---------- ---------- --------- ----------
BALANCE on December 31, 1996 $26,185 $1,172,000 $4,732,723 $ 481,308 $6,412,216
======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-7
<PAGE>
<TABLE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
===========================================================================
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (160,234) $ 1,133,462
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided By Operating Activities:
Depreciation and Amortization 2,469,873 1,735,090
Deferred Charges 208,248 --
Deposits 274,889 --
Income From Cellular Investments -- (168,788)
Gain on Sale of Cellular Investments -- (686,336)
Receivables (155,521) (450,599)
Income Taxes Receivable (248,500) --
Other Current Assets (52,618) (3,340)
Accounts Payable (379,143) 21,254
Accrued Income Taxes (260,655) 260,655
Other Current Liabilities 206,778 76,610
Deferred Credits 58,719 32,159
----------- -----------
Net Cash Provided By
Operating Activities 1,961,836 1,950,167
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment, Net (5,751,604) (1,554,131)
Sale of Cellular Investment -- 1,141,620
Deposits 107,822 (212,464)
Purchase of Temporary Cash Investments (1,249,000) --
Purchase of Other Investments (32,977) (12,063)
Purchase of Other Intangible Assets (541,300) --
Deferred Charges (8,885) (88,677)
Acquisition Costs, Net of Cash Acquired (40,295) --
----------- -----------
Net Cash Used In Investing Activities (7,516,239) (725,715)
----------- -----------
A-8
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-Term Debt 4,399,270 342,000
Principal Payments of Long-Term Debt (2,844,967) (562,942)
Construction Contracts Payable (182,912) 299,822
Retirement of Capital Credits (14,915) (16,772)
Excise Tax Refund -- 40,821
Other (3,513) 399
----------- -----------
Net Cash Provided by Financing Activities 1,352,963 103,328
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,201,440) 1,327,780
CASH AND CASH EQUIVALENTS at Beginning of Year 6,322,884 4,995,104
----------- -----------
CASH AND CASH EQUIVALENTS at End of Year $ 2,121,444 $ 6,322,884
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-9
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. NATURE OF OPERATIONS - The Company is a diversified telecommunications
services Company, which, directly or through wholly owned
subsidiaries, provides wireline local and network access services,
long distance telephone services, operator assisted calling services,
telecommunications equipment sale and leasing services, cable
television services, Internet access and related services. The
principal market for these telecommunications and cable services are
local residential and business customers residing in southeastern
South Dakota, with a portion of its cable television customers in
northwestern Iowa and southwestern Minnesota.
Local service rates charged to telephone customers are established by
the Company and are subject to approval of Rural Utilities Service
before becoming effective. Toll and access rates are subject to state
and Federal Communications Commission regulation. Rates charged cable
television customers are established by the Company.
B. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Dakota Cooperative Telecommunications, Inc.
and its wholly owned subsidiaries, Dakota Telecom, Inc., Iway, Inc.,
TCIC Communications, Inc. and Dakota Telecommunications Systems, Inc.
and its wholly owned subsidiary, Dakota Wireless Systems, Inc. All
significant intercompany transactions and accounts have been
eliminated.
C. BASIS OF ACCOUNTING - The accounting policies of the Company are in
conformity with generally accepted accounting principles and the
Company does not have any regulatory assets or liabilities as defined
by Financial Accounting Standards Board Statement No. 71, "Accounting
for the Effects of Certain Types of Regulation".
D. ACCOUNTING ESTIMATES - The presentation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A-10
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. CASH INVESTMENTS - Cash and cash equivalents include general funds and
short-term investments with original maturities of three months or
less. Investments with original maturities of three months to twelve
months are classified as temporary cash investments. Cash investments
are valued at market value.
F. MATERIALS AND SUPPLIES - Inventories are recorded at average unit
cost.
G. PROPERTY, PLANT AND DEPRECIATION - Property, plant and equipment are
recorded at original cost. Additions, improvements or major renewals
are capitalized. If the telecommunication and cable television
utility plant is sold, retired or otherwise disposed of in the
ordinary course of business, the cost plus removal costs less salvage,
is charged to accumulated depreciation.
Depreciation is computed using principally the straight-line method
based upon the estimated service lives of the depreciable assets.
H. EXCESS OF COST OVER NET ASSETS ACQUIRED - The excess of cost over net
assets of acquired companies is being expensed equally over fifteen
years and is shown net of accumulated amortization of $10,032 at
December 31, 1996.
I. OTHER INTANGIBLE ASSETS - Other intangible assets consist of customer
lists and is being expensed equally over fifteen years and shown net
of accumulated amortization of $31,741 at December 31, 1996.
J. OTHER INVESTMENTS - Other investments are recorded at cost.
K. CAPITAL CREDITS - The Company operates as a cooperative. Amounts
received from the furnishing of telephone service, interest income and
other nonoperating operations in excess of costs and expenses are
assigned to telephone patrons on a patronage basis to the extent they
are not needed to offset prior losses.
Dividend income from the subsidiaries will be allocated to telephone
patrons on a patronage basis when received.
A-11
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L. REVENUE RECOGNITION - Revenues are recognized when earned, regardless
of the period in which they are billed. Network access and long
distance revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies. Revenues
include estimates pending finalization of cost studies. Network
access revenues are based upon interstate tariffs filed with the
Federal Communications Commission by the National Exchange Carriers
Association and state tariffs filed with state regulatory agencies.
Management believes recorded revenues are reasonable based on
estimates of final cost separation studies which are typically settled
within two years.
M. INCOME TAXES AND EXCISE TAX REFUNDS - The Parent Company operates as
a cooperative and has been granted tax exempt status under Section
501(c)12 of the Internal Revenue Code; therefore the Parent Company
income is not taxable. Under the Internal Revenue Code a tax exempt
telephone Company is entitled to a refund for overpayment of federal
excise taxes by its patrons. Excise tax refunds are allocated to
telephone patrons' along with net income. The State of South Dakota
does not have an income tax.
The wholly owned subsidiaries, Dakota Telecom, Inc., Iway, Inc., TCIC
Communications, Inc., Dakota Telecommunications Systems, Inc., (and
its wholly owned subsidiary Dakota Wireless Systems, Inc.) are taxable
at the federal level and in Minnesota and Iowa for operations in those
states. Income taxes for these companies are provided for the tax
effects of transactions reported in the financial statements and
include taxes currently payable and deferred income taxes which
reflect the estimated income tax consequences of the differences
between the income tax bases of assets and liabilities and their
financial reporting bases. The differences relate to taxable
subsidiaries' property and equipment.
N. CREDIT RISK - Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of
temporary cash investments. The Company places its temporary cash
investments with high credit quality financial institutions and, by
policy, generally limits the amount of credit exposure to any one
financial institution. Concentrations of credit risk with respect to
trade receivables are limited due to the Company's large number of
customers. The Company maintains its cash in bank deposit accounts
A-12
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on temporary cash
investments.
O. RECLASSIFICATIONS - Certain reclassifications have been made to the
1995 financial statements to conform to the 1996 presentations. These
reclassifications had no effect on net income.
NOTE 2 - INVESTMENT IN CELLULAR ENTITIES AND GAIN ON SALE OF CELLULAR
INVESTMENTS
In 1995, the Company sold its investment in Sioux Falls Cellular Limited
Partnership and Dakota Systems, Inc. for cash. The gain on the sale of the
investments was $686,336 ($456,413 net of income taxes).
The Company's share of operating gains for the cellular franchises were
$168,788 in 1995.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment are as
follows:
A-13
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1996 1995
--------- ----------- -----------
<S> <C> <C> <C>
Land $ 101,573 $ 98,072
Buildings 16-33 years 1,486,491 1,483,236
Leasehold Improvements 3-5 15,677 --
Machinery and Equipment 5-7 1,499,518 1,173,137
Furniture and Fixtures 3-20 1,010,234 926,621
Telecommunications Plant 4-25 16,922,589 15,451,807
Cable Television Plant 8-12 4,869,851 1,355,252
Construction In Progress -- 354,025 461,819
----------- -----------
26,259,958 20,949,944
Less Accumulated
Depreciation 11,818,854 9,908,660
----------- -----------
Total $14,441,104 $11,041,284
=========== ===========
</TABLE>
Depreciation included in costs and expenses was $2,392,643 in 1996 and
$1,701,020 in 1995.
The Company intends to add new construction in 1997 of approximately
$16,000,000.
A-14
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 4 - LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Rural Utilities Service (RUS) mortgage notes:
2% payable in quarterly installments $ 2,595,175 $ 2,845,775
5% payable in monthly installments 10,756,343 10,158,861
----------- -----------
13,351,518 13,004,636
RUS - Rural Communication Development
Fund 5% mortgage note -- 217,955
Rural Telephone Finance Cooperative (RTFC)
Mortgage Note, matures 2006, variable
interest rate (6.3% at December 31, 1996) 1,537,537 --
Norwest Bank South Dakota, N.A. matures 1998,
variable interest rate (prime plus one percent,
9.25% at December 31, 1996) payable upon
maturity 330,000 --
Norwest Bank South Dakota, N.A. matures 1998,
variable interest rate (prime plus one percent,
9.25% at December 31, 1996) payable upon maturity 650,469
Unsecured Notes to a Preferred Shareholder,
matures 1998, variable interest rate (prime
plus one percent, 9.25% at December 31,
1996), payable upon maturity 45,000 --
Other 4,661 111,412
Construction Contracts Payable 116,910 299,822
----------- -----------
16,036,095 13,633,825
Amount Due Within One Year (697,700) (579,100)
----------- -----------
Total Long-Term Debt $15,338,395 $13,054,725
=========== ===========
</TABLE>
A-15
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 4 - LONG-TERM DEBT (CONTINUED)
Substantially all telephone Company assets are pledged as security for the
RUS mortgage notes. RUS mortgage notes mature in twenty to thirty-five
years at various dates ranging from 1997 to 2021. No principal payments on
RUS notes are required for the first two to three years after issuance. The
RTFC loan is collateralized by the cable plant located in ten cities in
southeastern South Dakota.
The $330,000 Norwest Bank loan is secured by the assets of Iway, Inc. and
guaranteed by the former shareholders of I-Way Partners, Inc. and the
$650,469 Norwest Bank loan is secured by the assets of two of the former
shareholders of TCIC Communications, Inc. and their personal guarantees.
The former shareholders of I-Way Partners, Inc. and TCIC Communications,
Inc. are preferred shareholders of the Company.
Approximate annual principal payments on the existing debt for the next
five years are: 1997 - $697,700; 1998 - $1,744,700; 1999 - $738,600; 2000
- - $754,600 and 2001 - $768,800.
Unadvanced loan funds of $3,983,175 are available to the Company on loan
commitments from RUS. Loan proceeds will be used to refinance current
construction and to finance future construction.
A-16
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 5 - CAPITAL STOCK
<TABLE>
<CAPTION>
COMMON PREFERRED
------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ----------
<S> <C> <C> <C> <C>
BALANCE - December 31, 1994 5,167 $25,835 -- $ --
Issued 457 2,285
Redeemed (399) (1,995)
----- -------
BALANCE - December 31, 1995 5,225 26,125
Issued 456 2,280 1,172 1,172,000
Redeemed (444) (2,220)
----- ------- ----- ----------
BALANCE - December 31, 1996 5,237 $26,185 1,172 $1,172,000
===== ======= ===== ==========
</TABLE>
The Company's common stock has a par value of $5 per share. There are
15,000 shares authorized. No person may own more than one share of common
stock and each holder of common stock has one vote in the affairs of the
Company. Nonvoting preferred stock has a par value of $100 per share and
there are 63,000 shares authorized. The preferred stock is shown on the
balance sheet at its redemption value of $1,000 per share. Preferred
shareholders are entitled to a Non-Liquidity Fee of $80 per share payable
semi-annually in cash or preferred stock at the discretion of the Company.
The first non-liquidity fee payment will be made December 15, 1997, and
will be prorated for the period from September 1, 1997, if the conversion
(Note 15) has not been consummated by that date. Preferred shareholders
also were granted warrants which entitled them to purchase additional
preferred stock at $1,000 per share. At December 31, 1996 there were
warrants outstanding which may be exercised through January 2, 1998 to
purchase 482 shares of preferred stock. Effective January 1, 1997, the
Company granted management options to purchase up to 1,534 shares of
preferred stock at $1,000 per share.
A-17
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 6 - CAPITAL CREDITS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Assignable $ 103,729 $ 611,433
Assigned to date 5,577,780 4,966,236
---------- ----------
Total 5,681,509 5,577,669
Retired to date (948,786) (933,760)
---------- ----------
Balance $4,732,723 $4,643,909
========== ==========
</TABLE>
The long-term debt agreements with the Rural Utilities Service contain
restrictions on retirements of capital credits, capital stock, and equity
capital. The restrictions are related in general to the Company's adjusted
net worth and assets as defined in the agreements. The Company may,
however, make distributions in any calendar year equal to twenty-five
percent of the net income of the immediate preceding calendar year.
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and temporary cash investments approximates
their fair value due to the short maturity of the instruments. The fair
value of the Company's long-term debt, after deducting current maturities,
is estimated to be $12,905,145 at December 31, 1996 and $10,068,719 at
December 31, 1995, compared to carrying values of $15,338,395 and
$13,054,725, respectively. The fair value estimates are based on the
overall weighted rates and maturity compared to rates and terms currently
available in the long-term financing markets.
NOTE 8 - DEPOSITS
In October, 1996 Dakota Wireless Systems, Inc. entered into an agreement
with another Company to bid on a license for a Broadband Personal
Communications Services System to provide service to Southeastern South
Dakota and Northwestern Iowa and on January 14, 1997 was awarded the
license. The Company made a deposit of $61,905 as of December 31, 1996 and
has a future commitment of $194,051.
A-18
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 8 - DEPOSITS (CONTINUED)
On December 7, 1994, the Company and its wholly owned subsidiary, Dakota
Telecommunications Systems, Inc., entered into an agreement with US WEST
Communications, Inc. to purchase the assets and acquire the right to
provide and operate wireline telecommunication services in eight exchanges
in the state of South Dakota for $10,144,884. In 1996, the Company
canceled the agreement. The Company has a $549,778 earnest money deposit
on the purchase. The deposit was written down by $274,889 to the estimated
recoverable amount of $274,889. In addition, the Company charged $275,252
of related acquisition costs to net income in 1996.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
CASH PAYMENTS FOR:
Interest $ 730,633 $592,067
Income Taxes $ 283,415 $ 18,875
NONCASH FINANCING ACTIVITY:
Preferred Stock Issued for Acquisition of I-Way
Partners, Inc. and TCIC Communications, Inc. $1,172,000
</TABLE>
NOTE 10 - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Current $(225,740) $279,530
Deferred 50,028 22,329
--------- --------
Total $(175,712) $301,859
========= ========
</TABLE>
A-19
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 10 - INCOME TAXES (CONTINUED)
The differences between the statutory federal rate and the effective tax
rate were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Consolidated Income (Loss) Before Income Taxes $(335,946) $1,435,321
Less Tax Exempt Income (100,729) (534,077)
--------- ----------
Taxable Income (Loss) $(436,675) $ 901,244
========= ==========
Statutory Tax Rate 35.0% 35.0%
Effect of Graduated Rates and Other 5.2 (1.5)
--------- ----------
Effective Tax Rate 40.2% 33.5%
========== ===========
</TABLE>
Deferred tax liabilities of $88,932 and $38,904 as of December 31, 1996 and
1995 are included on the balance sheet as deferred credits.
NOTE 11 - PENSION PLANS
Pension benefits for substantially all employees are provided through the
National Telephone Cooperative Association Retirement and Security Program
(a defined benefit plan) and Savings Plan (a defined contribution plan).
The Company makes annual contributions to the plans equal to the amounts
accrued for pension expense. The Retirement and Security Program is a
multi-employer plan and the accumulated benefits and plan assets are not
determined or allocated separately by individual employer. The total
pension costs for 1996 and 1995 were $150,220 and $114,663.
A-20
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 12 - CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1996, the Company revised its estimate of the useful
lives of telecommunication computers and fiber optic cable which were being
depreciated over 12 and 25 years. The revised useful lives are 4 and 10
years.
Effective February 1, 1996, the Company revised its estimate of the useful
lives of cable television plant. Previously the plant was depreciated over
20 years. The revised useful life of the plant ranges from eight to twenty
years. These changes were made to better reflect the estimated periods
during which such assets will remain in service. The 1996 changes
increased depreciation expense by approximately $189,000 in 1996.
Effective January 1, 1995, the Company revised its estimate of the useful
lives of central office equipment. Previously central office equipment was
depreciated over 16.67 years and the revised useful life was three years.
The change increased depreciation expense approximately $660,000 in 1995.
NOTE 13 - ACQUISITIONS
In the first half of 1996, Dakota Telecom, Inc. purchased the assets of
nineteen cable service areas from three companies that provided cable
services to various communities in addition to the assets purchased by
Dakota Telecom, Inc. in three separate purchase transactions and one asset
exchange transaction. These acquisitions were accounted for using the
purchase method of accounting. The total purchase price was $3,858,704.
Customer lists acquired for $541,300 are being expensed equally over
fifteen years. No goodwill was recorded as a result of these acquisitions.
Operations of the service areas purchased are included in the consolidated
statements of operations subsequent to their purchase.
In December, 1996 the Company acquired I-Way Partners, Inc. and TCIC
Communications, Inc. in exchange for 1,172 shares of preferred stock valued
at $1,172,000. The acquisitions were accounted for as purchases. The
excess of the aggregate purchase price and liabilities assumed exceed the
fair value of the assets by $1,840,991 and is being expensed equally over
fifteen years. Operations of the companies acquired are included in the
consolidated statement of operations subsequent to their purchase. The
following table summarizes the unaudited consolidated pro forma results of
operations, assuming the acquisition had occurred at the beginning of each
of the following years:
A-21
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 13 - ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Total Revenues $9,474,178 $7,455,901
Net Income (Loss) (616,726) 477,417
</TABLE>
NOTE 14 - SEGMENT INFORMATION
The Company operates in two businesses: telecommunications and cable
television. Industry segment information is as follows:
A-22
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Telecommunications $ 6,462,704 $ 5,584,155
Cable Television 1,346,138 531,374
----------- -----------
$ 7,808,842 $ 6,115,529
=========== ===========
Operating Income (Loss):
Telecommunications $ 454,097 $ 731,944
Cable Television (376,247) 109,928
----------- -----------
$ 77,850 $ 841,872
=========== ===========
Identifiable Assets:
Telecommunications $18,246,345 $18,084,644
Cable Television 5,258,530 2,037,031
----------- -----------
$23,504,875 $20,121,675
=========== ===========
Depreciation and Amortization Expense:
Telecommunications $ 2,011,046 $ 1,632,197
Cable Television 423,370 68,823
----------- -----------
$ 2,434,416 $ 1,701,020
=========== ===========
Capital Expenditures:
Telecommunications $ 1,930,389 $ 1,516,061
Cable Television 3,821,215 38,070
----------- -----------
$ 5,751,604 $ 1,554,131
=========== ===========
</TABLE>
A-23
<PAGE>
DAKOTA COOPERATIVE TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================================================
NOTE 15 - CHANGE IN CORPORATE STRUCTURE
The Company intends to file a registration statement with the Securities
and Exchange Commission under the Securities Act of 1933 and to submit to
its common stockholders (members) a proposal to convert from a tax exempt
cooperative into a taxable business corporation.
In the proposed conversion, owners of the Cooperative's common stock,
capital credits and preferred stock, issued and outstanding, would receive
common shares of the business corporation.
A-24
<PAGE>
APPENDIX B
B-1
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
===========================================================================
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,801,176 $ 2,121,444
Temporary Cash Investments 900,000 1,249,000
Accounts Receivable, Less Allowance for
Uncollectibles of $343,000 and $92,000 1,471,754 1,784,895
Deposits -- 274,889
Income Taxes Receivable 109,802 248,500
Materials and Supplies 1,383,644 694,097
Prepaid Expenses 245,178 168,078
----------- -----------
Total Current Assets 6,911,554 6,540,903
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired 1,738,901 1,830,959
Other Intangible Assets 560,725 509,559
Deposit 61,905 61,905
Other Investments 1,314,454 63,817
Deferred Charges 57,511 56,628
Deferred Income Taxes 238,000 --
----------- -----------
Total Investments and Other Assets 3,971,496 2,522,868
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 23,315,087 14,441,104
----------- -----------
TOTAL ASSETS $34,198,137 $23,504,875
=========== ===========
</TABLE>
B-2
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 2,081,000 $ 697,700
Accounts Payable 922,018 399,694
Other Current Liabilities 595,421 497,388
----------- -----------
Total Current Liabilities 3,598,439 1,594,782
----------- -----------
LONG-TERM DEBT 25,715,348 15,338,395
----------- -----------
DEFERRED CREDITS 120,432 159,482
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 5,637,855 26,185
Preferred Stock -- 1,172,000
Other Capital 179,666 --
Capital Credits -- 4,732,723
Retained Earnings (Accumulated Deficit) (1,053,603) 481,308
----------- -----------
Total Stockholders' Equity 4,763,918 6,412,216
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,198,137 $23,504,875
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
===========================================================================
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
Local Network $ 924,903 $ 746,995
Network Access 2,796,044 2,098,510
Long Distance Network 2,438,754 1,422,051
Cable Television Service 1,156,633 877,833
Other 1,124,333 138,725
---------- ----------
Total Operating Revenues 8,440,667 5,284,114
---------- ----------
COSTS AND EXPENSES:
Plant Operations 2,672,679 1,278,642
Depreciation and Amortization 2,379,769 1,777,843
Customer 828,096 339,045
General and Administrative 3,006,705 1,325,224
Other Operating Expenses 829,798 595,291
---------- ----------
Total Operating Expenses 9,717,047 5,316,045
---------- ----------
OPERATING LOSS (1,276,380) (31,931)
---------- ----------
OTHER INCOME (EXPENSES):
Interest and Dividend Income 240,509 222,745
Interest Expense (791,920) (522,971)
---------- ----------
Net Other Income (Expenses) (551,411) (300,226)
---------- ----------
LOSS BEFORE INCOME TAXES (1,827,791) (332,157)
INCOME TAX BENEFIT (292,880) (47,087)
---------- ----------
NET LOSS $(1,534,911) $ (285,070)
========== ==========
LOSS PER SHARE $ (.78)
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
===========================================================================
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,534,911) $ (285,070)
Adjustments to Reconcile Net Loss to Net
Cash Provided By Operating Activities:
Depreciation and Amortization 2,379,769 1,777,843
Receivables 313,141 252,360
Income Taxes Receivable 138,698 (61,000)
Other Current Assets (77,100) (48,723)
Accounts Payable 522,324 (114,397)
Accrued Income Taxes -- (260,655)
Other Current Liabilities 98,033 108,078
Deferred Credits (39,050) 43,120
----------- -----------
Net Cash Provided By Operating Activities 1,800,904 1,411,556
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment, Net (11,131,102) (4,665,000)
Materials and Supplies (689,547) (389,197)
Purchase of Other Investments (1,250,637) (500,000)
Decrease (Increase) in Temporary Cash Investments 349,000 (749,000)
Decrease in Deposits 274,889 --
Purchase of Other Intangible Assets (81,759) (541,299)
Increase in Deferred Charges (883) (52,555)
Increase in Deferred Income Taxes (238,000) --
----------- -----------
Net Cash Used In Investing Activities (12,768,039) (6,897,050)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-Term Debt 11,686,551 3,791,270
Principal Payments of Long-Term Debt (386,059) (977,188)
Increase (Decrease) in Construction Contracts Payable 459,761 (282,787)
Retirement of Patronage Capital (28,235) (11,210)
Other (85,151) 196
----------- -----------
Net Cash Provided by Financing Activities 11,646,867 2,520,281
----------- -----------
B-5
<PAGE>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 679,732 (2,965,213)
CASH AND CASH EQUIVALENTS at Beginning of Year 2,121,444 6,322,884
----------- -----------
CASH AND CASH EQUIVALENTS at End of Period $ 2,801,176 $ 3,357,671
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest Expense $ 791,920 $ 609,548
Income Taxes 18,883 282,790
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheets as of September 30, 1997 and December 31, 1996, statements
of operations and cash flows for the nine months ended September 30, 1997 and
1996 have been prepared by the Company without audit. In the opinion of
management, all adjustments (consisting solely of normal recurring accruals)
necessary to present fairly the financial position, results of operations and
changes in cash flows have been made.
The Consolidated Financial Statements have been prepared in accordance with
the requirements of Item 310(b) of Regulation S-B and with the instructions
to Form 10-QSB. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These condensed financial statements should be read in conjunction with the
financial statements and accompanying notes for the years ended December
31, 1996 and 1995. The results of operations for the nine month periods
ended September 30, 1997 are not necessarily indicative of the operating
results to be expected for the year ending December 31, 1997.
NOTE 2 - ACQUISITIONS
In the first quarter of 1996, Dakota Telecom, Inc. purchased the assets of
ten cable service areas in two separate purchase transactions and one asset
exchange transaction. In the second quarter of 1996, Dakota Telecom, Inc.
purchased the asses of an additional nine cable service areas. Operations
of the nineteen cable service areas are included in the consolidated
statements of operations for the nine months ended September 30, 1996
subsequent to their purchase. Operations of the nineteen cable service
areas are included in the consolidated statement of operations for the nine
months ended September 30, 1997.
In December 1996, the Company acquired I-Way Partners, Inc. and TCIC
Communications, Inc. in exchange for 1,172 shares of preferred stock (since
converted into common stock) valued at $1,172,000. Operations of the
companies acquired are included in the consolidated statement of operations
for the nine months ended September 30, 1997.
B-7
<PAGE>
NOTE 3 - LONG-TERM DEBT
<TABLE>
Long-term debt is as follows:
<CAPTION>
9/30/97 12/31/96
------- --------
<S> <C> <C>
Rural Utilities Service (RUS) mortgage notes:
2% payable in quarterly installments $ -- $ 2,595,175
5% payable in monthly installments -- 10,756,343
------------- ------------
-- 13,351,518
Rural Telephone Finance Cooperative (RTFC):
Mortgage Note, matures 2006, variable
interest rate (6.65% at September 30, 1997) 1,439,377 1,537,537
Mortgage Note, matures 2012, variable
interest rate (6.65% at September 30, 1997) 13,684,210 --
Mortgage Note, matures 2012, variable
interest rate (6.65% at September 30, 1997) 9,570,621 --
Norwest Bank South Dakota, N.A. matures
May 1998, variable interest rate (prime plus
one percent, 9.5% at September 30, 1997)
payable upon maturity 330,000 330,000
Norwest Bank South Dakota, N.A. matures
May 1998, variable interest rate (prime plus
one percent, 9.5% at September 30, 1997)
payable upon maturity 650,469 650,469
Unsecured Notes to a Shareholder,
matures May 1998, variable interest rate
(prime plus one percent, 9.5% at
September 30, 1997), payable upon maturity 45,000 45,000
RTFC variable rate (7.25% at September 30, 1997)
Lines of Credit: $1,500,000 Limit Maturing
May 2002 1,500,000
Other -- 4,661
Construction Contracts Payable 576,671 116,910
------------- ------------
27,796,348 16,036,095
Amount Due Within One Year 2,081,000 (697,700)
------------- ------------
Total Long-Term Debt $ 25,715,348 $ 15,338,395
============= ============
</TABLE>
B-8
<PAGE>
The RTFC loans, maturing in 2012, are collateralized by all assets and
revenues and stock of the Company's subsidiaries.
The RTFC loan, maturing in 2006, is collateralized by the cable plant
located in ten cities in southeastern South Dakota and is payable in
quarterly installments. The $330,000 Norwest Bank loan is secured by the
assets of Iway, Inc. and is guaranteed by the former shareholders of I-Way
Partners, Inc.; the $650,469 Norwest Bank loan is secured by the assets of
two of the former shareholders of TCIC Communications, Inc. and their
personal guarantees. The former shareholders of I-Way Partners, Inc. and
TCIC Communications, Inc. are stockholders of the Company.
Approximate annual principal payments on the existing debt for the next
five years are: 1998 - $2,081,000; 1999 - $1,140,000; 2000 - $1,219,000;
2001 - $1,302,000; and 2002 - $2,890,000.
Unadvanced loan funds of $5,166,221 are available to the Company on loan
commitments from the RTFC. Loan proceeds will be used to refinance current
construction and to finance future construction.
The Company has a line of credit arrangement for $1.5 million with RTFC
which expires in 2002. Interest is payable quarterly at prime rate plus
1.5%. Any advances must be paid in full within 360 days of the advance and
remain at a zero balance for at least five consecutive business days.
Advances from the line of credit were used to finance construction approved
in the RTFC long-term agreements. At September 30, 1997, the outstanding
line of credit balance was classified as a long-term obligation in
anticipation of the receipt of previously approved RTFC funds.
The Company received loans of $14,737,000 and $13,684,000 from the RTFC for
the purposes of refinancing its RUS debt and RTFC lines of credit and to
finance plant construction. The loans are payable quarterly, with full
payment due in fifteen years. On July 15, 1997, the Company retired its
entire RUS debt with loan proceeds from the RTFC. In order to obtain
financing from RTFC, the loans include borrowings of $1,188,000 to purchase
Subordinated Capital Certificates (SCC) of RTFC. The SCCs bear no interest
and will be repaid to the Company. SCCs are included in other investments
on the balance sheet. The Company is required to maintain a debt service
coverage of not less than 1.25 and a times interest earned ratio of not
less than 1.50, each ratio is determined by averaging the two highest
annual calculations during the three most recent fiscal years. The Company
is restricted from incurring any additional unsecured debt in excess of
five percent of total assets from any other lender and from declaring or
paying any dividend or purchasing or redeeming any capital stock in excess
of 25 percent of the prior fiscal year-end cash margins without written
approval of the lender.
B-9
<PAGE>
NOTE 4 - INCOME TAXES
As of July 22, 1997, the Company became taxable at the federal level.
Prior to that date, the Company operated as a cooperative and had been
granted tax exempt status under Section 501(c)12 of the Internal Revenue
Code and therefore the Company's income was not taxable prior to July 22,
1997.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Current $ (54,880) $ (47,087)
Deferred (238,000) --
----------- ----------
Total $ (292,880) $ (47,087)
=========== ==========
</TABLE>
The difference between the statutory federal rate and effective tax rate
were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Consolidated Taxable Income
(Loss) Before Taxes $ (1,827,791) $ (332,157)
Less Tax Exempt Loss (Income 626,412 (27,426)
------------ -----------
Taxable Income (Loss) $ (1,201,379) $ (359,583)
============ ===========
Statutory Tax Rate 35.0% 35.0%
Effect of Graduated Tax Rates
and Other (1.2) (3.2)
Losses with No Future Tax Benefits (9.4) (18.7)
------------ -----------
Effective Tax Rate 24.4% 13.1%
============ ===========
</TABLE>
The state of South Dakota does not have a tax on income. Deferred tax
assets of $238,000 as of September 30, 1997 and deferred tax liabilities of
B-10
<PAGE>
$88,932 as of September 30, 1997 and December 31, 1996 are included on the
balance sheet.
NOTE 5 - REORGANIZATION COSTS
Included in general and administrative expenses for the nine months ended
September 30, 1997 is $585,438 of costs related to the reorganizing of the
Company as explained in Note 6.
NOTE 6 - REORGANIZATION
At a special meeting of the stockholders on July 21, 1997, the stockholders
approved an amendment to the Company's articles of incorporation which
resulted in the conversion of the Company from a cooperative to a South
Dakota business corporation. Also at a meeting convened on July 21, 1997,
and subsequently adjourned and completed on July 25, 1997, the shareholders
of the South Dakota business corporation approved an Agreement and Plan of
Merger that provided for the subsequent merger of the South Dakota business
corporation with and into the Company. The conversion of equity in the
Cooperative to equity in the South Dakota business corporation and then
into equity in the Company was at the rate of one share of common stock for
each share of the Cooperative's common stock, 80.8216445 shares of common
stock for each share of preferred stock and 0.2 of a share of common stock
for each dollar of capital credits.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company has 5,000,000 shares of no par common stock authorized and
985,216 shares are issued and outstanding as of September 30, 1997. The
Company also has 250,000 shares of no par preferred stock of which 15,000
shares are designated as Series A Junior Participating preferred stock. No
preferred stock has been issued or is outstanding as of September 30, 1997.
Other capital consists of capital credits in the Company that had been
allocated to members and patrons that the Company was unable to locate at
the time of the reorganization.
On July 22, 1997, the Board of Directors adopted a leveraged employee stock
ownership plan ("ESOP") and the 1997 Stock Incentive Plan.
On July 22, 1997, the Board of Directors declared a dividend of one right
for each outstanding share of common stock that was distributed to common
stockholders of record on August 5, 1997. Each right represents the right
to purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock. The exercise price of the rights are $100 per right and
the redemption price is $.01. The rights expire August 4, 2007. As a result
of a January 1998 two-for-one stock split each share of common stock has
one-half of a right.
B-11
<PAGE>
NOTE 8 - EARNINGS PER SHARE
Earnings per share was computed by dividing the net loss by the number of
common shares outstanding, as though the common stock were outstanding for
the entire period, as adjusted for the two-for-one stock split explained
below. Stock options have not been considered since their effect is
anti-dilutive.
NOTE 9 - SUBSEQUENT EVENTS
On December 16, 1997, the Board of Directors declared a two-for-one common
stock split pursuant to a share dividend paid to persons who were
stockholders of record on January 1, 1998. All numbers of shares of
common stock shown below have been adjusted for the stock split.
The Company adopted a 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. The Company has reserved
350,000 shares of common stock for this plan.
In December 1997, the Company adopted a 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.
Effective December 1, 1997, the Company acquired Futuristic, Inc., a
South Dakota corporation doing business as DataNet, Inc. ("DataNet"), by
merging its wholly owned subsidiary with and into DataNet. In connection
with the transaction, the former shareholders of DataNet collectively
received 320,000 shares of common stock of the Company. The acquisition
will be accounted for as a purchase.
B-12
<PAGE>
APPENDIX C
OFFER EXPIRES 5:00 P.M., CENTRAL STANDARD TIME, MARCH 11, 1998
SUBSCRIPTION AGREEMENT
(THE INSTRUCTIONS ON THE REVERSE SIDE ARE A PART OF THIS AGREEMENT)
Dakota Telecommunications Group, Inc.
29705 453rd Avenue
Irene, South Dakota 57037-0066
The undersigned (the "Purchaser") acknowledges receipt of a prospectus
(the "Prospectus") dated February 6, 1998, which describes the offering by
Dakota Telecommunications Group, Inc. (the "Company"), of up to 400,000
shares of Common Stock (the "Shares"). Subject to the terms and conditions
of the offering described in the Prospectus (the "Offering"), the Purchaser
hereby irrevocably subscribes for the number of Shares indicated below.
This subscription, when and if accepted by the Company, will constitute the
binding obligation of the Purchaser to purchase that number of Shares or
such lesser number of Shares as may be allocated in the Offering. The
price per Share is $12.50.
__________________ x ________12.50__ = ______________________
(Number of Shares) (Price per Share) (Total Purchase Price)
The Purchaser represents and warrants that: (a) the Purchaser was as of
the close of business on January 27, 1998 (the "Record Date"),
CHECK [ ] a stockholder of the Company or
CHECK [ ] an employee of the Company (if the Purchaser is both a
stockholder and an employee, the Purchaser will be treated
only as a stockholder);
(b) the Purchaser has carefully reviewed the Prospectus (including,
without limitation, the "Risk Factors" section) and understands the terms,
conditions and risks of the Offering; and (c) no representative of the
Company has made any oral statements to the Purchaser that are inconsistent
with the Prospectus.
This Subscription Agreement is qualified in its entirety by reference
to the Prospectus, which describes the terms and conditions of the Offering
and is incorporated by reference in this Subscription Agreement. The
Purchaser agrees to be bound by the Company's allocation method and other
determinations as to the number of Shares to be purchased by the Purchaser.
C-1
<PAGE>
SPECIAL MAILING INSTRUCTIONS Dated: __________________, 1998
The Purchaser requests that the
stock certificates and/or check Purchaser Signature:
be mailed to:
_______________________________ X______________________________
_______________________________
_______________________________ _______________________________
(Print name)
[ ] Change address of record to above
X______________________________
(Joint owner, if applicable)
_______________________________
(Print name)
(INSTRUCTIONS ARE ON THE REVERSE SIDE)
C-2
<PAGE>
INSTRUCTIONS
GENERAL INSTRUCTIONS FOR SUBSCRIBING. THIS SUBSCRIPTION AGREEMENT
AND PAYMENT OF THE TOTAL PURCHASE PRICE MUST BE DELIVERED TO DAKOTA
TELECOMMUNICATIONS GROUP, INC., ATTN: MR. CRAIG A. ANDERSON, POST OFFICE
BOX 66, 29705 453RD AVENUE, IRENE, SOUTH DAKOTA 57037-0066, ON OR BEFORE
MARCH 11, 1998 (the "Expiration Date"), unless the Expiration Date is
extended by the Board of Directors. Payment may be made by check or bank
money order, payable to Dakota Telecommunications Group, Inc. The Purchase
Price will be deemed to have been received by the Company only upon (i)
clearance and payment of any uncertified check, or (ii) receipt by the
Company of any bank money order or certified check.
ALLOCATION. If the Offering is oversubscribed by subscribing stockholders,
(a) Shares will be allocated in proportion to the number of shares of the
Company's Common Stock held by each subscribing stockholder as of the
Record Date and (b) any subscribing stockholder who has subscribed for
fewer Shares than he or she would be entitled to purchase under the
allocation procedure will be permitted to purchase all Shares subscribed
for. Each subscribing stockholder who subscribes for 40 or fewer Shares
will, in any event, be entitled to purchase all Shares subscribed for.
Stockholders will be entitled to subscribe for Shares before employees.
Shares remaining, if any, after subscriptions by Stockholders ("Remaining
Shares") will be available for purchase by employees. Each subscribing
employee will be entitled to subscribe for as few as one Share or as many
Shares as the subscribing employee would like to purchase. If Remaining
Shares are oversubscribed by employees, Remaining Shares will be allocated
per person, with each subscribing employee entitled to purchase the same
maximum number of Remaining Shares. Each subscribing employee who
subscribes for a number of Shares equal to or less than such maximum number
of Remaining Shares will be entitled to purchase all Remaining Shares
subscribed for any subscribing employee who subscribes for more Remaining
Shares than such maximum number will be entitled to purchase such maximum
number of Remaining Shares.
CONDITIONS; RETURN OF FUNDS FOR UNPURCHASED SHARES. The Offering is not
conditioned on the subscription for or sale of any minimum number of
Shares. Once a Purchaser has subscribed for Shares or Remaining Shares,
such subscription may not be revoked. Accordingly, Purchasers who
subscribe for Shares will not have a right to return of their funds (except
for unpurchased Shares), unless the Company terminates the Offering. The
Company reserves the right at any time prior to the Expiration Date to
terminate or extend the Offering for any reason. Refunds of payments for
unpurchased Shares will be returned by Company check mailed to the address
of the Purchaser shown above as soon as practicable after the Expiration
Date.
<PAGE>
NOMINEE STOCKHOLDERS. In the event of oversubscription, Nominee
Stockholders (as that term is defined in the Prospectus) will be required
to provide information concerning the names and stock holdings of each
beneficial owner of Common Stock as of the Record Date. Nominee
Stockholders may complete one Subscription Agreement for all of their
beneficial owners or a separate Subscription Agreement for each beneficial
owner.
MISCELLANEOUS. The method of delivery of this Subscription Agreement and
payment of the total Purchase Price to the Company will be at the election
and risk of the Purchaser. All questions concerning the timeliness,
validity, form and eligibility of subscriptions will be determined by the
management of the Company, whose determinations will be final and binding.
The Company, in its sole discretion, may waive any defect or irregularity,
or permit a defect or irregularity to be corrected within such time as it
may determine, or reject any subscription. Subscription Agreements will
not be deemed to have been received or accepted until all irregularities
have been waived or cured within such time as the Company determines, in
its sole discretion. The Company is under no duty to notify any Purchaser
of any defect or irregularity in connection with the submission of
Subscription Agreements, and the Company will not incur any liability for
failure to give such notification.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING ANY METHOD OF
SUBSCRIBING SHOULD BE DIRECTED TO DAKOTA TELECOMMUNICATIONS GROUP,
INC., ATTN: MR. CRAIG A. ANDERSON, POST OFFICE BOX 66, 29705 453RD AVENUE,
IRENE, SOUTH DAKOTA 57037-0066, TELEPHONE (605) 263-3301.
<PAGE>
===========================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Determination of Offering Price. . . . . . . . . . . . . . . . . . . . . 24
No Board Recommendation . . . . . . . . . . . . . . . . . . . . . . . . 24
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Description of the Company's
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Additional Securities of the Company . . . . . . . . . . . . . . . . . . 73
Indemnification of Directors and Officers . . . . . . . . . . . . . . 76
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Available Information . . . . . . . . . . . . . . . . . . . . . . . . 80
Appendix A--Consolidated Financial
Statements for years ended
December 31, 1996 and 1995
Appendix B--Consolidated Financial
Statements for the periods ended
September 30, 1997 and 1996
Appendix C--Form of Subscription Agreement
===========================================================================
<PAGE>
===========================================================================
400,000 SHARES
[DAKOTA TELECOMMUNICATIONS GROUP LOGO]
COMMON STOCK
AT
$12.50 PER SHARE
______________
PROSPECTUS
______________
FEBRUARY 6, 1998
===========================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and Bylaws contain provisions
relating to the indemnification of directors, officers and certain other
persons. See "INDEMNIFICATION OF DIRECTORS AND OFFICERS." In addition,
the Company has entered into Indemnity Agreements with each of its
directors and executive officers. See 'INDEMNIFICATION OF DIRECTORS AND
OFFICERS."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the Common Stock being registered, other than
underwriting discounts and commissions. All amounts shown are estimates,
except the SEC registration fee, and assume sale of 400,000 shares in the
offering.
SEC registration fee. . . . . . . . . . . . . . . . . . . . $ 1,475.00
Printing and mailing expenses . . . . . . . . . . . . . . . 15,000.00
Fees and expenses of counsel (including blue sky) . . . . . 60,000.00
Accounting and related expenses . . . . . . . . . . . . . . 12,000.00
Blue Sky fees and expenses (not including counsel fees) . . 3,000.00
Registrar and Transfer Agent fees . . . . . . . . . . . . . 0
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 8,525.00
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .$100,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1997, the Company sold 98,462 (as adjusted for the Stock
Split) shares of Common Stock to the Company's ESOP, for an aggregate total
of $1,000,000. For this sale, the Company relied on the exemption from
registration found in Section 4(2) of the Securities Act, among other
exemptions.
In connection with the DataNet acquisition (see "THE COMPANY--Business")
the Company issued 320,000 shares (as adjusted for the Stock Split) of Common
Stock to the two former shareholders of DataNet. The closing of this
II-1
<PAGE>
transaction occurred in December 1997. For this transaction, the Company
relied on the exemption from registration found in Section 4(2) of the
Securities Act, among other exemptions.
In connection with the Cooperative's acquisition of TCIC and Iway (see
"THE COMPANY--Business"), the Cooperative issued to the former shareholders of
TCIC and Iway (the "Sellers") shares of Cooperative preferred stock which
automatically upon consummation of the Merger were converted into 94,727
shares of Common Stock and, after the Stock Split, are now 189,454 shares of
Common Stock. In addition, the Sellers collectively received warrants which
were converted into warrants to purchase an additional 38,956 shares of Common
Stock and, after the Stock Split, were warrants to purchase 77,912 shares of
Common Stock. For this transaction, the Company relied on the exemption from
registration found Section 4(2) of the Securities Act, among other
exemptions.
In November 1997, the Company issued a total of 450 shares of Common
Stock as a bonus to three employees of the Company. Because these shares of
Common Stock were issued as a bonus, no "offer" or "sale" within the
meaning of the Securities Act was involved.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following exhibits are filed as part of this
Registration Statement:
NUMBER EXHIBIT
- ------ -------
3.1 Certificate of Incorporation of Dakota Telecommunications Group,
Inc., a Delaware corporation. Filed as Exhibit 3.1 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation, 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.
II-2
<PAGE>
NUMBER EXHIBIT
- ------ -------
4.4 Standstill Agreement dated November 27, 1996, among Dakota
Cooperative Telecommunications, Inc. and the Selling Shareholders
of TCIC Communications, Inc. Filed as Exhibit 4.7 to the S-4
Registration Statement and here incorporated by reference.
4.5 Standstill Agreement dated November 27, 1996, among Dakota
Cooperative Telecommunications, Inc. and the Selling Shareholders
of I-Way Partners, Inc. Filed as Exhibit 4.8 to the S-4
Registration Statement and here incorporated by reference.
4.6 Dakota Cooperative Telecommunications, Inc. Form of Warrant
Agreement. Filed as Exhibit 4.11 to the S-4 Registration
Statement and here incorporated by reference.
4.7 Dakota Cooperative Telecommunications, Inc. Form of Option
Agreement. Filed as Exhibit 4.12 to the S-4 Registration
Statement and here incorporated by reference.
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.
II-3
<PAGE>
NUMBER EXHIBIT
- ------ -------
4.14 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Pledge and Security Agreement with Rural Telephone Finance
Cooperative dated June 24, 1997. Filed as Exhibit 4.33 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
4.15 The Company has several classes of long-term debt instruments
outstanding in addition to those described in Exhibits 4.11
through 4.14. The amount of these classes of debt outstanding
on December 1, 1997, does not exceed 10% of the Company's
total consolidated assets. The Company agrees to furnish copies
of any agreement defining the rights of holders of any such long-
term indebtedness to the Securities and Exchange Commission upon
request.
4.16 Form of Subscription Agreement. Filed as Appendix C to this
Registration Statement and here incorporated by reference.
5 Opinion of Warner Norcross & Judd LLP regarding the
legality of the securities being registered.
10.1 1997 Stock Incentive Plan.<F*> Attached as Appendix J to the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.2 Form of Indemnity Agreement.<F*> Attached as Appendix K to the
Prospectus and Ballot/Proxy Statement filed as part of the S-4
Registration Statement and here incorporated by reference.
10.3 Employment Agreement of Thomas W. Hertz.<F*> Filed as Exhibit
10.3 to the S-4 Registration Statement and here incorporated by
reference.
10.4 Employment Agreement of Craig A. Anderson.<F*> Filed as Exhibit
10.4 to the S-4 Registration Statement and here incorporated by
reference.
10.5 Early Retirement and Consulting Agreement of Robert R.
DeNeui.<F*> Filed as Exhibit 10.5 to the S-4 Registration
Statement and here incorporated by reference.
10.6 The registrant is a party to a number of loan contracts that are
material to the registrant's business (included in Exhibits 4.11
through 4.14).
10.7 Amendment to Articles of Incorporation of Dakota Cooperative
Telecommunications, Inc. Filed as Appendix A to the Prospectus
II-4
<PAGE>
NUMBER EXHIBIT
- ------ -------
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.<F**>
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.
21 Subsidiaries of Registrant.<F***>
23.1 Consent of Counsel (included in Exhibit 5).
23.2 Consent of Independent Auditors.
24
Limited Powers of Attorney.<F***>
99.1 Cover Letter to Offerees.
99.2 Cover Letter to Offerees.
99.3 Letter of Transmittal.
II-5
<PAGE>
<F*> Management contract or compensatory plan or arrangement.
<F**> Management contract or compensatory plan or arrangement; previously
filed.
<F***> Previously filed.
ITEM 28. UNDERTAKINGS.
(1) The registrant will:
(a) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation form the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price present no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(b) For determining liability under the Securities Act, treat
each post-effect amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial BONA FIDE offering.
(c) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer
II-6
<PAGE>
or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Irene, State of South Dakota, on
February 2, 1998.
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(Registrant)
By /s/Thomas W. Hertz
Thomas W. Hertz, President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/Ross L. Benson* February 2, 1998
Ross L. Benson, Director
/s/Dale Q. Bye* February 2, 1998
Dale Q. Bye, Director
/s/Edward D. Christensen, Jr.* February 2, 1998
Edward D. Christensen, Jr., Director
/s/Jeffrey J. Goeman* February 2, 1998
Jeffrey J. Goeman, Director
/s/James H. Jibben* February 2, 1998
James H. Jibben, Chairman of the
Board and Director
/s/Palmer O. Larson* February 2, 1998
Palmer O. Larson, Director
/s/Jeffrey G. Parker* February 2, 1998
Jeffrey G. Parker, Director
II-8
<PAGE>
/s/John (Jack) A. Roth* February 2, 1998
John (Jack) A. Roth, Director
/s/John A. Schaefer* February 2, 1998
John A. Schaefer, Director
/s/Thomas W. Hertz February 2, 1998
Thomas W. Hertz, Director, President
and Chief Executive Officer
/s/Craig A. Anderson February 2, 1998
Craig A. Anderson, Director, Executive
Vice President - Marketing, Chief
Financial Officer and Treasurer
(Principal Accounting and Financial
Officer)
*By /s/Thomas W. Hertz
Thomas W. Hertz
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT
- ------ -------
3.1 Certificate of Incorporation of Dakota Telecommunications Group,
Inc., a Delaware corporation. Filed as Exhibit 3.1 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation, 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 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.
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.
<PAGE>
NUMBER EXHIBIT
- ------ -------
4.10 Dakota Telecommunications Group, Inc. Common Stock Certificate.
Filed as Exhibit 4.16 to the S-4 Registration Statement and here
incorporated by reference.
4.11 Dakota Telecom, Inc. Loan Agreement with Rural Telephone Finance
Cooperative dated January 29, 1996. Filed as Exhibit 4.34 to the
S-4 Registration Statement and here incorporated by reference.
4.12 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Loan Agreement with Rural Telephone Finance Cooperative
dated June 24, 1997. Filed as Exhibit 4.31 to the Registrant's
Report on Form 10-QSB for the quarter ended June 30, 1997 and here
incorporated by reference.
4.13 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Mortgage and Security Agreement with Rural Telephone Finance
Cooperative dated June 24, 1997. Filed as Exhibit 4.32 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
4.14 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom,
Inc. Pledge and Security Agreement with Rural Telephone Finance
Cooperative dated June 24, 1997. Filed as Exhibit 4.33 to the
Registrant's Report on Form 10-QSB for the quarter ended June 30,
1997 and here incorporated by reference.
4.15 The Company has several classes of long-term debt instruments
outstanding in addition to those described in Exhibits 4.11
through 4.14. The amount of these classes of debt outstanding
on December 1, 1997, does not exceed 10% of the Company's
total consolidated assets. The Company agrees to furnish copies
of any agreement defining the rights of holders of any such long-
term indebtedness to the Securities and Exchange Commission upon
request.
4.16 Form of Subscription Agreement. Filed as Appendix C to this
Registration Statement and here incorporated by reference.
5 Opinion of Warner Norcross & Judd LLP regarding the
legality of the securities being registered.
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.
<PAGE>
NUMBER EXHIBIT
- ------ -------
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.<F**>
<PAGE>
NUMBER EXHIBIT
- ------ -------
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.
21 Subsidiaries of Registrant.<F***>
23.1 Consent of Counsel (included in Exhibit 5).
23.2 Consent of Independent Auditors.
24
Limited Powers of Attorney.<F***>
99.1 Cover Letter to Offerees.
99.2 Cover Letter to Offerees.
99.3 Letter of Transmittal.
<F*> Management contract or compensatory plan or arrangement.
<F**> Management contract or compensatory plan or arrangement; previously
filed.
<F***> Previously filed.
<PAGE>
AS AMENDED THROUGH
JANUARY 27, 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.
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
F-2
<PAGE>
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 stockholder shall at
every meeting of stockholders be entitled to one vote in person or by proxy
for each share of the capital stock having voting power held by such
stockholder.
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.
(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
F-3
<PAGE>
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
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.
F-4
<PAGE>
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.
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.
F-5
<PAGE>
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.
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
F-6
<PAGE>
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
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
F-7
<PAGE>
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
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
F-8
<PAGE>
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.
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.
F-9
<PAGE>
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
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
F-10
<PAGE>
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
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
F-11
<PAGE>
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.
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
F-12
<PAGE>
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,
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.
F-13
<PAGE>
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.
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.
F-14
<PAGE>
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
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.
F-15
<PAGE>
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.
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.
F-16
<PAGE>
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.
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
F-17
<PAGE>
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)
F-18
<PAGE>
EXHIBIT 5
February 4, 1998
Dakota Telecommunications Group, Inc.
Post Office Box 66
27905 453rd Avenue
Irene, South Dakota 57037-0066
RE: REGISTRATION STATEMENT ON FORM SB-2
Gentlemen:
We represent Dakota Telecommunications Group, Inc., a Delaware
corporation (the "Company"), with respect to the above-captioned
Registration Statement on Form SB-2 (the "Registration Statement") filed
pursuant to the Securities Act of 1933 (the "Act") to register 400,000
shares of the Company's common stock, no par value ("Common Stock").
As counsel for the Company, we are familiar with its Certificate
of Incorporation and Bylaws and have reviewed the various proceedings taken
by the Company to authorize the issuance of the Common Stock to be sold
pursuant to the Registration Statement. We have also reviewed and assisted
in preparing the Registration Statement. In our review, we have assumed
the genuineness of all signatures, the legal capacity of all natural
persons, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of
such copies.
On the basis of the foregoing, we are of the opinion that when
the Registration Statement has become effective under the Act, any and all
shares of Common Stock which are the subject of the Registration Statement
will, when issued upon payment of the purchase price therefor to the
Company, be validly issued, fully paid and nonassessable.
This opinion is rendered for purposes of Item 27 of Form SB-2 and
Item 601 of Regulation S-B and may not be used, quoted or referred to or
filed for any other purpose without our prior written permission.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the references to our firm in the Registration
Statement.
Very truly yours,
WARNER NORCROSS & JUDD LLP
By: /S/ TRACY T. LARSEN
Tracy T. Larsen, a Partner
<PAGE>
EXHIBIT 10.14
MERGER AGREEMENT
by and among
DAKOTA TELECOMMUNICATIONS GROUP, INC.,
DAKOTA WIRELESS SYSTEMS, INC.,
VANTEK COMMUNICATIONS, INC.
and
VAN/ALERT, INC.
and joined in by
LEMAR VAN HEUVELN
and
NORMA VAN HEUVELN
December 5, 1997
<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT (the "Agreement") is made as of December 5,
1997, by and among Dakota Telecommunications Group, Inc., a Delaware
corporation ("DTG"), Dakota Wireless Systems, Inc., a South Dakota
corporation and wholly owned subsidiary of DTG ("Wireless"), Vantek
Communications, Inc., a South Dakota corporation ("Vantek"), and Van/Alert,
Inc., a South Dakota corporation ("Van/Alert"). This Agreement is joined
in by LeMar Van Heuveln and Norma Van Heuveln, the sole shareholders of
Vantek and Van/Alert (each a "Seller" and collectively the "Sellers").
Vantek and Van/Alert are sometimes referred to in this Agreement each as a
"Company" and collectively as the "Companies." Capitalized terms used in
this Agreement and not otherwise defined are defined in Article 8 of this
Agreement.
Sellers and the boards of directors of DTG, Wireless, Vantek and
Van/Alert each deem it desirable and in the best interests of their
respective corporations for Vantek and Van/Alert to become affiliated with
DTG through the merger of each of Vantek and Van/Alert with and into
Wireless (the "Mergers") in accordance with the provisions of the South
Dakota Business Corporation Act (the "Act") and the terms and conditions of
this Agreement. The boards of directors and shareholders of Wireless,
Vantek and Van/Alert have unanimously approved this Agreement and the
transactions contemplated hereby (including the Mergers).
ACCORDINGLY, in consideration of the representations, warranties
and covenants contained in this Agreement, the Parties agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1. MERGERS OF VANTEK AND VAN/ALERT WITH AND INTO
WIRELESS. Subject to the other conditions set forth in this Agreement, (i)
Vantek and Wireless will be, at the Effective Time, merged into a single
surviving corporation, which will be Wireless and (ii) Van/Alert and
Wireless will be, at the Effective Time, merged into a single surviving
corporation, which will be Wireless. Wireless is sometimes referred to in
this Agreement as the "Surviving Corporation." The Surviving Corporation
will continue its corporate existence under the name "Dakota Wireless
Systems, Inc." and will remain a South Dakota corporation governed by and
subject to the laws of that state.
SECTION 1.2. SHAREHOLDER APPROVAL. This Agreement and the
Mergers have been approved by the shareholders of Vantek, Van/Alert and
Wireless in accordance with the applicable laws of the State of South
Dakota.
-1-
<PAGE>
SECTION 1.3. CLOSING. The closing of the transactions
contemplated by this Agreement (the "Closing") will, to the extent
practicable, take place at the offices of Iway, Inc., Sioux Falls, South
Dakota, at 10:00 a.m. local time, on January 2, 1998, or at such other
place or later time as the Parties may agree. At the Closing, the Parties
will cause the Articles of Merger to be filed in accordance with the Act
and shall take all other lawful actions and do all other lawful things
called for by this Agreement or necessary to cause the Mergers to become
effective and to consummate the transactions contemplated by this
Agreement. In addition, at the Closing the Parties will execute such
additional agreements, instruments or certificates as DTG may reasonably
require.
SECTION 1.4. EFFECTIVE TIME. The Mergers will become effective
at the date and time set forth in the Articles of Merger and related Plans
of Merger attached as EXHIBITS A and B to this Agreement following the
issuance of Certificates of Merger by the Secretary of the State of South
Dakota. The time and date on which the Mergers shall become effective is
referred to in this Agreement as the "Effective Time."
SECTION 1.5. EFFECTS OF THE MERGERS. The effect of the Mergers
on Vantek, Van/Alert and Wireless will be as provided in Sections 47-6-9
through 47-6-12, inclusive, of the Act with respect to the merger of two
domestic corporations where the surviving corporation will be governed by
the laws of the State of South Dakota.
SECTION 1.6. SURVIVING CORPORATION. Immediately after the
Effective Time, the Surviving Corporation will have the following
attributes until they are subsequently changed in the manner provided by
law: (i) the name of the Surviving Corporation will be "Dakota Wireless
Systems, Inc.;" (ii) the articles of incorporation and bylaws of Wireless
will be the articles of incorporation and bylaws of the Surviving
Corporation; and (iii) the persons who, immediately before the Effective
Time, constitute the board of directors and officers of Wireless will be
the directors and officers, respectively, of the Surviving Corporation and
will hold office until their respective successors are duly elected and
qualified.
SECTION 1.7. CONVERSION OF SHARES. As a result of the Mergers,
the Vantek Shares and the Van/Alert Shares will be converted into cash,
notes and shares of DTG Common Stock as follows:
(a) CONVERSION OF VANTEK SHARES. At the Effective Time,
all of the Vantek Shares outstanding immediately before the
Effective Time will automatically become and be converted into
the right to receive (i) 24,000 validly issued, fully paid and
nonassessable shares of DTG Common Stock and (ii) one or more
notes in the form attached as EXHIBIT C to this Agreement having
an aggregate principal amount of $250,000, all to be divided
-2-
<PAGE>
among Vantek's shareholders pro rata based upon their
proportionate ownership of the outstanding Vantek Shares as of
the Effective Time.
(b) CONVERSION OF VAN/ALERT SHARES. At the Effective Time,
all of the Van/Alert Shares outstanding immediately before the
Effective Time will automatically become and be converted into
the right to receive cash in the aggregate amount of $250,000, to
be divided among Van/Alert's shareholders pro rata based upon
their proportionate ownership of the outstanding Van/Alert Shares
as of the Effective Time.
(c) CONVERSION OF WIRELESS COMMON STOCK. At the Effective
Time, each share of Wireless' common stock, par value $1.00 per
share, outstanding immediately before the Effective Time will
continue to be outstanding without change and will constitute all
of the outstanding capital stock of the Surviving Corporation as
of such date.
(d) EXCHANGE OF VANTEK AND VAN/ALERT CERTIFICATES. At the
Effective Time, Sellers will surrender their outstanding
certificates representing the Vantek Shares and the Van/Alert
Shares to DTG and receive in exchange therefor certificates
representing the number of shares of DTG Common Stock, cash and
notes into which the Vantek Shares and the Van/Alert Shares
represented by the certificates so surrendered will have been
converted as described above. The holders of Vantek Shares and
Van/Alert Shares outstanding immediately before the Effective
Time will have no rights as Vantek and Van/Alert shareholders as
of the Effective Time and each certificate representing the
Vantek Shares and the Van/Alert Shares will represent only the
right to receive shares of DTG Common Stock, cash and notes as
provided in this Agreement. On and after the Effective Time,
there will be no transfer of Vantek Shares and Van/Alert Shares
on the stock books of Vantek and Van/Alert and ownership of
Vantek Shares and Van/Alert Shares may be transferred only on the
stock books of Wireless.
SECTION 1.8. CONVEYANCES TO SURVIVING CORPORATION. Each Company
hereby agrees that from time to time after the Effective Time, as and when
requested by the Surviving Corporation, or by the Surviving Corporation's
successors and assigns, it will execute and deliver, or cause to be
executed and delivered, all such deeds, conveyances, assignments,
assurances and other instruments, and will take or cause to be taken such
further or other action as the Surviving Corporation, or the Surviving
Corporation's successors or assigns, may deem necessary or desirable to
vest or perfect in or confirm to the Surviving Corporation, or the
Surviving Corporation's successors and assigns, title to and possession of
-3-
<PAGE>
all the property, rights, privileges, powers, immunities, franchises,
interests and assets acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Mergers and to
otherwise carry out the intent and purposes of this Agreement. Each
Company hereby grants to the Surviving Corporation an irrevocable power of
attorney to execute and deliver all such deeds, conveyances, assignments
and assurances and to do all acts necessary, proper or convenient to
accomplish this purpose. The directors and officers of the Surviving
Corporation will be fully authorized in the name of Vantek and Van/Alert to
take any and all such action contemplated by this Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF SELLERS, VANTEK AND VAN/ALERT
Sellers, Vantek and Van/Alert, jointly and severally, represent
and warrant to DTG and Wireless as follows:
SECTION 2.1. DISCLOSURE SCHEDULE. Sellers will deliver to DTG and
Wireless within 15 days following the date of this Agreement the Disclosure
Schedule, which will include the numbered schedules specifically referred
to in this ARTICLE 2. The information contained in the Disclosure Schedule
is complete and accurate in all respects, and all documents that are
attached to or form a part of the Disclosure Schedule are true and complete
copies of the genuine original documents they purport to represent.
SECTION 2.2. ORGANIZATION AND GOOD STANDING. Each Company is a
corporation duly organized, validly existing and in good standing under the
laws of the state of South Dakota, with full corporate power and authority
to conduct its business as it is now being conducted, to own or use the
properties and assets that it purports to own or use, and to perform its
obligations under Applicable Contracts. Each Company is duly qualified to
do business as a foreign corporation and is in good standing in each state
or other jurisdiction in which either the ownership or use of the
properties owned or used by it or the nature of the activities conducted by
it requires such qualification. Copies of each Company's Organizational
Documents are attached to SCHEDULE 1 of the Disclosure Schedule. Neither
Company has any subsidiaries and, except as disclosed on SCHEDULE 1,
neither Company owns nor has any right to acquire any equity interest in
any other Person.
SECTION 2.3. CAPITALIZATION OF THE COMPANIES; OWNERSHIP. The
authorized capital stock of Vantek consists of 100,000 shares of common
stock, $1 par value each, of which _____ shares (i.e., the Vantek Shares)
are issued and outstanding. The authorized capital stock of Van/Alert
consists of 25,000 shares of common stock, $1 par value each, of which
______ shares (i.e., the Van/Alert Shares) are issued and outstanding.
-4-
<PAGE>
There are no other authorized classes or series of capital stock or other
equity securities of either Company. All of the Vantek Shares and the
Van/Alert Shares were validly issued, are fully paid and nonassessable, and
were not issued in violation of any preemptive or similar rights of any
shareholder. There are no outstanding Contracts that require Sellers to
sell any Vantek Shares or Van/Alert Shares or that require either Company
to issue or sell any shares of capital stock of the Company or securities
convertible into shares of capital stock of the Company. Sellers own,
beneficially and of record, all of the Vantek Shares and Van/Alert Shares
free and clear of all Encumbrances.
SECTION 2.4. FINANCIAL STATEMENTS. Copies of the audited financial
statements for each Company at and for the fiscal year ended December 31,
1996, and the reviewed financial statements for each Company at and for the
fiscal years ended December 31, 1995 and 1994 are attached to SCHEDULE 2 of
the Disclosure Schedule (the "Financial Statements"). Also attached to
SCHEDULE 2 are copies of the interim balance sheets and interim statements
of income of each Company at and for each month-end during the current
fiscal year, each prepared internally by the applicable Company (the
"Interim Financial Statements"). The Interim Financial Statements include
the balance sheet of each Company at September 30, 1997 (the "Balance
Sheet"). The Financial Statements and Interim Financial Statements present
fairly the financial condition of the applicable Company at the dates
indicated and its results of operations for the periods then ended, all in
accordance with GAAP applied on a basis consistent throughout such periods
and consistent with prior periods (subject, in the case of the Interim
Financial Statements, to normal recurring year-end adjustments, the effect
of which will not individually or in the aggregate be materially adverse,
and the absence of notes which if presented would not differ materially
from those included in the Balance Sheet)
SECTION 2.5. BOOKS AND RECORDS. The books of account, minute books,
stock record books and other records of each Company, all of which have
been made available to DTG and Wireless, are complete and correct and have
been maintained in accordance with sound business practices. The minute
book of each Company contains accurate and complete records of all meetings
held, and all corporate action taken, by the shareholders or board of
directors of the Company (or any committee of the board of directors). As
of the Closing Date, all of these books and records will be in the
possession of the applicable Company.
SECTION 2.6. NO UNDISCLOSED LIABILITIES. Neither Company has any
liabilities or obligations of any nature (whether known or unknown and
whether absolute, accrued, contingent or otherwise) except for liabilities
or obligations reflected or reserved against in the applicable Balance
Sheet and current liabilities incurred in the Ordinary Course of Business
since September 30, 1997, which will not, individually or in the aggregate,
materially adversely affect the Company or its business.
-5-
<PAGE>
SECTION 2.7. TAXES. Each Company has timely (a) filed all Tax
Returns pursuant to applicable Legal Requirements; (b) paid or made proper
provision for payment of all Taxes due and payable by it; and (c) withheld
or collected all Taxes required by applicable Legal Requirements and, to
the extent required, paid such Taxes to the proper Governmental Body or
other Person. The charges, accruals and reserves with respect to the Taxes
on the books of each Company are adequate (determined in accordance with
GAAP) and are at least equal to the applicable Company's liability for
Taxes. Neither Company has signed an extension with any Governmental Body
concerning any liability for Taxes and no open matters exist for any prior
periods. There is no proposed tax assessment against either Company and no
deficiency has been asserted against either Company as a result of any
examination by the IRS or other Governmental Body that has not been paid or
finally settled, and no grounds exist for the assertion of any deficiency
for any periods that have not been audited by the IRS or other applicable
Governmental Body. Copies of each Company's federal, state and local
income Tax Returns with supporting schedules filed for the fiscal years
ended December 31, 1996, 1995 and 1994 are attached to SCHEDULE 3 of the
Disclosure Schedule.
SECTION 2.8. NO MATERIAL ADVERSE CHANGE; ABSENCE OF RESTRICTED
EVENTS. Since December 31, 1996: each Company has conducted its
operations and affairs only in the Ordinary Course of Business; there has
not been any material adverse change in the business, operations,
properties, prospects, assets or condition of either Company; and no event
has occurred or circumstance exists that may result in such a material
adverse change. Except as disclosed on SCHEDULE 4 of the Disclosure
Schedule, since December 31, 1996, no Restricted Event has occurred with
respect to either Company.
SECTION 2.9. EMPLOYEES; LABOR RELATIONS.
(a) SCHEDULE 5 of the Disclosure Schedule contains the
following information for each employee of each Company
(including each employee on leave of absence or layoff status):
name; job title; current compensation paid or payable; vacation
accrued; and service credited for purposes of vesting and
eligibility to participate under any of the applicable Company's
Employee Benefit Plans. To Sellers' Knowledge, no key employee
of either Company intends to terminate his or her employment with
the Company. Each of the employees of each Company is employed
on an "at will" basis.
(b) Neither Company is now and neither Company has ever
been a party to any collective bargaining or other labor
Contract. Since January 1, 1992, there has not been, there is
not presently pending or existing and, to Sellers' Knowledge,
there is not Threatened, any strike, slowdown, picketing, work
stoppage, labor arbitration or proceeding concerning the
-6-
<PAGE>
grievance of any employee, application or complaint filed by an
employee or union with the National Labor Relations Board or any
comparable Governmental Body, organizational activity or other
labor dispute against or affecting either Company or its
premises, and no application for certification of a collective
bargaining agent is pending or to Sellers' Knowledge Threatened.
No event has occurred or circumstance exists that could provide
the basis for any work stoppage or other labor dispute. There is
no lockout of any employees by either Company and no such action
is contemplated by either Company. Each Company has complied
with all Legal Requirements relating to employment, equal
employment opportunity, nondiscrimination, immigration, wages,
hours, benefits, collective bargaining, the payment of social
security and similar taxes, occupational safety and health and
plant closing. Neither Company is liable for the payment of any
taxes, fines, penalties or other amounts, however designated, for
failure to comply with any of the foregoing Legal Requirements.
SECTION 2.10. EMPLOYEE BENEFIT PLANS.
(a) SCHEDULE 6 of the Disclosure Schedule sets forth each
Employee Benefit Plan maintained by either Company or covering
current or former (including retired) employees of either
Company. Copies of all written Employee Benefit Plans and all
agreements adopted or other material used in connection with or
relating to such Employee Benefit Plans (including descriptions
of vacation, separation and other personnel policies) are also
attached to SCHEDULE 6.
(b) Each Company has timely performed all of its
obligations (including, to the extent applicable, reporting,
disclosure, prohibited transaction, IRS qualification and funding
obligations) under its Employee Benefit Plans. Each Employee
Benefit Plan, and the administration of each Employee Benefit
Plan, complies and has complied with all applicable Legal
Requirements.
(c) Neither Company nor any predecessor or affiliate of
either Company has ever established, maintained or contributed to
or otherwise participated in, or had an obligation to establish,
maintain, contribute to or otherwise participate in, any Multi-Employer
Retirement Plan.
SECTION 2.11. TITLE TO PROPERTIES; ENCUMBRANCES. SCHEDULE 7 of the
Disclosure Schedule contains a list of all real property, leaseholds or
other real property interests of each Company. Except as disclosed on
SCHEDULE 7, each Company owns all the properties and assets (whether real,
personal or mixed and whether tangible or intangible) located in or at the
-7-
<PAGE>
facilities owned or operated by the applicable Company or reflected as
owned in the books and records of the applicable Company, including all of
the properties and assets reflected in the Balance Sheet and the Interim
Financial Statements (except for personal property sold since the date of
the Balance Sheet or the Interim Financial Statements, as the case may be,
in the Ordinary Course of Business). All properties and assets reflected
in the Balance Sheet and the Interim Financial Statements are free and
clear of all Encumbrances. All personal property owned by each Company
will be in the possession of the applicable Company on the Closing Date or
at such other location as is specified on SCHEDULE 7. All buildings,
plants and structures owned or leased by each Company lie wholly within the
boundaries of the real property owned or leased by the applicable Company
and do not encroach upon the property of, or otherwise conflict with the
property rights of, any other Person.
SECTION 2.12. CONDITION AND SUFFICIENCY OF ASSETS. The buildings,
plants, structures and equipment owned or used by each Company (a) are
structurally sound, are in good operating condition and repair and are
adequate for the uses to which they are being put; (b) do not need
maintenance or repairs except for ordinary, routine maintenance and repairs
that are not material in nature or cost; and (c) are sufficient for the
continued conduct of the applicable Company's business after the Closing in
substantially the same manner as conducted before the Closing.
SECTION 2.13. ACCOUNTS RECEIVABLE. All accounts receivable of each
Company that are reflected on the Balance Sheet or the Interim Financial
Statements or on the accounting records of the applicable Company as of the
Closing Date (collectively, the "Accounts Receivable") represent or will
represent valid obligations arising from sales actually made or services
actually performed in the Ordinary Course of Business. Unless paid before
the Closing Date, the Accounts Receivable are, or will be as of the Closing
Date, current and collectible, and each of the Accounts Receivable either
has been or will be collected in full, without any set-off, within ninety
days after the day on which it first becomes due and payable.
SECTION 2.14. INVENTORY. All inventory of each Company, whether or
not reflected in the Balance Sheet or the Interim Financial Statements,
consists of a quality and quantity usable and salable in the Ordinary
Course of Business, except for obsolete items and items below standard
quality, all of which have been written off or written down to net
realizable value in the Balance Sheet or the Interim Financial Statements.
All inventories not written off have been priced at the lower of cost or
market on a first in, first out basis. The quantities of each item of
inventory (whether raw materials, work-in-process or finished goods) are
not excessive, but are reasonable in the present circumstances of the
applicable Company.
SECTION 2.15. LITIGATION. Except as set forth on SCHEDULE 8 of the
Disclosure Schedule, there is no Proceeding or Order pending against either
-8-
<PAGE>
Company or that otherwise relates to or may affect the business of, or any
of the property or assets owned or used by, either Company or that may
interfere with the transactions contemplated by this Agreement. To
Sellers' Knowledge, no such Proceeding or Order has been Threatened and no
event has occurred or circumstance exists that may give rise to or serve as
a basis for any such Proceeding or Order.
SECTION 2.16. AUTHORIZATION AND ENFORCEABILITY; NO CONFLICT WITH
OTHER INSTRUMENTS OR PROCEEDINGS.
(a) Sellers, Vantek and Van/Alert have full capacity, power
and authority to enter into and perform this Agreement and to
carry out the transactions contemplated by this Agreement. This
Agreement is binding upon Sellers, Vantek and Van/Alert and is
enforceable against Sellers, Vantek and Van/Alert in accordance
with its terms. The execution, performance and delivery of this
Agreement has been duly authorized, approved and adopted by all
requisite action of each Company's board of directors and
shareholders.
(b) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
by this Agreement will not (i) contravene the Organizational
Documents or result in a breach of any provision of, or
constitute a default under, any Applicable Contract; (ii) violate
any Legal Requirement or Order or give any Governmental Body the
right to revoke, withdraw, suspend, cancel, terminate or modify
any Governmental Authorization applicable to either Company;
(iii) result in the imposition of any Tax on DTG, Wireless or
either Company or accelerate any indebtedness of either Company
or increase the rate of interest payable by either Company with
respect to any indebtedness; or (iv) result in any Encumbrance
being created or imposed upon or with respect to any of the
property or assets owned or used by either Company. All
consents, approvals or authorizations of or declarations, filings
or registrations with any Person required in connection with the
execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated by this Agreement
(except for the filing of the Articles of Merger and related
Plans of Merger, which will be filed as contemplated in Article
1) are set forth on SCHEDULE 9 of the Disclosure Schedule and
will be obtained or made, as applicable, by Sellers, Vantek and
Van/Alert before the Closing.
SECTION 2.17. CONTRACTS. SCHEDULE 10 of the Disclosure Schedule sets
forth (and includes a copy of) each Material Contract to which either
Company is a party or by which either Company is bound or affected. Each
Material Contract is in full force and effect and is valid and enforceable
in accordance with its terms. Each Company and each other Person that is a
-9-
<PAGE>
party to a Material Contract has complied and is fully complying with the
terms of the applicable Material Contract, and no event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with or result in a violation or breach of, or give
either Company or any other Person the right to declare a default under,
any Material Contract.
SECTION 2.18. INTELLECTUAL PROPERTY. SCHEDULE 11 of the Disclosure
Schedule sets forth all Intellectual Property Assets presently owned or
used by either Company. Unless otherwise indicated on SCHEDULE 11, each
Company will own the entire right, title and interest in and to such
Intellectual Property Assets on the Closing Date free and clear of all
Encumbrances, and following the Closing each Company will have the right to
use each Intellectual Property Asset without payment to any other Person.
There is no infringement of or unlawful use by any Person of any of either
Company's Intellectual Property Assets, and neither Company has infringed
or unlawfully used any Intellectual Property Assets of any other Person.
SCHEDULE 11 also sets forth a list of all Contracts relating to
Intellectual Property Assets to which each Company is a party or by which
each Company is bound or affected. None of either Company's Intellectual
Property Assets is subject to any pending or to Sellers' Knowledge
Threatened claim or challenge, and there is no valid basis for asserting
any claim or challenge. The Intellectual Property Assets are all those
necessary for the operation of each Company's business as presently
conducted and are sufficient in form and quality so that following the
Closing Buyer can design, produce, manufacture, assemble and sell the
products and provide the services sold or provided by each Company before
the Closing in a manner that meets applicable specifications and conforms
to commercially acceptable quality standards.
SECTION 2.19. INSURANCE. SCHEDULE 12 of the Disclosure Schedule
contains a list of all policies of liability, crime, fidelity, life, fire,
product liability, workers' compensation, health, director and officer
liability and other forms of insurance owned or maintained by each Company,
including for each policy: the name of the insurer; the amount of coverage;
the type of insurance; the policy number; the renewal or expiration date;
and all pending claims under the policy. All of the insurance policies
listed on SCHEDULE 12 are outstanding and in full force, all premiums with
respect to the policies are currently paid and all duties of the insureds
under the policies have been fully discharged.
SECTION 2.20. NO ILLEGAL PAYMENTS. Neither Company nor any other
Person associated with or acting on behalf of either Company has used any
Company funds for unlawful contributions, gifts, entertainment or other
expenses or made any direct or indirect unlawful payments from Company
funds or established or maintained any unlawful or unrecorded funds.
SECTION 2.21. CUSTOMERS AND SUPPLIERS. Listed on SCHEDULE 13 of the
Disclosure Schedule are the ten largest customers and suppliers of each
-10-
<PAGE>
Company (by dollar volume) in terms of sales or purchases for the twelve
months ended December 31, 1996 and 1995, and for the eleven months ending
October 31, 1997, showing for each period the approximate total sales to
each customer and purchasers from each supplier. There has not been any
adverse change in the business relationship of either Company with any
customer or supplier listed on SCHEDULE 13 nor could an adverse change
reasonably be anticipated as a result of the consummation of the
transactions contemplated by this Agreement.
SECTION 2.22. PRODUCT WARRANTIES AND LIABILITIES. Set forth on
SCHEDULE 14 of the Disclosure Schedule are all warranties applicable to
products sold or services provided by each Company. Except as disclosed on
SCHEDULE 14, there are no claims against either Company to return products
in excess of an aggregate of $5,000 by any one purchaser, or $10,000 for
all purchasers considered collectively, by reason of alleged overshipments,
defective merchandise or otherwise, and there is no Proceeding pending or
to Sellers' Knowledge Threatened against either Company under any warranty
nor is there any basis upon which any claim could validly be made.
SCHEDULE 14 also summarizes all product liability claims that have been
asserted against each Company during the five years preceding the date of
this Agreement.
SECTION 2.23. CERTAIN RELATIONSHIPS. Except as disclosed on
SCHEDULE 15 of the Disclosure Schedule, neither Sellers nor any Related
Person is an owner, shareholder, creditor, director, agent, consultant or
employee of, or lender to, any Person engaged in a business that acts as a
supplier of any goods or services to either Company or any part of which is
in actual or potential competition with either Company. Neither Company
has any outstanding indebtedness to Sellers or any Related Person, and
neither Sellers nor any Related Person has any outstanding indebtedness to
either Company.
SECTION 2.24. PERMITS AND LICENSES; COMPLIANCE WITH LEGAL
REQUIREMENTS. All Governmental Authorizations necessary for each Company
to carry on its business as presently conducted are identified on SCHEDULE
16 of the Disclosure Schedule and have been timely obtained, are in full
force and effect and have been complied with. All fees and charges
incident to those Governmental Authorizations have been fully paid and are
current and no suspension or cancellation of any Governmental Authorization
has been Threatened or could result by reason of the transactions
contemplated by this Agreement. Neither Company is subject to, nor has it
been Threatened with, any Adverse Consequence as the result of a failure to
comply with any Legal Requirement applicable to it or the conduct or
operation of its business or the ownership or use of any of its properties
or assets, and no event has occurred or circumstance exists (with or
without notice or lapse of time) that may give rise to any such Adverse
Consequence. Each Company is presently, and during all applicable
limitations periods has been, in full compliance with all applicable Legal
Requirements.
-11-
<PAGE>
SECTION 2.25. INVESTMENT INTENT. Sellers are acquiring the DTG
Common Stock for their own accounts and not with a view to their
distribution within the meaning of the Securities Act of 1933, as amended
("Securities Act"). Sellers have no plan or intention to sell or otherwise
dispose of the shares of DTG Common Stock to be received by them in the
Mergers.
SECTION 2.26. NO BROKER'S FEES. Neither Sellers, Vantek or Van/Alert
nor anyone acting on any of their behalf, has incurred any liability or
obligation to pay fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement for which DTG or
Wireless or either Company could be liable.
SECTION 2.27. ACCURACY OF STATEMENTS. No representation or warranty
made by Sellers, Vantek or Van/Alert in this Agreement, the Disclosure
Schedule or any statement, certificate or schedule furnished, or to be
furnished, to DTG and Wireless pursuant to this Agreement or in connection
with the transactions contemplated by this Agreement contains any untrue
statement of a material fact or omits to state a material fact necessary to
make the statements contained therein not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF DTG AND WIRELESS
DTG and Wireless, jointly and severally, represent and warrant to
Sellers, Vantek and Van/Alert as follows:
SECTION 3.1. ORGANIZATION AND GOOD STANDING. DTG is a Delaware
corporation and Wireless is a South Dakota corporation each duly organized,
validly existing and in good standing under the laws of the applicable
state, with full corporate power and authority to conduct their business as
they are now being conducted, to own or use the properties and assets that
they purport to own or use and to perform their obligations under
Applicable Contracts.
SECTION 3.2. CAPITALIZATION OF DTG AND WIRELESS; OWNERSHIP.
The authorized capital stock of Wireless consists of 50,000 shares of Class
A common stock, par value $1.00 per share, of which 1,700 shares are issued
and outstanding and 50,000 shares of Class B preferred stock, $1.00 par
value per share, of which no shares are issued and outstanding. All of the
issued and outstanding capital stock of Wireless is owned by DTG. The
authorized capital stock of DTG consists of 5,000,000 shares of common
stock, without par value, of which approximately 1,060,000 shares were
issued and outstanding as of September 30, 1997 and 250,000 shares of
preferred stock, without par value, none of which is outstanding. All DTG
Common Stock to be issued in the Mergers will, when issued, be duly
-12-
<PAGE>
authorized, validly issued, fully paid and nonassessable and will not be
subject to any preemptive rights. Except as provided in DTG's
Organizational Documents or as described in the Prospectus and Ballot/Proxy
Statement, and except for shares of DTG Common Stock that may be issued in
connection with pending acquisitions, the implementation of an Employee
Stock Ownership Plan and stock options or grants awarded to directors,
officers or employees of DTG, there are no outstanding Contracts that
require DTG or Wireless to sell any of their common or preferred shares or
that require DTG or Wireless to issue or sell any shares of capital stock
or securities convertible into shares of capital stock of DTG or Wireless.
SECTION 3.3. NO MATERIAL ADVERSE CHANGE; ABSENCE OF RESTRICTED
EVENTS. Except as described in any document filed by DTG with the SEC,
including the Prospectus and Ballot/Proxy Statement: since January 1,
1997, DTG has conducted its operations and affairs only in the Ordinary
Course of Business; there has not been any material adverse change in the
business, operations, properties, prospects, assets, financial condition,
income or expenses of DTG; and no event has occurred or circumstance
exists that may result in such a material adverse change.
SECTION 3.4. LITIGATION. Except for docketed Proceedings before
the South Dakota Public Utilities Commission (which will not, individually
or in the aggregate, materially adversely affect DTG or its business) or as
described in any document filed by DTG with the SEC, there is no Proceeding
or Order pending against DTG or that otherwise relates to or may affect the
business of, or any of the property or assets owned or used by, DTG that
could reasonably be expected to have a material adverse effect on DTG or
that may interfere with the transactions contemplated by this Agreement.
No such Proceeding or Order has been, to the Knowledge of DTG, Threatened
and no event has occurred or circumstance exists that may give rise to or
serve as a basis for any such Proceeding or Order.
SECTION 3.5. AUTHORIZATION AND ENFORCEABILITY; NO CONFLICT WITH
OTHER INSTRUMENTS OR PROCEEDINGS.
(a) DTG and Wireless have full capacity, power and
authority to enter into, deliver and perform this Agreement and
to carry out the transactions contemplated by this Agreement.
This Agreement is binding upon DTG and Wireless and is
enforceable against DTG and Wireless in accordance with its
terms.
(b) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
by this Agreement have been authorized by all necessary corporate
actions and will not (i) contravene the Organizational Documents
or result in a Breach of any provision of, or constitute a
default under, any Applicable Contract (subject to obtaining
required consents of the Rural Telephone Finance Cooperative
-13-
<PAGE>
("RTFC") ; (ii) violate any Legal Requirement or Order or give
any Governmental Body the right to revoke, withdraw, suspend,
cancel, terminate or modify any Governmental Authorization
applicable to DTG or the Surviving Corporation; (iii) result in
the imposition of any Tax on the Surviving Corporation or
accelerate any indebtedness of DTG or the Surviving Corporation
or increase the rate of interest payable by DTG or the Surviving
Corporation with respect to any indebtedness; or (iv) result in
any Encumbrance being created or imposed upon or with respect to
any of the property or assets owned or used by DTG or Wireless,
except those in favor of the RTFC with respect to DTG's secured
financings through the RTFC.
SECTION 3.6. NO BROKER'S FEES. Neither DTG, Wireless, nor
anyone acting on their behalf, has incurred any liability or obligation to
pay fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which Sellers, Vantek or
Van/Alert could become liable.
SECTION 3.7. ACCURACY OF STATEMENTS. No representation or
warranty made by DTG or Wireless in this Agreement or any statement,
certificate or schedule furnished to Sellers, Vantek or Van/Alert pursuant
to this Agreement or in connection with the transactions contemplated by
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained therein
not misleading.
ARTICLE 4
COVENANTS AND AGREEMENTS
The Parties (as applicable) covenant and agree as follows:
SECTION 4.1. CONDUCT PENDING THE CLOSING. From the date of this
Agreement to the Closing Date, each Company will, and Sellers will cause
each Company to, conduct its operations and affairs only in the Ordinary
Course of Business. Each Company and Sellers will exercise their
reasonable best efforts to preserve intact the present business
organization and personnel of each Company and the goodwill of each Company
with all persons having business dealings with it, and will or will cause
each Company to comply with all Legal Requirements. From the date of this
Agreement to the Closing Date, neither Sellers nor either Company will,
without the prior written consent of DTG and Wireless: (a) enter into any
negotiations, discussions or agreements contemplating or respecting the
acquisition of either Company by any Person other than DTG or Wireless,
whether through a sale of stock, a merger or consolidation, the sale of all
or substantially all of the properties or assets of either Company, any
type of recapitalization or otherwise; (b) take any action that would
-14-
<PAGE>
interfere with or prevent the timely consummation or performance of this
Agreement; or (c) take any action that would constitute a Restricted Event
or which would be inconsistent in any respect with any of the
representations, warranties, covenants or obligations set forth in this
Agreement, as if such representations, warranties, covenants or obligations
were made at a time subsequent to such action.
SECTION 4.2. ACCESS AND INVESTIGATION BY DTG AND WIRELESS. From the
date of this Agreement to the Closing Date, Sellers and each Company will
give DTG and Wireless and their Representatives full and free access to
each Company's advisors, personnel, properties, contracts, books and
records, and other documents and data for the purpose of completing DTG's
and Wireless' investigation of each Company's business, properties and
assets; PROVIDED, HOWEVER, that (a) DTG and Wireless will conduct their
investigation in a manner that does not unreasonably interfere with the
normal operations and employee relationships of each Company and (b) DTG
and Wireless will hold any information obtained from Sellers or either
Company as part of their investigation in strict confidence and will return
all such written information upon request. Before the Closing, Sellers or
an officer of each Company designated by Sellers will introduce a
Representative designated by DTG and Wireless to those material customers
or suppliers of each Company as DTG and Wireless may identify. During
DTG's and Wireless' investigation, DTG and Wireless will have the right to
make copies of such materials as they deem appropriate.
SECTION 4.3. REASONABLE BEST EFFORTS; NOTICE OF BREACH OR FAILURE OF
CONDITION; FURTHER ASSURANCES. Each Party will use its or his reasonable
best efforts to fulfill the conditions required to be fulfilled by it or
him to bring about the timely consummation of the transactions contemplated
by this Agreement. Each Party will give prompt notice to the other of the
occurrence of any event or the failure of any event to occur that might
preclude or interfere with the satisfaction of any condition precedent to
the obligations of either Party under this Agreement or the timely
consummation of the transactions contemplated by this Agreement. After the
Closing, each Party will take all such further actions, execute and deliver
all such further documents and do all other acts and things as the other
Party may reasonably request for the purpose of carrying out the intent of
this Agreement and the other documents referred to in this Agreement.
SECTION 4.4. NON-COMPETE. In consideration of the consummation of
the transactions contemplated by this Agreement and no further
consideration, Sellers each covenant and agree that they will not, for a
period of five years from the Closing Date, compete, directly or
indirectly, or participate, directly or indirectly, in the ownership,
management, financing or control of, or act as a consultant or agent for,
any Person which competes or plans to compete, directly or indirectly, with
either Company. The geographic scope of the foregoing covenant is the
entire United States. Sellers each further covenant and agree that, for
the period specified, they will not induce any employee of either Company
-15-
<PAGE>
to leave the Company's employment or directly or indirectly assist any
other Person in requesting or inducing any employee of either Company to
leave the Company's employment. Finally, Sellers each covenant and agree
that they will not, from the date of this Agreement and forever afterward,
use or disclose to any Person any proprietary, secret or confidential
information of either Company, including customer names, sales and
manufacturing information and business and trade secrets. If any court of
competent jurisdiction finds that the time period of the foregoing
covenants is too lengthy or the scope of the covenants too broad, the
restrictive time period shall be deemed to be the longest period
permissible by law and the scope shall be deemed to comprise the largest
scope permissible by law under the circumstances. It is the Parties'
intent to protect and preserve the business and goodwill of each Company to
be acquired by DTG and Wireless and thus the Parties agree and direct that
the time period and scope of the covenants set forth in this SECTION 4.4 be
the maximum permissible duration and size. The foregoing covenant
not-to-compete shall terminate upon any liquidation of DTG pursuant to Chapter 7
of the Federal Bankruptcy Code.
ARTICLE 5
CONDITIONS TO OBLIGATION TO CLOSE
SECTION 5.1. CONDITIONS TO OBLIGATION OF DTG AND WIRELESS. DTG's and
Wireless' obligation to consummate the Mergers and to take the other
actions required to be taken by DTG and Wireless at the Closing is subject
to the satisfaction, at or before the Closing, of each of the following
conditions (any of which may be waived by DTG and Wireless, in whole or in
part):
(a) The representations and warranties set forth in
ARTICLE 2 of this Agreement, individually and collectively, must
have been accurate as of the date of this Agreement and must be
accurate as of the Closing Date as if made on the Closing Date;
(b) Sellers and each Company must have performed and
complied with all of their covenants and obligations under this
Agreement;
(c) Sellers and each Company must have delivered to DTG and
Wireless in form reasonably acceptable: (i) a written opinion of
Sellers' and each Company's legal counsel; (ii) a certificate
stating that the conditions specified in SECTIONS 5.1(A) and (B)
have been satisfied; (iii) a letter of resignation and release of
claims from each director and officer of each Company; and
(iv) such other certificates, instruments or documents as DTG and
Wireless may reasonably request;
-16-
<PAGE>
(d) There must not be any Proceeding or Order pending or
Threatened or any Legal Requirement in effect which would prevent
the consummation of any of the transactions contemplated by this
Agreement or which could result in any Adverse Consequence
against DTG, Wireless or either Company if the transactions
contemplated by this Agreement were consummated;
(e) Except as contemplated by this Agreement, there must
not have been any material adverse change in either Company's
condition, business, or operations, financial or otherwise, from
the date of this Agreement to the Closing Date.
(f) All authorizations, consents, and approvals by any
third parties, including any Governmental Authorization from any
Governmental Body including the RTFC, that are necessary for the
consummation of the transactions contemplated by this Agreement
shall have been received and shall be in full force and effect.
All necessary filings, declarations, and notices of DTG,
Wireless, each Company and Sellers with or to third parties shall
also have been made or given;
(g) Each Company must have entered into the following
agreements on terms reasonably acceptable to DTG and Wireless:
(i) new leases for the premises currently occupied by the
Companies and for the Companies' tower site; and (ii) an
employment agreement with LeMar Van Heuveln; and
(h) DTG and Wireless must be satisfied with the results of
their investigation of each Company's business, properties and
assets, including their review of the Disclosure Schedule
delivered pursuant to SECTION 2.1, and this Agreement and the
transactions contemplated by this Agreement must have been
approved and authorized by DTG's and Wireless' boards of
directors.
SECTION 5.2. CONDITIONS TO OBLIGATION OF SELLERS AND EACH COMPANY.
Sellers' and each Company's obligation to consummate the Mergers and to take
the other actions required to be taken by Sellers and each Company at the
Closing is subject to the satisfaction, at or before the Closing, of each
of the following conditions (any of which may be waived by Sellers and each
Company, in whole or in part):
(a) The representations and warranties set forth in
ARTICLE 3 of this Agreement, individually and collectively, must
have been accurate as of the date of this Agreement and must be
accurate as of the Closing Date as if made on the Closing Date;
(b) DTG and Wireless must have performed and complied with
all of their covenants and obligations under this Agreement;
-17-
<PAGE>
(c) DTG and Wireless must have delivered to Sellers and
each Company in form reasonably acceptable: (i) a written
opinion of DTG's and Wireless' legal counsel; (ii) a certificate
stating that each of the conditions specified in SECTIONS 5.2(A)
and (B) have been satisfied; and (iii) such other certificates,
instruments or documents as Sellers and each Company may
reasonably request;
(d) There must not be any Proceeding or Order pending or
Threatened or any Legal Requirement enacted since the date of
this Agreement which would prevent the consummation of any of the
transactions contemplated by this Agreement;
(e) All authorizations, consents, and approvals by any
third parties, including any Governmental Authorization from any
Governmental Body, that are necessary for the consummation of the
transactions contemplated by this Agreement shall have been
received and shall be in full force and effect. All necessary
filings, declarations, and notices of DTG, Wireless, each Company
and Sellers with or to third parties shall also have been made or
given; and
(f) Each Company must have entered into the following
agreements on terms reasonably acceptable to Sellers and each
Company: (i) and new leases for the premises currently occupied
by the Companies and the Companies' tower site; and (ii) an
employment agreement with LeMar Van Heuveln.
ARTICLE 6
TERMINATION
SECTION 6.1. TERMINATION EVENTS. This Agreement may be terminated by
mutual consent of the Parties or by notice given before or at the Closing:
(a) By either Party if a material Breach of any provision
of this Agreement has been committed by the other Party and the
Breach has not been waived;
(b) By DTG and Wireless if any of the conditions in SECTION
5.1 have not been satisfied as of the Closing Date or if
satisfaction of such a condition is or becomes impossible (other
than through the failure of DTG and Wireless to comply with their
obligations under this Agreement) and DTG and Wireless have not
waived the condition on or before the Closing Date;
(c) By Sellers and each Company if any of the conditions in
SECTION 5.2 have not been satisfied as of the Closing Date or if
-18-
<PAGE>
satisfaction of such a condition is or becomes impossible (other
than through the failure of Sellers and each Company to comply
with its or his obligations under this Agreement) and Sellers and
each Company have not waived the condition on or before the
Closing Date; or
(d) By either Party if the Closing has not occurred (other
than through the failure of the Party seeking to terminate this
Agreement to comply fully with its or his obligations under this
Agreement) on or before January 15, 1998, or such later date as
the Parties may agree upon.
SECTION 6.2. EFFECT OF TERMINATION. Each Party's right of
termination under SECTION 6.1 is in addition to any other rights it or he
may have under this Agreement or otherwise, and the exercise of a right of
termination will not be an election of remedies. If this Agreement is
terminated pursuant to SECTION 6.1, all further obligations of the Parties
under this Agreement will terminate. If this Agreement is terminated by a
Party because of a Breach of the Agreement by the other Party or because
one or more of the conditions to the terminating Party's obligations under
this Agreement is not satisfied as a result of the other Party's failure to
comply with its or his obligations under this Agreement, the terminating
Party's right to pursue all legal remedies will survive such termination
unimpaired.
ARTICLE 7
INDEMNIFICATION
SECTION 7.1. INDEMNIFICATION AND REIMBURSEMENT BY SELLERS. Sellers,
jointly and severally, will indemnify and hold harmless DTG and Wireless,
each Company and their respective Representatives and affiliates, and will
reimburse DTG and Wireless, each Company and their respective
Representatives and affiliates, for all Adverse Consequences arising from
or related to (a) any Breach by Sellers or either Company of any
representation, warranty, covenant or obligation of Sellers or either
Company in this Agreement or any other certificate or instrument delivered
by Sellers or either Company to DTG and Wireless pursuant to this
Agreement; and (b) the enforcement of indemnification rights under this
ARTICLE 7.
SECTION 7.2. INDEMNIFICATION AND REIMBURSEMENT BY BUYER. DTG and
Wireless will indemnify and hold harmless Sellers, and will reimburse
Sellers, for all Adverse Consequences arising from or related to (a) any
Breach by DTG and Wireless of any representation, warranty, covenant or
obligation of DTG and Wireless in this Agreement or any other certificate
or instrument delivered by DTG and Wireless to Sellers pursuant to this
Agreement, and (b) the enforcement of indemnification rights under this
-19-
<PAGE>
ARTICLE 7.
SECTION 7.3. INDEMNIFICATION PROCEDURES.
(a) THIRD-PARTY CLAIMS.
(i) Promptly after receipt by a Person entitled to be
indemnified under this ARTICLE 7 (an "Indemnified Party") of
notice of the commencement of any Proceeding against it, such
Indemnified Party will, if a claim for indemnification is to be
made against a Party (an "Indemnifying Party") under this
ARTICLE 7, give notice to the Indemnifying Party of the
commencement of such Proceeding. The failure to promptly notify
the Indemnifying Party will not relieve the Indemnifying Party of
any liability that it may have to an Indemnified Party except to
the extent that the defense of such action was irreparably and
materially prejudiced by the Indemnifying Party's failure to
provide prompt notice.
(ii) If any Proceeding is brought against an
Indemnified Party and it gives notice to the Indemnifying Party
of the commencement of such Proceeding, the Indemnifying Party
will, unless the claim involves Taxes, be entitled to participate
in such Proceeding and, to the extent that it wishes (unless
(A) the Indemnifying Party is also a party to such Proceeding and
the Indemnified Party determines in good faith that joint
representation would be inappropriate or (B) the Indemnifying
Party fails to provide reasonable assurances to the Indemnified
Party of its financial capacity to defend such Proceeding and
provide indemnification with respect to such Proceeding), to
assume the defense of such Proceeding with counsel satisfactory
to the Indemnified Party. Following a proper assumption of
defense by an Indemnifying Party, as long as the Indemnifying
Party diligently conducts such defense it will not be liable for
any subsequent fees of legal counsel or other expenses incurred
by the Indemnified Party in connection with the defense of such
Proceeding, other than reasonable costs of investigation. If the
Indemnifying Party assumes the defense of a Proceeding, (A) it
will be conclusively established for purposes of this Agreement
that the claims made in that Proceeding are within the scope of
and subject to indemnification; (B) no compromise or settlement
of such claims may be effected by the Indemnifying Party without
the Indemnified Party's consent unless (x) there is no finding or
admission of any violation of Legal Requirements or any violation
of the rights of any Person and no effect on any other claims
that may be made by or against the Indemnified Party, and (y) the
sole relief provided is monetary damages that are paid in full by
the Indemnifying Party concurrently with the compromise or
settlement; and (C) the Indemnifying Party will have no liability
-20-
<PAGE>
with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an
Indemnifying Party of the commencement of any Proceeding and the
Indemnifying Party does not within ten days give notice to the
Indemnified Party of its election to assume the defense of such
Proceeding, the Indemnifying Party will be bound by any
determination made in such Proceeding or any compromise or
settlement effected by the Indemnified Party.
(iii) Notwithstanding the foregoing, if an
Indemnified Party determines in good faith that there is a
reasonable probability that a Proceeding may adversely affect it
or its affiliates other than as a result of monetary damages for
which it would be entitled to indemnification under this
Agreement, the Indemnified Party may, by notice to the
Indemnifying Party, assume the exclusive right to defend,
compromise or settle such Proceeding, but the Indemnifying Party
will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its
consent (which may not be unreasonably withheld).
(iv) The Parties will make available to each other and
each other's legal counsel and other professional advisors all of
its or his books and records relating to a third-party claim and
each Party will render to the other assistance as may be
reasonably required in order to insure the proper and adequate
defense of a third-party claim.
(v) Each Party hereby consents to the non-exclusive
jurisdiction of any court in which a Proceeding is brought
against any Indemnified Party for purposes of any claim that an
Indemnified Party may have under this Agreement with respect to
such Proceeding or the matters alleged therein.
(b) OTHER CLAIMS. A claim for indemnification for any
matter not involving a third-party claim may be asserted by
notice to the Party from whom indemnification is sought.
SECTION 7.4. SET-OFF. Each Indemnified Party may, as one of its
remedies to effect indemnification under this ARTICLE 7, withhold or cause
to be withheld and set-off amounts payable following the Closing to the
Indemnifying Party. The exercise of a right of set-off in good faith,
whether or not ultimately deemed to be justified, will not constitute a
default of any obligation against which such set-off is made.
SECTION 7.5. BASKET. Neither Party will have any liability under
this ARTICLE 7 with respect to claims of Breach of the representations and
warranties set forth in this Agreement until the aggregate amount of all
Adverse Consequences relating to Breaches of such representations and
-21-
<PAGE>
warranties exceeds $12,000, and then only for the amount by which such
Adverse Consequences exceed $12,000 (the "Basket"); provided that no
Basket shall be applicable, and there shall be first dollar indemnity, for
claims under SECTIONS 2.3, 2.13, 2.26 or 3.4 of this Agreement or in the
event of fraud or an intentional Breach.
ARTICLE 8
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings specified or referred to in this ARTICLE 8:
"ADVERSE CONSEQUENCE" means any loss, cost, liability (including any
Environmental Liability), penalty, Tax, claim, damage, expense (including
cost of investigation, defense, settlement and reasonable attorneys' and
other professional fees), responsibility, disability, remedial action or
diminution of value.
"ACCOUNTS RECEIVABLE" has the meaning set forth in SECTION 2.13 of
this Agreement.
"APPLICABLE CONTRACT" means any Contract (a) under which either
Company has or may acquire any rights; (b) under which the Company is or
may become subject to any obligation or liability; or (c) by which the
Company or any of the property or assets owned or used by the Company is or
may become bound.
"BALANCE SHEET" has the meaning set forth in SECTION 2.4 of this
Agreement.
"BASKET" has the meaning set forth in SECTION 7.5 of this Agreement.
"BREACH" means, as to any representation, warranty, covenant,
obligation or other provision of this Agreement or any instrument or
document delivered pursuant to this Agreement, (a) any inaccuracy in, or
any failure to perform or comply with, such representation, warranty,
covenant, obligation or other provision or (b) any claim by any Person or
other occurrence or circumstance that is or was inconsistent with such
representation, warranty, covenant, obligation or other provision, in
either case regardless of whether deliberate, reckless, negligent, innocent
or unintentional.
"BUYER" has the meaning set forth in the first paragraph of this
Agreement.
"CLOSING" has the meaning set forth in SECTION 1.3 of this Agreement.
-22-
<PAGE>
"CLOSING DATE" means the date and time as of which the Closing
actually takes place.
"COMPANY" has the meaning set forth in the preamble to this Agreement.
"CONTRACT" means any agreement, contract, obligation, promise or
undertaking (whether written or oral and whether express or implied) that
is legally binding.
"DTG" has the meaning set forth in the first paragraph of this
Agreement.
"DTG COMMON STOCK" means the common stock, no par value, of DTG.
"DISCLOSURE SCHEDULE" has the meaning set forth in SECTION 2.1 of the
Agreement.
"EMPLOYEE BENEFIT PLAN" means any "employee pension benefit plan" or
"employee welfare benefit plan" as defined under ERISA, any incentive
compensation plan, benefit plan for retired employees, plan or Contract
providing for bonuses, pensions, profit-sharing, stock options, stock
purchase rights, deferred compensation, insurance or retirement benefits of
any nature, in each case whether written or oral.
"ENCUMBRANCE" means any charge, claim, community property interest,
condition, equitable interest, mortgage, lien, option, pledge, security
interest, right of first refusal or restriction of any kind, including any
restriction on use, voting (in the case of any security), transfer, receipt
of income or exercise of any other attribute of ownership.
"ENVIRONMENT" means soil, land surface or subsurface strata, surface
waters (including navigable waters and ocean waters), groundwaters,
drinking water supply, stream sediments, ambient air (including indoor
air), plant and animal life and any other environmental medium or natural
resource.
"ENVIRONMENTAL LAW" means any Legal Requirement designed: (a) to
advise appropriate authorities, employees and the public of intended,
threatened or actual releases of pollutants or hazardous substances or
materials, violations or discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction,
that could have significant impact on the Environment; (b) to prevent or
acceptably minimize the release or emission of pollutants or hazardous
substances or materials into the Environment; (c) to reduce the quantities,
prevent the release and minimize the hazardous characteristics of wastes
that are generated; (d) to regulate the generation, treatment, storage,
handling or disposal of hazardous substances; (e) to assure that products
are designed, formulated, packaged or used so that they do not present
unreasonable risks to human health or the Environment when used or disposed
-23-
<PAGE>
of; (f) to protect resources, species or ecological amenities; (g) to
acceptably minimize the risks inherent in transportation of hazardous
substances, pollutants, oil or other potentially harmful substances; (h) to
clean up pollutants that have been released, prevent the threat of release
or pay the costs of such clean up or prevention; (i) to make responsible
parties pay private parties, or groups of them, for damages done to their
health or Environment, or to permit self-appointed representatives of the
public interest to recover for injuries done to public assets; or (j) to
regulate in any manner the potential impact of an activity on the
Environment.
"ENVIRONMENTAL LIABILITY" means any Adverse Consequence arising from
or relating to Environmental Law or Occupational Safety and Health Law with
respect to acts or omissions by the Company or any predecessor or affiliate
or conditions in existence or events or circumstances having occurred, in
each case on or before the Closing Date, including (a) any environmental,
health or safety matters or conditions (including on-site or off-site
contamination, occupational safety and health and regulation of chemical
substances or products); and (b) any responsibility for response costs,
corrective action or actions to achieve compliance, including any cleanup,
removal, containment or other remediation or response action ("Cleanup")
required by applicable Environmental Law or Occupational Safety and Health
Law (whether or not such Cleanup has been required or requested by any
Governmental Body or any other Person) and for any natural resource
damages. The terms "removal," "remedial," and "response action" include the
types of activities covered by the United States Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. <Section>
9601 et seq., as amended, or any similar state law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"FINANCIAL STATEMENTS" has the meaning set forth in SECTION 2.4 of
this Agreement.
"GAAP" means generally accepted United States accounting principles.
"GOVERNMENTAL AUTHORIZATION" means any approval, consent, license,
permit, waiver or other authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or
pursuant to any Legal Requirement.
"GOVERNMENTAL BODY" means any: (a) nation, state, county, city, town,
village, district or other jurisdiction of any nature; (b) federal, state,
local, municipal, foreign or other government; (c) governmental or
quasi-governmental authority of any nature (including any governmental agency,
branch, department, official or entity and any court or other tribunal);
(d) multi-national organization or body; or (e) body exercising, or
entitled or purporting to exercise, any administrative, executive,
-24-
<PAGE>
judicial, legislative, police, regulatory or taxing authority or power of
any nature.
"INDEMNIFIED PARTY" has the meaning set forth in SECTION 7.3 of this
Agreement.
"INDEMNIFYING PARTY" has the meaning set forth in SECTION 7.3 of this
Agreement.
"INTELLECTUAL PROPERTY ASSETS" include all (a) legal names of Persons,
fictional business names, trading names, registered and unregistered
trademarks, service marks and applications; (b) patents and patent
applications; (c) copyrights both in published works and unpublished works;
(d) rights in mask works; and (e) know-how, trade secrets, confidential
information, software, technical information, process technology, plans,
drawings, specifications, bills of material, blue prints and other similar
data.
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in SECTION
2.4 of this Agreement.
"IRS" means the Internal Revenue Service.
"KNOWLEDGE" means actual awareness of a particular fact or other
matter or awareness that a prudent individual could be expected to obtain
in the course of conducting a reasonably comprehensive investigation
concerning the existence of such fact or other matter.
"LEGAL REQUIREMENT" means any federal, state, local, municipal,
foreign, international, multinational or other constitution, law (including
any Environmental Law or Occupational Safety and Health Law), ordinance,
principle of common law, statute, code, regulation, rule or treaty.
"MATERIAL CONTRACT" means any Applicable Contract: (a) that involves
performance of services or delivery of goods or materials by or to the
Company of an amount in excess of $5,000; (b) that involves expenditures or
receipts by or of the Company in excess of $5,000; (c) that relates to the
ownership, sale or use of real or personal property, except those relating
to personal property having a value per item or aggregate payments of less
than $5,000 and with a term of less than one year; (d) that relates to
Intellectual Property Assets; (e) that involves the sharing of profits,
losses, costs or liabilities by the Company with any other Person or by any
other Person with the Company; (f) that provides for payments to or by any
Persons based on sales, purchases or profits, other than direct payments
for goods; (g) that grants a power of attorney; (h) that was entered into
other than in the Ordinary Course of Business and contains or provides for
an undertaking by the Company to be responsible for consequential damages;
(i) that relates to capital expenditures in excess of $5,000; (j) that
limits the freedom of the Company to compete in any line of business or
-25-
<PAGE>
geographic area; (k) that contains a guaranty by the Company of performance
or payment by another Person; (l) that relates to indebtedness for borrowed
money or that creates an Encumbrance in any of the Company's properties or
assets; (m) that relates to the length, duration or condition of employment
or the termination thereof and which cannot be terminated by the Company on
notice without liability; and (n) that amends, supplements or modifies any
of the foregoing.
"MERGERS" has the meaning set forth in the first paragraph to this
Agreement.
"MULTI-EMPLOYER RETIREMENT PLAN" has the meaning set forth in
Section 3(37)(A) of ERISA.
"OCCUPATIONAL SAFETY AND HEALTH LAW" means any Legal Requirement
designed to provide safe and healthful working conditions and to reduce
occupational safety and health hazards, and any program, whether
governmental or private, designed to provide safe and healthful working
conditions.
"ORDER" means any award, decision, injunction, judgment, order,
ruling, subpoena or verdict entered, issued, made or rendered by any court,
administrative agency or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" means in accordance with the usages of
trade prevailing in the industry in which the Company operates and in
accordance with the Company's historical and customary day-to-day practices
with respect to the activity in question.
"ORGANIZATIONAL DOCUMENTS" means the complete charter and the bylaws
of the Company, including all amendments.
"PARTY" or "PARTIES" has the meaning set forth in the first paragraph
of this Agreement.
"PERSON" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company,
joint venture, estate, trust, association, organization or other entity or
Governmental Body.
"PROCEEDING" means any action, arbitration, audit, hearing,
investigation, litigation or suit (whether civil, criminal, administrative,
investigative or informal) commenced, brought, conducted or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
"PROSPECTUS AND BALLOT/PROXY STATEMENT" means the document filed by
DTG with the SEC on Form S-4 regarding the conversion of DTG's predecessor
from a cooperative corporation into a South Dakota business corporation and
the subsequent merger of that entity with and into DTG.
-26-
<PAGE>
"PURCHASE PRICE" has the meaning set forth in SECTION 1.2 of this
Agreement.
"RELATED PERSON" means with respect to a particular individual:
(a) each other member of such individual's Family; (b) any Person that is
directly or indirectly controlled by any one or more members of such
individual's Family; (c) any Person in which members of such individual's
Family hold (individually or in the aggregate) a Material Interest; and
(d) any Person with respect to which one or more members of such
individual's Family serves as a director, officer, partner, executor or
trustee (or in a similar capacity). For purposes of this definition,
(a) the "Family" of an individual includes (i) the individual; (ii) the
individual's spouse; (iii) any other natural person who is related to the
individual or the individual's spouse within the second degree; and
(iv) any other natural person who resides with such individual; and
(b) "Material Interest" means direct or indirect beneficial ownership (as
defined in Rule 13D-3 under the Securities Exchange Act of 1934) of voting
securities or other voting interests representing at least 20% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 20% of the outstanding equity securities or
equity interests in a Person.
"REPRESENTATIVE" means with respect to a particular Person, any
director, officer, employee, agent, consultant, advisor or other
representative of such Person, including legal counsel, accountants and
financial advisors.
"RESTRICTED EVENT" means (a) any declaration or payment of any
dividend or other distribution or payment in respect of shares of capital
stock; (b) any amendment of the Organizational Documents; (c) any payment
or increase of any bonuses, salaries or other compensation to any
shareholder, director, officer or (except in the Ordinary Course of
Business) employee or entry into any employment, severance or similar
Contract with any director, officer or employee; (d) the adoption of, or
increase in the payments to or benefits under, any Employee Benefit Plan
for or with any employees of the Company; (e) any damage to or destruction
or loss of any property or assets of the Company, whether or not covered by
insurance, materially and adversely affecting the properties, assets,
business, financial condition or prospects of the Company; (f) the entry
into, termination of or receipt of notice of termination of any license,
distributorship, dealer, sales representative, joint venture, credit or
similar Contract or transaction involving a total remaining commitment by
the Company of more than $10,000; (g) any sale (other than sales of
inventory in the Ordinary Course of Business), lease or other disposition
of any property or asset of the Company or the imposition of any
Encumbrance on any material property or asset of the Company, including the
sale, lease or disposition of any Intellectual Property Asset; (h) the
cancellation or waiver of any claims or rights with a value to the Company
in the aggregate in excess of $10,000; (i) any material change in the
-27-
<PAGE>
accounting methods used by the Company; or (j) any agreement or commitment,
whether written or oral, to do any of the foregoing.
"RTFC" has the meaning set forth in SECTION 3.5 (B) of this Agreement.
"SEC" means the Securities and Exchange Commission.
"SELLERS" has the meaning set forth in the first paragraph of this
Agreement.
"SHARES" has the meaning set forth in SECTION 1.1 of this Agreement.
"SURVIVING CORPORATION" has the meaning set forth in SECTION 1.1 of
this Agreement.
"TAX" means any tax (including, without limitation, any income tax,
capital gains tax, value-added tax, sales tax, property tax, gift tax or
estate tax), levy, assessment, tariff, duty (including any customs duty),
deficiency or other fee, and any related charge or amount (including any
fine, penalty or interest), imposed, assessed or collected by or under the
authority of any Governmental Body or payable pursuant to any tax-sharing
agreement or any other Contract relating to the sharing of payment of any
such tax, levy, assessment, tariff, duty, deficiency or fee.
"TAX RETURN" means any return (including, without limitation, any
information return), report, statement, schedule, notice, form or other
document or information filed with or submitted to, or reported to be filed
with or submitted to, any Governmental Body in connection with the
determination, assessment, collection or payment of any Tax or in
connection with the administration, implementation or enforcement of or
compliance with any Legal Requirement relating to any Tax.
"THREATENED" means, as to any claim, Proceeding, dispute, action or
other matter, that a demand or statement has been made (orally or in
writing), a notice has been given (orally or in writing) or an event has
occurred or some other circumstance exists that would lead a prudent Person
to conclude that such a claim, Proceeding, dispute, action or other matter
is reasonably likely to be asserted, commenced, taken or otherwise pursued
in the future.
"VAN/ALERT" has the meaning set forth in the first paragraph of this
Agreement.
"VAN/ALERT SHARES" means the outstanding shares of common stock of
Van/Alert, $1.00 par value each.
"VANTEK" has the meaning set forth in the first paragraph of this
Agreement.
-28-
<PAGE>
"VANTEK SHARES" means the outstanding shares of common stock of
Vantek, $1.00 par value each.
ARTICLE 9
GENERAL
SECTION 9.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. All representations, warranties, covenants and agreements made
by any Party to this Agreement will survive the Closing and any
investigation at any time made by or on behalf of the other Party before or
after the Closing. No investigation by or Knowledge of DTG or Wireless or
its Representatives will affect in any manner the representations,
warranties, covenants or agreements of Sellers and each Company set forth
in this Agreement (or in any document to be delivered in connection with
the consummation of the transactions contemplated by this Agreement) or
DTG's and Wireless' rights to rely thereon, and such representations,
warranties, covenants and agreements will survive any such investigation.
SECTION 9.2. BINDING EFFECT; BENEFITS; ASSIGNMENT. All of the terms
of this Agreement will be binding upon, inure to the benefit of and be
enforceable by and against the heirs and legal representatives of Sellers
and the successors and authorized assigns of DTG, Wireless and each
Company. Except as otherwise expressly provided in this Agreement, nothing
in this Agreement, express or implied, is intended to confer upon any other
Person any rights or remedies under or by reason of this Agreement, this
Agreement being for the exclusive benefit of the Parties and their
respective heirs, legal representatives, successors and assigns. Neither
Party will assign any of its or his respective rights or obligations under
this Agreement to any other Person without the prior written consent of the
other Party, except that DTG and Wireless may assign their rights to a
direct or indirect subsidiary of DTG or Wireless.
SECTION 9.3. ENTIRE AGREEMENT. This Agreement, and the exhibits and
schedules to this Agreement (including the Disclosure Schedule), and the
agreements referred to in this Agreement set forth the entire agreement and
understanding of the Parties in respect of the transactions contemplated by
this Agreement and supersede all prior agreements, arrangements and
understandings relating to the subject matter hereof. No representation,
promise, inducement or statement of intention has been made by either Party
that is not embodied in this Agreement or in the documents referred to in
this Agreement, and neither Party will be bound by or liable for any
alleged representation, promise, inducement or statement of intention not
so set forth.
SECTION 9.4. AMENDMENT AND WAIVER. This Agreement may be amended,
modified, superseded or canceled and any of the terms, covenants,
representations, warranties or conditions hereof may be waived only by a
written instrument executed by the Parties or, in the case of a waiver, by
-29-
<PAGE>
or on behalf of the Party waiving compliance. The failure of any Party at
any time to require performance of any provision of this Agreement will in
no manner affect the right of that Party at a later time to enforce such
provision. No waiver by any Party of any condition or of any Breach of any
term, covenant, representation or warranty contained in this Agreement, in
any one or more instances, will be deemed to be or construed as a further
or continuing waiver of any such condition or of any Breach of the term,
covenant, representation or warranty or any other term, covenant,
representation or warranty set forth in this Agreement.
SECTION 9.5. GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the state of South Dakota as
applicable to contracts made and to be performed in the state of South
Dakota without regard to conflicts of laws principles.
SECTION 9.6. PUBLIC DISCLOSURE. Except as may be required by
applicable law or the rules of any national securities exchange or
automated quotation service, neither Party will make any public disclosure
of the existence or terms of this Agreement or the transactions
contemplated by this Agreement without the prior written consent of the
other Party, which consent will not be unreasonably withheld.
SECTION 9.7. NOTICES. All notices, requests, demands and other
communications to be given pursuant to the terms of this Agreement will be
in writing and will be deemed to have been duly given if delivered by hand,
sent by facsimile with confirmation, sent by a nationally recognized
overnight mail service, or mailed first class, postage prepaid:
(a) If to Buyer: with a copy to:
Dakota Telecommunications Warner Norcross & Judd LLP
Group, Inc. 900 Old Kent Building
P.O. Box 66 111 Lyon St., N.W.
Highway 46 Grand Rapids, Michigan 49503-2487
Irene, South Dakota 57037
Telephone: 605/263-3301 Telephone: 616/752-2000
Facsimile: 605/263-3844 Facsimile: 616/752-2510
Attention: Craig A. Anderson Attention: Tracy T. Larsen
(b) If to Sellers: with a copy to:
Mr. LeMar Van Heuveln and Samp Law Firm
Ms. Norma Van Heuveln Box 495
607 Maple Sioux Falls, South Dakota 57101
Harrisburg, South Dakota 57032 Telephone: 605/339-1020
Telephone: ______________ Facsimile: 605-334-6630
Facsimile: ______________ Attention: Rollyn H. Samp
Either Party may change its address, telephone number of facsimile number
by prior written notice to the other Party.
-30-
<PAGE>
SECTION 9.8. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which when so executed will be deemed to be an
original and such counterparts will together constitute one and the same
agreement.
SECTION 9.9. EXPENSES. Each Party will pay its or his own respective
expenses, costs and fees (including attorneys' and accountants' fees)
incurred in connection with the negotiation, preparation, execution and
delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement, provided that none of such expenses, costs
or fees will be paid by either Company.
SECTION 9.10. SEVERABILITY. Any provision, or clause of any
provisions, of this Agreement that may be found to be contrary to South
Dakota law or otherwise unenforceable will not affect the remaining terms
of this Agreement, which will be construed as if the unenforceable
provision or clause were absent from this Agreement.
SECTION 9.11. HEADINGS; CONSTRUCTION; TIME OF ESSENCE. The headings
of the sections and paragraphs in this Agreement have been inserted for
convenience of reference only and will not restrict or otherwise modify any
of the terms or provisions of this Agreement. Unless otherwise expressly
provided, the word "including" whenever used in this Agreement does not
limit the preceding words or terms. With regard to all dates and time
periods set forth or referred to in this Agreement, time is of the essence.
Masculine terms are deemed to include the feminine equivalent.
-31-
<PAGE>
The parties have executed this Agreement as of the date stated in
the first paragraph of this Agreement.
DAKOTA TELECOMMUNICATIONS
GROUP, INC.
By _____________________________________
Its _________________________________
"DTG"
DAKOTA WIRELESS SYSTEMS, INC.
By _____________________________________
Its _________________________________
"Wireless"
VANTEK COMMUNICATIONS, INC.
By _____________________________________
Its _________________________________
"Vantek"
VAN/ALERT, INC.
By _____________________________________
Its _________________________________
"Van/Alert"
________________________________________
LeMar Van Heuveln
________________________________________
Norma Van Heuveln
"Sellers"
-32-
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 - THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Mergers of Vantek and Van/Alert with and into
Wireless . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Shareholder Approval . . . . . . . . . . . . . . . . 1
Section 1.3. Closing . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.4. Effective Time . . . . . . . . . . . . . . . . . . . 2
Section 1.5. Effects of the Mergers . . . . . . . . . . . . . . . 2
Section 1.6. Surviving Corporation . . . . . . . . . . . . . . . . 2
Section 1.7. Conversion of Shares . . . . . . . . . . . . . . . . 2
Section 1.8. Conveyances to Surviving Corporation . . . . . . . . 3
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF SELLERS, VANTEK AND
VAN/ALERT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.1. Disclosure Schedule . . . . . . . . . . . . . . . . . 4
Section 2.2. Organization and Good Standing. . . . . . . . . . . . 4
Section 2.3. Capitalization of the Companies; Ownership. . . . . . 4
Section 2.4. Financial Statements. . . . . . . . . . . . . . . . . 5
Section 2.5. Books and Records . . . . . . . . . . . . . . . . . . 5
Section 2.6. No Undisclosed Liabilities. . . . . . . . . . . . . . 5
Section 2.7. Taxes . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.8. No Material Adverse Change; Absence of Restricted
Events . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.9. Employees; Labor Relations. . . . . . . . . . . . . . 6
Section 2.10. Employee Benefit Plans . . . . . . . . . . . . . . . 7
Section 2.11. Title to Properties; Encumbrances . . . . . . . . . . 7
Section 2.12. Condition and Sufficiency of Assets . . . . . . . . . 7
Section 2.13. Accounts Receivable . . . . . . . . . . . . . . . . . 8
Section 2.14. Inventory . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.15. Litigation . . . . . . . . . . . . . . . . . . . . . 8
Section 2.16. Authorization and Enforceability; No Conflict with
Other Instruments or Proceedings . . . . . . . . . . 8
Section 2.17. Contracts . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.18. Intellectual Property . . . . . . . . . . . . . . . . 9
Section 2.19. Insurance . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.20. No Illegal Payments . . . . . . . . . . . . . . . . . 10
Section 2.21. Customers and Suppliers . . . . . . . . . . . . . . . 10
Section 2.22. Product Warranties and Liabilities . . . . . . . . . 10
Section 2.23. Certain Relationships . . . . . . . . . . . . . . . . 10
Section 2.24. Permits and Licenses; Compliance with Legal
Requirements . . . . . . . . . . . . . . . . . . . . 10
Section 2.25. Investment Intent . . . . . . . . . . . . . . . . . 11
Section 2.26. No Broker's Fees . . . . . . . . . . . . . . . . . . 11
Section 2.27. Accuracy of Statements . . . . . . . . . . . . . . . 11
-i-
<PAGE>
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF DTG AND
WIRELESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.1. Organization and Good Standing. . . . . . . . . . . 11
Section 3.2. Capitalization of DTG and Wireless; Ownership . . . 12
Section 3.3. No Material Adverse Change; Absence of Restricted
Events . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.4. Litigation . . . . . . . . . . . . . . . . . . . . 12
Section 3.5. Authorization and Enforceability; No Conflict with
Other Instruments or Proceedings. . . . . . . . . . 12
Section 3.6. No Broker's Fees. . . . . . . . . . . . . . . . . . 13
Section 3.7. Accuracy of Statements. . . . . . . . . . . . . . . 13
ARTICLE 4 - COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . 13
Section 4.1. Conduct Pending the Closing . . . . . . . . . . . . 13
Section 4.2. Access and Investigation by DTG and Wireless. . . . . 14
Section 4.3. Reasonable Best Efforts; Notice of Breach or
Failure of Condition; Further Assurances . . . . . . 14
Section 4.4. Non-Compete . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 5 - CONDITIONS TO OBLIGATION TO CLOSE. . . . . . . . . . . . . . 15
Section 5.1. Conditions to Obligation of DTG and Wireless. . . . . 15
Section 5.2. Conditions to Obligation of Sellers and Each
Company . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 6 - TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 6.1. Termination Events. . . . . . . . . . . . . . . . . . 17
Section 6.2. Effect of Termination . . . . . . . . . . . . . . . . 18
ARTICLE 7 - INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . 18
Section 7.1. Indemnification and Reimbursement by Sellers. . . . . 18
Section 7.2. Indemnification and Reimbursement by Buyer. . . . . . 19
Section 7.3. Indemnification Procedures. . . . . . . . . . . . . . 19
Section 7.4. Set-Off . . . . . . . . . . . . . . . . . . . . . . . 20
Section 7.5. Basket . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 8 - DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 9 - GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 9.1. Survival of Representations, Warranties, Covenants
and Agreements . . . . . . . . . . . . . . . . . . . 27
Section 9.2. Binding Effect; Benefits; Assignment. . . . . . . . . 27
Section 9.3. Entire Agreement. . . . . . . . . . . . . . . . . . . 27
Section 9.4. Amendment and Waiver. . . . . . . . . . . . . . . . . 28
-ii-
<PAGE>
Section 9.5. Governing Law . . . . . . . . . . . . . . . . . . . . 28
Section 9.6. Public Disclosure . . . . . . . . . . . . . . . . . . 28
Section 9.7. Notices . . . . . . . . . . . . . . . . . . . . . . . 28
Section 9.8. Counterparts. . . . . . . . . . . . . . . . . . . . . 29
Section 9.9. Expenses. . . . . . . . . . . . . . . . . . . . . . . 29
Section 9.10. Severability . . . . . . . . . . . . . . . . . . . . 29
Section 9.11. Headings; Construction; Time of Essence . . . . . . . 29
EXHIBITS
Exhibit A--Vantek Articles of Merger and Plan of Merger
Exhibit B--Van/Alert Articles of Merger and Plan of Merger
Exhibit C--Form of Promissory Notes
DISCLOSURE SCHEDULE
Schedule 1--Organization and Good Standing
Schedule 2--Financial Statements
Schedule 3--Taxes
Schedule 4--Certain Changes or Events
Schedule 5--Employee Relations
Schedule 6--Employee Benefit Plans
Schedule 7--Real Property, Leaseholds or other interests
Schedule 8--Litigation
Schedule 9--Authorization and Enforceability; No Conflict
Schedule 10--Contracts
Schedule 11--Intellectual Property
Schedule 12--Insurance
Schedule 13--Customers and Suppliers
Schedule 14--Product Warranties and Liabilities
Schedule 15--Certain Relationships
Schedule 16--Permits and Licenses; Compliance with Law
-iii-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 1 of the Registration Statement
of Dakota Telecommunications Group, Inc. on Form SB-2 of our report dated
January 18, 1997, on the consolidated financial statements of Dakota
Cooperative Telecommunications, Inc. and Subsidiaries as of December 31,
1996 and 1995, and for the years then ended. We also consent to the
references to us in the Prospectus contained in this Registration Statement.
/s/ Olsen Thielen & Co., Ltd.
Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
February 3, 1998
<PAGE>
EXHIBIT 99.1
DAKOTA TELECOMMUNICATIONS GROUP, INC.
POST OFFICE BOX 66
29705 453RD AVENUE
IRENE, SOUTH DAKOTA 57037-0066
(605) 263-3301
To our Stockholders and Employees:
Enclosed with this letter you will find a prospectus offering for sale
shares of the Common Stock of Dakota Telecommunications Group, Inc. (the
"Company") at a purchase price of $12.50 per share. The Company is
offering up to 400,000 Shares of Common Stock to persons who were
stockholders ("Stockholders") of record and/or directors, officers and
employees ("Employees") of the Company as of the close of business on
January 27, 1998.
Stockholders and Employees may subscribe for the shares of Common
Stock offered in this offering in accordance with the conditions and
procedures described in the enclosed prospectus.
If you wish to purchase shares in this offering, please complete the
enclosed Subscription Agreement and return it, together with payment for
the purchase price for the shares you wish to purchase, to the Company no
later than March 11, 1998. THE OFFERING WILL EXPIRE ON MARCH 11, 1998, AT
5:00 P.M. CENTRAL STANDARD TIME. The enclosed prospectus, which we urge you
to read carefully, contains instructions for completing the Subscription
Agreement.
Also enclosed with the Subscription Agreement is Letter of
Transmittal. Our records indicate that you have not yet returned to the
Company a transmittal letter covering your capital credits and/or have not
returned your certificates representing shares of common or preferred stock
of Dakota Cooperative Telecommunications, Inc., the Company's predecessor
(the "Cooperative"). As you know, in July 1997, the Cooperative was
converted into a South Dakota business corporation and then merged into the
Company. In connection with the conversion and the merger, (i) each share
of Common Stock of the Cooperative outstanding immediately prior to the
effective time of the conversion became the right to receive shares of the
Company's Common Stock, (ii) each share of preferred stock of the
Cooperative outstanding immediately prior to the effective time of the
conversion became the right to receive shares of the Company's Common Stock
and (iii) each dollar credited on the books of the Cooperative to the
capital account of each current and former member immediately prior to the
effective time of the conversion was retired in full and became the right
to receive shares of the Company's Common Stock. FAILURE TO RETURN A
COMPLETED LETTER OF TRANSMITTAL MAY EVENTUALLY RESULT IN THE LOSS OR
FORFEITURE OF YOUR OWNERSHIP INTERESTS.
<PAGE>
REGARDLESS OF WHETHER YOU WISH TO PURCHASE SHARES OF COMMON STOCK IN
THIS OFFERING, PLEASE RETURN THE ENCLOSED LETTER OF TRANSMITTAL SO THAT WE
CAN ISSUE TO YOU CERTIFICATES OF COMMON STOCK TO REPLACE YOUR FORMER
INTERESTS IN THE COOPERATIVE.
On behalf of the entire Board of Directors and management of the
Company, I want to thank you for your continuing support.
Sincerely yours,
/S/ THOMAS W. HERTZ
Thomas W. Hertz
President and CEO
<PAGE>
EXHIBIT 99.2
DAKOTA TELECOMMUNICATIONS GROUP, INC.
POST OFFICE BOX 66
29705 453RD AVENUE
IRENE, SOUTH DAKOTA 57037-0066
(605) 263-3301
To our Stockholders and Employees:
Enclosed with this letter you will find a prospectus offering for sale
shares of the Common Stock of Dakota Telecommunications Group, Inc. (the
"Company") at a purchase price of $12.50 per share. The Company is
offering up to 400,000 Shares of Common Stock to persons who were
stockholders ("Stockholders") of record and/or directors, officers and
employees ("Employees") of the Company as of the close of business on
January 27, 1998.
Stockholders and Employees may subscribe for the shares of Common
Stock offered in this offering in accordance with the conditions and
procedures described in the enclosed prospectus.
If you wish to purchase shares in this offering, please complete the
enclosed Subscription Agreement and return it, together with payment for
the purchase price for the shares you wish to purchase, to the Company no
later than March 11, 1998. THE OFFERING WILL EXPIRE ON MARCH 11, 1998, AT
5:00 P.M. CENTRAL STANDARD TIME. The enclosed prospectus, which we urge you
to read carefully, contains instructions for completing the Subscription
Agreement.
On behalf of the entire Board of Directors and management of the
Company, I want to thank you for your continuing support.
Sincerely yours,
/S/ THOMAS W. HERTZ
Thomas W. Hertz
President and CEO
<PAGE>
EXHIBIT 99.3
LETTER OF TRANSMITTAL To: DAKOTA TELECOMMUNICATIONS
CONCERNING COMMON STOCK, PREFERRED GROUP, INC.
STOCK AND CAPITAL CREDITS OF P.O. BOX 66
DAKOTA COOPERATIVE 29705 453RD AVENUE
TELECOMMUNICATIONS, INC. IRENE, SOUTH DAKOTA 57037-0066
TO BE EXCHANGED FOR COMMON STOCK ATTENTION: TIMOTHY DUPIC
CERTIFICATES OF (605) 263-3301
DAKOTA TELECOMMUNICATIONS
GROUP, INC.
At the special meeting of members of Dakota Cooperative
Telecommunications, Inc., a South Dakota cooperative association (the
"Cooperative"), begun on July 21, 1997, the members of the Cooperative
approved a proposal to adopt an amendment to the Cooperative's articles of
incorporation to convert the Cooperative into a South Dakota business
corporation (the "Conversion"). The name of the corporation resulting from
the Conversion was Dakota Telecommunications Group, Inc. ("DTG"). The
shareholders of DTG then approved an Agreement and Plan of Merger (the "Plan
of Merger"), pursuant to which DTG was merged with and into Dakota
Telecommunications Group (Delaware), Inc. (the "Company"), a Delaware
business corporation (the "Merger"). Pursuant to the Plan of Merger, the
name of the Company was changed to Dakota Telecommunications Group, Inc.
The Merger's terms and conditions are described in the Plan of Merger.
Capitalized terms appearing, but not defined, in this Letter of Transmittal
have meanings defined in the Plan of Merger. The Conversion and the Merger
were described in the Prospectus and Ballot/Proxy Statement dated June 13,
1997 (the "Prospectus"), which was mailed to the Cooperative's members and
Capital Credit holders on or about June 23, 1997.
As a result of the Conversion, (i) each share of common stock, $5.00
par value, of the Cooperative ("Cooperative Common Stock") issued and
outstanding immediately prior to the effective time of the Conversion
automatically became and was converted into the right to receive validly
issued, fully paid and nonassessable shares of DTG common stock, without
par value ("DTG Common Stock"), (ii) each share of preferred stock,
$100.00 par value, of the Cooperative ("Preferred Stock") issued and
outstanding immediately prior to the effective time of the Conversion
automatically became and was converted into the right to receive
validly issued, fully paid and nonassessable shares of DTG Common Stock
and (iii) each dollar credited on the books of the Cooperative to the
capital account of each current and former member of the Cooperative (a
"Capital Credit") immediately prior to the effective time of the Conversion
was retired in full and automatically became and was converted into the
right to receive validly issued, fully paid and nonassessable shares of
DTG Common Stock, all subject to payment in cash for fractional shares.
<PAGE>
In this Letter of Transmittal, shares of Cooperative Common Stock,
shares of Preferred Stock and Capital Credits are collectively referred
to as "Exchangeable Units" and the holder of any Exchangeable Units is
referred to as a "Member." A Member who would otherwise be entitled to
receive a fraction of a share of DTG Common Stock in the Conversion would
receive instead an amount of cash in lieu thereof.
As a result of the Merger, each right to receive a share of DTG Common
Stock issuable in the Conversion automatically became and was converted
into the right to receive validly issued, fully paid and nonassessable
shares of Company common stock, without par value ("Company Common Stock").
Each share of Cooperative Common Stock and Preferred Stock will be
exchanged for shares of Company Common Stock and shares of Company Common
Stock will be issued for each Capital Credit. No fractional shares of Company
Common Stock will be issued; instead, a check will be issued in lieu thereof.
THIS FORM MUST BE USED TO OBTAIN A CERTIFICATE REPRESENTING COMPANY COMMON
STOCK. PLEASE READ IT CAREFULLY.
<TABLE>
<CAPTION>
======================================================================================================
DESCRIPTION OF SHARES TENDERED CERTIFICATE(S)
(See Instructions 4 and 5) (Attach signed list if necessary)
- ------------------------------------------------------------------------------------------------------
Name and Address of Registered Holder Certificate Number of
(Fill in name(s) exactly as shown on the certificate(s)) Number(s) Shares
------------- -----------
<S> <C> <C>
<FN>
Stock certificates for Company Common Stock and checks for
cash in lieu of fractional shares will be issued in the name
of the registered holder of the Shares and mailed to the
registered holder's address, as shown above, unless otherwise
requested in the box labeled SPECIAL ISSUE INSTRUCTIONS or
SPECIAL DELIVERY INSTRUCTIONS on page 2 of this form. Total Shares:
======================================================================================================
</FN>
</TABLE>
Page 2
<PAGE>
The undersigned (the "Member") hereby tenders to the Company, as the
Member's agent and attorney-in-fact, with full power of substitution (this
power of attorney being deemed an irrevocable power coupled with an
interest), to: (i) receive on behalf of the Member shares of Company Common
Stock receivable in exchange for Exchangeable Units; and (ii) return to the
Member each new certificate for Company Common Stock, a check for any
fractional shares and any accumulated dividends or other benefits
receivable with respect to the Exchangeable Units; all in accordance with
the terms of this Letter of Transmittal.
The Member hereby represents and warrants to the Company: (1) the
information provided above accurately shows the number of Exchangeable
Units owned by the Member; (2) the Member has not transferred, assigned,
pledged, or encumbered the Exchangeable Units owned by the Member in any
manner; and (3) the Member has full power to execute and deliver this
Letter of Transmittal and to give the representations, warranties,
certifications and instructions contained in this Letter of Transmittal as
executed. The Member hereby agrees to indemnify and hold the Company and
its predecessors, directors, officers, employees, agents and attorneys
harmless against and in respect of any and all damages, losses, claims and
expenses caused by any person claiming ownership of any Exchangeable Unit
shown above through any purported transfer from or transaction with the
Member. The Member hereby acknowledges that the Exchangeable Units are
null and void except for the limited purpose of exchanging such
Exchangeable Units for Company Common Stock (and cash for fractional
shares) as described in this Letter of Transmittal. The Member's signature
below is the Member's irrevocable authorization of all instructions,
orders, and certifications given in this Letter of Transmittal. All
authority conferred or agreed to be conferred in this Letter of Transmittal
shall survive the death or incapacity of the Member and any obligation of
the Member under this Letter of Transmittal shall be binding upon the
heirs, personal representatives, successors, and assigns of the Member.
===========================================================================
SIGNATURE GUARANTY--necessary only MEMBER SIGNATURE--EACH Member MUST
for SPECIAL ISSUE INSTRUCTIONS-- sign here EXACTLY as your name
See Instruction 9. appears above. (See Instruction 4).
Date: ________________________, 1998
Telephone No: (___)_________________
X___________________________________
(Signature of Member)
X___________________________________
(Signature of Member)
Page 3
<PAGE>
===========================================================================
YOU MUST ALSO COMPLETE AND SIGN THE REQUEST FOR TAXPAYER IDENTIFICATION
NUMBER, SUBSTITUTE FORM W-9, ON PAGE 3.
===========================================================================
CAREFULLY READ THE INSTRUCTIONS. FAILURE TO FOLLOW THE INSTRUCTIONS WILL
DELAY DELIVERY OF YOUR NEW CERTIFICATES.
<TABLE>
<CAPTION>
===================================================================================================
<S> <C>
SPECIAL DELIVERY INSTRUCTIONS (See Instruction SPECIAL DENOMINATION INSTRUCTIONS (See Instruc-
7). Complete ONLY if your new certificate(s) tion 8). Complete ONLY if more than one new
should be MAILED to an address OTHER THAN the stock certificate for Company Common Stock
Member's permanent address appearing on the should be issued. Specify only whole numbers;
Cooperative's stock transfer records. This no fractional shares will be issued.
will NOT change your registered address.
For this mailing ONLY, use the following DELIVER TO
ADDRESS: ADDRESS
IN "SPECIAL
______________________________________________ NUMBER OF DESIRED DELIVERY
(Name) NEW CERTIFICATES: DENOMINATIONS INSTRUCTIONS"
----------------- ------------- -------------
______________________________________________
(Address) (1) [ ]
______________________________________________ (2) [ ]
(Address)
(3) [ ]
[ ] Send all [ ] Send only certificates indi-
cated in "Special Denomination This instruction may delay delivery of your
Instructions" new certificates.
===================================================================================================
</TABLE>
Page 4
<PAGE>
=========================================================================
SPECIAL ISSUE INSTRUCTIONS (See Instruction 9). Complete ONLY if your new
certificate(s) and any cash payment for fractional shares should be ISSUED
in another name or names or to a new permanent registered address. For
each new shareholder registration, a separate Form W-9 must be provided to
the Company--See Instruction 10. The Member hereby irrevocably sells,
assigns, and transfers all of the Member's rights, title, and interests in
the number of shares of Company Common Stock payable under the conversion
and Plan of Merger, to the following person or persons:
==========================================================================
<TABLE>
================================================================================================
<CAPTION>
<S> <C>
_______________________________________________ ______________________________________________
(Number of shares of Company Common Stock (Number of shares of Company Common Stock
to Transfer) to Transfer)
_______________________________________________ ______________________________________________
(New Owner's Name or Names) (New Owner's Name or Names)
_______________________________________________ ______________________________________________
(New Address) (New Address)
_______________________________________________ ______________________________________________
(New Address) (New Address)
- ------------------------------------------------------------------------------------------------
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
Substitute REQUEST FOR TAXPAYER See
Form W-9 IDENTIFICATION NUMBER AND CERTIFICATION Instruction 11
- ---------------------------------------------------------------------------------------------------
<S> <C>
Name. (If a joint account or you changed your name, see the separate sheet, Instructions
to Request for Taxpayer Identification Number and Certification on Substitute Form W-9,
that accompanies this form.)
Please >
-----------------------------------------------------------------------------------------
print Business name, if different from above. (See Specific Instructions)
-----------------------------------------------------------------------------------------
or Please check appropriate box: [ ] Individual/Sole proprietor [ ] Corporation
[ ] Partnership [ ] Other:
-----------------------------------------------------------------------------------------
type Address (number, street, and apt. or suite no.) Requester's name and address
> Dakota Telecommunications
Group, Inc.
-------------------------------------------------------- 29705 453rd Avenue
City, state, and ZIP code Irene, South Dakota 57037-3301
>
<FN>
- ---------------------------------------------------------------------------------------------------
PART I TAXPAYER IDENTIFICATION NUMBER (TIN) PART II FOR PAYEES EXEMPT
- ------------------------------------------------------------------ FROM BACKUP WITHHOLDING
Enter your TIN in the appropriate box. Social security number (SEE PART II - FOR PAYEES
For individuals, this is your social EXEMPT FROM BACKUP WITHHOLD-
security number (SSN). However, if [ ][ ][ ][ ][ ][ ][ ][ ][ ] ING in the Instructions to
you are a resident alien or a sole Request for Taxpayer Iden-
proprietor, see the Instructions to tification Number and
Request for Taxpayer Identification OR Certification on Substitute
Number and Certification on Substitute Form W-9 that accompanies
Form W-9. For other entities, it is this form.)
your employer identification number Employer identification
(EIN). If you do not have a number, number
see HOW TO GET A TIN in the Instruc-
tions to Request for Taxpayer [ ][ ][ ][ ][ ][ ][ ][ ][ ]
Identification Number and Certifica-
tion on Substitute Form W-9.
NOTE: IF THE ACCOUNT IS IN MORE THAN
ONE NAME, SEE THE CHART IN THE IN-
STRUCTIONS TO REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER AND CERTIFICA-
TION ON SUBSTITUTE FORM W-9 FOR GUIDE-
LINES ON WHOSE NUMBER TO ENTER.
Page 6
<PAGE>
- --------------------------------------------------------------------------------------------------
PART III CERTIFICATION
- --------------------------------------------------------------------------------------------------
Under penalties of perjury, I certify that:
1. The number shown on this form is my correct taxpayer identification number (or I am waiting for
a number to be issued to me); and
2. I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b)
I have not been notified by the Internal Revenue Service that I am subject to backup withholding
as a result of a failure to report all interest or dividends, or (c) the IRS has notified me
that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS--You must cross out Item 2 above if you have been notified by the IRS
that you are currently subject to backup withholding because you have failed to report all interest
and dividends on your tax return. For real estate transactions, Item 2 does not apply. For
mortgage interest paid, acquisition or abandonment of secured property, cancellation of debt,
contributions to an individual retirement arrangement (IRA), and generally, payments other than
interest and dividends, you are not required to sign the Certification, but you must provide your
correct TIN. (See the Instructions to Request for Taxpayer Identification Number and Certification
on Substitute Form W-9.)
- --------------------------------------------------------------------------------------------------
Sign
Here Signature > Date >
==================================================================================================
</FN>
</TABLE>
Page 7
<PAGE>
GENERAL INSTRUCTIONS
Please carefully read and follow these instructions in completing this
Letter of Transmittal. Failure to do so will likely delay delivery of your
new certificates.
1.RESPOND PROMPTLY TO RECEIVE DIVIDENDS. This Letter of Transmittal
must be properly completed, signed, and promptly delivered to the
Company at the address given in Instruction 12 if you are to receive
timely payment of any future dividends paid by the Company. Dividends
will be withheld pending our receipt of this form and a completed and
signed Request for Taxpayer Identification Number and Certification on
Substitute Form W-9, which appears on page 3 of this Letter of
Transmittal.
2. NO COOPERATIVE CERTIFICATES TO BE SENT. You do not need to send your
stock certificates representing your shares of Cooperative Common
Stock with this form. The Cooperative Common Stock is now void and
may be discarded.
3. INADEQUATE SPACE. If the space provided for any of your instructions
is inadequate, you can attach a separate SIGNED page or attach a
photocopy of this form, which must all be stapled and sent together.
Clearly indicate on this form that there is an attachment and to which
instruction(s) it relates. This Letter of Transmittal will govern in
the event of any inconsistency.
4. SIGNATURES ON LETTER OF TRANSMITTAL; DECEASED MEMBERS.
(a) Page 2 of THIS FORM MUST BE SIGNED by each holder of Exchangeable
Units. Each person must sign in EXACTLY THE SAME WAY as his or
her name is SHOWN ON PAGE 1 without any change whatsoever.
(b) If an old certificate was issued in the name of two or more
persons, each named holder must sign this form.
(c) If the old certificate was registered in the name of a
corporation, partnership, or trust, or if this form is signed by
an executor, administrator, personal representative, trustee,
guardian, attorney-in-fact, or other person acting in a fiduciary
or representative capacity on behalf of the Member, that
individual must indicate his or her capacity in the signature box
on page 2. Satisfactory evidence of a representative's authority
to sign this form is required if there are Special Issue
Instructions (See Instruction 9).
Page 8
<PAGE>
(d) If a stock certificate was registered to a person, either
individually or jointly, and that person is deceased, then a
certified or medallion guaranteed copy of the letters of
authority appointing the personal representative or executor for
the deceased person's estate must be delivered with this form,
together with satisfactory evidence of who is the new owner of
the Exchangeable Units. Remember to complete the SPECIAL ISSUE
INSTRUCTIONS box on page 2 of this form if you wish a new
certificate to be registered in a name other than the surviving
joint tenant(s).
5. COMPANY'S AUTHORITY. The Company has the absolute right to reject any
Letter of Transmittal that is not in the proper form or omits any
required documentation, or may in its discretion waive any
irregularities. The Company's interpretation of these instructions
and of what constitutes proper form and delivery shall be final and
binding. The Company may return to you any improperly completed forms
to be correctly completed and resubmitted.
6. ISSUANCE AND DELIVERY OF NEW CERTIFICATES. Unless you give us special
instructions in the box on page 2 of this form:
(a) All new Company Common Stock certificates will be issued to you
in a SINGLE certificate in your name as it presently appears on
the Cooperative's stock transfer records.
(b) Any check in payment for a fractional share will be made payable
in your name as it presently appears on the Cooperative's stock
transfer records.
(c) The new certificate(s) and any check for a fractional share will
be mailed to your registered address as it presently appears on
the Cooperative's stock transfer records.
By following Instructions 7, 8, and 9, you may give us special
instructions on page 2 of this form to:
(d) Have the certificate(s) and any check mailed, JUST THIS ONE TIME,
to a special address other than the current registered address
for your certificates (such as mail them to a custodian);
(e) Issue your new shares of Company Common Stock in more than one
certificate; or
(f) Permanently change the name(s) or address of each registered
holder of the new certificates.
Page 9
<PAGE>
7. SPECIAL DELIVERY INSTRUCTIONS. If you DO NOT wish to have the
certificates mailed to the current registered address, as described in
Instruction 6, please complete the Special Delivery Instructions box
on page 2 of this form. This will NOT change your permanent
registered address on Company's stock transfer records. If you wish
to have some of your certificates delivered to a third party, indicate
so in the appropriate box and give the denomination under "SPECIAL
DENOMINATION INSTRUCTIONS." To permanently change your registered
address, see Instruction 9.
8. SPECIAL DENOMINATION INSTRUCTIONS. Complete the Special Denomination
Instructions box on page 2 of this form if you wish to receive your
new shares of Company Common Stock in more than one stock certificate.
Specify your desired denominations for the new certificates, but use
only whole numbers; no fractional shares will be issued. For this
purpose, the Company can help you calculate the number of shares of
Company Common Stock you are entitled to receive. Requesting special
denominations may delay delivery of your new certificates.
9. SPECIAL ISSUE INSTRUCTIONS. Complete the Special Issue Instructions
box on page 2 of this form if you wish to permanently CHANGE THE
NAME(S) OR REGISTERED ADDRESS of the registered holder(s) of the
Company Common Stock certificates from the name(s) or address as they
presently appear on the Cooperative's stock transfer records. To do
so, you must take the following steps:
(a) If you are only changing your registered address, then simply
insert the new address on the designated lines in the Special
Issue Instructions box on page 2.
(b) If you are transferring some or all of your Company Common Stock
to another person, then specify the number of shares to be
transferred and the name(s) and address(es) of the new owner(s)
in the Special Issue Instructions box on page 2. The Company can
help you calculate the number of shares of Company Common Stock
you are entitled to receive.
(c) If any special issue instruction is given, YOU MUST HAVE A
MEDALLION SIGNATURE GUARANTEE in the box provided on the bottom
of page 2 of this form from a duly authorized representative of a
commercial bank or trust company located in the United States, by
a member of a national securities exchange, or by a member of the
National Association of Securities Dealers, Inc.
(d) If the Company Common Stock is to be issued in the name of any
other person, then you are responsible for payment of any
applicable transfer taxes and fees and for affixing any transfer
tax stamps to the certificates. The Company may elect to deduct
Page 10
<PAGE>
any amount of unpaid taxes or fees from the amount, if any, you
are otherwise entitled to receive in lieu of a fractional share;
however, you will remain liable for any unpaid taxes or fees.
(e) If the Company Common Stock is to be issued in the name of any
other person, then each new record owner must provide the Company
with a completed and signed Request for Taxpayer Identification
Number and Certification on Substitute Form W-9 that appears on
page 2 of this form. See Instruction 10.
10.SUBSTITUTE FORM W-9. The Member is required to provide the Company
with his or her correct taxpayer identification number ("TIN") on page
2 of this form. Failure to provide the information may subject the
Member to "backup withholding." See the Instructions for Request for
Taxpayer Identification Number and Certification, which accompanies
this form for further instructions and information.
11. QUESTIONS AND HELP WITH THIS FORM. Questions concerning this form,
registration of certificates, or any other matters pertaining to the
exchange of Cooperative Common Stock for Company Common Stock may be
directed to the Company at the telephone number and address shown on
the top of page 1 of this form.
12. DELIVERY OF DOCUMENTS. When properly completed and signed, this form
must all be delivered to the Company in order for your Company Common
Stock certificates to be issued. The method of delivery is at your
option and risk. You may use the return envelope that accompanies
this form. You must pay and affix postage to the envelope. Delivery
by registered and insured mail or by overnight courier service is
strongly recommended.
Mail or Deliver to:
DAKOTA TELECOMMUNICATIONS GROUP, INC.
P.O. Box 66
29705 453RD AVENUE
IRENE, SOUTH DAKOTA 57037-0066
ATTENTION: TIMOTHY DUPIC
(605) 263-3301
Page 11
<PAGE>
INSTRUCTIONS TO REQUEST FOR TAXPAYER IDENTIFICATION
NUMBER AND CERTIFICATION ON SUBSTITUTE FORM W-9
These instructions accompany a Letter of Transmittal furnished by Dakota
Telecommunications Group, Inc., the requester. These instructions relate
to the Substitute Form W-9 appearing on page 3 of that form. If you wish,
you may complete, sign, and date a separate IRS Form W-9, but it must
accompany your Letter of Transmittal.
The following is a summary of the relevant instructions to IRS Form W-9,
which may be helpful in completing Substitute Form W-9. Copies of IRS Form
W-9 are available upon request from Norwest Bank Minnesota, N.A. or the
IRS.
PURPOSE OF FORM W-9. A person who is required to file an information
return with the IRS must get your correct TIN to report, for example,
income paid to you, real estate transactions, mortgage interest you paid,
acquisition or abandonment of secured property, cancellation of debt, or
contributions you made to an IRA.
Use Form W-9 to give your correct TIN to the person requesting your TIN
(the requester) and, when applicable, to:
1. Certify the TIN you are giving is correct (or you are waiting for a
number to be issued),
2. Certify you not subject to backup withholding, or
3. Claim exemption from backup withholding if you are an exempt payee.
NOTE: IF A REQUESTER GIVES YOU A FORM OTHER THAN A W-9 TO REQUEST YOUR
TIN, YOU MUST USE THE REQUESTER'S FORM IF IT IS SUBSTANTIALLY SIMILAR TO
FORM W-9.
WHAT IS BACKUP WITHHOLDING? Persons making certain payments to you must
withhold and pay to the IRS 31% of such payments under certain conditions.
This is called "backup withholding." Payments that may be subject to
backup withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee pay, and certain payments from
fishing boat operations. Real estate transactions are not subject to
backup withholding.
If you give the requester your correct TIN, make the proper certifications,
and report all your taxable interest and dividends on your tax return,
payments you receive will not be subject to backup withholding. Payments
you receive WILL be subject to backup withholding if:
1. You do not furnish your TIN to the requester, or
2. The IRS tells the requester that you furnished an incorrect TIN, or
<PAGE>
3. The IRS tells you that you are subject to backup withholding because
you did not report all your interest and dividends on your tax return (for
reportable interest and dividends only), or
4. You do not certify to the requester that you are not subject to backup
withholding under 3 above (for reportable interest and dividend accounts
opened after 1983 only), or
5. You do not certify your TIN when required. See the Part III
instructions, below, for exceptions.
Certain payees and payments are exempt from backup withholding. See the
Part II instructions and the separate INSTRUCTIONS FOR THE REQUESTER OF
FORM W-9. (Such instructions are available from the Exchange Agent or the
IRS.)
PENALTIES
FAILURE TO FURNISH TIN. If you fail to furnish your correct TIN to a
requester, you are subject to a penalty of $50 for each such failure unless
your failure is due to reasonable cause and not to willful neglect.
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis that results in no backup
withholding, you are subject to a $500 penalty.
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
MISUSE OF TINS. If the requester discloses or uses TINs in violation of
Federal law, the requester may be subject to civil and criminal penalties.
SPECIFIC INSTRUCTIONS
NAME. If you are an individual, you must generally enter the name shown on
your social security card. However, if you have changed your last name,
for instance, due to marriage, without informing the Social Security
Administration of the name change, please enter your first name, the last
name shown on your social security card, and your new last name.
If the account is in joint names, list first and then circle the name of
the person or entity whose number you enter in Part I of the form.
SOLE PROPRIETOR. You must enter your INDIVIDUAL name as shown on your
social security card. You may enter your business, trade or "doing
business as" name on the business name line.
<PAGE>
PART I--TAXPAYER IDENTIFICATION NUMBER (TIN)
You must enter your TIN in the appropriate box. If you are a resident
alien and you do not have and are not eligible to get an SSN, your TIN is
your IRS individual taxpayer identification number (ITIN). Enter it in the
social security number box. If you do not have an ITIN, see HOW TO GET A
TIN below.
If you are a sole proprietor and you have an EIN, you may enter your SSN or
EIN. However, using your EIN may result in unnecessary notices to the
requester.
NOTE: SEE THE CHART ON THE NEXT PAGE FOR FURTHER CLARIFICATION OF NAME AND
TIN COMBINATIONS.
HOW TO GET A TIN.--If you do not have a TIN, apply for one immediately.
To apply for an SSN, get FORM SS-5 from your local Social Security
Administration office. Get FORM W-7 to apply for an ITIN or FORM SS-4 to
apply for an EIN. You can get Forms W-7 and SS-4 from the IRS by calling
1-800-TAX-FORM (1-800-829-3676).
If you do not have a TIN, write "Applied For" in the space for the TIN,
sign and date the form, and give it to the requester. For interest and
dividend payments, and certain payments made with respect to readily
tradable instruments, you will generally have 60 days to get a TIN and give
it to the requester. Other payments are subject to backup withholding.
NOTE: WRITING "APPLIED FOR" MEANS THAT YOU HAVE ALREADY APPLIED FOR A TIN
OR THAT YOU INTEND TO APPLY FOR ONE SOON.
PART II--FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING
Individuals (including sole proprietors) are NOT exempt from backup
withholding. Corporations are exempt from backup withholding for certain
payments, such as interest and dividends. For more information on exempt
payees, see the separate Instructions for the Requester of Form W-9.
If you are exempt from backup withholding, you should still complete this
form to avoid possible erroneous backup withholding. Enter your correct
TIN in Part I, write "Exempt" in Part II, and sign and date the form.
If you are a nonresident alien or a foreign entity not subject to backup
withholding, give the requester a completed FORM W-8, Certificate of
Foreign Status.
PART III--CERTIFICATION
For a joint account, only the person whose TIN is shown in Part I should
sign (when required).
<PAGE>
1. INTEREST, DIVIDEND, AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE 1984 AND
BROKER ACCOUNTS CONSIDERED ACTIVE DURING 1983. You must give your correct
TIN, but you do not have to sign the certification.
2. INTEREST, DIVIDEND, BROKER, AND BARTER EXCHANGE ACCOUNTS OPENED AFTER
1983 AND BROKER ACCOUNTS CONSIDERED INACTIVE DURING 1983. You must sign
the certification or backup withholding will apply. If you are subject to
backup withholding and you are merely providing your correct TIN to the
requester, you MUST cross out numbered paragraph 2 in the certification
section before signing the form.
3. REAL ESTATE TRANSACTIONS. You must sign the certification. You may
cross out item 2 of the certification.
4. OTHER PAYMENTS. You must give your correct TIN, but you do not have to
sign the certification unless you have been notified that you have
previously given an incorrect TIN. "Other payments" include payments made
in the course of the requester's trade or business for rents, royalties,
goods (other than bills for merchandise), medical and health care services
(including payments to corporations), payments to a nonemployee for
services (including attorney and accounting fees), and payments to certain
fishing boat crew members.
5. MORTGAGE INTEREST PAID BY YOU, ACQUISITION OR ABANDONMENT OF SECURED
PROPERTY, CANCELLATION OF DEBT, OR IRA CONTRIBUTIONS. You must give your
correct TIN, but you do not have to sign the certification.
PRIVACY ACT NOTICE
Section 6109 of the Internal Revenue Code requires you to give your correct
TIN to persons who must file information returns with the IRS to report
interest, dividends, and certain other income paid to you, mortgage
interest you paid, the acquisition or abandonment of secured property,
cancellation of debt, or contributions you made to an IRA. The IRS uses
the numbers for identification purposes and to help verify the accuracy of
your tax return. The IRS may also provide this information to the
Department of Justice for civil and criminal litigation and to cities,
states, and the District of Columbia to carry out their tax laws.
You must provide your TIN whether or not you are required to file a tax
return. Payers must generally withhold 31% of taxable interest, dividend,
and certain other payments to a payee who does not give a TIN to a payer.
Certain penalties may also apply.
<PAGE>
<TABLE>
WHAT NAME AND NUMBER TO GIVE THE REQUESTER
<CAPTION>
- ---------------------------------------------------------------------------
For this type of account: Give name and SSN of:
- ---------------------------------------------------------------------------
<S> <C>
1. Individual The individual
2. Two or more individuals The actual owner of the account or,
(joint account) if combined funds, the first indi-
vidual on the account<F1>
3. Custodian account of a minor The minor<F2>
(Uniform Gift to Minors Act)
4. a. The usual revocable savings The grantor-trustee<F1>
trust (grantor is also
trustee)
b. So-called trust account that The actual owner<F1>
is not a legal or valid
trust under state law
5. Sole proprietorship The owner<F3>
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
For this type of account: Give name and EIN of:
- ---------------------------------------------------------------------------
<S> <C>
6. A valid trust, estate or Legal entity<F4>
pension trust
7. Corporate The corporation
8. Association, club, religious, The organization
charitable, educational, or
other tax-exempt organization
9. Partnership The partnership
10. A broker or registered nominee The broker or nominee
<PAGE>
11. Account with the Department The public entity
of Agriculture in the name of
a public entity (such as a
state or local government,
school district, or prison)
that receives agricultural
program payments
<FN>
- ---------------------------------------------------------------------------
<F1> List first and circle the name
of the person whose number you
furnish.
<F2> Circle the minor's name and
furnish the minor's SSN.
<F3> You must show your individual
name, but you may also enter your
business or "doing business as"
name. You may use either your SSN
or EIN.
<F4> List first and circle the name
of the legal trust, estate or
pension trust. (Do not furnish the
TIN of the personal representative
or trustee unless the legal entity
itself is not designated in the
account title.)
NOTE: IF NO NAME IS CIRCLED WHEN
MORE THAN ONE NAME IS LISTED, THE
NUMBER WILL BE CONSIDERED TO BE
THAT OF THE FIRST NAME LISTED.
-----------------------------------
</FN>
</TABLE>
