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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1999
REGISTRATION NO. 333-89709
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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DTC COMMUNICATIONS CORP.
(Exact name of Registrant as Specified in its Charter)
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TENNESSEE 4813 62-1797005
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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WAYNE GASSAWAY
DTC COMMUNICATIONS CORP.
111 HIGH STREET 111 HIGH STREET
ALEXANDRIA, TENNESSEE 37012-0247 ALEXANDRIA, TENNESSEE 37012-0247
(615) 529-2151 (615) 464-2201
(Address, Including Zip Code, and Telephone Number, (Name, Address, Including Zip Code, and Telephone
Including Number,
Area Code, of Registrant's Principal Executive Offices) Including Area Code, of Agent for Service)
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PLEASE SEND COPIES OF COMMUNICATIONS TO:
GARY M. BROWN, ESQ.
TUKE YOPP & SWEENEY, PLC
BANK OF AMERICA PLAZA, SUITE 1100
NASHVILLE, TENNESSEE 37219
(615) 313-3325
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
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.
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DTC COMMUNICATIONS LOGO
PROSPECTUS INFORMATION STATEMENT
DTC Communications Corp. DeKalb Telephone Cooperative, Inc.
REORGANIZATION PROPOSED -- YOUR VOTE IS VERY IMPORTANT
Subject to approval by its members, DeKalb Telephone Cooperative, Inc. has
agreed to reorganize by merging with its wholly owned subsidiary, DTC
Communications Corp. In the merger, our members will receive shares of DTC
common stock. The merger is a way to change our form of organization from a
not-for-profit cooperative to a for-profit corporation.
If the merger is completed, each of our members will receive one share of
DTC stock for every $10.00 in capital credits that a member has on our books as
of January 31, 2000. Fractional shares will not be issued and our members will
receive cash in lieu of any fractional share.
The merger cannot be completed unless it is approved by you, our active
members. We have scheduled a special meeting so you may vote on the merger. Your
attendance at the meeting and vote are very important.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
Only persons to whom this information statement/prospectus is addressed may
attend and vote at the special meeting. No one may represent you at the meeting.
Owners of businesses which are members must appear with satisfactory proof that
you are authorized to represent the business.
Based on the number of capital credits existing as of September 30, 1999,
DTC will issue approximately 2,500,000 shares of DTC stock to members. Because
only active members currently have voting rights, they will receive class A
voting common stock and inactive members will receive class B non-voting common
stock. DTC stock issued in the merger is expected to be listed, subject to
official notice of issuance, on the American Stock Exchange under the symbols
"DKC.A" and "DKC.B".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF VARIOUS FACTORS
YOU SHOULD CONSIDER WITH RESPECT TO THE DTC STOCK OFFERED BY THIS INFORMATION
STATEMENT/PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
INFORMATION STATEMENT/PROSPECTUS OR DETERMINED IF THIS INFORMATION
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
December , 1999
Anticipated Mailing Date to Members: January 4, 2000.
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DEKALB TELEPHONE COOPERATIVE, INC.
111 HIGH STREET
ALEXANDRIA, TENNESSEE 37012-0247
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NOTICE OF SPECIAL MEETING OF MEMBERS
TO BE HELD AT 1:00 P.M. ON SATURDAY, JANUARY 29, 2000
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NOTICE IS HEREBY GIVEN that a special meeting of the members of DeKalb
Telephone Cooperative, Inc. will be held at its Maintenance and Operations
Center located between Highways 70 and 53 in Alexandria, Tennessee on Saturday,
January 29, 2000 at 1:00 p.m. (local time) for the following purposes:
(1) to consider and vote on a proposal to approve the merger as described
in the plan and agreement of merger dated as of October 18, 1999,
between DeKalb Telephone Cooperative and its wholly owned subsidiary,
DTC Communications Corp., all as described in the accompanying
information statement/prospectus; and
(2) to consider any other matters that may properly come before the
meeting.
Only active members of record as of the close of business on December 31,
1999 are entitled to notice of and to vote at the meeting or any adjournments or
postponements thereof. Approval of the merger at the meeting requires the
affirmative vote of two-thirds of the active members voting at the meeting.
Accordingly, your attendance and vote at the meeting are important.
--------------------------------------
Charles D. Vinson
Secretary
January 4, 2000
OUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT MEMBERS VOTE
FOR
APPROVAL OF THE MERGER.
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TABLE OF CONTENTS
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Where You Can Find More Information......................... 1
Questions and Answers About the DTC Merger.................. 2
Summary..................................................... 5
The Companies............................................. 5
The Special Meeting....................................... 5
Reasons for the Merger; Possible Disadvantages............ 5
Recommendation to Our Members............................. 6
Record Date; Quorum; Vote Required........................ 6
The Merger................................................ 6
Federal Income Tax Consequences........................... 7
Regulatory Approvals Required for the Merger.............. 7
Listing of DTC Common Stock............................... 8
Risk Factors................................................ 9
Disclosure Regarding Forward-Looking Statements............. 12
DeKalb Telephone Cooperative, Inc.
Selected Consolidated Financial Data...................... 13
The Special Meeting......................................... 15
Date, Time and Place...................................... 15
Purpose................................................... 15
Voting Rights and Record Date for the Merger.............. 15
Quorum; Abstentions....................................... 15
Expenses.................................................. 15
Recommendation of the Board of Directors.................. 15
Miscellaneous............................................. 15
The Merger.................................................. 16
General................................................... 16
Background of the Merger.................................. 16
Reasons for the Merger.................................... 17
Board Recommendation...................................... 19
Federal Income Tax Consequences........................... 19
Former Members of DeKalb Telephone Cooperative, Inc....... 21
Regulatory Approvals Required for the Merger.............. 22
Resale of DTC Common Stock; Restrictions on DTC
Affiliates............................................. 22
Management and Operations Following the Merger............ 22
No Dissenters' Rights..................................... 22
The Plan and Agreement of Merger.......................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Overview.................................................. 24
Results of Operations..................................... 25
Liquidity and Capital Resources........................... 28
Inflation................................................. 30
Recent Accounting Pronouncements.......................... 30
Year 2000 Considerations.................................. 30
Market Risk............................................... 31
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Market and Dividend Information............................. 32
Market Information........................................ 32
Dividend Information...................................... 32
Number of Members/Shareholders............................ 33
DeKalb Telephone Cooperative, Inc........................... 34
Business.................................................. 34
Business Strategy......................................... 36
Strategic Alliance/Joint Venture.......................... 37
Competition............................................... 37
Regulation................................................ 39
Employees................................................. 46
Environmental and Other Matters........................... 46
Properties................................................ 46
Legal Proceedings......................................... 47
Financial Statements...................................... 47
Information Regarding DTC................................... 47
Business.................................................. 47
Properties and Legal Proceedings.......................... 47
Financial Statements...................................... 47
Management Information...................................... 48
Amount and Nature of Beneficial Ownership................. 48
Directors and Executive Officers.......................... 48
Compensation of Our Executive Officers and Directors...... 51
Summary Compensation Table................................ 51
Interests of Certain Persons.............................. 51
Description of DTC Capital Stock............................ 52
DTC Common Stock.......................................... 52
DTC Preferred Stock....................................... 52
Statutory Provisions Affecting Control of DTC............. 53
Other Provisions Affecting Control of DTC................. 56
Comparison of Rights of Our Members and DTC Shareholders.... 58
Members Versus Shareholders............................... 58
Authorized Stock.......................................... 58
Transferability of Ownership Interests.................... 59
Required Vote for Mergers................................. 59
Board of Directors........................................ 60
Cumulative Voting for Directors........................... 60
Limitation of Liability of Directors and Officers......... 61
Indemnification of Directors and Officers................. 61
Amendments to Charter and Bylaws.......................... 63
Special Meetings of Members/Shareholders; Action Without
Meeting................................................ 64
Quorum Requirements....................................... 64
Dividends and Other Distributions......................... 65
Dissenters' Rights........................................ 66
Preemptive Rights......................................... 67
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Legal Matters............................................... 68
Experts..................................................... 68
Financial Statements........................................ F-1
Pro Forma Financial Statements............................ F-2
Historical Audited Financial Statements................... F-7
Historical Unaudited Financial Statements................. F-23
APPENDIX A -- Plan and Agreement of Merger.................. A-1
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WHERE YOU CAN FIND MORE INFORMATION
DTC has filed with the SEC a registration statement under the Securities
Act of 1933 that registers the DTC stock to be issued in the merger. The
registration statement, including the attached exhibits and schedules, contains
additional relevant information about DTC. SEC rules allow DTC to omit from this
information statement/prospectus some of the information in the registration
statement.
DTC currently is not subject to the information and reporting requirements
of the Securities Exchange Act of 1934. You may read and copy the registration
statement at any of the following locations of the SEC:
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Public Reference Room 7 World Trade Center Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661
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You also may obtain copies of the registration statement by mail from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. Further information on the
operation of the SEC's Public Reference Room in Washington, D.C. can be obtained
by calling the SEC at 800-SEC-0330.
The registration statement was filed with the SEC electronically via the
SEC's EDGAR system. The SEC maintains an internet world wide web site that
contains registration statements, reports and other information regarding
companies that file materials electronically with the SEC. The address of that
site is http://www.sec.gov.
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QUESTIONS AND ANSWERS ABOUT THE DTC MERGER
THE FOLLOWING ARE QUESTIONS WE BELIEVE YOU MIGHT HAVE ABOUT THE MERGER AND
OUR ANSWERS TO THOSE QUESTIONS. THESE QUESTIONS AND ANSWERS DO NOT ADDRESS ALL
QUESTIONS THAT YOU MAY HAVE ABOUT THE MERGER. YOU SHOULD CAREFULLY READ THIS
ENTIRE DOCUMENT, AS WELL AS ALL APPENDICES.
Q1: HOW DID I BECOME A MEMBER OF DEKALB TELEPHONE COOPERATIVE?
A: You became a member when you agreed to purchase telephone service from us.
Q2: HOW DID I OBTAIN MY CAPITAL CREDITS?
A: Your capital credits accumulated during the years that you have had
telephone service with us. In essence, your capital credits are your share
of our accumulated undistributed margin or profits, which is the excess of
operating revenues over expenses. Each year, profits or losses, if
applicable, are accrued and allocated to members' accounts. For example,
as of December 31, 1994, our accumulated capital credits were $13.4
million. During the past several years, however, due to our efficient
operation, these accumulated capital credits have grown to $26.2 million
as of September 30, 1999.
Q3: I ALSO HAVE CELLULAR TELEPHONE SERVICE FROM ADVANTAGE CELLULAR; HAVE I
RECEIVED CAPITAL CREDITS FOR THAT TOO?
A: No. Capital credits are accrued and allocated only on telephone service
with DeKalb Telephone Cooperative. They are not accrued or allocated based
upon wireless service from our for-profit subsidiary, Advantage Cellular.
Q4: HOW DO I FIND OUT THE AMOUNT OF MY CAPITAL CREDIT ACCOUNT?
A: Within the package containing this information statement/prospectus, the
page on which the mailing label appears shows the amount of your capital
credits as of December 31, 1998. That amount will change before the
closing date of the merger which is expected to be February 1, 2000.
Because of the timing of our year end audit, however, we will not be able
to provide members with the amount of any capital credits accrued during
the year ended 1999 and the one-month period ending January 31, 2000 until
after March 1, 2000. The plan and agreement of merger requires that DTC
stock and any cash that you receive in lieu of a fractional share be
distributed to members within 60 days after the effective date of the
merger.
Q5: WHO ARE "FORMER" OR "INACTIVE" MEMBERS OF DEKALB TELEPHONE COOPERATIVE?
A: Former or inactive members of DeKalb Telephone Cooperative are those
persons or businesses that within the last ten years were members but no
longer have telephone service with us. See "THE MERGER -- FORMER MEMBERS
OF DEKALB TELEPHONE COOPERATIVE."
Q6: DO "FORMER" OR "INACTIVE" MEMBERS RECEIVE THE SAME THING IN THE MERGER AS
ACTIVE MEMBERS?
A: Yes, except that the stock received by active members is voting while
stock received by inactive members is non-voting. Inactive members
currently have no voting rights on DeKalb Telephone Cooperative matters
and the issuance of non-voting stock to them carries forward the
active/inactive member distinction in the merged companies. Otherwise, all
of the stock to be issued in the merger has the same rights to the owners
of the stock.
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Q7: WHY ARE INACTIVE MEMBERS RECEIVING DTC STOCK IN THE MERGER?
A: Some inactive members, as of January 31, 2000, will still have capital
credits on our books. In addition, both active and inactive members to
whom capital credits have been allocated during the past ten years have
the right, if we were being dissolved, to receive their pro rata share of
our net assets. That right, generally called a "property right," is being
preserved for all active and inactive members by the issuance of DTC
common stock which carries with it a right, if DTC is dissolved in the
future, to receive a share of DTC's net assets.
Q8: WHAT HAPPENS IF BETWEEN NOW AND JANUARY 31, 2000, I BECOME AN INACTIVE
MEMBER OF DEKALB TELEPHONE COOPERATIVE?
A: You will receive non-voting rather than voting DTC stock. Otherwise, there
will be no difference in the way you are treated in the merger.
Q9: WHAT WILL MY DTC STOCK BE WORTH AFTER THE MERGER?
A: We do not know and cannot predict with any certainty what your DTC stock
will be worth. A number of internal and external factors affect the
determination of the market price of a company's stock. We recommend that
you discuss your share holdings with your personal financial advisor prior
to selling your DTC stock.
Q10: WHEN CAN I SELL MY DTC STOCK?
A: Despite the expected listing of the DTC stock on the American Stock
Exchange, we cannot guarantee you that any market will develop that will
allow you to sell your DTC stock. If a market does develop for the DTC
stock following the merger, any shareholder would be free to sell his/her
DTC stock. Again, we recommend that you discuss your share holdings with
your personal financial advisor prior to selling your DTC stock.
Q11: WHAT WILL HAPPEN TO MEMBERS' TELEPHONE SERVICE?
A: We intend to continue to improve the telephone and other services that you
receive through DTC. Also, one of the reasons for the merger and the
conversion to a for-profit entity is to have the ability to expand the
range of services that we offer, both inside and outside of our current
service area, to our current and future customers and to better compete
with other companies that we believe may enter our service area in the
future.
Q12: WHAT CHANGES IN DEKALB TELEPHONE COOPERATIVE WILL I SEE FOLLOWING THE
MERGER?
A: Other than converting to a for-profit corporation, we hope that you will
not see any changes in our day-to-day operations. Our employees, telephone
numbers and office locations will remain the same.
Q13: WHAT DO I NEED TO DO NOW?
A: You should read the information statement/prospectus carefully and be sure
you understand what we are proposing to do. Then, if possible, we would
like for you to attend the special meeting on January 29, 2000 and cast
your vote for the merger.
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Q14: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to vote on our merger into our wholly owned
subsidiary, DTC, which will result in a change of our form of organization
from a not-for-profit cooperative to a for-profit corporation. If the
merger is approved, you will own the same percentage of DTC as you now own
of DeKalb Telephone Cooperative.
Q15: WHAT RISKS SHOULD I CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MERGER?
A: Although your present capital credits are not transferable, there will be
various risks from ownership of DTC stock. These are described in detail
in "Risk Factors," beginning at page 9.
Q16: WHO CAN HELP ANSWER FURTHER QUESTIONS?
A: If you have more questions about the merger, you should contact:
DTC Communications Corp.
Investor Relations
111 High Street
Alexandria, TN 37012-0247
(615) 529-9000
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SUMMARY
THE COMPANIES
DEKALB TELEPHONE COOPERATIVE, INC. (PAGE 34)
111 High Street
Alexandria, TN 37012-0247
(615) 529-2151
http://www.dtccom.net
DeKalb Telephone Cooperative is a membership-based Tennessee cooperative
that provides a broad range of telecommunications services, including local
telephone service, long-distance network access, and dial-up and dedicated
internet access over a state-of-the-art wireline network. Our local telephone
service includes basic local lines, as well as ISDN, DSL and T-1 high speed
access lines. We also provide foreign exchange, private lines and switched data
services and install and maintain Centrex, PBX and key telephone switching
network systems for our business customers. In addition, we offer a wide range
of enhanced features such as voice mail, call waiting, caller identification,
automatic redial, call forwarding, three-way calling, speed calling and call
tracing. Advantage Cellular Systems, Inc., our wholly owned for-profit
subsidiary, provides wireless telephone service.
DTC COMMUNICATIONS CORP. (PAGE 47)
111 High Street
Alexandria, TN 37012-0247
(615) 529-2151
DTC is our wholly owned subsidiary which was formed in order for us to
convert into a for-profit corporation. We will convert by merging into DTC. When
the merger occurs, DTC will assume and carry on our business with our existing
personnel. Advantage Cellular will be a wholly owned subsidiary of DTC.
THE SPECIAL MEETING (PAGE 15)
The special meeting of our active members will be held on January 29, 2000,
at 1:00 p.m. (local time) at our Maintenance and Operations Center located
between Highways 70 and 53 in Alexandria, Tennessee. At the special meeting, you
will be asked to vote on our merger into DTC that will result in a change in our
form of organization from a not-for-profit cooperative to a for-profit
corporation.
REASONS FOR THE MERGER; POSSIBLE DISADVANTAGES (PAGE 17)
Our board of directors, together with management, believes that converting
from a not-for-profit cooperative into a for-profit corporation will increase
our present and future competitive position in our markets. Our board of
directors unanimously determined to recommend approval of the merger based on
the following factors:
- review of recent trends in the telecommunications industry including
rapid changes in technology and increasing competition in the provision
of many services offered by us;
- the risks associated with remaining a cooperative;
- the potential for enhanced liquidity and opportunity for the members to
realize the value of their investments in us; and
- recent changes in the regulatory environment affecting the
telecommunications industry.
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The board of directors also considered possible disadvantages of the
merger, including:
- loss of our partial tax-exempt status; and
- increased competition that the merged companies will face resulting from
the pursuit of DTC's business strategy.
RECOMMENDATION TO OUR MEMBERS (PAGE 19)
Our board of directors believes that the merger is fair to you, as our
members, and that the merger is in your best interests. Our board believes that
the recent and expected changes in the technological and regulatory environment
surrounding the telecommunications industry make it imperative that we convert
from a cooperative to a for-profit corporation. This change will allow us to
continue to offer services to our customers and, once free of the operating
restrictions that accompany being a telephone cooperative, expand our range of
services and pursue opportunities in other markets. Our board believes that
these steps will assist us in becoming more competitive in our markets. Our
board believes that it is in your best interests that you be allowed the
opportunity to realize, should you choose to do so, the value of your capital
credits by selling your DTC stock, assuming a market develops, that you will
receive in the merger. Our board also believes that the merger and resulting
conversion to a for-profit corporation may help to provide us greater access to
capital markets and increase our options in connection with potential
acquisitions, joint ventures and strategic alliances.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
PROPOSAL TO APPROVE THE MERGER.
RECORD DATE; QUORUM; VOTE REQUIRED (PAGE 15)
You may vote at the special meeting if you were an active member at the
close of business on December 31, 1999. On that date, there were approximately
15,000 active members entitled to vote. Each active member who attends the
special meeting in person is entitled to one vote on each issue voted on at the
special meeting.
The presence in person of the lesser of 50 active members or 2% of the
active members constitutes a quorum for purposes of the vote required at the
special meeting of members. This means that if as few as 50 active members are
present at the meeting, a quorum will exist and the merger may be validly voted
on. Approval of the merger requires the affirmative vote of two-thirds of the
active members present and voting at the special meeting. Our bylaws prohibit
voting by proxy.
THE MERGER
GENERAL (PAGE 16)
In the merger, we will merge into DTC and DTC will be the surviving
corporation. DTC will assume all of our operations, assets and liabilities and
will have a consolidated financial position substantially identical to ours
immediately before the merger. After the merger, our members will be
shareholders of DTC and the directors, officers, employees, businesses,
properties and operations of DTC will be substantially identical to ours, except
as otherwise indicated in this information statement/prospectus.
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MERGER CONSIDERATION YOU WILL RECEIVE (PAGE 23)
As merger consideration, each member will receive one share of DTC stock
for every $10.00 in capital credits that the member has on our books as of
January 31, 2000. Active members will receive voting stock and inactive members
will receive non-voting stock. DTC will not issue any fractional shares. If a
capital credit account is an amount that is not a whole multiple of $10.00, that
person or entity will be paid cash for any fractional amount.
NO DISSENTERS' RIGHTS FOR MEMBERS (PAGE 22)
Under Tennessee law, members do not have dissenters' rights with respect to
the merger. See "The Merger--No Dissenters' Rights."
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 23)
The completion of the merger depends on a number of conditions being
satisfied, including the following:
- approval of the plan and agreement of merger by two-thirds of our active
members voting at the special meeting;
- obtaining all required regulatory approvals and third party consents;
- there being no restraining order, injunction or court order preventing
the merger, or any proceeding seeking to prevent the merger or making the
merger illegal; and
- there being no statute, rule, regulation or governmental order that might
materially adversely affect or delay the merger.
TERMINATION OF PLAN AND AGREEMENT OF MERGER (PAGE 23)
We may agree at any time to terminate the plan and agreement of merger
without completing the merger, even after the active members have approved it.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 19)
The merger has been structured so that a majority of our members will have
tax-free treatment upon receiving the DTC stock. Receiving DTC stock in exchange
for your capital credits generally will be tax-free except to the extent that
you have deducted, for United States federal income tax purposes, the amount of
your telephone bills from your taxable income. If you have deducted the amount
of your telephone bills from your taxable income, you will have income in an
amount equal to the amounts you previously have deducted, but not more than the
fair market value of the DTC stock that you receive. Because it is unlikely that
most residential customers have deducted the amount of their telephone bills
from their taxable income, we believe this generally means that residential
customers will receive their DTC stock tax-free in the merger. Any member who
receives cash in lieu of fractional shares also will have income in the amount
of that cash. Any amount of income that you receive must be reported on your tax
return for the year in which the merger occurs. See "The Merger -- Federal
Income Tax Consequences."
REGULATORY APPROVALS REQUIRED FOR THE MERGER (PAGE 22)
Consummation of the merger is subject to the approval of the Rural
Utilities Service of the United States Department of Agriculture pursuant to
certain loan agreements between us and the
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Rural Utilities Service. We have received verbal assurances from the Rural
Utilities Service that the merger will be approved.
DTC also must receive from the Tennessee Regulatory Authority a certificate
of public convenience and necessity to operate our system following the
effective date of the merger. We currently are exempt from most Tennessee
Regulatory Authority regulation.
LISTING OF DTC COMMON STOCK (PAGE 32)
DTC stock issued in the merger is expected to be listed, subject to
official notice of issuance, on the American Stock Exchange under the symbols
"DKC.A" and "DKC.B".
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RISK FACTORS
In addition to the other information contained in this information
statement/prospectus, the following factors should be considered carefully in
evaluating us and our business which will be assumed by DTC if the merger is
consummated. In this information statement/prospectus, "we" means us and our
subsidiary before the merger and DTC and its subsidiary after the merger.
WE EXPECT REVENUE FROM NETWORK ACCESS CHARGES TO SUBSTANTIALLY DECLINE.
In 1996, 1997 and 1998, we received, respectively, 50.0%, 49.1% and 49.0%
of our operating revenue in the form of network access charges. During the first
nine months of 1999, we received 51.5% of our operating revenue from these
charges. Because of the increasing competitive and regulatory pressures to lower
these charges, the amount of revenue that we receive from network access
charges, and thus the amount of total revenue, will decline materially in the
future. This, in turn, could adversely affect the price of our stock.
A REDUCTION IN THE SUBSIDY AMOUNTS WE RECEIVE FROM THE UNIVERSAL SERVICE FUND
COULD LOWER OUR REVENUE AND EARNINGS.
During the nine months ended September 30, 1999, we received approximately
$1.8 million from the universal service fund. If these funds were materially
reduced or discontinued, we may not be able to operate profitably. We have been
protected against any loss of universal service fund monies to competitive local
exchange carriers because Tennessee law has not allowed such carriers to enter
markets served by incumbent local exchange carriers, such as us, with fewer than
100,000 access lines. Recently, however, the FCC held that this Tennessee law is
preempted by the Telecommunications Act, which encourages such competition. If
the FCC's decision is upheld it will be possible for a competitive local
exchange carrier to enter our markets. If a competitive local exchange carrier
is successful in our markets, we may lose some or all of our universal service
fund monies which could reduce our revenue and earnings. For more information,
please refer to the "DeKalb Telephone Cooperative, Inc. -- Regulation" section
in this information statement/prospectus.
WE ARE SUBJECT TO A COMPLEX AND UNCERTAIN REGULATORY ENVIRONMENT.
The telecommunications industry is regulated by the FCC, state regulatory
commissions and municipalities. Federal and state regulations and regulatory
trends in the direction of reduced regulation have had, and are likely to have,
both positive and negative effects on us and our ability to compete. For
example, during the nine months ended September 30, 1999, we received
approximately $1.8 million from the universal service fund, a fund established
by the FCC that provides monies to incumbent local exchange carriers in certain
rural areas in order to best assure that telecommunications services are
affordable and accessible to all citizens. Regulatory changes may reduce or
eliminate our receipt of these monies in the future. For more information,
please refer to the "DeKalb Telephone Cooperative, Inc.--Regulation" section in
this information statement/prospectus.
WE EXPECT TO FACE INCREASING COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY AND
MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
We operate in an increasingly competitive environment. Although a
cooperative with less than 100,000 access lines previously was insulated to some
extent from competition, we expect our present and future competitors to
include:
- competitive local exchange carriers;
- interexchange carriers;
9
<PAGE> 16
- internet service providers;
- wireless telecommunications providers;
- cable television companies; and
- resellers of telecommunications services and enhanced services providers.
The trend toward business combinations, strategic alliances and joint
ventures within the telecommunications industry could further increase
competition. In addition, the development of new technologies and expansion of
existing companies into our markets could increase competition. Aggressive
competition in our markets could reduce our customer base and result in more
competitive pricing. Some of the companies with whom we compete or may compete
are, or are affiliated with, major telecommunications companies that have
greater resources than we have to sustain losses for a longer period of time. We
may not be able to achieve or maintain adequate market share or revenue or
compete effectively in any of our markets.
FAILURE OF OUR OPERATING SUPPORT SYSTEMS MAY INHIBIT OUR GROWTH AND ABILITY TO
ACHIEVE OPERATING EFFICIENCIES.
Sophisticated information and processing systems are vital to our growth
and our ability to monitor costs, bill customers, process customer orders and
achieve operating efficiencies. Billing and information systems have
historically been produced by outside vendors. These systems generally have met
our needs. As we continue providing more services, we will need more
sophisticated billing and information systems. Our failure, or the failure of
vendors, to adequately identify all of our information and processing needs or
to upgrade systems as necessary could inhibit our growth and ability to achieve
operating efficiencies. See also "-- Our operations could be disrupted by data
processing failures after December 31, 1999."
OUR SUCCESS DEPENDS UPON OUR ABILITY TO HIRE AND RETAIN KEY PERSONNEL.
Because we are a relatively small company in the telecommunications
industry, the efforts of a small number of key management, particularly H. Wayne
Gassaway, and operating personnel will largely determine our success. Our
success also depends in part upon our ability to hire and retain highly skilled
and qualified operating, marketing, sales, financial and technical personnel.
The competition for qualified personnel in the telecommunications services
industry is intense and, accordingly, we may not be able to hire or retain
necessary personnel. In addition, it may be difficult to attract experienced
telecommunications executives to our small, rural service area. If we lose the
services of key personnel or if we are unable to attract additional qualified
personnel, we may be unable to successfully implement our business plan.
THERE MAY NOT BE A MARKET FOR DTC STOCK AND IF ONE DEVELOPS, THE MARKET PRICE
COULD BE VOLATILE.
Although we intend to apply for listing of the DTC stock on the American
Stock Exchange, we have not yet and may not receive approval by the American
Stock Exchange. If the DTC stock is not approved for listing on an exchange, a
market may not develop for your DTC stock. Even if a market were to develop, it
could be one of limited liquidity, low volume and high price volatility.
10
<PAGE> 17
OUR OPERATIONS COULD BE DISRUPTED BY DATA PROCESSING FAILURES AFTER DECEMBER 31,
1999.
Many existing computer systems, software applications and other electronics
are programmed to accept only two digits in the portion of the date field which
designates the year. If these systems and products are not modified or replaced,
many will fail or create erroneous results and may cause other related systems
to fail. Our failure to correct a material year 2000 problem could result in an
interruption in or failure of certain of our normal business operations or
activities. Year 2000 compliance issues are of particular importance to us since
our operations rely heavily upon computer systems, software applications and
other electronics which contain date-sensitive embedded technology. These
technologies are standard purchased systems and may or may not have been
customized for our particular application. We rely heavily upon various vendors
and suppliers that themselves are very reliant on computer systems, software
applications and other electronics which contain date-sensitive embedded
technology. We also rely heavily on other telecommunications providers for
facilities and technical capabilities and to originate and terminate calls onto
our network. Although we believe that, through execution and satisfactory
completion of our year 2000 compliance strategy, our computer systems, software
applications and electronics will be year 2000 compliant by December 31, 1999,
we cannot assure you until the year 2000 occurs that all systems and all related
technology when running jointly will function adequately. Additionally, we
cannot assure you that the assumptions we made within our year 2000 compliance
strategy will prove to be correct, that the strategy will succeed or that the
remedial actions being taken will be completed by the time necessary to avoid
system or component failures. In addition, disruptions in the computer systems
of vendors, customers or interconnecting carriers, which are outside of our
control, could impair our ability to obtain necessary products or services to
sell to our customers. Any of these disruptions, as well as the cost of avoiding
them, could have a material adverse effect on our revenues and the price of our
stock.
OUR MANAGEMENT MAY BE ABLE TO INFLUENCE THE MEMBER VOTE AT THE SPECIAL MEETING
IF THERE IS LOW ATTENDANCE.
All thirteen of our directors and executive officers also are active
members. Because only 50 of our approximately 15,000 active members must be
present in person in order to validly hold the special meeting and vote on the
merger, those directors and executive officers will be in a position to
substantially influence the results of the vote if a small number of other
members attend the meeting. For example, if only 50 members attend the meeting,
the 13 executive officers and directors will hold approximately 26.0% of the
voting power at the meeting. If, however, 1,000 members attend the meeting, the
13 executive officers and directors will hold only approximately 1.3% of the
voting power at the meeting.
OFFICERS AND DIRECTORS MAY HAVE INTERESTS IN THE MERGER DIFFERENT THAN THOSE OF
OUR MEMBERS GENERALLY.
Certain of our executive officers and directors may have interests in the
merger that are different from, or in addition to, the interests of our members
generally. In particular, certain of our officers and directors will receive
stock and stock options upon the consummation of the merger. See "Management
Information -- Interests of Certain Persons."
LOSS OF OUR PARTIAL TAX-EXEMPT STATUS WILL SUBJECT MORE OF OUR REVENUE TO
TAXATION WHICH WILL RESULT IN A LOWER PROFIT MARGIN.
As a not-for-profit cooperative, we currently are exempt from United States
federal income taxation on all revenues other than revenues from non-member
sources. After the merger we will be a
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<PAGE> 18
for-profit corporation and, thus, will lose this partial tax exemption. These
additional taxes will result in a lower profit margin.
RATE REGULATION BY THE TENNESSEE REGULATORY AUTHORITY WILL INCREASE THE LEVEL OF
UNCERTAINTY REGARDING FUTURE REVENUE.
As a telephone cooperative, we currently are subject to regulation by the
Tennessee Regulatory Authority only with respect to our service area boundaries.
After the merger, as a for-profit corporation and a public utility, we will be
subject to rate and other regulation by the Tennessee Regulatory Authority.
Therefore, we will not have complete control over the rates we charge for our
services or the type or terms of our rate regulation plan which will increase
the level of uncertainty regarding future revenue.
LACK OF CERTAINTY THAT THE MERGER WILL BE TAX FREE.
There are no Internal Revenue Code provisions, U.S. federal income tax
regulations, court decisions or published Internal Revenue Service rulings
bearing directly on the treatment of a merger of a Section 501(c)(12)
cooperative. Therefore, it is possible that the Internal Revenue Service could
take a position inconsistent with the opinion of Tuke Yopp & Sweeney, PLC that
the merger will constitute a reorganization for U.S. federal income tax
purposes. If the Internal Revenue Service were to take a position that the
merger does not constitute a reorganization and that position prevailed, then:
- a member would likely recognize gain or loss in an amount equal to the
difference between the member's capital credit amount and the fair market value
of the DTC stock received; and
- if the member recognized gain or loss, the tax basis in the shares of DTC
stock received would likely equal their fair market value at the time of
receipt.
For a description of the material federal income tax consequences of the
merger, including counsel's views as to the likelihood that the Internal Revenue
Service would prevail if it held the merger does not constitute a
reorganization, see "The Merger -- Federal Income Tax Consequences."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This information statement/prospectus contains certain statements that are
"forward-looking" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. All statements
other than statements of historical fact included in this information
statement/prospectus, including, without limitation, statements regarding our
future financial position, business strategy, budgets, market position, future
operations, margins, profitability, liquidity and capital resources are
forward-looking statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "believe," or "continue"
(or the negative thereof) or similar terminology. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we can
give no assurance that these expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from our
expectations ("cautionary statements") are disclosed under "Risk Factors" and
elsewhere in this information statement/prospectus. All forward-looking
statements are expressly qualified in their entirety by the cautionary
statements.
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<PAGE> 19
DEKALB TELEPHONE COOPERATIVE, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information for each of the
years in the five-year period ended December 31, 1998 has been derived from the
consolidated financial statements of DeKalb Telephone Cooperative, Inc., which,
for the years ended December 31, 1996, 1997 and 1998, have been audited by
Arthur Andersen LLP, independent public accountants, included elsewhere in this
information statement/prospectus. The selected historical financial data for the
years ended December 31, 1994 and 1995 and the nine months ended September 30,
1998 and 1999 is derived from unaudited financial statements which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the financial
condition and results of operations. Operating results for the nine months ended
September 30, 1999 are not indicative of results for the full year. The selected
historical financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto with respect to
DeKalb Telephone Cooperative included at pages F-2 through F-27 to this
information statement/prospectus. No historical financial statements of DTC are
included in this information statement/prospectus since DTC has no significant
assets or liabilities and has no operating history.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- --------- --------- ---------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Local telephone services revenue..... $ 3,247 $ 3,500 $ 3,704 $ 3,942 $ 4,190 $ 3,122 $ 3,299
Network access services revenue...... 6,336 5,904 7,892 8,242 8,877 6,528 8,164
Wireless products and services
revenue............................ 2,418 2,707 2,859 3,085 3,463 2,495 3,201
Miscellaneous revenue................ 1,283 1,300 1,317 1,502 1,595 1,181 1,177
------- ------- ------- ------- --------- --------- ---------
Total operating revenue....... 13,284 13,411 15,772 16,771 18,125 13,325 15,841
------- ------- ------- ------- --------- --------- ---------
OPERATING EXPENSES:
Plant operations expense............. 2,528 3,208 3,686 3,345 3,900 2,751 2,995
Depreciation and amortization
expense............................ 3,418 3,815 3,727 4,879 4,586 3,453 3,688
Customer operations expense.......... 779 902 906 911 1,132 778 936
Corporate operations expense......... 2,281 2,636 2,658 3,319 3,403 2,267 2,422
Operating taxes...................... 493 492 425 404 380 323 365
------- ------- ------- ------- --------- --------- ---------
Total operating expenses...... 9,499 11,053 11,402 12,858 13,401 9,573 10,406
------- ------- ------- ------- --------- --------- ---------
Total operating income........ 3,785 2,358 4,370 3,913 4,724 3,753 5,435
------- ------- ------- ------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Loss on retirement of assets......... -- -- -- (1,107) (328) (438) --
Interest expense..................... (1,443) (1,330) (1,187) (1,119) (1,109) (837) (807)
Interest income...................... 244 382 452 649 713 567 562
Other income......................... 299 231 124 234 510 248 224
------- ------- ------- ------- --------- --------- ---------
Total other income
(expense)................... (900) (717) (611) (1,343) (214) (460) (21)
------- ------- ------- ------- --------- --------- ---------
Income before income taxes.... 2,885 1,641 3,759 2,570 4,510 3,293 5,414
INCOME TAXES........................... 117 221 256 197 107 77 239
------- ------- ------- ------- --------- --------- ---------
Net income.................... $ 2,768 $ 1,420 $ 3,503 $ 2,373 $ 4,403 $ 3,216 $ 5,175
======= ======= ======= ======= ========= ========= =========
PRO FORMA INFORMATION ASSUMING MERGER
WITH DTC(1):
Net income to common shareholders.... $ 2,792 $ 1,932 $ 3,346
========= ========= =========
Net income per common share:
Basic.............................. $ 1.58 $ 1.13 $ 1.55
========= ========= =========
Diluted............................ $ 1.58 $ 1.13 $ 1.55
========= ========= =========
Weighted average shares used in
calculating earnings per share(2):
Basic.............................. 1,770,309 1,708,710 2,160,846
========= ========= =========
Diluted............................ 1,770,309 1,708,710 2,160,846
========= ========= =========
</TABLE>
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<PAGE> 20
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
AS OF DECEMBER 31, ---------------------
------------------------------------------------- PRO
1994 1995 1996 1997 1998 ACTUAL FORMA(3)
------- ------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $ 5,031 $ 6,940 $ 9,505 $13,690 $ 13,406 $ 16,046 $ 14,439
Total assets......................... 43,649 43,479 45,241 45,919 49,868 52,634 51,028
Long-term debt, net of current
maturities......................... 26,476 25,339 24,510 23,665 22,845 22,094 22,094
Members' equity...................... 13,396 14,125 16,861 18,346 21,989 26,167 --
Shareholders' equity................. -- -- -- -- -- -- 24,561
</TABLE>
- ------------------------
(1) Pro forma gives effect to the merger of DeKalb Telephone Cooperative and
DTC, as if such merger had occurred as of January 1, 1998 and January 1,
1999, respectively, and as if the combined entity had been a taxable
corporation during these respective periods.
(2) The computation of weighted average shares outstanding is based upon an
estimated number of common shares outstanding as a result of the proposed
merger at a conversion rate of one common share per $10.00 in capital
credits outstanding.
(3) Pro forma gives effect to the balance sheet data as though the merger of
DeKalb Telephone Cooperative and DTC had occurred as of September 30, 1999.
14
<PAGE> 21
THE SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting will take place on January 29, 2000 at 1:00 p.m. (local
time) at our Maintenance and Operations Center located between Highways 70 and
53 in Alexandria, Tennessee.
PURPOSE
The special meeting of our active members will be held to consider and vote
upon a proposal to approve our merger into DTC which will change our form of
organization from a not-for profit cooperative to a for-profit corporation, and
to transact any other business that may properly come before the meeting.
VOTING RIGHTS AND RECORD DATE FOR THE MERGER
Only our active members at the close of business on December 31, 1999 are
entitled to notice of and to vote at the meeting and at any adjournment of that
meeting. At the close of business on that date, there were approximately 15,000
active members. Each active member at the close of business on December 31, 1999
who attends the special meeting in person will be entitled to one vote on each
matter presented for a vote of the members at the meeting. As of December 31,
1999, our directors and executive officers and their respective affiliates and
associates accounted for less than 1% of the total number of members.
QUORUM; ABSTENTIONS
The presence in person of 50 active members constitutes a quorum for
purposes of the meeting. Accordingly, if a small number of persons attend the
meeting, our 13 executive officers and directors who are members will be in a
position to substantially influence the outcome of matters to be voted upon. For
example, if only 50 members attend the meeting, the 13 executive officers and
directors will cast approximately 26.0% of the votes. If, however, 1,000 members
attend the meeting, the 13 executive officers and directors merely will cast
approximately 1.3% of the votes. If a member attends the meeting and abstains,
that abstention will be counted as a vote against the merger.
The merger agreement must be approved by the affirmative vote of two-thirds
of the active members present in person and voting at the meeting. Our bylaws
prohibit voting by proxy.
EXPENSES
We will pay all printing expenses and filing fees pertaining to the
registration statement and the information statement/prospectus, including all
expenses for postage, labor and materials.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors unanimously approved the plan and agreement of
merger. The board of directors also declared that the plan and agreement of
merger and the merger are advisable, and determined that the merger is fair to
and in the best interests of our members. Accordingly, the board of directors
unanimously recommends that you vote "FOR" approval of the merger. See "The
Merger--Board Recommendation" and--"Reasons for the Merger."
MISCELLANEOUS
The board of directors is not aware of any matter to be presented for
action at the special meeting other than the matter described in this
information statement/prospectus. Only business within the purpose or purposes
described in the meeting notice may be conducted at a special meeting of the
members.
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<PAGE> 22
THE MERGER
The discussion in this information statement/prospectus is a summary of the
material aspects of the merger and the plan and agreement of merger which is
attached as Appendix A to this information statement/prospectus and incorporated
herein by this reference. We encourage you to read the plan and agreement of
merger in its entirety.
GENERAL
At the special meeting, you will be asked to approve our merger into DTC.
The merger is a way to change our form of organization from a not-for-profit
cooperative to a for-profit corporation. Therefore, the surviving corporation
would be DTC, which would own all of our assets and be subject to all of our
liabilities.
In the merger, each active and inactive member will receive one share of
DTC stock for every $10.00 in capital credits that the member has on our books
as of January 31, 2000, subject to payment in cash for fractional shares. Active
members, those still having telephone service with us, will receive class A
voting common stock. Inactive members, those who no longer have telephone
service with us but still have capital credits on our books, will receive class
B non-voting common stock. All DTC stock issued and outstanding immediately
prior to the effective time of the merger will be canceled.
DTC will not issue fractional shares. Any active or inactive member who
would otherwise be entitled to receive a fraction of a share of DTC stock in the
merger will receive instead cash for any fractional amount that is not a whole
multiple of $10.00.
The merger will become effective upon the time when the articles of merger
are accepted for record by the Secretary of State of the State of Tennessee or
at any other time established under the articles of merger. We expect that the
merger will become effective on February 1, 2000 after any required regulatory
approvals are received and the other conditions to closing are met if the merger
is approved by our members.
BACKGROUND OF THE MERGER
Our board of directors, together with management, has been studying our
strategic future particularly in view of the rapid regulatory changes that are
affecting the telecommunications industry, beginning with the Telecommunications
Act of 1996. The Telecommunications Act mandated open competition in the
telecommunications industry. Until recently, we have been effectively insulated
from competition in our local telephone markets due to Tennessee law. Tennessee
law requires any competitive local exchange carrier that desires to offer local
service in an area being served by an incumbent local exchange carrier to obtain
a license from the Tennessee Regulatory Authority. Tennessee law, however,
provides that no license will be issued in any area served by an incumbent local
exchange carrier, such as us, with fewer than 100,000 access lines.
Despite our monopoly on the provision of local telephone service, our board
of directors became concerned about future competition from companies that
offered "packages" of telecommunications products and services in our area.
These packages might include services that we, as a cooperative, were prevented
from offering, such as cable television, or over which we had no monopoly, such
as wireless or internet services. Failure to offer a full selection of
telecommunications products and services could result in customer migration to
competitors that provided more diverse services and inhibit our ability to
attract new customers.
16
<PAGE> 23
As a result of these issues, our board began studying the means by which it
could convert to a for-profit corporation that would be free of the restrictions
of operating as a cooperative. This process began in early 1999. That occurred
when the Tennessee Attorney General issued a legal opinion that telephone
cooperatives could merge with for-profit companies.
Our board of directors accelerated its strategic process following a May
1999 decision of the FCC. At that time, the FCC ruled that the
Telecommunications Act preempted that portion of Tennessee law that
automatically denied a license to a competitive local exchange carrier solely on
the basis that the proposed area to be served is already being served by an
incumbent local exchange carrier with fewer than 100,000 access lines. If the
FCC's order is sustained, we will lose our monopoly on local telephone service
and be subject to potential competition in our service area.
Therefore, the board unanimously concluded that to continue under the
cooperative form of business was not in the best interests of our members and
that the most advantageous plan for our members is to convert to a for-profit
corporation which would have no restrictions on the services that could be
offered. Accordingly, your board has unanimously approved the proposed plan and
agreement of merger and recommended that the merger be submitted for approval by
the members at the special meeting.
REASONS FOR THE MERGER
In the course of reaching its decision to approve the merger our board,
without assigning any relative or specific weights, considered the following
factors:
- The changing nature of the telecommunications industry has caused
telecommunications providers to consider offering a diverse selection of
telecommunications products and services. A single provider may offer
basic local telephone service, internet access, cable television,
wireless telephone service and long distance reselling services. As a
result, customers have come to expect "one-stop shopping" for all of
their telecommunications needs. To remain competitive with these large,
diverse telecommunications providers, we too must have the capability to
offer a full selection of telecommunications products and services. We
currently are considering offering cable television service,
long-distance reselling services and facilities-based competitive local
exchange carrier services.
- The changing regulatory environment surrounding the telecommunications
services industry has significantly increased competition. Local
telecommunications companies, like us, can no longer expect to be
insulated from competition from the diverse, multi-state or
multi-national telecommunications providers or from competitive local
exchange carriers. Our failure to devise ways to compete will result in
the loss of customers to those providers and in our inability to attract
and retain new customers in the areas we currently serve or in those into
which we may expand in the future. To be competitive, we must have the
capability to offer a full selection of telecommunications products and
services.
- We currently are restricted in the types of services that we can provide.
As already stated, we must offer a wide range of telecommunications
services to remain competitive. However, we do not believe that Tennessee
law allows us, as a telephone cooperative, to offer certain
telecommunication products and services, such as cable television. After
the merger, and our resulting conversion to a for-profit corporation, we
will no longer be subject to this restriction. Rather, we will be able to
engage in any lawful telecommunications business that we believe is
desirable or necessary to remain competitive.
- Growth opportunities exist outside our current service area. Although our
board currently has no plans to expand into any specific geographic area,
we believe that developing an expanded service area in the future will be
necessary to compete and will be in the best interests of our
17
<PAGE> 24
members. We believe we are well-positioned to expand into markets
adjacent to our current markets by offering facilities-based competitive
local exchange carrier services to customers near our existing or future
fiber nodes. In addition, we believe there are a number of companies that
offer telecommunications services either within or near our service area
which may become interested in potential acquisition or joint venture
opportunities.
- We believe it is desirable to provide members with an opportunity for
liquidity and the ability to realize the value of their investments. As a
for-profit corporation, DTC's shareholders, assuming a market develops,
will have the opportunity to realize their investment in DTC by selling
their stock, if they so choose. Our members currently do not have the
opportunity to realize the value of their investment with respect to
their capital credits or their membership interests, both of which are
non-transferable.
- We believe it is desirable to have access to public equity markets to
potentially provide additional resources to promote growth and support
operating needs. As a telephone cooperative, we do not have access to
public equity markets. Although we do not anticipate an immediate need
for capital beyond that which currently is available to us, we believe
having this access in our costly technological and increasingly
competitive environment is in our and our members' best interests.
Our board does not believe that there are any material disadvantages to the
merger. The only potential material disadvantages of the merger identified by
the board were:
- the loss of our partial tax-exempt status; and
- the increased competition that the merged companies will face resulting
from the pursuit of DTC's business plan.
We are partially exempt from United States federal income taxation by
virtue of Section 501(c)(12) of the Internal Revenue Code, which makes the
exemption available to telephone cooperatives which do not receive more than 15%
of their revenues from non-member sources. The board believes that
diversification and broadening of goods and services sold are essential to our
ability to respond to any future competition we may face from competitive local
exchange carriers and large, multi-state or multi-national telecommunications
providers which may enter our service area. Therefore, our board is considering
offering cable television service, long distance reselling services, and
facilities-based competitive local exchange carrier services. Our board also
believes there is growth opportunity in our wireless services and that new
customers may be attracted either by offering wireless service as the customer's
primary telephone or by installing fixed broadband wireless technology when the
technology has matured.
However, as our revenues from non-member sources, such as revenue from our
wireless services, increase and the goods and services offered by us expand into
other areas of telecommunications, such as cable television, the board believes
the amount of member-sourced income will decrease relative to total income. In
other words, we may still lose our tax-exempt status even if we remain a
cooperative. If we became a non-exempt cooperative, any tax benefit would be
outweighed by increases in administrative costs and burdens. As revenue sources
diversify and broaden, the difficulties of accounting for, and allocating among,
various classes of members and non-members and various levels and classes of
goods and services sold intensify significantly, with corresponding increases in
administrative costs. We would not incur these costs if we convert into a
for-profit corporation. Therefore, our board does not consider the loss of our
partial tax-exempt status to be a significant disadvantage to the merger.
18
<PAGE> 25
Our board also has discounted the disadvantage of increased competition
that will result from the pursuit of DTC's business plan. As discussed
previously, as a small rural telephone cooperative, we have been insulated to
some extent from competition within our service area because of Tennessee law.
However, the recent FCC decision that preempted that portion of Tennessee law,
if sustained, would result in the loss of our protection from competition even
though we would still be subject to the restrictions of a telephone cooperative
in the types of telecommunications services that we offer and the service area
within which they could be offered. For example, we, as a telephone cooperative,
are prohibited by Tennessee law from offering cable television service, a
service we may offer if we convert to a for-profit corporation. Because we will
be subject to increased competition regardless of whether we remain as a
cooperative or convert to a for-profit corporation, the board believes this is
not a significant disadvantage to the merger. Rather, our board believes that
this inevitable increased competition by companies able to offer a wider choice
of telecommunications services, including cable television services, actually
supports the merger since continuing to operate as a telephone cooperative risks
loss of members' capital credits in the event that we, as a result of the
inability to anticipate or respond to competitive forces, failed as a business
entity.
BOARD RECOMMENDATION
Our board of directors believes that the merger is fair to you, as our
members, and that the merger is in your best interests. As of the date of this
information statement/prospectus, our directors and executive officers, together
with their respective affiliates and associates, as a group, constituted less
than one percent of the total number of our members. After the merger, our
directors, executive officers and their respective affiliates and associates as
a group would beneficially own substantially less than one percent of the DTC
stock issuable in the merger.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE MEMBERS VOTE
FOR
APPROVAL OF THE MERGER.
FEDERAL INCOME TAX CONSEQUENCES
Tuke Yopp & Sweeney, PLC, special counsel to DTC, has rendered certain
advice in connection with the material tax consequences of the merger.
The following discussion is Tuke Yopp & Sweeney, PLC's opinion as to the
material United States federal income tax consequences that should arise from
the merger to us, DTC and members who are residents or citizens of the United
States. The following discussion does not address state, local or foreign tax
consequences of the merger.
Members should note that this discussion is not binding upon the Internal
Revenue Service and that neither we nor DTC have sought, nor do we or DTC intend
to seek, a ruling from the Internal Revenue Service as to the federal tax
consequences of the merger. In view of this and in view of the absence of
directly applicable legal precedent, there can be no assurance that the Internal
Revenue Service will agree with the treatment described below, or that any
challenge to such treatment would not be sustained. EACH MEMBER SHOULD CONSULT
THAT MEMBER'S OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
MERGER AND THE RECEIPT OF SHARES OF DTC STOCK, INCLUDING THE APPLICATION OF
STATE, LOCAL AND FOREIGN LAW.
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It is the opinion of Tuke Yopp & Sweeney, PLC that our proposed merger into
DTC will constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended. As a consequence:
- Neither we nor DTC will recognize any taxable gain or loss as a result of
the merger. DTC's tax basis and holding period of the assets acquired in
the merger will be the same as it currently is for us.
- Active and inactive members receiving DTC stock in the merger who have
not deducted, as a miscellaneous itemized deduction or as a trade or
business expense, for federal income tax purposes the amounts of their
monthly telephone bills from us, will not recognize taxable income or
loss because of the merger, except with respect to cash received in lieu
of fractional shares. The DTC stock received by those members in the
merger will have the same basis and holding period as the capital credits
that those members previously had in us.
EXAMPLE: A customer who has not deducted the amount of his/her
telephone bills for United States federal income tax purposes has
capital credits of $100.00, $10.00 of which was earned in each of the
years 1990 through 1999. That customer will receive ten shares of DTC
stock in the merger. The customer will not recognize any gain or loss
upon receipt of the stock and the customer's tax basis, which is used to
calculate gain or loss upon a later sale of the stock, is $100.00. In
addition, the customer will be deemed, for purposes of the holding
period used to determine whether gain or loss on a later sale of the
stock is long-term or short-term, to have received one-tenth of each
share during each of the years 1990 through 1999.
- Active and inactive members receiving DTC stock in the merger that have
deducted, as miscellaneous itemized deductions or as trade or business
expense, for federal income tax purposes the amounts of their monthly
telephone bills from us, will not recognize income because of the merger
in excess of the amount previously deducted. However, that member may
recognize taxable income because of the merger in an amount up to the
amount of the previous deductions. The DTC stock received by those
members in the merger will have a tax basis equal to any income
recognized by the member because of the merger plus any remaining basis
in the member's capital credits. In addition, the DTC stock will have the
same holding period as the capital credits that those members previously
had in us.
EXAMPLE: A customer who has deducted the amount of his/her telephone
bills for United States federal income tax purposes has capital credits
of $100.00, $10.00 of which was earned in each of the years 1990 through
1999. That customer will receive ten shares of DTC stock in the merger.
If the DTC stock when received is worth $100.00, the customer will not
recognize income upon receipt of the stock in excess of the amounts
previously deducted; however, the amount of that income will not exceed
the fair market value of the DTC stock received (in this
example--$100.00). The tax basis, used to calculate gain or loss upon a
later sale of the stock, will be between zero, because of the previous
deduction, and $100.00, depending upon the amount, if any, that the
member is required to recognize as income as a result of receiving a
previous tax deduction. In addition, the customer will be deemed, for
purposes of the holding period used to determine whether gain or loss on
a later sale of the stock is long-term or short-term, to have received
one-tenth of each share during each of the years 1990 through 1999.
- Members receiving cash in lieu of fractional shares of DTC stock will be
treated as if the fractional shares had been distributed as part of the
merger and then redeemed by DTC. The cash payments should be treated as
having been received as a distribution in full payment in
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<PAGE> 27
exchange for the fractional shares treated as redeemed. Gain or loss will
be measured by the difference between the cash received and the adjusted
basis of the fractional share. The gain or loss will be capital gain or
loss if the capital credits were consolidated capital assets in the hands
of the member.
EXAMPLE: A customer has capital credits of $109.00. That customer will
receive ten shares of DTC stock in the merger for $100.00 of the capital
credits. A customer may or may not recognize income upon receipt of the
stock depending on whether or not the customer has deducted the amounts
of his/her telephone bills as discussed in the previous two examples.
The customer will receive $9.00 in cash in satisfaction of the remainder
of the capital credits. That customer will recognize income in the year
that the merger occurs for United States federal income tax purposes
equal to the difference between the $9.00 received and the amount of the
basis in the fractional share treated as redeemed.
Because it is unlikely that most residential customers have deducted the
amount of their telephone bills for federal income tax purposes, we believe this
generally means that the receipt of DTC stock in the merger will be tax free to
residential customers and possibly taxable to business customers to the extent
of the amount of payments previously deducted.
Tuke Yopp & Sweeney, PLC indicates that the basis for their opinion is
derived from their review of previously issued public and private letter rulings
by the Internal Revenue Service and court opinions involving transactions with
similar but not identical characteristics. Because the Internal Revenue Service
has not previously ruled on a transaction involving the merger of a Section
501(c)(12) cooperative, the opinion states that there is a lack of direct
precedent for the stated tax treatment. The opinion of Tuke Yopp & Sweeney, PLC,
states, however, that existing precedent involving transactions with similar but
not identical characteristics, if followed, would cause the merger to be treated
as and constitute a tax free exchange and that Tuke Yopp & Sweeney, PLC, has no
reason to believe that the Internal Revenue Service would not follow this
precedent.
Due to the complexities of federal, state and local income tax laws, it is
strongly recommended that members, particularly members who have previously
deducted their payments to us, consult their own tax advisors concerning the
particular federal, state and local tax consequences of the merger to them.
FORMER MEMBERS OF DEKALB TELEPHONE COOPERATIVE, INC.
Our former or inactive members are those persons or entities that at one
time were our members but no longer have telephone service with us. Inactive
members have no voting rights on the merger; however, inactive members have
rights to participate in the distribution of our assets in certain events.
Some inactive members, as of January 31, 2000, will still have capital
credits on our books. In addition, active and inactive members to whom capital
credits have been allocated during the past ten years have the right, if we were
being dissolved, to receive a share of our net assets. That right, generally
called a "property right," is being preserved for all active and inactive
members by the issuance of DTC common stock which carries with it a right, if
DTC is dissolved in the future, to receive a share of DTC's net assets.
The stock received in the merger by inactive members is non-voting but the
stock received by active members has voting rights. Inactive members currently
have no voting rights and the issuance of non-voting stock to them carries
forward the active/inactive member distinction in the merged companies.
Otherwise, the stock to be issued in the merger has the same rights to the
owners of the stock.
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REGULATORY APPROVALS REQUIRED FOR THE MERGER
Consummation of the merger is subject to the approval of the Rural
Utilities Service pursuant to certain loan agreements between us and the Rural
Utilities Service. We have received verbal assurances from the Rural Utilities
Service that the merger will be approved.
DTC also must receive from the Tennessee Regulatory Authority a certificate
of public convenience and necessity to operate our system following the
effective date of the merger. We currently are exempt from most Tennessee
Regulatory Authority regulation. However, after the merger the Tennessee
Regulatory Authority will regulate DTC with regard to various matters, including
rates for basic telephone service, intrastate toll and access rates, quality of
service, issuance of securities, depreciation rates, disposition of public
utility property, issuance of debt and accounting systems.
RESALE OF DTC COMMON STOCK; RESTRICTIONS ON DTC AFFILIATES
Assuming that a market develops for the stock, DTC stock received in the
merger will be freely transferable, except for DTC stock received by any
"affiliate" of DTC. Affiliate shares will not be transferable except in
compliance with the Securities Act. The term "affiliate" is defined in the
Securities Act and generally includes directors, certain executive officers and
beneficial owners of 10% or more of a class of capital stock. This information
statement/prospectus does not cover sales of DTC stock by any person deemed an
affiliate.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
After the merger, our members will be shareholders of DTC and the
businesses, properties and operations of DTC would be substantially identical to
ours. The directors and officers of DTC who were engaged immediately prior to
the effective time of the merger would continue immediately after the effective
time of the merger as the directors and officers of DTC. Upon consummation of
the merger, the employees of DTC would be the persons who were our employees
immediately prior to the effective time of the merger.
As a result of the merger, DTC will assume all of our operations, assets
and liabilities and will have a consolidated financial position substantially
identical to ours immediately before the merger.
NO DISSENTERS' RIGHTS
Our members are not entitled to dissenters' rights under either the
Tennessee Nonprofit Corporation Act or the Tennessee Telephone Cooperative Act
in connection with the merger.
THE PLAN AND AGREEMENT OF MERGER
Effective Time of the Merger
If approved by our members, the merger will be consummated on the date and
time the articles of merger are filed with the Secretary of the State of
Tennessee in accordance with the Tennessee Business Corporation Act or at such
other time as is set forth in the articles of merger. If our members approve the
merger at the special meeting and the other conditions to the merger are
satisfied, the effective time of the merger would occur as soon after the
special meeting as is possible, which may be the same date as the special
meeting, provided that the merger has not been abandoned prior to such time. It
is anticipated that the merger, if approved and consummated, would become
effective at 12:01 a.m. Central Standard Time on February 1, 2000.
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Conversion of Capital Credits
At the effective time of the merger, we will merge into DTC and cease to
exist. As of the effective time of the merger, members would cease to be our
members and consequently would have no rights as members. Instead, our members
after the merger would have rights as shareholders of DTC.
If the merger is consummated:
- each active and inactive member will receive one share of DTC stock for
every $10.00 in capital credits that a member has on our books as of
January 31, 2000;
- persons or entities that are active members as of January 31, 2000 will
receive shares of DTC's class A voting common stock;
- persons or entities that are inactive members as of January 31, 2000 will
receive shares of DTC's class B non-voting common stock; and
- each member with capital credits in an amount other than in whole
multiples of $10.00 will receive cash for any fractional amount.
Based on the capital credits on our books as of September 30, 1999, DTC
expects to issue approximately 2,000,000 shares of class A voting common stock
and approximately 500,000 shares of class B non-voting common stock in the
merger.
Procedure for Issuance of Merger Consideration
If the merger is consummated, as soon as practicable, and in any event
within 60 days after the effective date of the merger, DTC is required to send
to each member certificates for the shares of DTC stock that the member is to
receive in the merger based upon that member's capital credit account as of
January 31, 2000. Each member also will receive a check for the amount of cash
required, if any, to pay that member for any fractional share to which the
member otherwise would be entitled.
Conditions to Completion of the Merger
Our obligation to consummate the merger is subject to the fulfillment of
the following conditions:
- approval of the merger by two-thirds of our active members voting at the
special meeting;
- obtaining all required regulatory approvals and third party consents;
- there being no restraining order, injunction or court order preventing
the merger or any proceeding seeking to prevent the merger or making the
merger illegal; and
- there being no statute, rule, regulation or governmental order that might
materially adversely affect or delay the merger.
We may terminate the plan and agreement of merger and abandon the merger at
any time before the effective time of the merger, even after approval of the
merger by the members.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our historical
financial information included elsewhere in this document.
OVERVIEW
DeKalb Telephone Cooperative, Inc., which presently operates under the
trade name of DTC Communications, provides telecommunications services,
including local telephone service, long distance network access and dial-up
internet access, as well as wireless telephone services. At September 30, 1999,
our incumbent local exchange carrier services operated approximately 19,000
access lines primarily in rural Middle Tennessee, and our for-profit subsidiary,
Advantage Cellular, offered wireless telephone services to approximately 7,400
subscribers.
Our operating revenue primarily is reported in four captions: local
telephone services revenue, network access services revenue, wireless products
and services revenue and miscellaneous revenue.
Local Telephone Services Revenue. Local telephone services revenue is
primarily derived from providing local service to customers. Local service
operations provide lines from telephone exchange offices to subscribers'
premises for the origination and termination of telecommunications, including
the following: basic local telephone service and internet service provided
through the regular switched network; dedicated private line facilities for
voice and special services, such as transport of data, audio and video;
switching services for customers' internal communications through facilities
owned by us; services for data transport that include managing and configuring
special service networks; and dedicated low- or high-capacity public or private
digital networks. Other local service revenue is derived from information and
directory assistance and public payphone services. We also offer enhanced
calling features, such as voice mail, call waiting, caller identification,
automatic redial, call forwarding, three-way calling, speed calling and call
tracing, on a monthly subscription or per-use basis.
Network Access Services Revenue. We provide network access and
interconnection services by connecting the equipment and facilities of our
subscribers with the communications networks of long distance carriers (e.g.,
AT&T or MCI-Worldcom) in order to allow a long distance call to be either
originated or terminated within our network. These connections are provided by
linking these carriers and subscribers through the public switched network or
through dedicated private lines furnished by us. Network access charges, which
are payable by long distance carriers and end-user subscribers, are designed to
recover the costs of the common and dedicated facilities and equipment used to
connect networks of long distance carriers with our local network and to
subsidize the cost of providing local service to rural and other high-cost
areas. In addition, we receive monies from the universal service fund. We
provide Wide Area Telecommunications Service for customers with highly
concentrated demand; and special services, such as transport of data, audio and
video as well as long distance directory assistance services.
Wireless Products and Services Revenue. Wireless products and services
revenue is primarily derived from customers of Advantage Cellular, who purchase
wireless telephone products and services, and from roaming charges paid by
customers of other wireless companies for originating or terminating a wireless
call while traveling within Advantage Cellular's wireless network.
Miscellaneous Revenue. Miscellaneous revenue is primarily derived from
directory publication (i.e., advertising) and billing and collection services
for long distance carriers.
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For the nine months ended September 30, 1999, we had revenue of $15.8
million, of which 20.8% was attributable to local telephone services revenue,
51.5% was attributable to network access services revenue, 20.2% was
attributable to wireless products and services revenue and 7.4% was attributable
to miscellaneous revenue. For the year ended December 31, 1998, we had revenue
of $18.1 million, of which 23.1% was attributable to local telephone services
revenue, 49.0% was attributable to network access services revenue, 19.1% was
attributable to wireless products and services revenue and 8.8% was attributable
to miscellaneous revenue.
Plant Operations Expense. Plant operations expense consists primarily of
maintenance, repair and testing of our telephone network facilities, including
switches and cable.
Customer Operations Expense. Customer operations expense consists
primarily of salaries and benefits of employees who respond to customer
inquiries, customer complaints and requests for service.
Corporate Operations Expense. Corporate operations expense consists
primarily of unallocated general and administrative expenses associated with
corporate operations, for example, certain consulting and professional fees,
salaries and benefits of management and management information systems.
Operating Taxes Expense. Operating taxes expense consists of property
taxes, ad valorem and certain sales taxes.
RESULTS OF OPERATIONS
The following table sets forth selected income statement data and such data
as a percentage of operating revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- -------------- -------------- ---------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Local telephone services revenue..... $ 3,704 23.5% $ 3,942 23.5% $4,190 23.1% $3,122 23.4% $ 3,299 20.8%
Network access services revenue...... 7,892 50.0 8,242 49.1 8,877 49.0 6,528 49.0 8,164 51.5
Wireless products and services
revenue............................ 2,859 18.1 3,085 18.4 3,463 19.1 2,495 18.7 3,201 20.2
Miscellaneous revenue................ 1,317 8.4 1,502 9.0 1,596 8.8 1,181 8.9 1,177 7.4
------- ----- ------- ----- ------ ----- ------ ----- ------- -----
Total operating revenue...... 15,772 100.0 16,771 100.0 18,125 100.0 13,325 100.0 15,841 100.0
OPERATING EXPENSES:
Plant operations expense............. 3,686 23.4 3,345 19.9 3,900 21.5 2,751 20.6 2,995 18.9
Depreciation and amortization
expense............................ 3,727 23.6 4,879 29.1 4,586 25.3 3,453 25.9 3,688 23.3
Customer operations expense.......... 906 5.7 910 5.4 1,132 6.2 778 5.8 936 5.9
Corporate operations expense......... 2,658 16.9 3,319 19.8 3,403 18.8 2,267 17.0 2,422 15.3
Operating taxes...................... 426 2.7 404 2.4 381 2.1 323 2.4 365 2.3
------- ----- ------- ----- ------ ----- ------ ----- ------- -----
Total operating expenses..... 11,402 72.3 12,858 76.7 13,402 73.9 9,573 71.8 10,406 65.7
------- ----- ------- ----- ------ ----- ------ ----- ------- -----
Operating income..................... $ 4,370 27.7% $ 3,913 23.3% $4,724 26.1% $3,753 28.2% $ 5,436 34.3%
======= ===== ======= ===== ====== ===== ====== ===== ======= =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Local telephone services revenue increased $178,000, or 5.7%, to $3.3
million for the nine months ended September 30, 1999 from $3.1 million for the
comparable 1998 period. This increase was due primarily to growth in the number
of customers and sales of additional or enhanced calling features to existing
customers. As a percentage of total operating revenue, local telephone services
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revenue decreased to 20.8% for the nine months ended September 30, 1999 from
23.4% for the comparable 1998 period. This decrease resulted primarily from the
large increase in network access services revenues that was attributable in
large part to the increase in universal service fund monies.
Network access services revenue increased $1.6 million, or 25.1%, to $8.2
million for the nine months ended September 30, 1999 from $6.5 million for the
comparable 1998 period. This increase was primarily due to an increase of $1.5
million received from the universal service fund, the majority of which resulted
from certain reclassifications of portions of our switching network. As a
percentage of total operating revenue, network access services revenue increased
to 51.5% for the nine months ended September 30, 1999 from 49.0% for the
comparable 1998 period.
Wireless products and services revenue increased by $706,000, or 28.3%, to
$3.2 million for the nine months ended September 30, 1999 from $2.5 million for
the comparable 1998 period. This increase was primarily due to growth in number
of customers and increased usage by existing customers as well as an increase in
roaming charges, which are charges for calls made by wireless users from other
areas while travelling through our service area. As a percentage of total
operating revenue, wireless products and services revenue increased to 20.2% for
the nine months ended September 30, 1999 from 18.7% for the comparable 1998
period.
Miscellaneous revenue remained relative constant during the comparable
periods, decreasing by $4,000. As a percentage of total operating revenue,
miscellaneous revenue decreased to 7.4% for the nine months ended September 30,
1999 from 8.9% for the comparable 1998 period.
Plant operations expense increased by $243,000, or 8.8%, to $3.0 million
for the nine months ended September 30, 1999 from $2.8 million for the
comparable 1998 period. As a percentage of total operating revenue, plant
operations expense decreased to 18.9% for the nine months ended September 30,
1999 from 20.6% for the comparable 1998 period. This decrease was due primarily
to an increase in total revenues.
Depreciation and amortization expense increased by $234,000, or 6.8%, to
$3.7 million for the nine months ended September 30, 1999 from $3.5 million for
the comparable 1998 period. As a percentage of total operating revenue,
depreciation and amortization expense decreased to 23.3% for the nine months
ended September 30, 1999 from 25.9% for the comparable 1998 period.
Customer operations expense increased by $158,000, or 20.3%, to $936,000
for the nine months ended September 30, 1999 from $778,000 for the comparable
1998 period. As a percentage of total operating revenue, customer operations
expense increased to 5.9% for the nine month period ended September 30, 1999
from 5.8% for the comparable 1998 period.
Corporate operations expense increased by $155,000, or 6.8%, to $2.4
million for the nine months ended September 30, 1999 from $2.3 million for the
comparable 1998 period. As a percentage of total operating revenue, corporate
operations expense decreased to 15.3% for the nine months ended September 30,
1999 from 17.0% for the comparable 1998 period. This decrease was due primarily
to an increase in total revenues.
Operating taxes increased by $43,000, or 13.2%, to $365,000 for the nine
months ended September 30, 1999 from $323,000 for the comparable 1998 period. As
a percentage of total operating revenue, operating taxes decreased to 2.3% for
the nine months ended September 30, 1999 from 2.4% for the comparable 1998
period.
Operating income increased by $1.7 million, or 44.8%, to $5.4 million for
the nine months ended September 30, 1999 from $3.8 million for the comparable
1998 period. As a percentage of total operating revenue, operating income
increased to 34.3% for the nine months ended September 30, 1999 from 28.2% for
the comparable 1998 period.
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<PAGE> 33
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Local telephone services revenue increased by $248,000, or 6.3%, to $4.2
million for 1998 from $3.9 million for 1997. This increase was primarily due to
increased revenues from the sale of custom calling features. As a percentage of
total operating revenue, local telephone services revenue decreased to 23.1% for
1998 from 23.5% for 1997.
Network access services revenue increased by $635,000, or 7.7%, to $8.9
million for 1998 from $8.2 million for 1997. This increase was due primarily to
interstate switched access revenues. As a percentage of total operating revenue,
network access services revenue remained relatively constant between 1998 and
1997.
Wireless products and services revenue increased by $378,000, or 12.2%, to
$3.5 million for 1998 from $3.1 million for 1997. This increase was due
primarily to an increase in the number of customers and usage. As a percentage
of total operating revenue, wireless products and services revenue increased to
19.1% for 1998 from 18.4% for 1997.
Miscellaneous revenue increased by $94,000, or 6.2%, to $1.6 million in
1998 from $1.5 million in 1997. This increase was due primarily to billing and
collections revenue. As a percentage of total operating revenue, miscellaneous
revenue remained relatively constant decreasing to 8.8% in 1998 from 9.0% in
1997.
Plant operations expense increased by $555,000, or 16.6%, to $3.9 million
for 1998 from $3.3 million for 1997. As a percentage of total operating revenue,
plant operations expense increased to 21.5% for 1998 from 19.9% for 1997. This
increase was due primarily to accelerated maintenance programs and increases in
roaming charges caused by Advantage Cellular customers originating or
terminating calls in another wireless network.
Depreciation and amortization expense decreased by $294,000, or 6.0%, to
$4.6 million for 1998 from $4.9 million for 1997. As a percentage of total
operating revenue, depreciation and amortization expense decreased to 25.3% for
1998 from 29.1% for 1997. This decrease was due primarily to an increase in
total operating revenues.
Customer operations expense increased by $221,000, or 24.3%, to $1.1
million for 1998 from $910,000 for 1997. As a percentage of total operating
revenue, customer operations expense increased to 6.2% for 1998 from 5.4% for
1997. This increase was due primarily to expansion of services offered and
related personnel costs.
Corporate operations expense increased by $85,000, or 2.5%, to $3.4 million
for 1998 from $3.3 million for 1997. As a percentage of total operating revenue,
corporate and other operations expense decreased to 18.8% for 1998 from 19.8%
for 1997. This decrease was due primarily to an increase in total revenues.
Operating taxes decreased by $23,000, or 5.8%, to $381,000 for 1998 from
$404,000 for 1997. This decrease resulted primarily from decreased property
taxes. As a percentage of total operating revenue, operating taxes decreased to
2.1% in 1998 from 2.4% in 1997.
Operating income increased by $811,000, or 20.8%, to $4.7 million for 1998
from $3.9 million in 1997. As a percentage of total operating revenue, operating
income increased to 26.1% in 1998 from 23.3% in 1997.
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<PAGE> 34
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Local telephone services revenue increased by $238,000, or 6.4%, to $3.9
million for 1997 from $3.7 million for 1996. This increase was due primarily to
growth in customers and to offering enhanced calling features to existing
customers. As a percentage of total operating revenue, local telephone services
revenue remained relatively constant at 23.5%.
Network access services revenue increased by $350,000, or 4.4%, to $8.2
million for 1997 from $7.9 million for 1996. This increase was due primarily to
interstate switched access revenues. As a percentage of total operating revenue,
network access services revenue decreased to 49.1% in 1997 from 50.0% in 1996.
Wireless products and services revenue increased by $226,000, or 7.9%, to
$3.1 million for 1997 from $2.9 million for 1996. This increase was due
primarily to growth in number of customers and increased roaming service
revenues. As a percentage of total operating revenue, wireless products and
services revenue increased to 18.4% in 1997 from 18.1% in 1996.
Miscellaneous revenue increased by $185,000, or 14.0%, to $1.5 million in
1998 from $1.3 million in 1997. This increase resulted from interstate and
intrastate billing and collection revenue. As a percentage of total operating
revenue, miscellaneous revenue increased to 9.0% in 1998 from 8.4% in 1996.
Plant operations expense decreased by $340,000, or 9.2%, to $3.3 million
for 1997 from $3.7 million for 1996. As a percentage of total operating revenue,
plant operations expense decreased to 19.9% for 1997 from 23.4% for 1996. This
decrease was due primarily to a decrease in the amount of application software
expensed in 1997 from 1996.
Depreciation and amortization expense increased by $1.2 million, or 30.9%,
to $4.9 million for 1997 from $3.7 million for 1996. As a percentage of total
operating revenue, depreciation and amortization expense increased to 29.1% for
1997 from 23.6% for 1996. This increase was due primarily to an increase in
total operating revenue.
Customer operations expense remained relatively constant during 1997 and
1996. As a percentage of total operating revenue, customer operations expense
decreased to 5.4% for 1997 from 5.7% for 1996. This decrease was due primarily
to an increase in total revenue while customer operations expense remained
unchanged.
Corporate operations expense increased by $661,000, or 24.9%, to $3.3
million for 1997 from $2.7 million for 1996. As a percentage of total operating
revenue, corporate operations expense increased to 19.8% for 1997 from 16.9% for
1996. This increase was due primarily to an increase in the expensing of
application software and associated database development.
Operating taxes decreased by $22,000, or 5.1%, to $404,000 in 1997 from
$426,000 in 1996. This decrease resulted primarily from decreased property
taxes. As a percentage of total operating revenue, operating taxes decreased to
2.4% in 1997 from 2.7% in 1996.
Operating income decreased by $457,000, or 10.4%, to $3.9 million in 1997
from $4.4 million in 1996. As a percentage of total operating revenue, operating
income decreased to 23.3% in 1997 from 27.7% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and marketable securities of $15.8
million, working capital of $16.0 million and long-term indebtedness of $22.1
million, net of current maturities. Our
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<PAGE> 35
primary sources of liquidity are cash flows from operations and available
borrowings from the Rural Utilities Service of the United States Department of
Agriculture. As of September 30, 1999, we had available from the Rural Utilities
Service an additional $8.6 million in borrowing capacity. Conversion to a
for-profit corporation will not affect our ability to borrow from the Rural
Utilities Service.
Historically, our operations and growth have been financed through cash
flows from operations and long-term indebtedness. These borrowings generally are
secured by substantially all of our assets. Our existing long-term debt consists
of a series of loans from the Rural Utilities Service that impose numerous
restrictive covenants on us and our operations. The weighted average interest
rate on these loans at September 30, 1999 was approximately 4.9%.
We anticipate that our cash flows from operations and the available
borrowings from the Rural Utilities Service will provide sufficient cash to
enable us to meet our working capital needs, debt service requirements and
planned capital expenditures for property and equipment for the foreseeable
future.
Operating Activities
During the nine months ended September 30, 1999, cash provided by operating
activities was $8.0 million. Net income plus non-cash charges provided $9.1
million of operating cash flow during this period. Reduction in accounts payable
reduced operating cash flow during this period by $1.2 million.
During the year ended December 31, 1998, cash provided by operating
activities was $9.9 million. Net income plus non-cash charges provided $9.4
million of operating cash flow during this period. Other items that
significantly affected cash flow during this period were increases in
receivables, which reduced cash flow, of $443,000 and in accounts payable, which
increased cash flow, of $1.2 million. The increase in receivables resulted from
an increase in the number of customers and customer services and the increase in
payables resulted from year-end timing differences.
Investing Activities
During the nine months ended September 30, 1999, cash used by investing
activities was $6.6 million. Cash used on capital expenditures was $4.7 million
during this period. The capital expenditures were incurred to construct and
acquire property, plant and equipment. During the nine months ended September
30, 1999, cash used for investments was $1.9 million. Our investments included
marketable securities, consisting primarily of government securities.
During the year ended December 31, 1998, cash used by investing activities
was $7.9 million. Cash used on capital expenditures was $7.9 million during this
period. The capital expenditures were incurred to construct and acquire
property, plant and equipment. In addition, we disposed of $333,000 in
marketable securities during this period.
The Telecommunications Act requires that we offer telephone number
portability to the customers of any competitive local exchange carrier providing
service in our area. We must provide this service within six months after being
requested by a competitive local exchange carrier to do so. Although there
presently is no competitive local exchange carrier in our area, if one were to
be licensed and requested number portability we would be required to purchase an
estimated $200,000 of software.
As of September 30, 1999, we had made a $100,000 capital investment in
Tennessee Independent Telecommunications Group, LLC, a new wholesale transport
telecommunications
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network. Although additional capital investments have not been required, we are
obligated to contribute an additional $400,000 in the future.
Financing Activities
During the nine months ended September 30, 1999, cash used by financing
activities was $1.7 million. Cash used for payments on long-term borrowings was
$710,000 during this period. In addition, we used $996,000 of cash to retire
certain capital credits.
During the year ended December 31, 1998, cash used by financing activities
was $1.6 million. Cash used for payments on long-term borrowings was $848,000
during this period. In addition, we used $760,000 of cash to retire certain
capital credits.
The retirement of capital credits during 1998 and 1999 resulted from our
policy of retiring credits of active and inactive members that accrued more than
ten years in the past. For administrative convenience and in order to make our
capital credit position, at the time of the merger, reflect the precise
requirements of tax and cooperative law, we expect to retire, effective as of
January 31, 2000, all capital credits that originated prior to 1990. Those
credits total approximately $1.5 million and, assuming the merger occurs, would
be paid in fiscal year 2000.
INFLATION
Due to relatively low levels of inflation experienced in the years ended
December 31, 1996, 1997 and 1998, we believe inflation did not have a material
effect on our results during these periods.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted SFAS 130, Reporting Comprehensive Income, which establishes
standards for displaying comprehensive income and its components in our
consolidated financial statements. Comprehensive income encompasses all changes
in shareholders equity with the exception of those transactions arising with
owners. The adoption of this pronouncement had no material effect on our results
of operations.
We adopted SFAS 131, Disclosures about Segments of an Enterprise and
Related Information, which establishes standards for reporting information about
operating segments in our consolidated financial statements. The standard also
establishes requirements for related disclosure about our products and services,
geographic areas and major customers. We operate in two industry segments;
wireline and wireless telephone services and accordingly, have disclosed
information for each of these segments in our consolidated financial statements.
The adoption of this pronouncement had no effect on our presentation of
operating results or financial position.
We have adopted the AICPA Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
As permitted, we have elected to adopt the provisions of SOP 98-1 during the
year ended December 31, 1998. Under the provisions of SOP 98-1, we began
capitalizing and amortizing the cost of our internal use software that we had
previously expensed as incurred. During 1998, we capitalized approximately
$500,000 of internal use software that previously would have been expensed.
YEAR 2000 CONSIDERATIONS
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to
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<PAGE> 37
accept four-digit entries to distinguish 21st century dates from 20th century
dates. As a result, computer systems and software used by many companies may
need to be upgraded to comply with such year 2000 requirements. Significant
uncertainty exists concerning the potential effects associated with such
compliance, but systems that do not properly recognize such information could
generate erroneous data or cause a system to fail.
We have reviewed both our information technology and our non-information
technology systems to determine whether they are year 2000 compliant. Our
planned replacements and upgrades to our billing systems recently have been
completed at an estimated cost of $125,000. Testing indicates that our billing
systems now are year 2000 compliant. We have not identified any material systems
that currently are not year 2000 compliant. We have prepared a formal
questionnaire for all significant suppliers, customers and service providers to
determine the extent to which we are vulnerable to those third parties' failure
to remediate the year 2000 problem. Based upon the response we have received to
these questionnaires, we believe that our operations will not be significantly
disrupted even if third parties with whom we have relationships are not year
2000 compliant. We believe that our reasonably likely worst case scenario would
be a two or three week delay in our billing in the event we experience problems
with our billing software. If we experience such problems, we intend to focus
our efforts on promptly identifying and correcting any billing software
problems.
Except as described above, we believe that we will not be required to make
any material expenditures to address the year 2000 problem as it relates to our
existing systems. While it is not possible at present to quantify the cost of
all corrective actions, we do not expect that these actions will materially
exceed the cost of previously planned capital expenditures as we integrate the
systems of the businesses we acquire and of normal software upgrades and
replacements expected to occur through the year 2000. However, uncertainty
exists concerning the potential costs and effects associated with any year 2000
compliance and we intend to continue to make efforts to ensure third parties
with whom we have relationships are year 2000 compliant. Therefore, we cannot be
certain that unexpected year 2000 compliance problems of either us or our
vendors, customers and service providers would not materially and adversely
affect our business, financial condition or operating results. We will continue
to consider the likelihood of a material business interruption due to the year
2000 issue, and, if necessary, implement appropriate contingency plans.
MARKET RISK
We have not been exposed to significant market risks in the normal course
of our business. To date, the interest rate on our long-term indebtedness has
been at fixed rates ranging from 2.0% to 5.0%, which are significantly below
market. Accordingly, to date, we have not deemed it necessary to employ any
market or interest risk management strategies, such as interest rate swap
agreements. In the future, as DTC pursues its business strategy, these low cost
borrowing sources may be unavailable for some business activities. Accordingly,
DTC may have to employ such strategies in the future. In addition, as DTC
pursues its market strategy, it may become subject to a higher degree of
interest rate sensitivity as it is required to borrow at higher or at variable
rates. This could significantly increase DTC's future sensitivity to interest
rate fluctuations and materially affect, in a negative manner, DTC's future
financial position and results of operations.
As of December 31, 1998, we had $12.2 million in marketable securities. As
of September 30, 1999, we had $14.0 million invested in marketable securities.
For the periods ended December 31, 1998 and September 30, 1999, we had interest
income of $713,000 and $562,000, respectively. Accordingly, a large portion of
our income depends upon our ability to continue to invest monies in these
instruments and prevailing interest rates. We do not believe there is any other
significant risk associated with our investment in marketable securities.
However, if DTC in the future invests in other income-producing securities, it
could subject DTC's income to greater risk and volatility.
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MARKET AND DIVIDEND INFORMATION
MARKET INFORMATION
DeKalb Telephone Cooperative, Inc.
No public trading market currently exists for capital credits, and capital
credits currently are not transferable.
DTC Communications Corp.
No public trading market currently exists for DTC stock.
We intend to apply for the listing of the DTC stock to be issued in the
merger on the American Stock Exchange under the symbols "DKC.A" (common class A
voting) and "DKC.B" (common class B non-voting).
There can be no assurance that a trading market will develop or be
maintained for any DTC stock or, if it did, that it would provide the
shareholders of DTC a meaningful opportunity to liquidate their equity interests
in DTC at a fair value.
DIVIDEND INFORMATION
DeKalb Telephone Cooperative, Inc.
By law, we have been required to make an annual refund or rate reduction to
our members to the extent our operating revenues exceeded operating expenses,
maintenance and interest. The law also allows any refund to take the form of
either cash or capital credits on our books. This refund customarily has taken
the form of accumulation of capital credits for the members on our books. See
"Comparison of Rights of Our Members to Rights of DTC Shareholders -- Dividends
and Other Distributions." We previously have not paid dividends or interest on
capital credits.
Our policy previously has been to pay the capital credits of a member to
the estate of that person upon death or to a business upon its dissolution, when
we receive written application for payment and proof of death or dissolution, as
the case may be.
In addition, we generally have elected to pay capital credits to both
active and inactive members within ten years after the year in which the capital
credits were accumulated. This policy, however, is subject to the discretion of
the board and to our financial ability to make the payments. During 1996, 1997
and 1998, we retired $767,000, $889,000 and $760,000, respectively, in capital
credits. During the nine months ended September 30, 1999, we retired
approximately $996,000 in capital credits. Assuming the merger is approved, we
anticipate that we will retire all capital credits that accumulated in years
prior to 1990, which amount is approximately $1.5 million.
DTC Communications Corp.
After the merger, DTC would be permitted by law to pay dividends to its
shareholders, although certain covenants in existing loan agreements between us
and the Rural Utilities Service, as well as federal statutes and regulations
which apply to Rural Utilities Service borrowers, could limit the circumstances
under which DTC would be permitted to pay dividends or make other distributions
to its shareholders. The Rural Utilities Service must authorize distributions
other than in shares of stock unless certain financial ratio requirements are
met. The amount and timing of future dividend payments, if any, would be based
on a number of factors, including the capital requirements of DTC's business and
the financial condition of DTC. There can be no assurance that DTC would pay any
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dividends at any time and DTC has no intention of paying cash dividends in the
foreseeable future. In the future, it also is possible that agreements with
lenders would continue to limit or restrict, or could place additional
limitations or restrictions upon, DTC's ability to pay dividends or the amount
of dividends that DTC may pay to its shareholders. The dividend rights of DTC
stock also would be subject to the rights of any DTC preferred stock which may
be issued in the future.
NUMBER OF MEMBERS/SHAREHOLDERS
As of December 31, 1999, we had approximately 15,000 active members of
record. In addition, there were approximately 29,000 inactive members.
As of December 31, 1999, DTC had one shareholder of record, which was us.
We will remain the sole shareholder of DTC through the effective date of the
merger.
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DEKALB TELEPHONE COOPERATIVE, INC.
The following description should be considered carefully in evaluating us
and our businesses which will be assumed by DTC if the merger is consummated.
BUSINESS
DeKalb Telephone Cooperative, Inc. provides telecommunications services to
residential and commercial customers primarily in several counties in rural
Middle Tennessee. We offer high-quality, low-cost telecommunications services,
including local telephone service, long-distance network access, and dial-up
internet access over a state-of-the-art wireline network, as well as wireless
telephone services. In addition, we offer a wide range of enhanced calling
features such as voice mail, call waiting, caller identification, automatic
redial, call forwarding, three-way calling, speed calling and call tracing.
We were formed in 1951 as a non-profit corporation with assistance from the
Alexandria, Tennessee Lions Club after an ice storm destroyed much of the
existing telephone service. We obtained a Rural Utilities Service loan to
construct a new telephone system and subsequently began operations in 1953 with
508 initial subscribers. Following our incorporation, we focused on acquiring
privately owned rural telephone companies in adjacent communities in an effort
to expand our operations to the service area we currently cover. Also, we
focused on continually upgrading and improving our telecommunications equipment
in order to provide the highest quality telecommunications services to our
customers. In doing so, we replaced eight-party lines with private and two-party
lines in the 1960s, then upgraded completely to one-party lines by 1972, and
converted all ten of our primary exchanges to digital switches by 1990.
In 1974, we converted to a telephone cooperative under the Tennessee
Telephone Cooperative Act. In 1991, we formed a wholly owned for-profit
subsidiary, Advantage Cellular, to provide customers with wireless telephone
services. Advantage Cellular currently serves approximately 7,400 wireless
customers in eight Middle Tennessee counties. Advantage Cellular's wireless
customers are not our members solely by reason of their wireless service.
Today, we are the seventh largest telephone company and third largest
cooperative in Tennessee. Our core service area encompasses approximately 759
square miles in rural portions of Cannon, DeKalb, Rutherford, Smith and Wilson
counties in Tennessee. This area is located east of Nashville along the
Interstate 40 corridor, a major east/west connector between Nashville and
Knoxville, Tennessee. According to 1990 U.S. Census data, Nashville is the 40th
largest metropolitan statistical area in the United States and has a compounded
annual growth rate of 2.0% from 1990 to 1998.
Our core operations focus on providing incumbent local exchange carrier
services to approximately 19,000 residential and commercial access lines in the
Middle Tennessee markets. Our incumbent local exchange carrier services are
comprised of two primary components: local telephone service and long-distance
network access charges. We believe our incumbent local exchange carrier business
encounters little or no competition from alternative local exchange carriers
primarily due to the low population density of our service area, the topography
of our service area, quality of our service and our low basic service rates to
both residential and commercial customers.
Our local telephone service includes basic local lines, as well as ISDN,
DSL, and T-1 high speed access lines. We also provide foreign exchange, private
lines and switched data services and install and maintain Centrex, PBX and key
telephone switching network systems for our business customers. In addition, our
digital switch platform enables us to offer enhanced services such as voice
mail, call waiting, caller identification, automatic redial, call forwarding,
three-way calling, speed
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calling and call tracing. In addition to our incumbent local exchange carrier
services, we offer internet and data services in our core service area. We began
offering these services in the mid 1990's as demand from our residential and
commercial customers significantly increased. We provide dial-up internet access
at speeds of up to 56Kbps through basic telephone lines, 128Kbps through ISDN
and various higher speeds through dedicated DSL lines. We provide local
telephone services to residential, commercial and institutional customers,
generally for a fixed monthly charge.
Our network access services relate to long distance or toll calls that
typically involve more than one company to complete the call. Since toll calls
generally are billed to the customer originating the call, a mechanism is
required to compensate each company providing services to complete the call. We
bill access charges to the other company involved in completing the call for the
use of our facilities to access our customer, whether that customer originated
or received the call. We generate intrastate access revenue when an intrastate
long-distance call is originated within the same state but within different
local access and transport areas. We generate intra local access and transport
area access revenue when long distance calls are made within the same local
access and transport area that originate in our service area. We generate
interstate access revenue when an interstate long distance call is originated
from a local access and transport area in one state to a local access and
transport area in another state.
Through our for-profit subsidiary, Advantage Cellular, we offer both analog
and digital wireless telephone services to approximately 7,400 wireless
subscribers throughout eight Middle Tennessee counties that combine our core
service area with adjacent counties. We have entered into roaming agreements
with other wireless carriers to enable our customers to utilize their wireless
telephone services throughout the United States. In addition, we own local
multi-point distribution system licenses to operate broadband wireless service
in the Cookeville and Clarksville, Tennessee, and Dalton, Georgia markets.
The following chart summarizes the major components of our total operating
revenue for each of the years ended December 31, 1996 through December 31, 1998
and the nine-month periods ended September 30, 1998 and September 30, 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF OPERATING REVENUE
---------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Local telephone services....................... 23.5% 23.5% 23.1% 23.4% 20.8%
Network access services........................ 50.0 49.1 49.0 49.0 51.5
Wireless products and services................. 18.1 18.4 19.1 18.7 20.2
Miscellaneous.................................. 8.4 9.0 8.8 8.9 7.4
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
We recently have experienced significant growth. We have grown the number
of access lines we serve as an incumbent local exchange carrier from 15,720 in
1994 to almost 19,000 in 1999, a compounded annual growth rate of 4.3%. Total
operating revenue has increased from $13.3 million in 1994 to $18.1 million in
1998, a compounded annual growth rate of 8.1%. Net income has increased from
$2.8 million to $4.4 million, an annual growth rate of 12.3%.
Our principal executive offices are located at 111 High Street, Alexandria,
Tennessee 37012-0247 and our telephone number is (615) 529-2151. In addition, we
maintain a website at http://www.dtccom.net where general information about us
is available.
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BUSINESS STRATEGY
We believe there are significant opportunities to increase our revenues and
improve profitability. The key elements of our business strategy are:
Maintain Existing Customer Base. Our primary business focus is providing
our existing customers with high-quality, low-cost telecommunications services.
We believe our local market knowledge provides a significant competitive
advantage towards servicing our customers. For example, we offer a wide range of
services, from leasing old-fashioned, rotary-dial telephones to providing modern
DSL lines, in an attempt to meet each of our customer's specific needs or
requests. Our ability to satisfy such customer requests historically has created
a loyal customer base in our incumbent local exchange carrier market and has
discouraged interest from larger regional telephone companies and competitive
local exchange carriers.
Add New Residential and Business Customers and Access Lines. Although we
currently have an effective monopoly on our local wireline service, we believe
we can add new residential and commercial customers to the markets we serve. We
believe the demand for wireless services and for second lines to customers for
internet, facsimile and data services provides an effective opportunity to add
new access lines.
Cross-Sell Enhanced Calling Features. We intend to focus on cross-selling
enhanced calling features that are complementary to our local telephone service.
We believe there are significant opportunities to bundle enhanced calling
features in our market area. Currently, our average customer buys only 1.17
enhanced services from us per access line. In addition, only 7% of customers
maintain a voice mailbox with us and only 13% subscribe to our internet access
service. Because of the current low subscription percentages, we believe that
there are significant growth opportunities in this market segment.
Expand Into Selected Markets Through Competitive Local Exchange Carrier
Services. We believe we are well-positioned to expand into adjacent markets to
our incumbent local exchange carrier market by offering facilities-based
competitive local exchange carrier services to customers near our existing or
future fiber nodes. Currently, we hold the cellular license for five counties
outside of our incumbent local exchange carrier area, as well as the "A" and "B"
local multi-point distribution system licenses for the Cookeville, Tennessee
market and the "B" licenses for Clarksville, Tennessee and Dalton, Georgia
markets. We believe new customers could be attracted either by offering wireless
service as the customer's primary telephone or by installing fixed broadband
wireless technology when the technology has matured.
Provision of Cable Television Services. We have not been allowed under
Tennessee law to provide cable television service, although we have made a
limited effort to be a reseller of large C-band satellite dishes in prior years.
We feel that many rural cable systems use outdated technology to offer fewer
than 30 channels at non-competitive prices. Once we have converted to a
for-profit company, DTC will be able to offer broadband video services either
using cable or, as the technology becomes available, enhanced DSL lines. We also
believe that there will be opportunities to cross-sell telephone service to
television customers.
Offer Long-Distance Reselling Services. We are considering becoming a
long-distance reseller in the same market areas served by our incumbent local
exchange carrier market. We believe the ability to offer long-distance reselling
services provides an attractive opportunity to expand our incumbent local
exchange carrier business because many of our customers increasingly request a
simpler telecommunications package, including one-rate service. As network
access charges are reduced, long-distance reselling services provide us the
ability to become a single-source provider with a more complete, competitive
telecommunications solution for our customers.
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Increase Geographic Presence and Market Penetration Through Strategic
Acquisitions. We believe there are a number of companies that offer
telecommunications services either within or near our service area that are, or
may become, interested in potential acquisition or joint venture opportunities.
In evaluating potential acquisitions or joint ventures, we will evaluate
opportunities based on a number of criteria, including the attractiveness of the
geographic market, experience in the telecommunications industry, services and
products offered and strength of management.
STRATEGIC ALLIANCE/JOINT VENTURE
We, along with nine other rural Tennessee local exchange carriers, are a
founding investor in Tennessee Independent Telecommunications Group, LLC, a new
fiber optic wholesale transport telecommunications network. By laying new fiber
optic cable where necessary to connect the existing fiber of the ten founding
companies, Tennessee Independent Telecommunications Group intends to be a
carrier's carrier and lease fiber capacity in four initial loops between
Nashville and Knoxville, Nashville and Chattanooga, Nashville and Johnson City,
and Nashville and Huntsville, Alabama, including a Florence, Alabama connection
with Telaplex, a Mississippi transport carrier.
Through the Tennessee Independent Telecommunications Group network, we
expect to:
- provide our customers with fast, reliable access to data transmission
lines;
- reduce expenses by not paying another carrier expensive access transport
charges; and
- diversify revenues through reselling high speed transport of voice and
data to other telecommunications companies.
We have made a commitment to contribute to Tennessee Independent
Telecommunications Group an aggregate initial capital investment of $500,000. As
of September 30, 1999, we had contributed approximately $100,000 of this
commitment.
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 our industry. See "DeKalb
Telephone Cooperative, Inc.--Regulation." New technology is continuing to expand
the types of available communications services and equipment and the number of
competitors offering such services. We face actual and potential competition in
all of our businesses. Many of our competitors are large companies which have
considerably greater financial, technological, marketing and other resources
than we have.
We believe 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. Our objective is to be one of the most responsive service providers in the
telecommunications industry, particularly when providing customized
communications services. We recognize that we must grow to be able to compete
effectively in the changing telecommunications industry and to avail ourself of
greater economies of scale and increased scope in our transport and local access
requirements and in our back office operations.
Local Service Competition
Until recently, we were effectively insulated from competition in providing
local service. Although the Telecommunications Act mandated local competition,
any competitive local exchange carrier that desired to offer local service in
our area nevertheless was required to obtain a license from
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the Tennessee Regulatory Authority. Tennessee law, however, provides that no
license will be issued in any area served by an incumbent local exchange carrier
with fewer than 100,000 access lines.
In May 1999, the FCC rendered a decision involving a request by a company
seeking to expand in Tennessee as a competitive local exchange carrier into an
area already served by an existing incumbent local exchange carrier. The
Tennessee Regulatory Authority denied the license on the basis that the
incumbent local exchange carrier was protected from competition by Tennessee
law. The proposed competitive local exchange carrier appealed the Tennessee
Regulatory Authority's decision to the FCC, requesting that the FCC preempt
Tennessee law.
The FCC found the Tennessee law not competitively neutral as required by
the Telecommunications Act and, on the facts presented, preempted operation of
the Tennessee law insofar as it operated to deny the license request. The FCC
ordered the Tennessee Regulatory Authority to reevaluate the license request in
view of the Telecommunications Act and the FCC's decision. The Tennessee
Regulatory Authority has filed a request with the FCC for it to reconsider its
order. If the FCC's order is not modified, we will be subject to the threat of
increasing competition in our service area.
Wireless Competition
Although Advantage Cellular, since 1991, has provided wireless telephone
service in our wireline service area and in several neighboring counties, we
face severe competition in the provision of such service. The other wireless
provider in the rural service area is GTE Cellular, which has considerably
greater financial, technological, marketing and other resources than we have.
Numerous other large wireless companies are able to serve our customers through
various arrangements with GTE Wireless. We and GTE Wireless hold the only
wireless licenses for our eight county service area. Commercial mobile radio
services, which include personal communication systems, and specialized mobile
radio, also have grown rapidly in the area due to the increased clarity,
security and bandwidth of the new technology. Sprint, Nextel and other companies
hold the necessary commercial mobile radio service licenses to provide this
service in our area.
Internet Competition
The market for data communications services, including internet access
services, is extremely competitive. There are no substantial barriers to entry,
and we expect that competition will intensify in the future. We believe that our
ability to compete successfully will depend on a number of factors, including:
- market presence;
- the ability to execute a rapid expansion strategy;
- the capacity, reliability and security of our network infrastructure;
- ease of access to and navigation of the internet;
- the pricing policies of our competitors and suppliers;
- the timing of our and our competitors' introduction of new products and
services;
- our ability to support industry standards; and
- industry and general economic trends.
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We believe that our success in the data communications services market will
depend heavily upon our ability to provide high-quality internet connectivity
and value-added internet services at competitive prices.
As a result of increased competition in the internet access services
industry, we expect that we will continue to encounter significant pricing
pressure, which in turn could result in significant reductions in the average
selling price of our internet services. There can be no assurance that we will
be able to offset the effects of any such price reductions with an increase in
the number of customers, higher revenue from enhanced services, cost reductions
or otherwise. In addition, we believe 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 our market share and could have a material adverse
effect on our business, financial condition and results of operations. There can
be no assurance that we 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.
REGULATION
Overview
We operate in a highly regulated industry and our services are and will be
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 Tennessee Regulatory Authority has had certain limited
jurisdiction over our telecommunications operations in Tennessee. Following the
merger, the Tennessee Regulatory Authority will have more jurisdiction over the
activities of the merged companies.
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 merged companies. Recent developments include,
without limitation:
- enactment of the Telecommunications Act which modifies the AT&T
divestiture decree, which required the divestiture by AT&T of its 22 Bell
operating companies and divided the country into 201 local access and
transport areas, restrictions on the provision of long distance services
by Regional Bell Operating Companies between local access and transport
areas, as defined in the AT&T divestiture decree;
- FCC and state public utilities commissions actions changing access rates
charged by incumbent local exchange carriers and making other related
changes to universal service, access and interconnection policies,
certain of which could have adverse consequences for the merged
companies' long distance and local service businesses;
- related FCC and state regulatory proceedings considering additional
deregulation of incumbent local exchange carriers access pricing;
- pending FCC "billed party preference" rules that could affect our
provision of operator services;
- mandatory deployment of advanced telecommunications services; and
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- various legislative and regulatory proceedings that would result in new
local exchange competition.
As the following discussion illustrates, the regulation of the
telecommunications 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 merged companies' business will not be
affected adversely by future legislation, new regulation or deregulation.
Telecommunications Act of 1996
Among other things, this legislation:
- permitted Regional Bell Operating Companies to provide domestic and
international long distance services in their own regions upon a finding
that the petitioning Regional Bell Operating Company 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;
- removed existing barriers to entry into local service markets;
- significantly changed the manner in which carrier-to-carrier
interconnection arrangements are regulated at the federal and state
level; and
- established procedures to revise universal service standards.
The Telecommunications Act creates a duty on our part to interconnect our
networks with those of our competitors and, in particular, creates a duty on the
part of our 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. Because implementation of the rules will
be at the state level, it is uncertain how these new requirements will affect
the merged companies.
On October 21, 1999, the FCC adopted new rules regarding the universal
service fund. The new rules first set forth the FCC's completed cost model that
will be used to estimate the forward-looking cost of providing service. Second,
the FCC adopted a methodology that uses costs to calculate the appropriate level
of support for non-rural carriers serving high cost areas. The high-cost support
mechanism for rural carriers is not scheduled to be revised until January 1,
2001.
We cannot predict the effect that this legislation and the FCC's
implementing regulations, many of which are still forthcoming, will have on the
merged companies or the industry as a whole. However, we believe that the merged
companies will be better positioned to pursue business opportunities in the
rapidly changing telecommunications market.
Local Telephone Service Regulation
Historically, because we are a cooperative, our local telephone operations
have not been subject to most state regulation. When we convert to a private
corporation, and if the Tennessee Regulatory Authority grants DTC a license,
DTC's operations will become subject to regulation and oversight of the
Tennessee Regulatory Authority. The Tennessee Regulatory Authority will then
have primary jurisdiction over various matters including rates for basic
telephone service, intrastate toll and access rates, quality of service,
issuance of securities, depreciation rates, disposition of public utility
property and issuance of debt and accounting systems used by the merged
companies. The FCC historically
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has had primary jurisdiction over our interstate toll and access rates and
issues related to interstate telephone service.
The Telecommunications Act has substantially modified both the states' and
the FCC's jurisdictions in the regulation of local exchange telephone companies.
The Telecommunications Act prohibits any state legislative or regulatory
restrictions or barriers to entry regarding the provision of local telephone
service. The Telecommunications Act required the FCC to develop regulations to
implement various sections of the Telecommunications Act including:
- the obligations imposed on incumbent local exchange carriers to
interconnect with the networks of other telecommunications carriers,
including competitive telecommunications carriers;
- unbundling of services into network elements;
- repricing of their services at wholesale rates for the purpose of
permitting resale of those services;
- allowing other telecommunications carriers physically to collocate their
equipment on the premises of the incumbent local exchange carrier; and
- requiring telecommunications carriers to compensate each other based on
their own costs for the transport and termination of calls on the other
carriers' networks.
The Telecommunications Act requires that we offer telephone number
portability to the customers of any competitive local exchange carrier providing
service in our area. We must provide this service within six months after being
requested by a competitive local exchange carrier to do so. An estimated
$200,000 of software will be required to provide this service, which we believe
will be installed and operational within an acceptable period of time after the
first request for portability.
In addition, pursuant to the Telecommunications 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. On October 21, 1999, the FCC adopted
new rules regarding the universal service fund. The new rules first set forth
the FCC's completed cost model that will be used to estimate the forward-looking
cost of providing service. Second, the FCC adopted a methodology that uses costs
to calculate the appropriate level of support for non-rural carriers serving
high cost areas. The high-cost support mechanism for rural carriers is not
scheduled to be revised until January 1, 2001. We cannot predict the terms or
the effect that the FCC's actions will have on the merged companies or on the
industry as a whole. However, we believe that we are taking proper steps to
reduce our exposure to potential declines in universal service support.
The Telecommunications Act requires that all telecommunications providers,
including cable operators that provide telecommunications services, must
contribute equitably to a universal service fund, although the FCC may exempt an
interstate carrier or class of carriers if their contribution would be minimal
under the universal service fund formula. The Telecommunications Act allows
states to determine which intrastate telecommunications providers contribute to
the universal service fund. The purpose of the universal service fund 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.
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After the merger, DTC will be subject to regulation of its local service by
the Tennessee Regulatory Authority. Such regulation covers prices, services,
competition and other issues. Traditionally, wireline rates were set in
Tennessee at levels that were anticipated to generate revenues sufficient to
cover its allowed expenses and to provide an opportunity to earn a fair rate of
return on its capital investment. Such a regulatory structure, generally known
as rate of return regulation, was acceptable in a less competitive era. However,
the regulatory processes have changed in response to the increasingly
competitive telecommunications environment.
Under the first generation of alternative regulation, generally known as
incentive regulation, economic incentives were provided to lower costs and
increase productivity through the potential availability of "shared" earnings
over a benchmark rate of return. Generally, when levels above targeted returns
were reached, earnings were "shared" by providing refunds or price reductions to
customers. Under the next generation of alternative regulation, generally known
as price regulation, the state authorities established maximum prices that could
be charged for certain telecommunications services. While such plans limit the
amount of increases in prices for specified services, they enhance a company's
ability to adjust prices and service options to respond more effectively to
changing market conditions and competition and provide an opportunity to benefit
more fully from productivity enhancements. The majority of these plans, during
the early years, have price cap provisions on basic local exchange services with
provisions for inflation-based price increases in later years. These plans are
now operational for certain carriers within Tennessee although appeals relating
to these plans are pending.
Upon the effectiveness of the merger, we plan to apply to the Tennessee
Regulatory Authority to be subject to incentive or rate of return regulation.
Incentive or rate of return regulation allows a carrier a certain percentage
(generally 10-12%) return on its investment in telecommunications infrastructure
and operating expenses. We believe this type of rate regulation is advisable
until we can evaluate the economies of scale that we can achieve once we have
had the opportunity to expand the telecommunications products and services we
offer. Until that time, we believe we have a better opportunity to earn
reasonable rates of return under incentive regulation. Once we have achieved a
certain level of operational economies of scale, we may apply to be regulated
based upon a price cap plan. Under a price cap plan, the applicable regulatory
authority, with input from the carrier, sets the maximum prices that may be
charged for various telecommunications services. The carrier may then charge any
price for those services up to the specified maximums. We believe a price cap
plan provides an opportunity to benefit more fully from operational improvements
as well as to respond to future competitive pressures.
Network Access Regulation
The FCC regulates rates and other aspects of interstate network access
services through its price cap and access charge rules. State regulatory
commissions have jurisdiction over the provision of network access to the long
distance carriers to complete intrastate telecommunications. Historically,
network access charges paid by long distance carriers have been set at levels
that subsidize the cost of providing local residential service. The
Telecommunications Act requires that the FCC identify the local service subsidy
implicitly provided by such network access charges; provide for the removal of
such subsidy from network access rates in order that network access charges
reflect underlying costs; arrange for the universal service fund to ensure the
continuation of universal service to high-cost, low-income service areas; and
develop the arrangements for payments into that fund by all carriers.
The FCC's 1997 network access charge reform order, which was upheld by the
United States Court of Appeals for the Eighth Circuit, resulted in several
changes to the existing interstate network access rate structure designed to
move network access charges, over time, to more economically efficient levels
and to create more efficient rate structures. Non-traffic-sensitive costs, that
were
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previously recovered on a per-minute-of-use basis, were changed to be recovered
on a flat-rate, per-line basis. As part of this plan, subscriber line charges
were increased and a new presubscribed long distance carrier charge was
established. As subscriber line charges and presubscribed long distance carrier
charges are increased over time, usage charges are reduced. At January 1, 1999,
subscriber line charges for primary residence and single-line business access
lines remained unchanged at $3.50 per line, per month.
Beginning in January 1999, subscriber line charges for non-primary or
"additional" residence access lines increased from $5.00 to $6.07 per line, per
month, and subscriber line charges for multi-line business customers increased
from $8.17 to $8.25 per line, per month. Presubscribed long distance carrier
charges were established on January 1, 1998 and are charged to long distance
carriers for recovery of non-traffic-sensitive costs not recovered through
subscriber line charges. These charges were established for primary residence
and single-line business access lines, non-primary residence access lines and
multi-line business access lines and were initially set at $.53, $1.50 and
$2.75, respectively, per line, per month, beginning January 1998. We believe
that the net effect of these changes has been substantially revenue-neutral.
The Universal Service Order, which has been substantially upheld by the
U.S. Court of Appeals for the Fifth Circuit, established new funding mechanisms
for high-cost, low-income service areas. We began contributing to the new funds
on January 1, 1998 and are allowed recovery of our contributions through
increased interstate network access charges. Major changes to the support
mechanism to subsidize the provision of services to high-cost areas are under
consideration by regulatory bodies. The new support mechanism, when implemented,
is expected to be based on forward-looking economic costs. The order also
established significant discounts to be provided to eligible schools and
libraries for all telecommunications services, internal connections and internet
access. It also established support for rural health care providers so that they
may pay rates comparable to those that urban health care providers pay for
similar services. Industry-wide annual costs of the program, estimated at
approximately $1.9 billion, through June 1999, are to be funded out of the
universal service fund. Local and long distance carriers' contributions to the
education and health care funds would be assessed by the fund administrator on
the basis of their interstate and intrastate end-user revenues.
As a result of litigation challenging a number of the FCC's rulings under
the Telecommunications Act, the U.S. Supreme Court has ruled that the FCC has
considerable authority to establish many pricing, interconnection and other
policies that have been considered within the exclusive jurisdiction of the
state public service commissions. We expect the FCC to accelerate the growth of
local service competition by aggressively utilizing such power to require
interconnection with competing carriers and the sale of network elements to
competitors who wish to provide communications services to customers in our
region.
Wireless Services
As discussed below, the FCC regulates, among other things, the licensing,
construction, operation, interconnection arrangements, sale and acquisition of
wireless telephone systems. Competition between providers of wireless
communications service in each market is conducted principally on the basis of
price, services and enhancements offered, the technical quality and coverage of
the system, and the quality and responsiveness of customer service. As discussed
below, competition has intensified in recent years in our markets and is
expected to continue to intensify.
Wireless Licensing Process.
During the 1980's and early 1990's, the FCC awarded two 10-year licenses to
provide wireless service in each metropolitan statistical area and rural service
area market. Initially, one license was
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reserved for companies offering local telephone service in the market, the
wireline carrier, and one license was available for firms unaffiliated with the
local telephone company, the non-wireline carrier.
Since mid-1986, the FCC has permitted telephone companies or their
affiliates to acquire control of non-wireline licenses in markets in which they
do not hold interests in the wireline license. The FCC has issued a decision
that grants a renewal expectancy during the license renewal period to incumbent
licensees that substantially comply with the terms and conditions of their
wireless authorizations and the FCC's regulations. The license for the operated
rural service area initially granted to Advantage Cellular expires in October
2000. We expect that license to be renewed for an additional ten years.
The completion of an acquisition involving the transfer of control or
assignment of a wireless system as contemplated by the merger requires prior FCC
approval. The acquisition of a minority interest generally does not require FCC
approval. Whenever FCC approval is required, any interested party may file a
petition to dismiss or deny the application for approval of the proposed
transfer or assignment. In addition to regulation by the FCC, wireless systems
are subject to certain Federal Aviation Administration tower height regulations
concerning the siting and construction of wireless transmitter towers and
antennas.
Wireless operators are also subject to state and local regulation in some
instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of entry and rate regulation. States may regulate
quality of service and areas not related to entry into the market or rates
charged by the operator. The siting and construction of the wireless facilities
may also be subject to state or local zoning, land use and other local
regulations. State approval also is required for interconnection arrangements
made between the wireless operator and landline networks.
Developments Affecting Wireless Competition.
Competition in the wireless communications industry has increased due to
continued and rapid technological advances in the communications field, coupled
with legislative and regulatory changes. Several recent FCC initiatives over the
past several years have resulted in the allocation of additional radio spectrum
or the issuance of licenses for emerging mobile communications technologies that
are competitive with our wireless operations, including personal communication
systems.
Although there is no universally recognized definition of personal
communication systems, the term is generally used to refer to wireless services
to be provided by licensees operating in the 1850 MHz to 1990 MHz radio
frequency band using microcells and high-capacity digital technology. From 1996
to 1997 the FCC auctioned six personal communication systems licenses per
market. Two 30 MHz frequency blocks were awarded for each of the 51 Rand McNally
major trading areas, while one 30 MHz and three 10 MHz frequency blocks were
awarded for each of the 493 Rand McNally basic trading areas. Personal
communication systems technology permits personal communication systems
operators to offer wireless voice, data, image and multimedia services.
The largest personal communication systems providers commenced initial
operations in late 1996 and since then have aggressively expanded their
operations. These providers have initially focused on larger markets, and have
generally marketed personal communication systems as being a competitive service
to cellular. Many of these companies have aggressively competed for customers on
the basis of price, which has placed downward pressure on cellular prices. There
is at least one personal communication systems competitor in our service area.
In addition to personal communication systems, users and potential users of
cellular systems may find their communication needs satisfied by other current
and developing technologies. Several years ago the FCC authorized the licensees
of certain specialized mobile radio service systems, which historically have
generally been used by taxicabs and tow truck operators, to configure their
systems into digital networks that operate in a
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manner similar to cellular systems. Such systems are commonly referred to as
enhanced specialized mobile radio service systems.
We believe that enhanced specialized mobile radio service systems are
operating in a few cellular markets. One well-established enhanced specialized
mobile radio service provider has constructed a nationwide digital mobile
communications system to compete with cellular systems. Other similar
communication services that have the technical capability to handle wireless
telephone calls may provide competition in certain markets, although these
services currently lack the subscriber capacity of cellular systems. Paging or
beeper services that feature text message and data display as well as tones may
be adequate for potential subscribers who do not need to converse directly with
the caller. Mobile satellite systems, in which transmissions are between mobile
units and satellites, may ultimately be successful in obtaining market share
from cellular systems that communicate directly to land-based stations.
In recent years, several large cellular providers have merged with other
companies or formed joint ventures. Several of these joint ventures pooled their
resources to develop extensive personal communication systems. Many of our
current or potential competitors have substantially greater financial and
marketing resources than we. Although it is uncertain how personal communication
systems, specialized mobile radio service, enhanced specialized mobile radio
service, mobile satellites and other emerging technologies will ultimately
affect us, we anticipate that we will continue to face increased competition in
our operating markets. However, management believes that providing digital
services and applying new microcellular technologies will permit our cellular
systems to provide services comparable with the emerging technologies described
above, although no assurances can be given that this will happen or that future
technological advances or legislative or regulatory changes will not create
additional sources of competition.
We anticipate that regulatory changes and competitive pressures may result
in future revenue reductions in our telephone operations. However, we anticipate
that such reductions may be minimized by increases in revenues attributable to
the continued demand for enhanced services and new product offerings.
Regulation of Internet Access Services
In the United States, internet access is not currently subject to direct
regulation other than pursuant to laws applicable to businesses generally.
Adverse changes in the legal or regulatory environment relating to the
interactive online services and internet industry in the United States could
have a material adverse effect on our business, financial condition and
operating results. A number of legislative and regulatory proposals from various
international bodies and foreign and domestic governments in the areas of
telecommunication regulation, access charges, encryption standards, content
regulation, consumer protection, intellectual property, privacy, electronic
commerce, and taxation, among others, are now under consideration. We are unable
at this time to predict which, if any, of such proposals may be adopted and, if
adopted, whether such proposals would have an adverse effect on our business,
financial condition and operating results.
Summary Only
The foregoing discusses all relevant, material regulatory issues relating
to our 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 we operate. Neither the outcome of these proceedings nor
their impact upon the merged companies can be predicted at this time.
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EMPLOYEES
As of September 30, 1999, we employed approximately 100 employees, none of
whom was subject to any collective bargaining agreements.
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 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
our network may include one or more of these chemicals or substances. We believe
that in our present uses, none of our facilities poses any significant
environmental or health risk that derives from Environmental Protection Agency
regulated substances. If Environmental Protection Agency 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,
we are not subject to any environmental litigation.
PROPERTIES
The net book value of our property, plant and equipment in service was
$29.5 million at December 31, 1998 and $28.4 million at September 30, 1999.
We own four principal facilities:
- our principal executive office, approximately 10,000 square feet, on
approximately four acres of land in Alexandria, Tennessee;
- our maintenance and operations facility, approximately 20,000 square
feet, on approximately five acres of land in Alexandria, Tennessee;
- a business office and switching building, approximately 7,500 square
feet, on approximately 1 1/2 acres of land in Smithville, Tennessee; and
- a business office and remote switch, approximately 4,000 square feet, on
approximately 1 1/2 acres of land in Woodbury, Tennessee.
Our remaining properties do not lend themselves to simple description by
character and location. Our tangible assets include a substantial investment in
our telecommunications property, plant and equipment. Our telecommunications
property, plant and equipment consists primarily of:
- numerous switching and transmission equipment and related facilities;
- aerial and underground cable;
- poles and cellular towers;
- conduit and wiring;
- public pay telephones;
- telephone equipment, including PBXs and other switching networks, leased
by us to customers;
- office equipment and furniture; and
- approximately 50 vehicles.
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We believe that we follow standard practices prevailing in the
telecommunications industry in the construction and maintenance of plant and
facilities, and that all properties presently being used for our operations are
suitable, well maintained and adequately equipped for the purposes for which
they are used. Substantially all of our properties are subject to mortgage liens
held by the Rural Utilities Service.
LEGAL PROCEEDINGS
There are no material pending legal proceedings against us.
FINANCIAL STATEMENTS
The audited consolidated financial statements of DeKalb Telephone
Cooperative, Inc. and subsidiary as of December 31, 1997 and 1998 and for the
years ended December 31, 1996, 1997 and 1998, together with the notes thereto
and the report of Arthur Andersen, LLP, dated September 1, 1999 (except with
respect to the matter discussed in Note 11 as to which the date is October 18,
1999), are included at pages F-7 through F-22 of this information
statement/prospectus. The unaudited consolidated financial statements of DeKalb
Telephone Cooperative, Inc. as of September 30, 1998 and 1999 and for the nine
months ended September 30, 1998 and 1999, together with the notes thereto, are
included at pages F-23 through F-27 of this information statement/prospectus.
INFORMATION REGARDING DTC
BUSINESS
DTC is a Tennessee for-profit business corporation incorporated on October
4, 1999 and currently is our wholly owned subsidiary. Before the merger, DTC
will have had no operating history. If the merger is consummated, we would be
merged into DTC, and DTC would be the surviving corporation; the business of DTC
initially would be identical to our business. For a description of our business,
see "DeKalb Telephone Cooperative, Inc. -- Business."
PROPERTIES AND LEGAL PROCEEDINGS
If the merger is approved and consummated, the properties and legal
proceedings of DTC would be identical to ours. See "DeKalb Telephone
Cooperative, Inc.-Properties" and " -- Legal Proceedings."
FINANCIAL STATEMENTS
DTC has no operating assets or liabilities and no income. If the merger is
approved and consummated, DTC would assume all of our operations, assets and
liabilities and DTC's financial position would be substantially identical to
ours immediately prior to the merger. For this reason, historical consolidated
financial statements of DTC have not been included in this information
statement/prospectus. See pages F-7 through F-22 of this information
statement/prospectus for our historical consolidated financial statements and
pages F-2 through F-6 for pro forma financial statements that give effect to the
merger. DTC recently was formed as our wholly owned subsidiary for purposes of
changing our form of organization from a not-for-profit cooperative to a
for-profit corporation by means of a merger. As such, DTC has no assets or
liabilities and has had no operating history. The directors, officers,
employees, business and properties of DTC will be substantially identical after
the merger as ours immediately prior to the merger.
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MANAGEMENT INFORMATION
The following table shows the number of shares of DTC stock that each of
our directors and executive officers would receive based upon the capital
credits as of December 31, 1998 and the receipt of certain awards of DTC stock
that are described below. No director or executive officer would receive more
than 1% of the DTC stock to be issued in the merger.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
NUMBER OF SHARES OF DTC
STOCK
THAT WOULD BE RECEIVED BASED
NAME OF BENEFICIAL OWNER UPON 12/31/98 CREDIT(2)
- ------------------------ ----------------------------
<S> <C>
H. Wayne Gassaway........................................... 1,170
Denise J. Brown............................................. 105
Phyllis McKinney............................................ 66
James Paul Cantrell......................................... 674
Billy Chumbley.............................................. 590
James C. Hale............................................... 771
Danny Lattimore............................................. 743
Royce N. Martin............................................. 627
David L. Parker............................................. 713
Robert B. Parton............................................ 605
Roy N. Pugh................................................. 622
Eddie Thomas................................................ 589
Charles Dwight Vinson....................................... 568
All directors & executive officers as a group (13
persons)(1)............................................... 6,847
</TABLE>
- ------------------------
(1) All directors and officers, as a group, own less than 1% of our capital
credits and, following the merger, will own less than 1% of DTC's stock.
(2) Includes grants of DTC stock to directors and officers that will become
effective upon completion of the merger.
DIRECTORS AND EXECUTIVE OFFICERS
Our current board and DTC's board of directors following the merger would
be 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 now are or would be
directors or executive officers of DTC after the consummation of the merger 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 and would be appointed annually and serve at the pleasure of our or DTC's
board of directors, as applicable.
Directors with Terms Expiring in 2002
Billy Chumbley Age: 61 Director since 1990
Mr. Chumbley, since retiring from General Electric in 1993, has been self
employed in the farming business.
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Robert B. Parton Age: 47 Director since 1987
Mr. Parton is the Director of Motor Vehicle Management (overseeing
procurement, maintenance and disposal of vehicles and motorized vehicles)
for the Department of General Services of the State of Tennessee.
Charles D. Vinson Age: 48 Director since 1987
Mr. Vinson is the Chief of Food Production and Service of the Alvin C. York
V.A. Medical Center in Murfreesboro, Tennessee. He also, since 1997, has
been an affiliate broker and auctioneer with Durham Realty and Auction Co.
Directors with Terms Expiring in 2001
Royce N. Martin Age: 57 Director since 1989
Mr. Martin is retired.
David L. Parker Age: 47 Director since 1976
Mr. Parker is the owner-operator of DKM Farms in Woodland, Tennessee.
Roy N. Pugh Age: 48 Director since 1983
Mr. Pugh is a vice president of the Liberty State Bank in Liberty,
Tennessee.
Eddie Thomas Age: 46 Director since 1989
Mr. Thomas is a lineman for the Upper Cumberland Electric Cooperative, an
electricity supplier.
Directors with Terms Expiring in 2000
James Paul Cantrell Age: 61 Director since 1994
Mr. Cantrell is a letter carrier for the United States Postal Service.
James C. Hale Age: 47 Director since 1988
Mr. Hale, since January 1, 1996, has served as Vice President at Large and
Regional Manager (Southeast Region) of the Laborers International Union of
North America. Prior to 1996, he was the Business Manager of the Laborers
District Council of Tennessee.
Danny Lattimore Age: 54 Director since 1991
Mr. Lattimore is retired.
Executive Officers
Mr. Gassaway has been our general manager since 1989.
Ms. Brown has been our controller since 1991.
Ms. McKinney has been our office manager since 1997. Prior to 1997, Ms.
McKinney was our administrative services supervisor.
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Board Committees
DTC has standing Audit, Compensation and Nominating Committees.
The Audit Committee, composed of Messrs. Parton, Chumbley and Vinson, will
provide assistance to the board in fulfilling its responsibilities relating to
oversight of DTC's financial reporting and internal controls. Some of the Audit
Committee's specific duties include:
- Reviewing DTC's annual and quarterly reports and periodic filings with
the SEC;
- Determining the accounting principles and practices to be followed in the
preparation of DTC's financial statements;
- Determining the scope of and procedures to be used in DTC's annual audit;
- Analyzing the strength of DTC's internal accounting and financial
controls to ensure fair reporting in accordance with generally accepted
accounting principles of DTC's publicly released financial statements;
- Reviewing with management and the external and internal auditors DTC's
major financial risk exposures and assessing the necessary steps to
minimize those risks.
The Compensation Committee, composed of Messrs. Hale, Parker and Cantrell,
will assist the board in establishing policies with respect to compensation and
all pension and retirement plans for which DTC may have responsibility. The
Compensation Committee will review and make recommendations to the board
concerning the following:
- Annual salary, bonus and other benefits of the directors, senior officers
and employees and the overall compensation philosophy;
- Executive contracts and management perquisites;
- Stock based plans and other incentive plans; and
- Policy regarding all pension and retirement plans for which DTC may have
responsibility. The Compensation Committee also directs the
administration of those plans and reviews the investment performance of
funds held in the plans.
The Nominating Committee, composed of Messrs. Martin, Thomas and Lattimore,
will assist the board in determining matters relating to the composition of the
board and in developing effective corporate governance policies. Some of the
Nominating Committee's specific duties include:
- Recommending the size of the board;
- Recommending committee members and candidates for the board;
- Assessing the performance of the Chief Executive Officer and senior
officers in consultation with the Compensation Committee; and
- Monitoring and recommending changes to DTC's corporate governance
policies.
DTC has adopted a policy that the Chairman of the Board and Chief Executive
Officer should be different persons. Accordingly, the DTC board has elected Mr.
Pugh as the Chairman of the Board. Mr. Pugh receives no additional compensation
for his service as Chairman.
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COMPENSATION OF OUR EXECUTIVE OFFICERS AND DIRECTORS
The following table shows certain information concerning the compensation
paid to H. Wayne Gassaway, our General Manager, for services rendered during the
years ended December 31, 1998, 1997 and 1996. No other officer earned cash
compensation in excess of $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
- --------------------------- ---- --------- --------
<S> <C> <C> <C>
H. Wayne Gassaway.......................................... 1998 91,135 7,379
General Manager 1997 81,885 4,731
1996 78,827 3,038
</TABLE>
During 1998, we compensated our directors at the rate of $50 per board
meeting attended. This rate of pay has been in place since 1951. In addition,
board members are provided medical coverage under our group insurance plan
generally applicable to all our employees.
INTERESTS OF CERTAIN PERSONS
As of the date of this information statement/prospectus, our directors and
executive officers are entitled to a total of 13 votes on matters presented for
member action, or less than 1% of the total member votes. See "Management
Information."
As of the date of this information statement/prospectus, directors and
executive officers of DTC would hold less than 1% of DTC stock to be issued in
the merger, assuming that the merger was consummated as of such date. See
"Management Information."
After the merger, DTC intends to pay its directors a quarterly retainer of
$2,000. Members of committees would receive a fee of $100, plus travel expenses,
for each committee meeting attended. All board members also will be eligible for
medical coverage under DTC's group medical insurance that will be applicable to
all DTC employees. In addition, each person who is a DTC director upon the
effectiveness of the merger will receive a grant of 500 shares of DTC class A
voting common stock and an option to buy 1,000 shares of DTC class A voting
common stock at an exercise price of $10.00 per share. Afterwards, at each
annual meeting of the shareholders of DTC, each person who continues to serve as
a member of the board following that annual meeting will receive an option to
buy 1,000 shares of DTC class A voting common stock at the then current fair
market value of the shares.
The board of directors has provided that upon the effectiveness of the
merger, Mr. Gassaway will receive a grant of 1,000 shares of DTC class A voting
common stock and an option to buy 10,000 shares of DTC class A voting common
stock at an exercise price of $10.00 per share.
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DESCRIPTION OF DTC CAPITAL STOCK
DTC's authorized capital stock consists of 200,000,000 shares of DTC common
stock and 20,000,000 shares of preferred stock. Of the common stock, 199,000,000
shares are designated as class A voting common stock and 1,000,000 shares are
designated as class B non-voting common stock. Class A shares will be issued to
persons or entities that, as of January 31, 2000, are our active members. Class
B shares will be issued to those persons or entities who, as of January 31,
2000, are our inactive members as a result of their ceasing to have telephone
service with us. Also, 250,000 class A shares are reserved for issuance pursuant
to certain DTC stock compensation plans.
DTC has no plans at this time to issue any of the 20,000,000 authorized
shares of preferred stock.
As of the date of this information statement/prospectus, there are 100
outstanding class A shares, all of which are held by us, and no outstanding
class B shares or shares of DTC preferred stock.
DTC expects that no more than 2,100,000 class A shares and 500,000 class B
shares would be issued in the merger.
DTC COMMON STOCK
DTC Class A Voting Common Stock
The holders of class A shares are entitled to one vote per share. The
charter of DTC does not provide for cumulative voting in the election of
directors. The DTC board may declare dividends on the class A shares in its
discretion, if funds are legally available for that purpose. Certain covenants
in existing loan agreements between us and the Rural Utilities Service to which
DTC would be subject following the merger, as well as federal statutes and
regulations which apply to Rural Utilities Service borrowers, would limit the
circumstances under which DTC would be permitted to pay dividends or make other
distributions to class A shareholders. Under these agreements, the Rural
Utilities Service must authorize distributions other than in shares of stock
unless certain financial ratio requirements are met. On liquidation, holders of
class A shares are entitled to receive pro rata any remaining assets of DTC
after DTC satisfies or provides for the satisfaction of all of its liabilities
and the obligations on its preferred stock, if any. Holders of class A shares do
not have preemptive rights to subscribe for or purchase any shares of capital
stock or other securities of DTC. All class A shares issued in the merger would
be fully paid and nonassessable.
DTC Class B Non-Voting Common Stock
With the exception of the right to vote, holders of class B shares have the
same rights and preferences as the holders of class A shares. The holders of
class B shares have no voting rights as to any matter affecting DTC.
DTC PREFERRED STOCK
DTC's charter authorizes the board to issue, without further shareholder
approval, up to 20,000,000 shares of DTC preferred stock from time to time in
one or more series with such designations, powers, preferences and relative
voting, distribution, dividend, liquidation, transfer, redemption, merger and
other rights, preferences, qualifications, limitations or restrictions as may be
provided for the issue of such series by resolution and amendment to DTC's
charter adopted by DTC's board. This generally is referred to as "blank check"
preferred stock. The DTC preferred
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stock could have priority over class A shares or class B shares as to dividends
and as to the distribution of DTC's assets upon any liquidation, dissolution or
winding up of DTC.
STATUTORY PROVISIONS AFFECTING CONTROL OF DTC
The following discussion concerns the provisions of the Tennessee Business
Corporation Act which would affect control of DTC if the merger is approved and
consummated.
The matters discussed below may have an anti-takeover impact and may make
tender offers, proxy contests and certain mergers more difficult to consummate.
Control Share Acquisition Act
Under Sections 48-103-301 through 48-103-312 of the Tennessee Business
Corporation Act which make up the "Control Share Acquisition Act", the "control
shares" of stock acquired by an acquiring person in a "control share
acquisition" that exceed certain thresholds of voting power do not have voting
rights unless the holders of the other voting shares vote to grant voting rights
to the acquiring person's shares. The Control Share Acquisition Act also
contains other provisions applicable to a control share acquisition. A
corporation is not subject to the Control Share Acquisition Act unless it
affirmatively elects in its charter or bylaws to be so subject. Neither the
charter nor the bylaws of DTC elect to be subject to the Control Share
Acquisition Act, and therefore such Act is not applicable to DTC unless DTC's
charter or bylaws are subsequently amended to "opt in" to the Control Share
Acquisition Act.
Business Combination Act
Under Sections 48-103-201 through 48-103-209 of the Tennessee Business
Corporation Act which make up the "Business Combination Act", a "resident
domestic corporation" such as DTC may not engage in a "business combination"
with an "interested shareholder" for a five-year period following such
interested shareholder's acquisition date and may engage in a "business
combination" with an "interested shareholder" after the expiration of such
five-year period only if certain conditions specified in the statute are met.
Generally, an "interested shareholder" is one that directly or indirectly
beneficially owns 10% or more of the outstanding voting shares of the
corporation or is an affiliate or associate of the corporation and at any time
within the last five years prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the corporation's voting stock.
A "business combination" means any of the following:
- any merger or consolidation of the resident domestic corporation or any
subsidiary with the interested shareholder or any affiliate or associate
of the interested shareholder or with any other corporation that is, or
after the merger or consolidation would be, an affiliate or associate of
the interested shareholder;
- any exchange of shares or securities convertible into shares of the
resident domestic corporation with the interested shareholder or any
affiliate or associate of the interested shareholder or with any other
corporation that is, or after the exchange would be, an affiliate or
associate of the interested shareholder;
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions, to, with or
proposed by or on behalf of the interested shareholder, or any affiliate
or associate of the interested shareholder, of assets of the resident
domestic corporation or any subsidiary that has an aggregate market value
equal to 10% or more of the aggregate market value of all the assets,
determined on a consolidated basis, of the resident
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domestic corporation or that has an aggregate market value equal to 10%
or more of the aggregate market value of all of the outstanding shares of
the resident domestic corporation or that represents 10% or more of the
net income, determined on a consolidated basis, of the resident domestic
corporation;
- any transaction which results in the issuance or transfer by the resident
domestic corporation or any subsidiary, in one or more transactions, of
any shares or securities convertible into shares of the resident domestic
corporation or any subsidiary to such interested shareholder or any
affiliate or associate of such interested shareholder except pursuant to
the exercise of warrants or rights to purchase shares or securities
convertible into shares, or a dividend or distribution paid or made pro
rata to all shareholders of the resident domestic corporation, or in
connection with the exercise or merger of securities exercisable for or
convertible into shares of the resident domestic corporation or any
subsidiary which securities were issued outstanding prior to the
interested shareholder's share acquisition date;
- the adoption of any plan or proposal for the liquidation or dissolution
of the resident domestic corporation, or any reincorporation of the
resident domestic corporation in another state or jurisdiction, proposed
by or on behalf of, or pursuant to any written or unwritten agreement,
arrangement or understanding with, the interested shareholder or any
affiliate or associate of the interested shareholder;
- any transaction proposed by or on behalf of, or pursuant to any
agreement, arrangement or understanding with, an interested shareholder
or any affiliate or associate of such interested shareholder, which has
the effect, directly or indirectly, of increasing the proportionate share
of the outstanding shares of any class or series of shares or securities
convertible into shares entitled to vote or securities that are
exchangeable for, convertible into, or carry a right to acquire shares
entitled to vote, of such resident domestic corporation or any subsidiary
which are, directly or indirectly, owned or controlled by the interested
shareholder or any affiliate or associate of the interested shareholder,
except as a result of immaterial changes due to fractional share
adjustments; or
- any receipt by the interested shareholder or any affiliate or associate
of the interested shareholder of the benefit, directly or indirectly,
except proportionately as a shareholder of the resident domestic
corporation, of any loans, advances, guarantees, pledges, financial
assistance, security arrangements, restrictive covenants or any tax
credits or other tax advantages provided by, through or to the resident
domestic corporation or any subsidiary.
Certain business combinations are excluded from the Business Combination
Act, including:
- unless the charter provide otherwise, a business combination of a
resident domestic corporation with, or proposed by or on behalf of, an
interested shareholder or any associate or affiliate of the interested
shareholder if the resident domestic corporation did not have, on the
interested shareholder's acquisition date, a class of voting stock
registered or traded on a national securities exchange or registered with
the SEC pursuant to Section 12(g) of the Exchange Act, or, regardless of
such registration, if the resident domestic corporation was, on the
interested shareholder's share acquisition date, a holding company whose
principal subsidiary was a domestic life insurance company;
- unless the charter provides otherwise, a business combination of a
resident domestic corporation with, or proposed by or on behalf of, an
interested shareholder who was an interested shareholder prior to March
11, 1988, unless subsequent to such date the interested shareholder
increased such interested shareholder's proportion of the voting power of
the resident domestic corporation's outstanding voting stock to a
proportion in excess of the
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proportion of voting power such interested shareholder held prior to
March 11, 1988, without prior board approval;
- a business combination of a resident domestic corporation, the original
charter or original bylaws of which contain a provision, or whose board
of directors or shareholders adopt an amendment to the resident domestic
corporation's bylaws within 90 days of March 11, 1988, or, if no class or
series of its voting stock is registered or traded on a national
securities exchange or registered with the SEC pursuant to Section 12(g)
of the Exchange Act within 90 days of March 11, 1988, prior to the
issuance of any voting stock registered or traded on a national
securities exchange or registered with the SEC pursuant to Section 12(g)
of the Exchange Act, expressly electing not to be governed by Sections
205 and 206 of the Business Combination Act;
- a business combination of a resident domestic corporation with, or
proposed by or on behalf of, the interested shareholder who became an
interested shareholder inadvertently, if the interested shareholder as
soon as practicable divests itself of a sufficient amount of the voting
stock of the resident domestic corporation so that it no longer is the
beneficial owner, directly or indirectly, of 10% or more of the voting
power of the outstanding voting stock of such corporation and would not
at any time within the five-year period preceding the announcement date
with respect to the business combination have been an interested
shareholder but for such inadvertent acquisition; or
- a business combination or the transaction which resulted in the
shareholder becoming an interested shareholder that is approved by the
board of directors of the resident domestic corporation prior to the
interested shareholder's share acquisition date, as long as the proposed
business combination satisfies any additional applicable requirements
imposed by law and by the charter or bylaws of the resident domestic
corporation.
In addition, a resident domestic corporation otherwise subject to the
Business Combination Act shall not be subject to Sections 48-103-205 and
48-103-206 if an amendment to the charter or bylaws of the resident domestic
corporation is approved by a majority of the outstanding shares to expressly
provide that the resident domestic corporation shall not be subject to Sections
48-103-205 and 48-103-206, and further expressly provide that it is not to be
effective until two years after the vote.
The board of directors has no present intention to opt out of the
provisions of the Business Combination Act and neither DTC's current charter nor
bylaws opt out of such provisions.
Greenmail Act
Pursuant to the provisions of Sections 48-103-501 through 48-103-505 of the
Tennessee Business Corporation Act, which make up the "Greenmail Act", it is
unlawful for any Tennessee corporation which has a class of voting stock
registered or traded on a national securities exchange or registered with the
SEC pursuant to Section 12(g) of the Exchange Act, like DTC, to purchase,
directly or indirectly, any of its shares at a price above the market value of
such shares from any person who holds more than 3% of the class of the
securities to be purchased if such person has held such shares for less than two
years, unless the purchase has been approved by the affirmative vote of a
majority of the outstanding shares of each class of voting stock issued by the
corporation or the corporation makes an offer, of at least equal value per
share, to all holders of shares of such class.
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OTHER PROVISIONS AFFECTING CONTROL OF DTC
If the merger is approved and consummated, certain provisions of DTC's
charter and bylaws also may affect control of DTC. The following provisions 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. A classified board is one for which a certain number,
but not all, of the directors are elected on a rotating basis each year.
A classified board makes changes in the composition of the board of
directors more difficult and thus a potential change in control of a
corporation more difficult. The Tennessee Business Corporation Act
permits a classified board of directors, divided into as many as three
classes. DTC's charter provides that the board of directors is classified
into three classes serving staggered, three-year terms. Thus, in any
given year, only one-third of the directors would be elected by the
shareholders. Classification of the board could have the effect of
extending the time during which the existing board could control the
operating policies of DTC even though opposed by the holders of a
majority of the outstanding DTC stock. We currently have a classified
board.
- Nomination of Directors. Under the bylaws of DTC, all nominations for
directors by shareholders would be required to be delivered to DTC in
writing at least 60 days prior to the first anniversary of the preceding
year's annual meeting of shareholders or, in the case of a special
meeting of shareholders at which a director or directors would be
elected, at least 60 days before the special meeting. A nomination that
is not received prior to these deadlines would not be placed on the
ballot and such nominee would not be eligible for election. The board
believes that advance notice of nominations by shareholders would afford
a meaningful opportunity to consider the qualifications of the proposed
nominees and, to the extent deemed necessary or desirable by the board,
would provide an opportunity to inform shareholders about such
qualifications. Although this nomination procedure would not give the
board any power to approve or disapprove shareholder 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 Tennessee Business Corporation Act,
unless the charter provides that a director may be removed only for
cause, a director of a corporation generally may be removed, with or
without cause, by the shareholders if the number of votes cast to remove
the director exceeds the number of votes cast not to remove the director.
If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to remove
the director without cause. If cumulative voting is authorized, a
director may not be removed if the number of votes sufficient to elect
the director under cumulative voting is voted against the director's
removal. If so provided by the charter, any or all of the directors may
be removed for cause by a vote of a majority of the entire board of
directors. Under DTC's charter, any director may be removed from office,
but only for cause and only by the affirmative vote of 80% of the
outstanding shares entitled to vote at an election of directors, voting
together as a single voting class. DTC's charter does not provide for
cumulative voting.
Supermajority Vote Provisions
DTC's charter contains "supermajority" vote requirements for certain
business combinations. Article 9 provides that, in addition to any vote required
by law or other provisions of the charter or bylaws, the affirmative vote of not
less than 80% of the outstanding shares of "voting stock," which is
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defined as all shares of DTC 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 DTC, or its subsidiaries,
and an "interested person" or an "affiliate" of an "interested person."
A "business combination" is generally defined for purposes of Article 9 as
including mergers, sales of all or substantially all of the assets of the
corporation and certain other transactions. An "interested person" is defined as
a person, other than DTC or its majority owned subsidiaries, who, alone or
together with affiliated persons, beneficially own 5% or more of the voting
stock of the corporation, as well as certain other persons that are affiliated
with an interested person.
These requirements would not apply when the transaction was approved by
66 2/3% of the directors who are not affiliates of an interested person and who
were directors before the time the interested person became an interested
person. These directors are called the "continuing directors".
Restrictions on Amendments to Charter and Bylaws of DTC
Several provisions of DTC's charter require a greater-than-majority vote to
be amended. Specifically, Article 7 of the charter provides that no amendment to
the charter could alter, modify, change or repeal any of all of the following
charter provisions unless the amendment is adopted by the affirmative vote of
not less than 80% of the outstanding shares of voting stock held by shareholders
who are otherwise entitled to vote on the matter, voting together as a single
voting group:
- Article 6 -- authorized capital stock and blank check preferred stock;
- Article 7 -- amendments to the charter and bylaws;
- Article 8 -- board of directors classification, removal, etc.;
- Article 10 -- indemnification and limitation of certain director
liability; or
- Article 11 -- shareholder action.
In addition, Article 7 of the charter requires a greater-than-majority vote
to alter, modify, change or repeal the following bylaw provisions:
- Section 2.2 -- board of directors number and tenure;
- Section 4.4 -- removal of directors;
- Section 4.5 -- director vacancies;
- Section 6.7 -- notice of shareholder business and nominations;
- Section 6.8 -- procedure for election of directors;
- Article 9 -- indemnification; and
- Article 2 -- amendment of bylaw.
However, the provisions of Article 7 of the charter 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 the affirmative vote of 66 2/3% of
the number of directors then in office. Also, Article 9.4 of the charter
requires the affirmative vote of at least 80% of the votes entitled to be case,
voting as a single class, to make, alter, amend, change, add to or repeal any
provision inconsistent with Article 9 of the charter, which provides for a
supermajority vote for certain business combinations.
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COMPARISON OF RIGHTS OF OUR MEMBERS AND DTC SHAREHOLDERS
At the special meeting, our members will vote on our merger into DTC which
will change our form of organization. We are organized as a cooperative
association and are deemed a not-for-profit corporation under Tennessee law. DTC
is regulated as a for-profit business corporation under Tennessee law. The
following discussion describes certain significant differences between the
rights of a cooperative's members under provisions of Tennessee law relating to
cooperatives as compared to the rights of shareholders under provisions of
Tennessee law relating to for-profit business corporations.
MEMBERS VERSUS SHAREHOLDERS
DeKalb Telephone Cooperative
A Tennessee cooperative is owned by its members. Under the provisions of
Tennessee law applicable to telephone cooperatives, no person, other than an
incorporator, may become a member of the cooperative unless that person agrees
to use telephone service furnished by the cooperative when telephone service is
available through its facilities. A cooperative's bylaws may provide that any
person, including an incorporator, must cease to be a member if that person
fails or refuses to use telephone service made available by the cooperative
within a specified time after having become a member. Our bylaws provide that a
member automatically shall cease to be a member if that member fails or refuses
to use telephone service furnished by us within 30 days after service is
available to that member. A member of a Tennessee cooperative is entitled to
only one vote on matters on which members must vote, regardless of the number of
membership interests that the member owns. A member who owns numerous membership
interests is not entitled to any additional voting power.
DTC
A Tennessee for-profit corporation is owned by its shareholders. A
Tennessee for-profit corporation must have at least one class of voting capital
stock and at least one class of stock that is entitled to receive the net assets
of the corporation upon dissolution. However, the corporation may issue shares
of capital stock divided into different classes or series. In general, a holder
of shares of voting stock is entitled to one vote for each share of voting stock
that the person owns. This is significantly different from the law applicable to
Tennessee cooperatives, which, as discussed above, provides that each member may
only have one vote. The general rule for Tennessee cooperatives is one vote per
member, whereas the general rule for a for-profit corporation is one vote per
share.
AUTHORIZED STOCK
DeKalb Telephone Cooperative
Our charter does not authorize the issuance of stock, as we are a
member-based, not-for-profit cooperative.
DTC
DTC's charter authorizes stock consisting of 200,000,000 shares of common
stock, consisting of 199,000,000 class A voting shares and 1,000,000 class B
non-voting shares, no par value per share, and 20,000,000 shares of preferred
stock.
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TRANSFERABILITY OF OWNERSHIP INTERESTS
DeKalb Telephone Cooperative
The owner of membership interests in a Tennessee cooperative generally is
not able to transfer those membership interests unless the bylaws so provide. If
the bylaws do so provide, the bylaws generally limit transferability to other
persons or entities that are eligible to become members in the cooperative, and
only when such transferees satisfy the cooperative's membership requirements.
Our bylaws do not provide for the transferability of our membership interests.
DTC
Generally, shares of stock in a for-profit corporation generally are freely
transferable, unless the transferor has agreed in some way or is required by
applicable securities laws not to transfer the stock or to transfer it only in
certain circumstances.
REQUIRED VOTE FOR MERGERS
DeKalb Telephone Cooperative
Telephone cooperatives may merge with other cooperatives or other
corporations, whether not-for-profit or for-profit. To do so, the board of
directors of each entity involved in the merger must approve the proposition for
the merger and the proposed articles of merger. Before the merger may take
place, the proposition for the merger and the proposed articles of merger must
be approved by the members of any telephone cooperative involved in the merger.
Member approval is obtained upon the affirmative vote of not less than
two-thirds of the active members of any telephone cooperative voting at a
meeting.
DTC
Under the Tennessee Business Corporation Act generally, a corporation's
board of directors and a majority of the outstanding shares of common stock
entitled to vote must approve a merger or share exchange. In accordance with the
Tennessee Business Corporation Act, submission by a corporation's board of
directors of that action may be conditioned on any basis, including conditions
regarding a super-majority voting requirement or that no more than a certain
number of shares indicate that they will seek dissenters' rights, if the rights
are otherwise available.
Under the Tennessee Business Corporation Act generally, the shareholders of
a corporation need not vote on a merger or share exchange if the corporation is
the surviving corporation and the following results occur:
- the charter remains unchanged after the transaction, subject to certain
exceptions;
- each shareholder of the corporation immediately before the transaction
holds an identical number of shares, with identical rights and
preferences, after the transaction;
- the number of voting shares outstanding immediately after the transaction
plus the number of voting shares issuable as a result of the transaction,
either by conversion of securities issued pursuant to the transaction or
the exercise of rights and warrants issued pursuant to the transaction,
does not exceed by more than 20% the number of voting shares of the
surviving corporation outstanding immediately before the transaction; and
- the number of participating shares outstanding immediately after the
transaction, plus the number of participating shares issuable as a result
of the transaction, either by conversion or
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securities issued pursuant to the transaction or the exercise of rights
and warrants issued pursuant to the transaction, does not exceed by more
than 20% the total number of participating shares outstanding immediately
before the transaction.
BOARD OF DIRECTORS
DeKalb Telephone Cooperative
A director of a cooperative must be a member of the cooperative or of
another cooperative which is a member. A cooperative's board of directors may
not consist of less than five directors. Without the approval of the members, a
director of a Tennessee cooperative may not receive any salary for services as a
director and, except in emergencies, shall not be employed by the cooperative in
any capacity involving compensation. The bylaws of a Tennessee cooperative,
however, may provide that a fixed fee and expenses of attendance, if any, be
allowed to each director for attendance at each meeting of the board. Our bylaws
allow directors no more than $50 a day in compensation for each day spent on our
business, such as attendance at board meetings.
DTC
A director of a Tennessee for-profit corporation is not required to be a
shareholder, unless the corporation's charter or bylaws require otherwise. There
generally are no minimum limits on the number of directors of a Tennessee
for-profit corporation except as the corporation may provide in its charter or
bylaws. Shareholder approval is not required for salary compensation for
directors and directors may be employed by the corporation in any capacity
involving compensation.
The charter or bylaws of a Tennessee for-profit corporation may fix the
number of directors. Unless the charter or bylaws provide that the board of
directors have the power to fix or change the number of directors, including an
increase or decrease in the number of directors, only the shareholders may fix
or change the number of directors. The charter or bylaws may establish a
variable range for the size of the board of directors by fixing a minimum and
maximum number of directors. If a variable range is established, the number of
directors may be fixed or changed from time to time, within the minimum and
maximum, by the shareholders or the board of directors; provided, that unless
the charter or bylaws provided otherwise, only the shareholders may change the
range for the size of the board of directors or change from a fixed to a
variable-range size board or vice versa. If the charter or bylaws fix the number
of directors, the number of directors may be increased or decreased from time to
time by amendment to the charter or bylaws, as the case may be. DTC's charter
allows the board, from time to time by resolution adopted by at least 66 2/3% of
the board, to fix the number of DTC directors within the ranges of one to
fifteen total directors. This charter provision may not be amended, modified or
repealed unless such amendment, modification or repeal is adopted by the
affirmative vote of the holders of at least 80% of the outstanding shares of
DTC's outstanding capital stock entitled to vote, voting together as a single
class.
CUMULATIVE VOTING FOR DIRECTORS
DeKalb Telephone Cooperative
The Tennessee Nonprofit Corporation Act provides that members do not have
the right to cumulate their votes in the election of directors unless authorized
in the charter or bylaws. Neither our charter nor bylaws provide for cumulative
voting rights.
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DTC
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number of
directors to be elected. A shareholder may cast all such votes for a single
nominee or may allocate the votes among as many nominees as the shareholder may
choose. Without cumulative voting, a plurality of votes cast by the shares
entitled to vote at an annual meeting or any special meeting held to elect
directors would be necessary to elect all of the directors to be elected at that
meeting and no nominee could be elected without the support of a plurality of
the shares voting at the meeting. Under the Tennessee Business Corporation Act,
shareholders do not have cumulative voting rights unless those rights are
provided in the charter. DTC's charter does not provide for cumulative voting
rights.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
DeKalb Telephone Cooperative
The Tennessee Nonprofit Corporation Act provides that all directors and
members of the governing bodies of Tennessee telephone cooperatives, such as us,
whether or not compensated, shall be immune from suits arising from the conduct
of the cooperative's affairs. Such immunity will not be granted for willful or
wanton conduct or gross negligence.
DTC
The Tennessee Business Corporation Act allows Tennessee for-profit
corporations to adopt a provision in its charter eliminating or limiting, with
certain exceptions, the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty as a director. Under the Tennessee Business Corporation Act, a Tennessee
for-profit corporation may not eliminate or limit director monetary liability
for:
- breaches of the director's duty of loyalty to the corporation or its
shareholders;
- acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law; or
- unlawful dividends, stock repurchases or redemptions.
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. DTC's charter
contains a provision stating that directors shall not be personally liable for
monetary damage to the corporation or its shareholders, except to the extent
required by the Tennessee Business Corporation Act.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
DeKalb Telephone Cooperative
The Tennessee Nonprofit Corporation Act provision, applicable to
cooperatives, for the indemnification of directors and officers is substantially
the same as the Tennessee Business Corporation Act provision, applicable to
for-profit corporations, described below.
61
<PAGE> 68
DTC
The Tennessee Business Corporation Act provides that, unless the charter
provides otherwise, a Tennessee for-profit corporation shall indemnify a
director or officer who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which that person was a party because that
person is or was a director or officer, as the case may be, of the corporation
against reasonable expenses incurred by that person in connection with the
proceeding.
In addition, a Tennessee for-profit corporation may indemnify a director,
officer, agent or employee made a party to a proceeding because of such person's
status as a director, officer, agent or employee, as the case may be, against
liability incurred in the proceeding if:
- that person's conduct was in good faith;
- that person reasonably believed, in the case of conduct in that person's
official capacity with the corporation, that such person's conduct was in
the corporation's best interests and, in all other cases, that such
person's conduct was at least not opposed to the corporation's best
interests; and
- in the case of any criminal proceeding, that person had no reasonable
cause to believe that the conduct was unlawful.
However, a Tennessee for-profit corporation may not indemnify a director,
officer, agent or employee against liability incurred in connection with a
proceeding by or in the right of the corporation in which that person was
adjudged liable to the corporation or in connection with any other proceeding
charging improper personal benefit to that person, whether or not involving
action in such person's official capacity, in which that person was found liable
on the basis that personal benefit was improperly received by that person.
A Tennessee for-profit corporation also may pay for or reimburse the
reasonable expenses incurred by a director, officer, agent or employee who is a
party to a proceeding in advance of final disposition of the proceeding if a
determination is made that the facts then known to those making the
determination would not preclude indemnification and that person furnishes the
corporation a written affirmation of that person's good faith belief that such
person has met the standard of conduct required by the Tennessee Business
Corporation Act for indemnification and a written undertaking to repay the
advance if it is ultimately determined that such person is not entitled to
indemnification.
The Tennessee Business Corporation Act allows a director or officer of a
Tennessee for-profit corporation to apply to a court for indemnification unless
the corporation's charter provides otherwise. Upon application, a court may
order indemnification of such person if the court determines that person is
entitled to mandatory indemnification or is fairly and reasonably entitled to
indemnification in view of all relevant circumstances, whether or not the
director met the standard of conduct set forth in the Tennessee Business
Corporation Act or was found liable in connection with a proceeding by or in the
right of the corporation or in connection with any other proceeding charging
improper personal benefit to that person, but if that person was found liable in
such proceedings, the indemnification must be limited to reasonable expenses
incurred.
DTC's charter and bylaws contain a provision that directors, officers,
agents and employees of DTC, as well as persons serving in such capacities for
another entity at the request of DTC, may be indemnified to the fullest extent
provided by law. DTC's charter provides that DTC may purchase and maintain
insurance to cover indemnification expenses, whether or not indemnification
would be permissible under the Tennessee Business Corporation Act in the absence
of insurance.
62
<PAGE> 69
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of DTC pursuant
to the foregoing provisions, or otherwise, DTC has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and, therefore, is unenforceable.
AMENDMENTS TO CHARTER AND BYLAWS
DeKalb Telephone Cooperative
A Tennessee cooperative may amend its charter by adoption of a resolution
of the board of directors followed by an affirmative vote of not less than
two-thirds of the active members voting at a meeting. A Tennessee cooperative
may amend its bylaws by a majority vote of the members voting at a meeting, at
which a quorum is present.
DTC
With certain exceptions, an amendment to the charter of a Tennessee
for-profit corporation must first be proposed by its board of directors to be
submitted to the shareholders at an annual or special meeting. The board must
recommend the amendment to the shareholders, unless the board determines that
because of conflict of interest or other special circumstances, it should make
no recommendation and it communicates the basis for its determination to the
shareholders with the amendment. The amendment is adopted upon receiving the
affirmative vote of a majority of the shares entitled to vote, unless the
charter, Tennessee law or the board specify a higher percentage, or unless any
class of shares is entitled to vote as a class on the amendment, in which case
the amendment is adopted upon receiving the affirmative vote of a majority of
votes cast by holders of shares of each class entitled to vote as a class and of
the total number of shares entitled to vote.
The Tennessee Business Corporation Act provides that shares of one class
are entitled to vote as a class if the amendment would do any of the following:
- increase or decrease the aggregate number of authorized shares of such
class;
- effect an exchange or reclassification of all or parts of the shares of
such class into shares of another class;
- effect an exchange or reclassification, or create a right of exchange, of
all or any part of the shares of another class into the shares of such
class;
- change the designations, preferences, limitations or relative rights of
all or part of the shares of such class;
- change the shares of all or part of the class into a different number of
shares of the same class;
- create a new class or change a class with subordinate and inferior rights
into a class of shares, having rights or preferences with respect to
distributions or dissolution that are prior, superior, or substantially
equal to the shares of the class, or increase the rights, preferences or
number of authorized shares of any class having rights or preferences
with respect to distributions or to dissolution that are prior, superior,
or substantially equal to the shares of the class;
- authorize the issuance as a share dividend of shares of the class in
respect of shares of another class;
- limit or deny the existing preemptive rights of all or part of the shares
of the class; or
63
<PAGE> 70
- cancel or otherwise affect rights to distributions or dividends that have
accumulated but not yet been declared on all or part of the shares of the
class.
Also pursuant to the Tennessee Business Corporation Act, the board of
directors may amend the charter without the approval of the shareholders with
respect to certain routine matters.
Under the Tennessee Business Corporation Act, a corporation's bylaws may be
amended or repealed by the board of directors unless the corporation's charter
or Tennessee law reserve that power, in whole or in part, to the shareholders of
the corporation or the shareholders in amending or repealing a particular bylaw
provide expressly that the board of directors may not amend or repeal that
bylaw. In addition, a corporation's shareholders may amend or repeal the
corporation's bylaws even though the bylaws may also be amended or repealed by
the board of directors.
DTC's charter provides that the bylaws may be altered or repealed in
accordance with Tennessee law. DTC's charter requires a supermajority vote to
amend certain provisions of the charter and of the bylaws. See "Description of
DTC Capital Stock -- Other Provisions Affecting Control of DTC -- Restrictions
on Amendments to Charter and Bylaws of DTC."
SPECIAL MEETINGS OF MEMBERS/SHAREHOLDERS; ACTION WITHOUT MEETING
DeKalb Telephone Cooperative
Special meetings of the members of a cooperative may be called by the board
of directors, by any three directors, by the president or by not less than 10%
of all the members.
The Tennessee Nonprofit Corporation Act allows any action which may be
taken at a meeting of the members to be taken without a meeting if all of the
active members entitled to vote thereon sign a written consent setting forth the
action taken.
DTC
Special meetings of the shareholders of a Tennessee for-profit corporation
may be called by the board of directors, the person(s) authorized to do so by
the charter or bylaws or, unless the charter provides otherwise, by the holders
of at least 10% of all the votes entitled to be cast on any issue proposed to be
considered at the proposed special meeting. DTC's charter provides that the
holders of at least 20% of all the votes entitled to be cast on any issue
proposed to be considered at a proposed special meeting are necessary to call
such a special meeting. DTC's bylaws authorize a majority of the board to call a
special meeting of shareholders.
Any action which may be taken at a meeting of the shareholders of a
Tennessee for-profit corporation may be taken without a meeting if all of the
shareholders entitled to vote thereon sign a written consent setting forth the
action taken.
QUORUM REQUIREMENTS
DeKalb Telephone Cooperative
A quorum for a meeting of the members of a Tennessee cooperative is the
presence, in person, of the lesser of 2% of all members or 50 members. Thus, in
a Tennessee cooperative that has numerous members, such as we do, 50 active
members would constitute a quorum at a meeting of members and the majority of a
quorum may take action at the meeting unless the charter or other provisions of
law require a higher percentage for member actions.
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<PAGE> 71
DTC
In general, under the Tennessee Business Corporation Act, a quorum of
shareholders in a for-profit corporation is present when the holders of a
majority of the shares entitled to vote at the meeting are present in person or
by proxy, although the corporation's charter may specify a greater percentage.
The Tennessee Business Corporation Act does not specify a maximum percentage of
shares or number of shareholders that may constitute a quorum.
DIVIDENDS AND OTHER DISTRIBUTIONS
DeKalb Telephone Cooperative
The Tennessee Telephone Cooperative Act provides that all operating
revenues for a fiscal year in excess of the amounts necessary to pay expenses of
operating and maintaining the cooperative's facilities and interest during the
fiscal year shall be distributed to the cooperative's members. The distribution
may be, in the discretion of the board, either a refund or a general rate
reduction. A refund may be a credit on the cooperative's books as a capital
credit, in cash, or part capital credit and part cash payment. In addition, each
member's refund amount, other than a refund given as a general rate reduction,
shall be the same percentage of the total funds available for credit to members
as such member contributed to the total capital credits of the cooperative for
the period involved.
Throughout our existence, we have accounted for the equity of our members
through capital credits. Each year we have mailed a statement to each capital
credit holder showing the holder's percentage of that period's capital credit.
Each member's capital credit account balance as of December 31, 1998 appears on
the page of that member's information statement/prospectus on which the mailing
label appears.
No capital credits are issued on initial membership. To determine a
member's capital credits, at the end of each year each member's total capital
credits is calculated and then compared to total member capital credits for the
year, creating an allocation ratio which is then applied to our net income. The
resulting share of net income is then reflected on each member's individual
capital credit account and becomes part of that member's capital credit account
balance. Neither dividends nor interest has been or currently is paid on capital
credits. Such credits are accumulated on our books rather than paid in cash.
Our bylaws allow the board to repay capital credits at any time in full or
in part in the order of priority according to the year in which the capital was
furnished, but only if our financial condition would not be impaired.
The bylaws also authorize the board to repay to an estate the capital
credits of a deceased person at any time, if our financial condition would not
be impaired, upon written request by the deceased person's legal representative.
We have refunded the capital credits accumulated through June 30, 1999 to the
estates of deceased persons and to dissolved businesses which have made written
application for a refund. If the merger is approved and consummated, capital
credits would cease to exist and, accordingly, would not accumulate.
DTC
A Tennessee for-profit corporation is not required to pay dividends on
shares of its capital stock. Instead, except to the extent restricted in the
corporation's charter or by covenants in agreements with lenders or others,
dividends and distributions are within the discretion of the corporation's board
of directors, provided that the corporation is solvent at the time of paying the
dividend and that paying the dividend would not render the corporation
insolvent.
65
<PAGE> 72
DISSENTERS' RIGHTS
DeKalb Telephone Cooperative
The Tennessee Telephone Cooperative Act does not provide dissenters' rights
to members of a Tennessee cooperative.
DTC
A shareholder of a Tennessee for-profit corporation participating in
certain major corporate transactions, may, under varying circumstances, be
entitled to dissenters' rights pursuant to which the shareholder may receive
cash in the amount of the fair value of the shareholder's shares in lieu of the
consideration the shareholder would otherwise receive in the transaction.
Dissenters' rights generally are available to shareholders of a Tennessee
for-profit corporation if:
- the corporation sells, leases, exchanges or otherwise disposes of all or
substantially all of its assets not in the usual and regular course of
business, but only if the shareholder is otherwise entitled to vote on
the sale, lease, exchange or other disposition;
- the corporation consummates a merger, but only if shareholder approval is
required and the shareholder is entitled to vote or if the corporation is
a subsidiary that is merged with its parent under Section 48-21-105 of
the Tennessee Business Corporation Act;
- the corporation consummates a share exchange to which the corporation is
a party as the corporation whose shares will be acquired, but only if the
shareholder is entitled to vote; or
- the corporation takes any action pursuant to a shareholder vote to the
extent that the charter, bylaws or a resolution of the board provides
that voting or nonvoting shareholders are entitled to dissenters' rights.
Shareholders of a Tennessee for-profit corporation also have dissenters'
rights if an amendment to the charter would materially and adversely affect
rights in respect of a dissenter's shares because it:
- alters or abolishes a preferential right of the shares;
- creates, alters or abolishes a right in respect of redemption, including
a provision respecting a sinking fund for the redemption or repurchase,
of the shares;
- alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities;
- excludes or limits the right of the shares to vote on any matter, or to
cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights; or
- reduces the number of shares owned by the shareholder to a fraction of a
share, if the factional share is to be acquired for cash.
With respect to mergers, share exchanges, the sale, lease, exchange or
other disposition of all or substantially all of the assets of a corporation not
in the ordinary or regular course of business, and amendments to the charter
that materially and adversely affects rights in respect of a dissenter's shares,
dissenters' rights are not available under the Tennessee Business Corporation
Act as to shares that are listed on an exchange registered under Section 6 of
the Exchange Act or that are a "national market system security," as defined in
the rules promulgated pursuant to the Exchange Act.
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<PAGE> 73
PREEMPTIVE RIGHTS
DeKalb Telephone Cooperative
The Tennessee Telephone Cooperative Act does not provide for preemptive
rights of members.
DTC
The Tennessee Business Corporation Act does not provide for preemptive
rights unless a corporation's charter specifically so provides. DTC's charter
does not provide for preemptive rights.
67
<PAGE> 74
LEGAL MATTERS
Certain legal matters in connection with the merger will be passed upon for
us and DTC by our special legal counsel, Tuke Yopp & Sweeney, PLC of Nashville,
Tennessee.
EXPERTS
The consolidated financial statements of DeKalb Telephone Cooperative as of
December 31, 1997 and 1998 and for each of the three years in the respective
periods ended December 31, 1996, 1997 and 1998 included in this information
statement/prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
68
<PAGE> 75
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA DATA
Pro Forma Selected Financial Data...................... F-2
Pro Forma Consolidated Statement of Income Data for the
year ended December 31, 1998.......................... F-3
Pro Forma Consolidated Balance Sheet Data as of
September 30, 1999.................................... F-4
Pro Forma Consolidated Statement of Income Data for the
nine months ended September 30, 1999.................. F-5
Notes to Pro Forma Selected Consolidated Financial
Data.................................................. F-6
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF DEKALB
TELEPHONE COOPERATIVE, INC.
Report of Independent Public Accountants............... F-7
Consolidated Balance Sheets as of December 31, 1997 and
1998.................................................. F-8
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998...................... F-9
Consolidated Statements of Patronage Capital for the
years ended December 31, 1996, 1997 and 1998.......... F-10
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997 and 1998................ F-11
Notes to Consolidated Financial Statements............. F-12
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF DEKALB
TELEPHONE COOPERATIVE, INC.
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999.................................... F-23
Consolidated Statements of Income for the nine months
ended September 30, 1998 and 1999..................... F-24
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999.............. F-25
Notes to Consolidated Financial Statements............. F-26
</TABLE>
F-1
<PAGE> 76
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
PRO FORMA SELECTED FINANCIAL DATA
(UNAUDITED)
The unaudited pro forma consolidated statement of income and patronage
capital data for the year ended December 31, 1998 and the nine months ended
September 30, 1999 have been prepared based on the historical consolidated
income statements of the Company, as adjusted to reflect the merger of the
Company with DTC Communications Corp. as described in this
prospectus/information statement as if this merger had occurred on January 1,
1998 and January 1, 1999, respectively. The unaudited pro forma consolidated
balance sheet data as of September 30, 1999 has been prepared based on the
historical balance sheet of the Company, as adjusted to reflect the merger of
the Company with DTC Communications Corp. as described in this
prospectus/information statement as if this merger had occurred on September 30,
1999. The pro forma consolidated statements of income data may not be indicative
of the future results of operations and what the actual results of operations
would have been had the merger described above been effective January 1, 1998
and January 1, 1999, respectively. The pro forma selected financial data should
be read in connection with the consolidated financial statements and notes
thereto included herein.
F-2
<PAGE> 77
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ -----------
<S> <C> <C> <C>
OPERATING REVENUE:
Local telephone services revenue............... $ 4,189,939 $ -- $ 4,189,939
Network access services revenue................ 8,876,861 -- 8,876,861
Wireless products and services revenue......... 3,462,958 -- 3,462,958
Miscellaneous revenue.......................... 1,595,730 -- 1,595,730
----------- ------------ -----------
Total operating revenue................... 18,125,488 -- 18,125,488
----------- ------------ -----------
OPERATING EXPENSES:
Plant operations expense....................... 3,900,176 -- 3,900,176
Depreciation and amortization.................. 4,585,799 -- 4,585,799
Customer operations expense.................... 1,131,798 -- 1,131,798
Corporate operations expense................... 3,403,317 -- 3,403,317
Operating taxes................................ 380,676 -- 380,676
----------- ------------ -----------
Total operating expenses.................. 13,401,766 -- 13,401,766
----------- ------------ -----------
Total operating income.................... 4,723,722 -- 4,723,722
----------- ------------ -----------
OTHER INCOME (EXPENSE):
Loss on retirement of assets................... (327,605) -- (327,605)
Interest expense............................... (1,109,359) -- (1,109,359)
Interest income................................ 712,644 -- 712,644
Other income................................... 510,119 -- 510,119
----------- ------------ -----------
Total other income (expense).............. (214,201) -- (214,201)
----------- ------------ -----------
Income before income taxes................ 4,509,521 -- 4,509,521
PROVISION FOR INCOME TAXES....................... 106,845 1,610,445(a) 1,717,290
----------- ------------ -----------
Net income................................ $ 4,402,676 $ 1,610,445 $ 2,792,231
=========== ============ ===========
Weighted average shares outstanding............ 1,770,309
===========
Basic earnings per share.................... $ 1.58
===========
Diluted earnings per share.................. $ 1.58
===========
</TABLE>
The accompanying notes to pro forma selected consolidated financial data
are an integral part of this financial data.
F-3
<PAGE> 78
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET DATA
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,783,098 $ -- $ 1,783,098
Marketable securities..................................... 14,027,819 (128,092)(b) 12,421,161
(1,478,566)(c)
Telecommunications accounts receivable.................... 2,613,303 -- 2,613,303
Other receivables......................................... 197,341 -- 197,341
Materials and supplies.................................... 357,290 -- 357,290
Prepaids and other current assets......................... 137,492 -- 137,492
Deferred tax assets....................................... 79,646 -- 79,646
------------ ------------ ------------
Total current assets................................ 19,195,989 (1,606,658) 17,589,331
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost.................... 60,429,826 -- 60,429,826
Accumulated depreciation.................................. (32,069,772) -- (32,069,772)
------------ ------------ ------------
Net property, plant and equipment................... 28,360,054 -- 28,360,054
Property, plant and equipment under construction.......... 4,593,548 -- 4,593,548
------------ ------------ ------------
Total property, plant and equipment................. 32,953,602 -- 32,953,602
------------ ------------ ------------
OTHER ASSETS................................................ 484,619 -- 484,619
------------ ------------ ------------
$ 52,634,210 $ (1,606,658) $ 51,027,552
============ ============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 820,064 $ -- $ 820,064
Advance billings and payments............................. 87,027 -- 87,027
Customer deposits......................................... 192,013 -- 192,013
Current maturities of long-term debt...................... 859,171 -- 859,171
Accrued taxes............................................. 313,907 -- 313,907
Accrued salaries, wages and benefits...................... 348,550 -- 348,550
Other accrued liabilities................................. 529,533 -- 529,533
------------ ------------ ------------
Total current liabilities........................... 3,150,265 -- 3,150,265
LONG-TERM DEBT:
Rural Utilities Service, net of current maturities........ 22,093,793 -- 22,093,793
OTHER LIABILITIES:
Postretirement benefits other than pension................ 599,747 -- 599,747
Deferred tax liabilities.................................. 623,127 -- 623,127
------------ ------------ ------------
Total liabilities................................... 26,466,932 -- 26,466,932
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY:
Patronage capital......................................... 26,167,278 (24,688,712)(b) --
(1,478,566)(c)
------------ ------------ ------------
Total members' equity............................... 26,167,278 (26,167,278) --
------------ ------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, Class A, voting............................. -- 19,648,490(b) 19,648,490
Common stock, Class B, non-voting......................... -- 4,912,130(b) 4,912,130
------------ ------------ ------------
Total stockholders' equity.......................... -- 24,560,620 24,560,620
------------ ------------ ------------
$ 52,634,210 $ (1,606,658) $ 51,027,552
============ ============ ============
</TABLE>
The accompanying notes to pro forma selected consolidated financial data
are an integral part of this financial data.
F-4
<PAGE> 79
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUE:
Local telephone services revenue........... $ 3,299,437 $ -- $ 3,299,437
Network access services revenue............ 8,164,108 -- 8,164,108
Wireless products and services revenue..... 3,201,225 -- 3,201,225
Miscellaneous revenue...................... 1,176,626 -- 1,176,626
----------- ----------- -----------
Total operating revenue............ 15,841,396 -- 15,841,396
----------- ----------- -----------
OPERATING EXPENSES:
Plant operations expense................... 2,994,607 -- 2,994,607
Depreciation and amortization.............. 3,687,565 -- 3,687,565
Customer operations expense................ 936,156 -- 936,156
Corporate operations expense............... 2,422,343 -- 2,422,343
Operating taxes............................ 365,223 -- 365,223
----------- ----------- -----------
Total operating expenses........... 10,405,894 -- 10,405,894
----------- ----------- -----------
Total operating income............. 5,435,502 -- 5,435,502
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense........................... (806,509) -- (806,509)
Interest income............................ 561,578 -- 561,578
Other income............................... 223,670 -- 223,670
----------- ----------- -----------
Total other income (expense)....... (21,261) -- (21,261)
----------- ----------- -----------
Income before income taxes......... 5,414,241 -- 5,414,241
PROVISION FOR INCOME TAXES................... 239,461 1,828,873(a) 2,068,334
----------- ----------- -----------
Net income......................... $ 5,174,780 $ 1,828,873 $ 3,345,907
=========== =========== ===========
Weighted average shares outstanding........ 2,160,846
===========
Basic earnings per share................ $ 1.55
===========
Diluted earnings per share.............. $ 1.55
===========
</TABLE>
The accompanying notes to pro forma selected consolidated financial data
are an integral part of this financial data.
F-5
<PAGE> 80
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
(a) To record an income tax provision for both the year ended December 31,
1998 and the nine months ended September 30, 1999 as if the Company had
been a taxable corporation.
(b) To record the conversion of outstanding capital credits into shares of
common stock at a conversion ratio of 10 - to - 1 and the cash payment of
fractional shares.
(c) To record the retirement of all capital credits earned prior to 1990.
NOTE: The pro forma consolidated statement of income data does not include
approximately $850,000 of non-recurring expenses that will be recorded by
the Company in connection with the reorganization of the Company. These
$850,000 of non-recurring expenses include expenses related to legal,
consulting, accounting and other professional service fees.
F-6
<PAGE> 81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DeKalb Telephone Cooperative, Inc.:
We have audited the accompanying consolidated balance sheets of DeKalb
Telephone Cooperative, Inc., (a Tennessee cooperative) and subsidiary as of
December 31, 1997 and 1998 and the related statements of income, patronage
capital and cash flows for each of the three years in the period ended December
31, 1998. 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of DeKalb Telephone
Cooperative, Inc. and subsidiary as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Nashville, Tennessee
September 1, 1999 (except with respect to
the matter discussed in Note 11 as to which
the date is October 18, 1999)
F-7
<PAGE> 82
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,660,085 $ 2,098,624
Marketable securities..................................... 12,485,539 12,152,700
Telecommunications accounts receivable, less allowance for
uncollectible accounts of $209,504 in 1997 and $257,018
in 1998................................................ 1,886,006 2,309,179
Other receivables......................................... 188,696 208,533
Materials and supplies.................................... 191,680 241,210
Prepaids and other current assets......................... 374,318 404,661
Deferred tax assets....................................... 44,393 75,525
------------ ------------
Total current assets.............................. 16,830,717 17,490,432
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost.................... 55,567,145 59,505,122
Accumulated depreciation.................................. (28,199,391) (29,995,236)
------------ ------------
Net property, plant and equipment................. 27,367,754 29,509,886
Property, plant and equipment under construction.......... 1,580,555 2,450,920
------------ ------------
Total property, plant and equipment............... 28,948,309 31,960,806
------------ ------------
OTHER ASSETS................................................ 140,136 416,270
------------ ------------
$ 45,919,162 $ 49,867,508
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 804,506 $ 2,009,225
Advance billings and payments............................. 50,952 68,081
Customer deposits......................................... 139,923 160,023
Current maturities of long-term debt...................... 845,394 818,258
Accrued taxes............................................. 665,844 378,367
Accrued salaries, wages and benefits...................... 404,515 442,535
Other accrued liabilities................................. 230,027 208,095
------------ ------------
Total current liabilities......................... 3,141,161 4,084,584
LONG-TERM DEBT:
Rural Utilities Service, net of current maturities........ 23,665,197 22,844,766
OTHER LIABILITIES:
Postretirement benefits other than pension................ 532,288 562,272
Deferred tax liabilities.................................. 234,593 387,025
------------ ------------
Total liabilities................................. 27,573,239 27,878,647
------------ ------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY:
Patronage capital......................................... 18,345,923 21,988,861
------------ ------------
$ 45,919,162 $ 49,867,508
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-8
<PAGE> 83
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUE:
Local telephone services revenue............. $ 3,704,232 $ 3,942,016 $ 4,189,939
Network access services revenue.............. 7,891,713 8,241,547 8,876,861
Wireless products and services revenue....... 2,859,073 3,085,127 3,462,958
Miscellaneous revenue........................ 1,317,077 1,501,896 1,595,730
----------- ----------- -----------
Total operating revenue.............. 15,772,095 16,770,586 18,125,488
----------- ----------- -----------
OPERATING EXPENSES:
Plant operations expense..................... 3,685,576 3,345,253 3,900,176
Depreciation and amortization................ 3,726,916 4,879,396 4,585,799
Customer operations expense.................. 906,029 910,398 1,131,798
Corporate operations expense................. 2,657,818 3,318,639 3,403,317
Operating taxes.............................. 425,518 403,971 380,676
----------- ----------- -----------
Total operating expenses............. 11,401,857 12,857,657 13,401,766
----------- ----------- -----------
Total operating income............... 4,370,238 3,912,929 4,723,722
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Loss on retirement of assets................. -- (1,107,149) (327,605)
Interest expense............................. (1,186,667) (1,119,355) (1,109,359)
Interest income.............................. 452,147 649,553 712,644
Other income................................. 123,546 234,212 510,119
----------- ----------- -----------
Total other income (expense)......... (610,974) (1,342,739) (214,201)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES..................... 3,759,264 2,570,190 4,509,521
PROVISION FOR INCOME TAXES..................... 256,139 196,900 106,845
----------- ----------- -----------
Net income........................... 3,503,125 2,373,290 4,402,676
PRO FORMA INFORMATION ASSUMING MERGER WITH DTC
(NOTE 11) (UNAUDITED)
ADDITIONAL PROVISION FOR INCOME TAXES.......... 1,223,050 833,435 1,610,445
----------- ----------- -----------
PRO FORMA NET INCOME........................... $ 2,280,075 $ 1,539,855 $ 2,792,231
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
<PAGE> 84
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PATRONAGE CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
PATRONAGE CAPITAL, beginning of year............... $14,124,948 $16,861,484 $18,345,923
Net income....................................... 3,503,125 2,373,290 4,402,676
Capital credits retired.......................... (766,589) (888,851) (759,738)
----------- ----------- -----------
PATRONAGE CAPITAL, end of year..................... $16,861,484 $18,345,923 $21,988,861
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-10
<PAGE> 85
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 3,503,125 $ 2,373,290 $ 4,402,676
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 3,726,916 4,879,396 4,585,799
Deferred taxes.............................. 254,260 8,200 121,300
Loss on retirement of fixed assets.......... -- 1,107,149 327,605
Changes in assets and liabilities:
Receivables.............................. 16,058 (244,999) (443,010)
Materials and supplies................... 143,742 58,471 (49,530)
Prepaids and other current assets........ (295,890) 4,036 (30,343)
Accounts payable......................... (266,958) 111,197 1,204,719
Advance billings and payments............ (1,076) 3,732 17,129
Customer deposits........................ 17,125 18,700 20,100
Accrued liabilities...................... (90,067) 257,656 (271,389)
Postretirement benefits other than
pension............................... (22,689) (318,051) 29,984
----------- ----------- -----------
Net cash provided by operating
activities.......................... 6,984,546 8,258,777 9,915,040
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of marketable securities, net.... (1,842,015) (4,034,650) 332,839
Construction and acquisition of property, plant
and equipment, net............................ (3,263,597) (2,123,369) (7,925,901)
(Increase) decrease in other assets, net......... (92,385) 2,246 (276,134)
----------- ----------- -----------
Net cash used in investing
activities.......................... (5,197,997) (6,155,773) (7,869,196)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt....................... (847,498) (877,542) (847,567)
Retirement of capital credits.................... (766,589) (888,851) (759,738)
----------- ----------- -----------
Net cash used in financing
activities.......................... (1,614,087) (1,766,393) (1,607,305)
----------- ----------- -----------
NET INCREASE IN CASH............................... 172,462 336,611 438,539
CASH, beginning of year............................ 1,151,012 1,323,474 1,660,085
----------- ----------- -----------
CASH, end of year.................................. $ 1,323,474 $ 1,660,085 $ 2,098,624
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes................... $ 1,879 $ 92,500 $ 252,398
=========== =========== ===========
Cash payments for interest....................... $ 1,278,228 $ 1,229,349 $ 1,191,819
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-11
<PAGE> 86
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
DeKalb Telephone Cooperative, Inc. ("the Company") was formed under the
laws of the State of Tennessee in 1951 for the purpose of providing
telecommunications services to a rural region of eastern middle Tennessee. The
Company formed Advantage Cellular Systems, Inc. ("Advantage"), a wholly owned
subsidiary, in 1991 for the purpose of providing cellular telecommunications
services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany transactions and
balances have been eliminated.
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("FAS 115"),
the Company considers its investment in debt securities as held-to-maturity. The
securities are reflected in the consolidated balance sheets at amortized cost,
and interest income is included in the consolidated statements of income as
earned.
MATERIALS AND SUPPLIES
Materials and supplies are stated at the lower of cost or market with cost
determined by the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including labor and other
direct costs associated with installation. The Company capitalizes interest
costs incurred during construction in the cost of property, plant and equipment.
Those capitalized interest charges were $88,530, $114,847, and $69,947 in 1996,
1997, and 1998, respectively. Improvements that significantly add to productive
capacity or extend the useful life are capitalized, while repairs and
maintenance are expensed as incurred.
Depreciation is calculated on a straight-line basis at annual rates that
will amortize the depreciable property over its estimated useful life.
Individual depreciation rates are as follows:
<TABLE>
<S> <C>
Buildings................................................... 3.3%
Central office equipment.................................... 8.0 - 10.0%
Poles, cables, wire and towers.............................. 5.0%
Public telephone equipment.................................. 10.0%
Furniture and office equipment.............................. 10.0 - 12.5%
Vehicles and other work equipment........................... 10.0 - 20.0%
</TABLE>
F-12
<PAGE> 87
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
When depreciable property, plant and equipment is retired in the normal
course of business, the amount of such property, plant and equipment is deducted
from the property, plant and equipment account and the accumulated depreciation
account. Gains or losses on disposition are amortized with the remaining net
investment in property, plant and equipment. When specifically identifiable
depreciable property, plant and equipment is retired outside the normal course
of business, the Company recognizes any gains or losses in the consolidated
statements of income. During 1997 and 1998, the Company recorded losses on
retirements of property, plant and equipment of $1,107,149 and $327,605,
respectively.
The Company evaluates property, plant and equipment for impairment when
changes in circumstances indicate that carrying values may not be recoverable.
Under Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("FAS 121"), impairment is considered and, if necessary, measured based on
estimated future cash flows, salvage values or expected net sales proceeds
depending on the circumstances.
HEALTH INSURANCE
The Company has assumed self-insured risks for employee health insurance.
The Company has purchased stop-loss coverage that insures all benefits up to a
maximum of $400,000 per participant per year. The Company's deductible is
$35,000 per participant per year.
The Company has established a trust fund to administer the processing and
payment of all health care claims. The Company contributes an amount monthly to
the trust fund representing an estimate of the health care costs expected to be
incurred, which amount is expensed as incurred. Management has evaluated the
adequacy of the contributions to the trust fund for each of the three years
ended December 31, 1998 and believes that the contributions are sufficient to
cover all claims relating to those years.
INCOME TAXES
The Company is organized and operates as a cooperative. As such, the
Company is not subject to federal or state income taxes provided it meets the
requirements of the Internal Revenue Code to continue to qualify as a
cooperative. The Company is, however, subject to income taxes on income
unrelated to the provision of telephone service.
The Company's wholly owned subsidiary, Advantage, is a taxable corporation.
Income taxes of Advantage are accounted for using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). Under FAS
109, Advantage recognizes deferred tax assets and liabilities for future tax
consequences of events that have been previously recognized in its financial
statements or tax returns. The measurement of deferred tax assets and
liabilities is based on provisions of the enacted tax law.
MEMBERSHIP FEES AND PATRONAGE CAPITAL
The Company does not charge its members membership fees. Patronage capital
is the net income retained by the Company and is allocated to members based on
their respective purchases of
F-13
<PAGE> 88
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services from the Company. The Company's board of directors approves all capital
credit retirements, which are paid in the year approved.
REVENUE RECOGNITION
Local telephone services revenue and network access services revenue are
recognized as services are provided. Wireless products and services revenue are
recognized when products are delivered or services are provided to customers.
Due to the timing of the Company's billing cycles, at any point in time certain
services have been provided to customers but not yet billed. Revenue that has
been earned but not yet billed to customers amounts to $197,673 and $280,527 at
December 31, 1997 and 1998, respectively, and is included in telecommunications
accounts receivable in the consolidated balance sheets. Additionally, the
Company invoices customers one month in advance for certain recurring charges,
resulting in advance billings and payments of $50,952 and $68,081 at December
31, 1997 and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments ("FAS
107"), the Company calculates the fair value of financial instruments using
quoted market prices and the present value of future cash flows. At December 31,
1997 and 1998, the fair value of the Company's long-term debt was $22,171,213
and $21,462,612, respectively, compared to carrying values of $24,510,591 and
$23,663,024, respectively. For the Company's other financial instruments, there
were no material differences between fair values and carrying amounts.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130"). FAS
130 requires that the changes in the amounts of certain items, including gains
and losses on certain securities, be shown in the financial statements. For
1996, 1997 and 1998, the Company's comprehensive income was equal to net income.
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, ("FAS 131"). FAS 131 establishes standards for reporting
information about operating segments in the Company's consolidated financial
statements and requirements for related disclosure about the Company's products
and services, geographic areas and major customers. The Company has two
reportable segments-- Wireline Services and Wireless Products and Services-- and
has disclosed information for each of these segments in these consolidated
financial statements.
F-14
<PAGE> 89
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). As permitted, the Company
has elected to adopt the provisions of SOP 98-1 during the year-ended December
31, 1998. Under the provisions of SOP 98-1, the Company began capitalizing and
amortizing the cost of its internal use software that it had previously expensed
as incurred. Consistent with SOP 98-1, the Company capitalizes direct costs
associated with the development of internal use software once the software
project has reached the application development stage and management has
determined that the software will be completed and used as originally intended.
Internal use software that has been capitalized is amortized on a straight-line
basis over useful lives ranging from 3 to 5 years. During 1998, the Company
capitalized approximately $500,000 of internal use software that previously
would have been expensed.
2. MARKETABLE SECURITIES
Total investment earnings for December 31, 1996, 1997 and 1998 were
$452,147, $649,553 and $712,644, respectively, and consisted solely of interest
income.
Marketable securities as of December 31, 1997 and 1998 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
U.S. Treasury Securities, interest ranging from 5.5% to
6.4%, maturing 1999......................................... $11,745,539 $11,337,700
Certificates of Deposit, interest ranging from 4.5% to 5.5%,
maturing 1999............................................. 740,000 815,000
----------- -----------
$12,485,539 $12,152,700
=========== ===========
</TABLE>
Because of the short-term nature of these investments, the carrying amount
approximates fair value.
3. OTHER ASSETS
Other assets as of December 31, 1997 and 1998 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Local multipoint distribution service ("LMDS") license cost,
net of accumulated amortization of $8,677 in 1998........... $ -- $199,560
Prepaid lease costs......................................... -- 83,334
Investment in Co Bank Stock................................. 89,501 82,741
Cash surrender value of life insurance policy............... 50,000 50,000
Deposits.................................................... 635 635
-------- --------
$140,136 $416,270
======== ========
</TABLE>
The investment in LMDS license is being amortized using the straight-line
method over a ten-year useful life.
F-15
<PAGE> 90
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Listed below are the major
classes of the property, plant and equipment as of December 31, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land........................................................ $ 493,746 $ 493,746
Buildings................................................... 4,088,422 4,436,081
Leasehold improvements...................................... 108,374 116,277
Central office equipment.................................... 12,897,832 13,552,529
Poles, cables and wire...................................... 31,376,577 34,215,424
Furniture and office equipment.............................. 1,821,853 1,770,099
Vehicles and other work equipment........................... 2,355,085 2,608,917
Paystation, internet and customer services equipment and
towers.................................................... 2,425,256 2,312,049
----------- -----------
$55,567,145 $59,505,122
=========== ===========
</TABLE>
5. LONG-TERM DEBT
Long-term debt is represented by mortgage notes payable to the Rural
Utilities Service, a U.S. governmental agency. Following is a summary of
outstanding long-term debt.
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Notes payable to Rural Utilities Service, principal and
interest (at 2%) payable quarterly through 2007............. $ 1,177,245 $ 977,667
Notes payable to Rural Utilities Service, principal and
interest (at 5%) payable quarterly through 2023........... 23,333,346 22,685,357
----------- -----------
24,510,591 23,663,024
Less current maturities..................................... 845,394 818,258
----------- -----------
$23,665,197 $22,844,766
=========== ===========
</TABLE>
The notes payable to Rural Utilities Service provide for various
restrictions on the retirement of capital credits by the Company. Substantially
all assets of the Company are pledged as security for the outstanding debt.
The maturities of long-term debt for each of the five years after 1998 are
as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- -----------
<S> <C>
1999........................................................ $ 818,258
2000........................................................ 859,171
2001........................................................ 902,130
2002........................................................ 947,236
2003........................................................ 994,598
Thereafter.................................................. 19,141,631
-----------
$23,663,024
===========
</TABLE>
F-16
<PAGE> 91
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. BENEFIT PLAN
The Company has adopted the defined contribution retirement and security
program of the National Telephone Cooperative Association plan covering all
employees meeting certain age and length of service requirements. The Company
funds the plan by making quarterly contributions into the program based upon
salaries. The Company's contributions were $215,795 in 1996, $225,742 in 1997,
and $244,066 in 1998.
7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has adopted Statement of Financial Accounting Standards No.
106, Employers' Accounting for Postretirement Benefits other than Pensions ("FAS
106"). FAS 106 requires accrual accounting for all postretirement benefits other
than pensions. Under the prescribed accrual method, the Company's obligation for
these postretirement benefits is to be fully accrued by the date employees
attain full eligibility for such benefits. Prior to the adoption of FAS 106, the
cost of health and life insurance benefits for retirees was recognized by
charging claims to expense as they were incurred. The cost of health benefits
for current and future associate retirees was recognized as determined under the
projected unit credit cost method.
In conjunction with the adoption of FAS 106, for financial reporting
purposes, the Company elected to amortize the cost for the initial obligation
over twenty years.
Substantially all of the Company's employees are covered under
postretirement health and life insurance plans. The determination of
postretirement benefit cost for postretirement health benefit plans is based on
comprehensive hospital, medical, surgical and dental benefit provisions.
All of the following information is presented in accordance with the
revised disclosure requirements of Statement of Financial Accounting Standards
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits.
F-17
<PAGE> 92
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth the plan's funded status and the amount
recognized in the Company's consolidated financial statements as of December 31,
1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Reconciliation of benefit obligation:
Obligation at January 1................................... $1,927,479 $2,092,739
Service cost.............................................. 75,536 95,161
Interest cost............................................. 132,862 151,770
Liability (gain) or loss.................................. (3,841) 260,065
Benefits paid............................................. (39,297) (37,545)
---------- ----------
Obligation at December 31.............................. $2,092,739 $2,562,190
========== ==========
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1.................... $ 215,913 $ 778,033
Actual return on plan assets.............................. 101,417 113,304
Employer contributions.................................... 500,000 200,000
Benefits paid............................................. (39,297) (37,545)
---------- ----------
Fair value of plan assets at December 31............... $ 778,033 $1,053,792
========== ==========
Funded status
Funded status at December 31.............................. $1,314,706 $1,508,398
Unrecognized transition obligation........................ (963,356) (894,568)
Unrecognized prior service cost........................... (108,723) (99,383)
Unrecognized gain......................................... 289,661 47,825
---------- ----------
Net amount recognized.................................. $ 532,288 $ 562,272
========== ==========
</TABLE>
Periodic postretirement benefit cost is composed of the following for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................... $ 60,036 $ 75,536 95,161
Interest cost.............................................. 113,768 132,862 151,770
Expected return on plan assets............................. (8,734) (55,842) (86,572)
Net amortization........................................... 61,416 72,196 78,128
-------- -------- --------
Postretirement benefit cost...................... $226,486 $224,752 $238,487
======== ======== ========
</TABLE>
For measurement purposes of the postretirement benefit obligation, the
Company used discount rates of 7.0%, 7.0% and 6.5% for the years ended December
31, 1996, 1997 and 1998, respectively. For each of the years ended December 31,
1996, 1997 and 1998, the assumed rate of future increases in compensation levels
was 6.0%. The medical cost trend rate in 1998 was approximately 8.5%, decreasing
to an ultimate rate in 2005 of 5.5%. A one percentage point increase (decrease)
in the assumed health care cost trend rates for each future year would have
increased (decreased) the aggregate of the service and interest cost components
of 1998 net periodic postretirement benefit cost by approximately $60,000 and
would have increased (decreased) the accumulated postretirement benefit
obligation as of December 31, 1998 by approximately $480,000.
F-18
<PAGE> 93
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision for income taxes consisted of the following for the three
years ended December 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current provision (benefit)
Federal.................................................. $ 1,681 $168,830 $(12,993)
State.................................................... 198 19,870 (1,462)
-------- -------- --------
1,879 188,700 (14,455)
======== ======== ========
Deferred provision
Federal.................................................. 227,486 7,337 108,532
State.................................................... 26,774 863 12,768
-------- -------- --------
254,260 8,200 121,300
-------- -------- --------
$256,139 $196,900 $106,845
======== ======== ========
</TABLE>
The deferred tax assets and liabilities, at the respective income tax
rates, are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Current deferred tax asset
Allowance for uncollectible accounts receivable........... $ 44,393 $ 75,525
======== ========
Noncurrent deferred tax liability
Tax depreciation in excess of financial reporting
depreciation........................................... $234,593 $387,025
======== ========
</TABLE>
The provisions for income taxes differ from the amounts computed using
statutory rates as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Provision at statutory rates................................ 38% 38% 38%
Deduction for income allocated to cooperative members..... (31%) (30%) (36%)
--- --- ---
Effective tax rate.......................................... 7% 8% 2%
=== === ===
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company currently has a five-year noncancellable operating lease with
IBM for computer equipment. Rent expense for the years ended December 31, 1996,
1997 and 1998 amounted to $37,716, $75,432, and $75,432, respectively.
F-19
<PAGE> 94
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum lease payments under the
noncancellable operating lease:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
1999........................................................ $ 75,432
2000........................................................ 75,432
2001........................................................ 37,716
--------
Total....................................................... $188,580
========
</TABLE>
TELECOMMUNICATIONS LEGISLATION
The Telecommunications Act of 1996 (the "96 Act") was passed in February
1996. The 96 Act is intended to promote competition in all sectors of the
telecommunications marketplace, while preserving and advancing telephone
service. As a result of the 96 Act, the Federal Communications Commission
("FCC") is in the process of issuing revised rules governing telecommunications
services. Presently, competition has not had a significant adverse impact on the
Company. However, as the regulations required by the 96 Act have not yet been
finalized, management cannot predict the ultimate effects that the 96 Act and
future competition will have on the Company.
LITIGATION
The Company is also subject to various legal proceedings and claims that
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liabilities with respect to these actions will not materially
affect the Company.
10. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
SEGMENT INFORMATION
In accordance with FAS 131, the Company has two reportable segments -
Wireline Services and Wireless Products and Services.
Wireline Services include local telephone service and toll calls as well as
access services that enable long-distance carriers to complete calls to or from
locations outside of the Company's wireline operating area. Wireline Services
also provides billing and collection services to other telecommunications
companies.
Wireless Products and Services includes wireless communications services
and the sale of cellular telephones and accessories.
F-20
<PAGE> 95
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment results for the years ended December 31, 1996, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
WIRELINE SERVICES
Revenue.......................................... $12,913,022 $13,685,459 $14,662,530
Operating income................................. 3,797,075 3,530,519 4,374,720
Total assets..................................... 41,986,321 40,907,884 42,541,522
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
WIRELESS PRODUCTS AND SERVICES
Revenue.......................................... $ 2,859,073 $ 3,085,127 $ 3,462,958
Operating income................................. 573,163 382,410 349,002
Total assets..................................... 3,932,841 5,011,278 7,325,986
</TABLE>
SIGNIFICANT CUSTOMER INFORMATION
A single long-distance carrier provides a significant portion of the
Company's network access services and billing and collection revenue. For the
years ended December 31, 1996, 1997 and 1998, this customer provided $1,992,680,
$1,943,850 and $1,707,239, respectively, of the Company's total operating
revenues. Revenues from this significant customer are included in the Wireline
Services segment.
11. SUBSEQUENT EVENT
On October 18, 1999, the board of directors of the Company approved a plan
of merger that effectively results in a reorganization of the Company. To effect
the transaction, the Company has formed a wholly-owned, taxable subsidiary, DTC
Communications Corp. ("DTC"), into which the Company will merge via an exchange
of all accumulated capital credits of the Company for shares of common stock of
DTC. In accordance with the Company's bylaws, the plan of merger must be voted
on and approved by the membership of the Company, which is expected to occur in
December 1999. If approved, the Company will be merged into DTC and DTC will
continue to carry on the Company's business activities.
Prior to the merger, DTC has had no substantive operations, therefore the
financial position and results of operations immediately subsequent to the
merger will be identical to those of the Company.
The following unaudited pro forma data is provided for information purposes
only and is subject to completion of the merger transaction described above.
The Company, as a cooperative, does not have outstanding shares of stock.
Rather the Company has accumulated capital credits due to its active and
inactive members. For purposes of the pro forma data below, ten dollars of
capital credits are equal to one share of common stock.
Pursuant to Statement of Financial Accounting Standards No. 128, Earnings
per Share, basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by dividing
net income by the weighted average number of common and common equivalent shares
outstanding during the year, which includes the additional dilution related to
F-21
<PAGE> 96
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
conversion of convertible debt and/or preferred stock and the exercise of stock
options as computed under the treasury stock method. Because there were no
convertible securities outstanding during the years ended December 31, 1996,
1997 and 1998, diluted earnings per share was equal to basic earnings per share.
As mentioned above, DTC is a taxable entity. The Company, except for the
Advantage subsidiary, has not been subject to federal or state income taxes. The
following unaudited pro forma amounts present basic earnings per share and
diluted earnings per share as if the Company had been a taxable corporation for
all three years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
PRO FORMA -- UNAUDITED
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net income, as reported............................... $3,503,125 $2,373,290 $4,402,676
Additional tax provision.............................. 1,223,050 833,435 1,610,445
---------- ---------- ----------
Pro forma net income............................. $2,280,075 $1,539,855 $2,792,231
========== ========== ==========
Weighted average shares outstanding.............. 1,302,411 1,514,019 1,770,309
========== ========== ==========
Basic earnings per share......................... $ 1.75 $ 1.02 $ 1.58
========== ========== ==========
Diluted earnings per share....................... $ 1.75 $ 1.02 $ 1.58
========== ========== ==========
</TABLE>
The pro forma net income above does not include approximately $850,000 of
one-time non-recurring expenses that will be recorded by the Company in
connection with this proposed merger transaction. These costs consist of legal,
consulting, accounting and other professional service fees.
F-22
<PAGE> 97
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 2,098,624 $ 1,783,098
Marketable securities..................................... 12,152,700 14,027,819
Telecommunications accounts receivable, less allowance for
uncollectible accounts of $257,018 in 1998 and $251,088
in 1999................................................ 2,309,179 2,613,303
Other receivables......................................... 208,533 197,341
Materials and supplies.................................... 241,210 357,290
Prepaids and other current assets......................... 404,661 137,492
Deferred tax assets....................................... 75,525 79,646
------------ ------------
Total current assets.............................. 17,490,432 19,195,989
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost.................... 59,505,122 60,429,826
Accumulated depreciation.................................. (29,995,236) (32,069,772)
------------ ------------
Net property, plant and equipment................. 29,509,886 28,360,054
Property, plant and equipment under construction.......... 2,450,920 4,593,548
------------ ------------
Total property, plant and equipment............... 31,960,806 32,953,602
------------ ------------
OTHER ASSETS................................................ 416,270 484,619
------------ ------------
$ 49,867,508 52,634,210
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,009,225 820,064
Advance billings and payments............................. 68,081 87,027
Customer deposits......................................... 160,023 192,013
Current maturities of long-term debt...................... 818,258 859,171
Accrued taxes............................................. 378,367 313,907
Accrued salaries, wages and benefits...................... 442,535 348,550
Other accrued liabilities................................. 208,095 529,533
------------ ------------
Total current liabilities......................... 4,084,584 3,150,265
LONG-TERM DEBT:
Rural Utilities Service, net of current maturities........ 22,844,766 22,093,793
OTHER LIABILITIES:
Postretirement benefits other than pension................ 562,272 599,747
Deferred tax liabilities.................................. 387,025 623,127
------------ ------------
Total liabilities................................. 27,878,647 26,466,932
------------ ------------
COMMITMENTS AND CONTINGENCIES:
MEMBERS' EQUITY:
Patronage capital......................................... 21,988,861 26,167,278
------------ ------------
$ 49,867,508 $ 52,634,210
============ ============
</TABLE>
F-23
<PAGE> 98
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- -------------
<S> <C> <C>
OPERATING REVENUE:
Local telephone services revenue.......................... $ 3,121,733 $ 3,299,437
Network access services revenue........................... 6,527,984 8,164,108
Wireless products and services revenue.................... 2,494,971 3,201,225
Miscellaneous revenue..................................... 1,180,793 1,176,626
----------- -----------
Total operating revenue........................... 13,325,481 15,841,396
----------- -----------
OPERATING EXPENSES:
Plant operations expense.................................. 2,751,404 2,994,607
Depreciation and amortization............................. 3,453,460 3,687,565
Customer operations expense............................... 777,735 936,156
Corporate operations expense.............................. 2,267,484 2,422,343
Operating taxes........................................... 322,523 365,223
----------- -----------
Total operating expenses.......................... 9,572,606 10,405,894
----------- -----------
Total operating income............................ 3,752,875 5,435,502
----------- -----------
OTHER INCOME (EXPENSE):
Loss on retirement of assets.............................. (437,822) --
Interest expense.......................................... (836,976) (806,509)
Interest income........................................... 567,472 561,578
Other income.............................................. 247,623 223,670
----------- -----------
Total other income (expense)...................... (459,703) (21,261)
----------- -----------
Income before income taxes........................ 3,293,172 5,414,241
PROVISION FOR INCOME TAXES.................................. 77,451 239,461
----------- -----------
Net income........................................ 3,215,721 5,174,780
PRO FORMA INFORMATION ASSUMING MERGER WITH DTC:
ADDITIONAL PROVISION FOR INCOME TAXES....................... 1,283,230 1,828,873
----------- -----------
Pro forma net income.............................. 1,932,491 3,345,907
=========== ===========
</TABLE>
F-24
<PAGE> 99
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,215,721 $ 5,174,780
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 3,453,460 3,687,565
Deferred taxes......................................... (49,652) 231,981
Loss on retirement of fixed assets..................... 437,822 --
Changes in assets and liabilities:
Receivables.......................................... (238,735) (292,932)
Materials and supplies............................... (22,838) (116,080)
Prepaids and other current assets.................... 149,922 267,169
Accounts payable..................................... 2,060,312 (1,189,161)
Advance billings and payments........................ 13,283 18,946
Customer deposits.................................... 17,253 31,990
Accrued liabilities.................................. 124,237 162,993
Postretirement benefits other than pension........... (62,525) 37,475
----------- -----------
Net cash provided by operating activities......... 9,098,260 8,014,726
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities, net.................... (1,071,522) (1,875,119)
Construction and acquisition of property, plant and
equipment, net......................................... (6,181,325) (4,680,361)
Increase in other assets, net............................. (212,000) (68,349)
----------- -----------
Net cash used in investing activities............. (7,464,847) (6,623,829)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (672,902) (710,060)
Retirement of capital credits............................. (804,772) (996,363)
----------- -----------
Net cash used in financing activities............. (1,477,674) (1,706,423)
----------- -----------
NET INCREASE (DECREASE) IN CASH............................. 155,739 (315,526)
CASH, beginning of period................................... 1,660,085 2,098,624
----------- -----------
CASH, end of period......................................... 1,815,824 1,783,098
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes............................ 173,651 239,461
=========== ===========
Cash payments for interest................................ 884,608 857,772
=========== ===========
</TABLE>
F-25
<PAGE> 100
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1999 and the
consolidated statements of income and cash flows for the periods ended September
30, 1998 and September 30, 1999 have been prepared by the Company in accordance
with the accounting policies described in its annual financial statements for
the year ended December 31, 1998 and should be read in conjunction with the
notes thereto.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position at
September 30, 1999 and results of operations and changes in cash flows for all
periods presented have been made. The results of operations for the period ended
September 30, 1999 are not necessarily indicative of the operating results for
the full year.
2. PRO FORMA NET INCOME AND PER SHARE AMOUNTS
As discussed in note 11 to the consolidated financial statements, the Board
of Directors of the Company approved a plan of merger with DTC Communications
Corporation ("DTC").
The Company, as a cooperative, does not have outstanding shares of stock.
Rather the Company has accumulated capital credits due to its current and former
members. For purposes of the pro forma data below, ten dollars of capital
credits are equal to one share of common stock.
Pursuant to Statement of Financial Accounting Standards No. 128, Earnings
per Share ("FAS 128"), basic earnings per share is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during the year, which includes the additional
dilution related to conversion of convertible debt and/or preferred stock and
the exercise of stock options as computed under the treasury stock method.
Because there were no convertible securities outstanding during each of the nine
months ended September 30, 1998 and 1999, diluted earnings per share was equal
to basic earnings per share.
F-26
<PAGE> 101
DEKALB TELEPHONE COOPERATIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DTC is a taxable entity. The Company, except for its wholly owned
subsidiary, has not been subject to federal or state income taxes. The following
unaudited pro forma amounts present basic earnings per share and diluted
earnings per share as if the Company had been a taxable corporation for the nine
months ended September 30, 1998 and 1999, respectively:
<TABLE>
<CAPTION>
PRO FORMA -- UNAUDITED
---------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Net income, as reported................................ $3,215,721 $5,174,780
Additional tax provision............................... 1,283,230 1,828,873
---------- ----------
Pro forma net income................................. $1,932,491 $3,345,907
========== ==========
Weighted average shares outstanding.................. 1,708,710 2,160,846
========== ==========
Basic earnings per share............................. $ 1.13 $ 1.55
========== ==========
Diluted earnings per share........................... $ 1.13 $ 1.55
========== ==========
</TABLE>
3. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
As discussed in note 10 to the consolidated financial statements, the
Company has two reportable segments -- Wireline Services and Wireless Products
and Services.
Wireline Services include local telephone service and toll calls as well as
access services that enable long-distance carriers to complete calls to or from
locations outside of the Company's wireline operating area. Wireline Services
also provides billing and collection services to other telecommunications
companies.
Wireless Products and Services includes wireless communications services
and the sale of cellular telephones and accessories.
Segment results for the nine months ended September 30, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
WIRELINE SERVICES
Revenue................................................... $10,830,510 $12,640,171
Operating income.......................................... 3,513,316 4,879,090
Total assets.............................................. 42,668,823 44,529,018
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
WIRELESS PRODUCTS AND SERVICES
Revenue................................................... $ 2,494,971 $ 3,201,225
Operating income.......................................... 239,559 556,412
Total assets.............................................. 7,115,855 8,105,192
</TABLE>
SIGNIFICANT CUSTOMER INFORMATION
A single long-distance carrier provides a significant portion of the
Company's network access services and billing and collection revenue. For the
nine months ended September 30, 1998 and 1999, this customer provided $1,271,540
and $1,310,548, respectively, of the Company's total operating revenues.
Revenues from this significant customer are included in the Wireline Services
segment.
F-27
<PAGE> 102
APPENDIX A
PROPOSED PLAN AND AGREEMENT OF MERGER
BY AND BETWEEN
DEKALB TELEPHONE COOPERATIVE, INC.
AND
DTC COMMUNICATIONS CORP.
A-1
<PAGE> 103
AGREEMENT AND PLAN OF MERGER
OF
DEKALB TELEPHONE COOPERATIVE, INC
(A TENNESSEE COOPERATIVE)
AND
DTC COMMUNICATIONS CORP.
(A TENNESSEE CORPORATION)
THIS AGREEMENT AND PLAN OF MERGER dated as of October 18, 1999 (the
"Agreement") is between DeKalb Telephone Cooperative, Inc., a Tennessee
cooperative ("Cooperative") and DTC Communications Corp., a Tennessee
corporation ("DTC"). The Cooperative and DTC are sometimes referred to herein as
the "Constituent Corporations."
RECITALS
A. DTC is a corporation duly organized and existing under the laws of the
State of Tennessee, with an authorized capital of 220,000,000 shares,
199,000,000 of which are designated "Class A Voting Common Stock" ("Class A
Common"), 1,000,000 of which are designated as "Class B Non-Voting Common Stock"
("Class B Common") (the Class A Common and the Class B Common being sometimes
herein referred to as the "Common Stock") and 20,000,000 of which are designated
"Preferred Stock." The Preferred Stock of DTC is undesignated as to series,
rights, preferences, privileges or restrictions. As of the date hereof, 100
shares of Class A Common were issued and outstanding, all of which were held by
the Cooperative, and no shares of either Class B Common or Preferred Stock were
issued and outstanding.
B. The Cooperative is a corporation duly organized and existing under the
laws of the State of Tennessee, having in 1974 elected to convert to a rural
telephone cooperative under the provisions of the Telephone Cooperative Act,
presently found at T.C.A. Sections 65-29-101 et seq. The Cooperative has no
authorized capital; however, as a cooperative owned by its members, it has
patronage capital which, as of June 30, 1999, was approximately $25.5 million.
C. The Board of Directors of the Cooperative has determined that, for the
purpose of effecting the conversion of the Cooperative to a for profit
corporation subject to the provisions of the Tennessee Business Corporation Act,
T.C.A. Sections 48-11-101 et seq., it is advisable and in the best interests of
the Cooperative and its members that the Cooperative merge with and into DTC
upon the terms and conditions herein provided.
D. The respective Boards of Directors of DTC and the Cooperative have
approved this Agreement and have directed that this Agreement be submitted to a
vote of their respective sole shareholder and members and executed by the
undersigned officers.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, DTC and the Cooperative hereby agree as follows:
A-2
<PAGE> 104
I. MERGER
1.1 Merger. In accordance with the provisions of this Agreement, the
Tennessee Business Corporation Act, the Tennessee Nonprofit Corporation Act and
the Telephone Cooperative Act, the Cooperative shall be merged with and into DTC
(the "Merger"), the separate existence of the Cooperative shall cease and DTC
shall survive the Merger and shall continue to be governed by the laws of the
State of Tennessee. DTC shall be, and is herein sometimes referred to as, the
"Surviving Corporation." The name of the Surviving Corporation shall be DTC
Communications Corp.
1.2 Conditions Precedent. Neither the Cooperative or DTC shall be
required to consummate the Merger if all of the following conditions have not
been satisfied or waived:
(a) this Agreement and Merger shall have been adopted and approved by
the sole shareholder of DTC and the members of the Cooperative in
accordance with the requirements of the Tennessee Business Corporation Act,
the Tennessee Nonprofit Corporation Act and the Telephone Cooperative Act;
(b) the Cooperative and DTC shall have received all material licenses,
permits, consents, approvals, authorizations, qualifications and orders of
governmental authorities and parties to contracts with the Cooperative and
its subsidiaries necessary for consummation of the Merger (other than those
which, if not obtained, would not have a material adverse effect upon: (1)
the Merger; (2) the financial condition or results of operations of the
Cooperative and it subsidiaries taken as a whole; or (3) the continuation
by DTC of the business and operations of the Cooperative and its
subsidiaries after the consummation of the Merger);
(c) no litigation or other proceeding shall have been instituted that
seeks to prevent consummation of the Merger or to obtain material damages
as a result of consummation of the Merger, and no restraining order or
injunction issued by any court of competent jurisdiction shall be in effect
prohibiting the consummation of the Merger; and
(d) there shall not have been proposed, enacted or deemed applicable
to the Merger any statute, rule, regulation or order by any governmental
agency or other regulatory or administrative authority which, in the sole
judgment of the Cooperative, might materially adversely affect or
materially delay the Merger.
1.3 Filing and Effectiveness. The Merger shall become effective when the
following actions shall have been completed:
(a) all of the conditions precedent to the consummation of the Merger
specified in this Agreement shall have been satisfied or duly waived; and
(b) executed Articles of Merger meeting the requirements of the
Tennessee Business Corporation Act and the Tennessee Nonprofit Corporation
Act shall have been filed with the Secretary of State of the State of
Tennessee.
The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger."
1.4 Effect of the Merger. Upon the Effective Date of the Merger, the
separate existence of the Cooperative shall cease and DTC, as the Surviving
Corporation, (i) shall continue to possess all of its assets, rights, powers and
property as constituted immediately prior to the Effective Date of the Merger,
(ii) shall be subject to all actions previously taken by its and the
Cooperative's Boards of Directors, (iii) shall succeed, without other transfer,
to all of the assets, rights, powers and property of the Cooperative in the
manner more fully set forth in Section 48-21-108 of the Tennessee Business
A-3
<PAGE> 105
Corporation Act and Section 48-61-105 of the Tennessee Nonprofit Corporation
Act, (iv) shall continue to be subject to all of the debts, liabilities and
obligations of the Cooperative as constituted immediately prior to the Effective
Date of the Merger, and (v) shall succeed, without other transfer, to all of the
debts, liabilities and obligations of the Cooperative in the same manner as if
DTC had itself incurred them, all as more fully provided under the applicable
provisions of the Tennessee Business Corporation Act and the Tennessee Nonprofit
Corporation Act.
II. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 Charter. The Charter of DTC as in effect immediately prior to the
Effective Date of the Merger shall continue in full force and effect as the
Charter of the Surviving Corporation until duly amended in accordance with the
provisions thereof and applicable law.
2.2 Bylaws. The Bylaws of DTC as in effect immediately prior to the
Effective Date of the Merger shall continue in full force and effect as the
Bylaws of the Surviving Corporation until duly amended in accordance with the
provisions thereof and applicable law.
2.3 Directors and Officers. The directors and officers of DTC immediately
prior to the Effective Date of the Merger shall be the directors and officers of
the Surviving Corporation until their successors shall have been duly elected
and qualified or until as otherwise provided by law or the Charter or Bylaws of
the Surviving Corporation.
III. MANNER OF CONVERSION OF STOCK AND
MEMBERSHIP INTERESTS
3.1 DTC Common Stock. Upon the Effective Date of the Merger, each share of
Common Stock of DTC issued and outstanding immediately prior thereto, by virtue
of the Merger and without any action by DTC, the holder of such shares or any
other person, shall be canceled and returned to the status of authorized but
unissued shares.
3.2 Cooperative Patronage Capital. Upon the Effective Date of the Merger,
the patronage capital of the Cooperative as of the Effective Date of the Merger,
by virtue of the Merger and without any action by the Constituent Corporations,
the members or any other person, shall be converted into and exchanged for the
right to receive the following (the "Merger Consideration"):
(a) each person or entity who, as of the Effective Date of the Merger,
is an active member of (i.e., one who has standard telephone service with)
the Cooperative shall receive one (1) fully paid and nonassessable share of
Class A Common of the Surviving Corporation for each ten dollars ($10.00)
in patronage capital that the member has on the books of the Cooperative as
of the Effective Date of the Merger;
(b) each person or entity who, as of the Effective Date of the Merger,
is an inactive member of (i.e., one who previously had, but as of the
Effective Date of the Merger no longer has standard telephone service with)
the Cooperative shall receive one (1) fully paid and nonassessable share of
Class B Common of the Surviving Corporation for each ten dollars ($10.00)
in patronage capital that the member has on the books of the Cooperative as
of the Effective Date of the Merger; and
(c) each person or entity that receives either Class A Common or Class
B Common of the Surviving Corporation under subparagraphs (a) or (b) above
shall receive cash for any fractional share that results from that person
or entity's patronage capital account being an amount other than exact
multiples of $10.00.
A-4
<PAGE> 106
3.3 Issuance of Certificates. After the Effective Date of the Merger, and
in no event later than sixty (60) days after the Effective Date of the Merger,
DTC shall issue to each person or entity entitled to receive the Merger
Consideration any cash and certificates representing any Common Stock that the
person or entity is entitled to receive pursuant to Section 3.2.
Until the certificates for such Common Stock shall have been issued by the
Surviving Corporation, the registered owner on the books and records of the
Cooperative of any patronage capital which, pursuant to the Merger, has been
converted into Common Stock of the Surviving Corporation shall have and be
entitled to exercise any voting and other rights with respect to and to receive
dividends and other distributions upon the shares of Common Stock of the
Surviving Corporation to which holders of the Common Stock would be entitled.
IV. GENERAL
4.1 Further Assurances. From time to time, as and when required by DTC or
by its successors or assigns, there shall be executed and delivered on behalf of
the Cooperative such deeds and other instruments, and there shall be taken or
caused to be taken by DTC and the Cooperative such further and other actions as
shall be appropriate or necessary in order to vest or perfect in or conform of
record or otherwise by DTC the title to and possession of all the property,
interests, assets, rights, privileges, immunities, powers, franchises and
authority of the Cooperative and otherwise to carry out the purposes of this
Agreement. The officers and directors of DTC are fully authorized in the name
and on behalf of the Cooperative or otherwise to take any and all such action
and to execute and deliver any and all such deeds and other instruments.
4.2 Abandonment. At any time before the Effective Date of the Merger,
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either the Cooperative or of DTC, or of
both, notwithstanding the approval of this Agreement by the members of the
Cooperative or by the sole shareholder of DTC, or by both.
4.3 Amendment. The Boards of Directors of the Constituent Corporations
may amend this Agreement at any time prior to the filing of this Agreement (or
articles of merger with respect thereto) with the Secretary of State of the
State of Tennessee, provided that an amendment made subsequent to the adoption
of this Agreement by the members of the Cooperative and the sole shareholder of
DTC shall not: (a) alter or change the amount or kind of shares, securities,
cash, property and/or rights to be received in exchange for or on conversion of
all or any of the patronage capital of the Cooperative; (b) alter or change any
term of the Charter of the Surviving Corporation to be effected by the Merger;
or (c) alter or change any of the terms and conditions of this Agreement if such
alteration or change would adversely affect the members of the Cooperative or
the holders of any class or series of capital stock of DTC.
4.4 Agreement. Executed copies of this Agreement will be on file at the
principal place of business of the Surviving Corporation at 111 High Street,
Alexandria, Tennessee 37012 and copies thereof will be furnished to any
shareholder or member of either Constituent Corporation, upon request and
without cost.
4.5 Governing Law. This Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
State of Tennessee and, so far as applicable, the merger provisions of the
Tennessee Business Corporation Act and the Tennessee Nonprofit Corporation Act.
[Signatures appear on following page]
A-5
<PAGE> 107
IN WITNESS WHEREOF, this Agreement having first been approved by the
resolutions of the Board of Directors of DTC Communications Corp., a Tennessee
corporation, and DeKalb Telephone Cooperative, Inc., a Tennessee cooperative, is
hereby executed on behalf of each of such two corporations by their respective
officers thereunto duly authorized.
DEKALB TELEPHONE COOPERATIVE, INC.
By: /s/ ROY N. PUGH
-------------------------------------
Title: President
------------------------------------
DTC COMMUNICATIONS CORP.
By: /s/ H. WAYNE GASSAWAY
-------------------------------------
Title: President & CEO
------------------------------------
A-6
<PAGE> 108
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS INFORMATION STATEMENT/PROSPECTUS IN
CONNECTION WITH THE OFFERING AND SOLICITATION MADE HEREBY. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY
THIS INFORMATION STATEMENT/PROSPECTUS IN ANY JURISDICTION TO OR FROM ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF THE SECURITIES THIS INFORMATION STATEMENT/PROSPECTUS OFFERS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN A
CHANGE IN THE INFORMATION CONTAINED HEREIN OR IN THE AFFAIRS OF DEKALB TELEPHONE
COOPERATIVE OR DTC SINCE THE DATE HEREOF.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DTC is subject to the Tennessee Business Corporation Act. For a description
of the provisions of the Tennessee Business Corporation Act relating to
indemnification of a director or officer of a Tennessee for profit business
corporation, see "The Merger -- Indemnification and Limitation of Liability."
DTC's charter and bylaws contain provisions regarding the indemnification of
DTC's directors and officers. See "The Merger -- Indemnification and Limitation
of Liability."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. See the Exhibit Index located on page II-5 for a list of
exhibits that are filed as part of this Registration Statement
(b) FINANCIAL STATEMENT SCHEDULES. The required financial statement
schedule is filed as Schedule II (pages II-7 and II-8) to this Registration
Statement.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
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 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For determining liability under the Securities Act, to 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
II-1
<PAGE> 110
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 registrant of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant 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.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Information
statement/prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section (10)(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment 1 to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Alexandria, State of Tennessee, on December 14, 1999.
DTC COMMUNICATIONS CORP.
By: /s/ H. WAYNE GASSAWAY
------------------------------------
Name: H. Wayne Gassaway
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities on this 14th of December, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ H. WAYNE GASSAWAY President and Chief Executive Officer
- --------------------------------------------------------
H. Wayne Gassaway
/s/ DENISE J. BROWN* Controller (principal financial and
- -------------------------------------------------------- accounting officer)
Denise J. Brown
/s/ PHYLLIS MCKINNEY* Secretary
- --------------------------------------------------------
Phyllis McKinney
/s/ JAMES PAUL CANTRELL* Director
- --------------------------------------------------------
James Paul Cantrell
/s/ BILLY CHUMBLEY* Director
- --------------------------------------------------------
Billy Chumbley
Director
- --------------------------------------------------------
James C. Hale
/s/ DANNY LATTIMORE* Director
- --------------------------------------------------------
Danny Lattimore
/s/ ROYCE N. MARTIN* Director
- --------------------------------------------------------
Royce N. Martin
/s/ DAVID L. PARKER* Director
- --------------------------------------------------------
David L. Parker
/s/ ROBERT B. PARTON* Director
- --------------------------------------------------------
Robert B. Parton
</TABLE>
II-3
<PAGE> 112
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROY N. PUGH* Director
- --------------------------------------------------------
Roy N. Pugh
/s/ EDDIE THOMAS* Director
- --------------------------------------------------------
Eddie Thomas
/s/ CHARLES DWIGHT VINSON* Director
- --------------------------------------------------------
Charles Dwight Vinson
</TABLE>
* By H. Wayne Gassaway pursuant to power of attorney previously filed.
II-4
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C> <C>
3.1 -- Amended and Restated Charter of DTC Communications Corp.*...
3.2 -- Bylaws of DTC Communications Corp.*.........................
5 -- Opinion of Tuke Yopp & Sweeney, PLC re: legality............
8 -- Opinion of Tuke Yopp & Sweeney, PLC re: tax matters.........
10.1 -- DTC Communications Corp. Incentive Plan*....................
10.2 -- DTC Communications Corp. Share Compensation Plan for
Non-employee directors*.....................................
10.3 -- Telephone Loan Contract, dated as of October 15, 1951,
between DeKalb Telephone Cooperative and United States of
America*....................................................
10.4 -- Amendment, dated as of March 9, 1953, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.5 -- Amendment, dated as of February 15, 1954, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.6 -- Amendment, dated as of November 15, 1954, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.7 -- Amendment, dated as of November 15, 1957, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.8 -- Amendment, dated as of November 9, 1959, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.9 -- Amendment, dated as of June 20, 1961, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.10 -- Amendment, dated as of June 8, 1964, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.11 -- Amendment, dated as of March 23, 1966, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.12 -- Amendment, dated as of July 1, 1968, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America..........
10.13 -- Amendment, dated as of February 13, 1970, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.14 -- Amendment, dated as of December 15, 1971, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.15 -- Amendment, dated as of August 5, 1973, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
</TABLE>
II-5
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C> <C>
10.16 -- Amendment, dated as of July 15, 1974, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.17 -- Amendment, dated as of January 27, 1976, to Telephone Loan
Contract, dated as of October 15, 1951, between DeKalb
Telephone Cooperative and United States of America*.........
10.18 -- Telephone Loan Contract Amendment, dated as of March 17,
1980, between DeKalb Telephone Cooperative and United States
of America*.................................................
10.19 -- Agreement, dated as of June 24, 1986, between United States
of America and DeKalb Telephone Cooperative*................
10.20 -- Telephone Loan Contract Amendment, dated as of July 29,
1988, between DeKalb Telephone Cooperative and United States
of America*.................................................
10.21 -- Promissory Note, dated as of May 23, 1994, made by DeKalb
Telephone Cooperative, Inc. in favor of the Federal
Financing Bank..............................................
10.22 -- Mortgage Note, dated as of November 28, 1988, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.23 -- Mortgage Note, dated as of June 23, 1980, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.24 -- Mortgage Note, dated as of April 27, 1976, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.25 -- Mortgage Note, dated as of September 23, 1974, made by
DeKalb Telephone Cooperative in favor of United States of
America*....................................................
10.26 -- Mortgage Note, dated as of October 24, 1973, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.27 -- Mortgage Note, dated as of February 14, 1972, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.28 -- Mortgage Note, dated as of March 25, 1970, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.29 -- Mortgage Note, dated as of October 11, 1968, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.30 -- Mortgage Note, dated as of August 3, 1966, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.31 -- Mortgage Note, dated as of June 21, 1965, made by DeKalb
Telephone Cooperative in favor of United States of
America*....................................................
10.32 -- Mortgage Note, dated as of August 17, 1964, made by DeKalb
Telephone Cooperative in favor of United State of
America*....................................................
23.1 -- Consent of Tuke Yopp & Sweeney, PLC (included in Exhibit
5)..........................................................
23.2 -- Consent of Arthur Andersen LLP, independent public
accountants.................................................
24 -- Power of Attorney**.........................................
27 -- Financial Data Schedule
</TABLE>
- ------------
* Previously filed as an exhibit to the Registration Statement on Form S-4
(file number 333-89709) of DTC Communications Corp., filed with the
Securities and Exchange Commission on October 26, 1999.
** Previously filed on the signature page to the Registration Statement on Form
S-4 (file number 333-89709) of DTC Communications Corp., filed with the
Securities and Exchange Commission on October 26, 1999.
II-6
<PAGE> 115
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DeKalb Telephone Cooperative, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of DeKalb Telephone Cooperative, Inc. and
subsidiary for the three years ended December 31, 1998 included in the Form S-4
and have issued our report thereon dated September 1, 1999 (except with respect
to the matter discussed in Note 11 as to which the date is October 18, 1999).
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying financial
statement schedule is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth herein in relation to the basic consolidated financial statements taken as
a whole.
/s/ ARTHUR ANDERSEN LLP
Nashville, Tennessee
September 1, 1999
II-7
<PAGE> 116
SCHEDULE II
DEKALB TELEPHONE COOPERATIVE AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS DEDUCTIONS BALANCE AT
PERIOD AND EXPENSES(1) (CHARGE OFFS)(1) END OF PERIOD
------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for uncollectible accounts......... $209,504 $143,381 $ (95,867) $257,018
======== ======== ========= ========
Year ended December 31, 1997:
Allowance for uncollectible accounts......... $207,939 $128,401 $(126,836) $209,504
======== ======== ========= ========
Year ended December 31, 1996:
Allowance for uncollectible accounts......... $119,435 $156,442 $ (67,938) $207,939
======== ======== ========= ========
</TABLE>
- ---------------
(1) Additions to the allowance for uncollectible accounts are included in
corporate operations expense. All deductions or charge offs are charged
against the allowance for uncollectible accounts.
II-8
TUKE YOPP & SWEENEY, PLC
Attorneys
Bank of America plaza, Suite 1100
414 Union Street
Nashville, Tennessee 37219
-----
Telephone (615) 313-3300
Facsimile (615) 313-3310
December 14, 1999
DTC Communications Corp.
111 High Street
Alexandria, TN 37012-247
RE: Registration Statement on Form S-4 (SEC File No. 333-89709)
Ladies and Gentlemen:
This opinion is issued in connection with the registration statement
of DTC Communications Corp. ("DTC") on Form S-4 (File No. 333-89709) (the
"Registration Statement") filed with the United States Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), relating to the registration of 3,000,000 shares (the
"Shares") of common stock, no par value, of DTC ("DTC Common Stock") to be
issued to members of DeKalb Telephone Cooperative, Inc. (the "Cooperative")
upon the merger by the Cooperative with DTC (the "Merger") pursuant to that
certain Agreement and Plan of Merger dated as of October 18, 1999 (the
"Plan"), by and between the Cooperative and DTC.
In connection with this opinion letter, we have examined, among other
things, the Amended and Restated Charter and By-Laws of DTC, the Registration
Statement and any amendments thereto (including the Information Statement/
Prospectus that forms a part of the Registration Statement) and the Plan, and
are familiar with the proceedings taken by DTC relating to the Merger.
We have also examined such records, certificates and other documents as we
have considered necessary or appropriate for the purposes of this opinion.
Based on the foregoing, we are of the opinion that, when the
Registration Statement has become effective and the Merger consummated in
accordance with applicable law and the Plan, the Shares of DTC Common Stock
to be issued to members of the Cooperative, when issued pursuant to and in
accordance with the terms of the Plan, will be validly issued, fully paid and
nonassessable.
Our opinion is directed to the Board of Directors of DTC and
addresses only the specific legal matters set forth above. Our opinion may
not be relied upon by any persons other than said directors and members of
the Cooperative entitled to vote at the special meeting of the Cooperative's
members described in the Information Statement/Prospectus included in Part I
of the Registration Statement. We note that attorneys in our firm are
members of the bar of the State of Tennessee, and the opinion set forth above
is restricted to matters controlled by United States federal laws and the
laws of the State of Tennessee. We expressly disclaim any responsibility for
advising you of any change hereafter occurring in circumstances touching or
concerning the transaction which is the subject of this opinion, including
any changes in the law or in factual matters occurring subsequent to the date
of this opinion.
We hereby consent to the filing of this opinion, or copies thereof,
as an exhibit to the Registration Statement and to the reference to us under
the caption "Legal Matters" in the Information Statement/Prospectus included
in Part I of the Registration Statement. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ TUKE YOPP & SWEENEY, PLC
TUKE YOPP & SWEENEY, PLC
Attorneys
Bank of America plaza, Suite 1100
414 Union Street
Nashville, Tennessee 37219
-----
Telephone (615) 313-3300
Facsimile (615) 313-3310
December 14, 1999
DTC Communications Corp.
111 High Street
Alexandria, TN 37012-247
Ladies and Gentlemen:
We have acted as tax counsel to DTC Communications Corp. ("DTC") in
connection with the filing with the United States Securities and Exchange
Commission of the Registration Statement on Form S-4 (File Number 333-89709)
(the "Registration Statement") in respect of the common stock of DTC to be
issued in the proposed merger by DTC with its parent corporation, DeKalb
Telephone Cooperative, Inc. (the "Cooperative"), pursuant to the Agreement
and Plan of Merger dated as of October 18, 1999, as amended (the "Plan") by
and between the Cooperative and DTC. All capitalized terms used and not
otherwise defined herein shall have the meanings provided in the Registration
Statement or the appendices thereto (including the Plan).
For purposes of the opinion set forth below, we have assumed that the
Merger will be effected in accordance with the Plan and as described in the
Registration Statement. We have further assumed, with your consent and
without any independent investigation or verification on our part, that as of
the Effective Date of the Merger:
1. The payment of cash in lieu of fractional shares of Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
DTC of issuing fractional shares and does not represent separately bargained
for consideration. No Member, as a result of the Merger, will receive cash
in an amount greater than the value of one full share of Common Stock.
2. The fair market value of the Common Stock to be received by
each Cooperative member will be approximately equal to the fair market value
of the Cooperative capital credits surrendered in the exchange.
3. To the best of the knowledge of the management of the
Cooperative, there is and will be no plan or intention on the part of the
Members to sell, exchange, or otherwise dispose of a number of shares of
Common Stock received in the Merger that would reduce the Members' ownership
of Common Stock to a number of shares having a value, as of the Effective
Date of the Merger, of less than 50 percent of the value of all of the
formerly outstanding Cooperative capital credits as of the same date. To
the best of the knowledge of the management of the Cooperative, there has not
been and there is no anticipated transfer of Cooperative capital credits that
are or will be made in contemplation of the Merger, with the exception of the
redemption by the Cooperative of certain capital credits pursuant to the
Cooperative's by-laws in the ordinary course of business.
4. Following the Merger, DTC will continue the historic business of
the Cooperative (including the business conducted by the Cooperative through
its subsidiaries), or use a significant portion of the historic business
assets of the Cooperative (including the business assets held by its
subsidiaries) in a business.
Based upon and subject to the foregoing assumptions, it is our
opinion that the statements set forth in the Registration Statement under the
caption "The Merger --Federal Income Tax Consequences" provide a fair and
accurate summary of the material federal income tax consequences of the
Merger.
As stated in the Registration Statement, the basis for our opinion
is derived from our review of previously issued private letter rulings by the
Internal Revenue Service and court opinions involving transactions with
similar but not identical characteristics. Because the Internal Revenue
Service has not previously ruled on a transaction involving the merger of a
Section 501(c)(12) cooperative, there is a lack of direct precedent for the
stated tax treatment. Nevertheless, existing precedent involving transactions
with similar but not identical characteristics, if followed, would cause the
Merger to be treated as and constitute a tax free exchange and we have no
reason to believe that the Internal Revenue Service would not follow this
precedent.
The opinion expressed herein is based upon currently applicable
statutes and regulations and existing interpretations. We can provide no
assurance that such statutes or regulations, or existing judicial or
administrative interpretations thereof, will not be amended, revoked or
modified (possibly prior to the Effective Date of the Merger) in a manner
which would affect our conclusions. Finally, we note that this opinion is
solely for the benefit of the addressee hereof in connection with the Merger
and, except as otherwise provided herein, should not be referred to, used,
relied upon or quoted (with or without specific reference to our firm) in any
documents, reports, financial statements or otherwise, without our prior
written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us in the Information
Statement/Prospectus included in Part I of the Registration Statement under
the captions "The Merger - Federal Income Tax Consequences" and "Legal
Matters". In giving this consent, we do not hereby admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Tuke Yopp & Sweeney, PLC
REA Project Designation:
TENNESSEE 521-L DEKALB
AMENDMENT
Dated as of July 1, 1968
to
TELEPHONE
LOAN CONTRACT
Dated as of October 15, 1951, as amended,
between
DEKALB TELEPHONE COOPERATIVE
and
UNITED STATES OF AMERICA
UNITED STATES DEPARTMENT OF AGRICULTURE
RURAL ELECTRIFICATION ADMINISTRATION
No. 1
-------
AGREEMENT, made as of July 1, 1968, pursuant to the Rural
Electrification Act of 1936, as amended (7 U. S. C. 901 et seq.)
between DEKALB TELEPHONE COOPERATIVE (hereinafter called the
"Borrower"), a corporation existing under the laws of the State of
Tennessee, and UNITED STATES OF AMERICA (hereinafter called the
"Government"), acting through the Administrator of the Rural
Electrification Administration.
WHEREAS, the Government and the Borrower have heretofore entered into
a certain telephone loan contract, dated as of October 15, 1951, and eight
certain amendments thereto, dated, respectively, as of March 9, 1953, as of
February 15, 1954, as of November 15, 1954, as of November 15, 1957, as of
November 9, 1959, as of June 20, 1961, as of June 8, 1964 and as of March 23,
1966, (said telephone loan contract, as so amended, being hereinafter called
the "Loan Contract"), and intend by this agreement to amend the Loan Contract
by increasing the aggregate amount of the loans therein provided for by an
amount not in excess of $1,850,000, and in certain other respects;
NOW, THEREFORE, for and in consideration of the mutual agreements
herein contained, the Government and the Borrower agree as follows:
SECTION 1. Section 1.1 of article I of the Loan Contract is amended
to read as follows:
SECTION 1.1 Amount and Purpose. For the purpose of
furnishing telephone service in rural areas, the Government shall
lend and the Borrower shall borrow an amount not in excess of
$6,071,000 which, together with the sum of $57,983 of equity funds
to be deposited by the Borrower in the "Special Construction Account"
hereinafter defined and provided for in section 2.4, shall be used
to finance, pursuant to the provisions of the Act, the acquisition,
construction and operation of telephone lines and facilities
(hereinafter called the "Project") to serve approximately 6,538
subscribers and to be located in the Counties of Cannon, Dekalb,
Rutherford, Smith and Wilson, and in counties contiguous thereto, all
in the State of Tennessee.
SEC. 2. Section 2.9 of article II of the Loan Contract is amended
to read as follows:
SEC. 2.9. Relation of General Funds Level to Advances. The
Borrower covenants and agrees that it will not, without the approval
of the Administrator, submit a requisition for the advance of any
funds on account of the Loan, nor use any funds advanced on account
of the Loan to reimburse its general funds, at any time or times when
the amount of its general funds either exceeds fifteen percent of its
total telephone plant, or would exceed fifteen percent of its total
telephone plant as a result of the intended use of such advance to
reimburse its general funds. Notwithstanding anything contained in
this agreement, the Government shall not be obligated at any time or
times to make an advance on account of the Loan if the amount of the
Borrower's general funds at such time or times either exceeds fifteen
percent of its total telephone plant, or would exceed fifteen percent
of its total telephone plant as a result of the intended use of such
advance to reimburse the Borrower's general funds. As used in this
section: (a) the term "general funds" means the sum of the following
accounts: "Investments in Affiliated Companies", "Advances to
Affiliated Companies", "Other Investments", "Miscellaneous Physical
Property", "Sinking Funds", "Cash" (except for cash in the "Cash -
REA Construction Fund - Trustee Account"), "Special Cash Deposits",
"Working Funds", and "Temporary Cash Investments", and (b) the term
"total telephone plant" means the sum of the following accounts:
"Telephone Plant in Service", "Telephone Plant Under Construction",
"Property Held for Future Telephone Use", "Telephone Plant
Acquisition Adjustment", and "Telephone Plant Adjustment". Titles
of accounts used in the foregoing definitions shall have the meanings
prescribed for them by the Federal Communications Commission in its
prevailing uniform system of accounts for Class A telephone
companies. These titles and definitions shall also apply to accounts
of the Borrower which have substantially the same meanings as those
referred to in such uniform system of accounts regardless of the
account title or the system of accounts actually used by the
Borrower.
SEC. 3. Article II of the Loan Contract is further amended by adding
thereto two new sections numbered and reading as follows:
SEC. 2.10. Prerequisites to Advances on Account of
Additional Loan of $1,850,000. Notwithstanding anything in this
agreement, the Government shall be under no obligation to advance any
portion of the increase of $1,850,000 in the amount of the Loan
provided for in the agreement, dated as of July 12, 1968,
(hereinafter called the "L-Loan"), made by and between the Borrower
and the Government unless and until the Borrower shall have submitted
evidence, satisfactory to the Administrator that the Board of
Directors has adopted a revised tariff or rate schedule relating to
the five exchanges to be upgraded with L-Loan funds, which tariff or
rate schedule shall be satisfactory to the Administrator.
SEC. 2.11. Construction Schedule. Notwithstanding anything
contained in this agreement, the Government shall not be obligated
to advance to the Borrower any funds on account of the Loan (other
than funds hitherto approved by the Administrator for advances)
except in accordance with a schedule covering construction, and the
use of the Borrower's general funds and Loan funds therefor, which
shall have been submitted by the Borrower and approved in writing by
the Administrator. Such schedule shall reflect the policy of
scheduling construction in conformance with current national
objectives, and may, with the written approval of the Administrator,
be amended from time to time. To the extent that such schedule, as
it may be amended, fixes the time for final advance of funds on
account of the Loan beyond the period of time specified in section
2.7 of article II hereof, the period of time specified in said
section shall be accordingly extended. Advances of Loan funds to
reimburse general funds used for construction shall be made only
after the Administrator has determined that the Borrower's financial
and operating condition require such reimbursement. The authority
granted to the Government or the Administrator to withhold advances
of Loan funds pursuant to the section shall terminate on a date three
years after the date of the agreement between the Government and the
Borrower which initially incorporated the foregoing provisions, or
on any earlier termination date designated by the Administrator if,
in his discretion, he determines such earlier termination date is
warranted.
SEC. 4. This agreement may be simultaneously executed and
delivered in two or more counterparts, each of which so executed and
delivered shall be deemed to be an original, and all shall constitute
but one and the same instrument.
IN WITNESS WHEREOF the Borrower has caused this agreement to be
signed in its corporate name and its corporate seal to be hereunto affixed
and attested by its officers thereunto duly authorized, and the Government
has caused this agreement to be duly executed, all as of the day and year
first above written.
DEKALB TELEPHONE COOPERATIVE
(Seal) by /s/ Jim O. Amonnett
Attest: /s/ Raymond Duke President
Secretary
UNITED STATES OF AMERICA
by /s/
Acting Administrator
of
Rural Electrification Administration
- 2 -
FOR FFB USE ONLY: REA Note No.
Note Identifier: TENNESSEE 521-V9 DeKALB
-----------------------
- ------------------------ $8,623,000
Purchase Date:
Date: May 23, 1994
- ------------------------ Alexandria, Tennessee
PROMISSORY NOTE
1. Promise to Pay.
FOR VALUE RECEIVED, DeKALB TELEPHONE COOPERATIVE, INC. (the
"Borrower," which term includes any successors or assigns) promises to pay
the FEDERAL FINANCING BANK ("FFB," which term includes any successors or
assigns) at the time, in the manner, and with interest at the rates
hereinafter provided, such amounts as may be advanced from time to time by
FFB to the Borrower under this Note (each such amount being an "Advance" and
more than one such amount being "Advances").
2. Reference to FFB-REA Agreement.
This Note is one of the Notes referred to in, is entitled to the
benefits of, and is subject to the requirements of, the Note Purchase
Commitment and Servicing Agreement dated as of January 1, 1992, between FFB
and the Administrator of the Rural Electrification Administration ("REA")
(such agreement, as it may be amended, supplemented, or restated from time to
time in
NEW LOAN NOTE - page 1
accordance with its terms, being the "Agreement").
3. Advances; Approval Notices; Last Day for Advances.
FFB shall make Advances to the Borrower from time to time under this
Note upon the delivery by REA to FFB of written notification of REA's
approval of a request by the Borrower for an Advance under this Note (each
such notice being an "Advance Request Approval Notice") in accordance with
the Agreement; provided, however, that no Advance shall be made under this
Note after June 30, 2011. The Borrower hereby agrees that (a) FFB, for its
purposes, may consider any Advance Request Approval Notice delivered by REA
to FFB in accordance with the terms of the Agreement to be an accurate
representation of the Borrower's request for an Advance under this Note and
evidence of REA's approval of that request, and (b) Advances made by FFB in
accordance with any Advance Request Approval Notice delivered by REA to FFB
shall be credited towards FFB's commitment to make Advances under this Note.
4. Principal Amount of Advances; Maximum Principal Amount.
The principal amount of each Advance shall be the amount specified
in the respective Advance Request Approval Notice; provided, however, that
the aggregate principal amount of Advances made under this Note shall not
exceed the sum of eight million six hundred twenty-three thousand dollars
($8,623,000) (the "Maximum Principal Amount").
5. Maturity Dates for Advances; Maturity Extensions; Early Extensions.
Each Advance shall mature on the date specified in the respective
Advance Request Approval Notice (such date being the "Maturity Date" for such
Advance), which shall be the date
NEW LOAN NOTE - page 2
selected by the Borrower in accordance with the following provisions of this
paragraph:
(A) Each Maturity Date shall be a Payment Date (as
defined in paragraph 7 of this Note).
(B) No Maturity Date for any Advance shall be later
than December 31, 2011 (the "Final Maturity Date").
(C) Each Maturity Date for an Advance shall be at
least 6 months from the date on which such Advance was made
or the effective date of such Maturity Extension, as the
case may be; except that, in the case of a Maturity Date
that occurs on the third Payment Date preceding the Final
Maturity Date, any extension of that Maturity Date shall be
to the Final Maturity Date.
(D) For each Advance with respect to which the
Borrower selected a Maturity Date that occurs prior to the
Final Maturity Date, the Borrower may, effective as of such
Maturity Date, extend the Maturity Date for such Advance to
a new Maturity Date (any such extension, or any subsequent
extension, being a "Maturity Extension"); provided that the
new Maturity Date for each Maturity Extension shall meet the
criteria for Maturity Dates prescribed in subparagraphs (A),
(B), and (C) of this paragraph 5.
(E) For each Advance with respect to which the
Borrower selected a Maturity Date that occurs prior to the
Final Maturity Date, the Borrower may, prior to such
Maturity Date, extend the Maturity Date for such Advance to
a new Maturity Date, including the Final Maturity Date (any
such extension being an "Early
NEW LOAN NOTE - page 3
Extension"); provided that the Borrower shall (i) follow
the procedures prescribed in paragraph 16 of this Note for
repurchasing Advances, and (ii) pay FFB, on the effective
date of such Early Extension, an amount equal to the
interest accrued on such Advance through the effective date
of such Early Extension and the premium, if any, that would
be payable to FFB under paragraph 16 of this Note if the
Borrower were to repurchase such Advance on the effective
date of such Early Extension.
Each selection by the Borrower of a Maturity Date for any Advance or Maturity
Extension must be approved by REA in writing, and written notification of
each such Maturity Date, together with evidence of REA approval thereof, must
be delivered to FFB not less than 3 Business Days (as defined in paragraph 10
of this Note) prior to the proposed date for such Advance or Maturity
Extension.
6. Computation of Interest on Advances.
Subject to paragraph 11 of this Note, interest on each Advance shall
accrue from the date on which such Advance was made to the date on which the
principal amount of such Advance is due. Interest on each Advance shall be
computed on the basis of (a) actual days elapsed from (but not including) the
date on which such Advance was made to (and including) the date on which
payment is due, and (b) a year of 365 days (except in calendar years
including February 29, when the basis shall be a 366-day year). The interest
rate for each Advance shall be established by FFB at the time that such
Advance is made on the basis of the determination made by the Secretary of
the Treasury pursuant to section 6(b) (12 U.S.C. Sec. 2285(b)) of the Federal
Financing Bank Act of 1973, as amended (12 U.S.C. Sec. 2281 et seq.) (the "FFB
Act"); provided, however, that the shortest maturity used as the
NEW LOAN NOTE - page 4
basis for any rate determination shall be the remaining maturity of the most
recently auctioned 13-week United States Treasury bill. In the event of a
Maturity Extension of any Advance, the interest rate for such Advance, from
and after the effective date of such Maturity Extension, shall be the
respective rate that is established by FFB at the time of such Maturity
Extension in accordance with the principles of the preceding sentences of
this paragraph 6.
7. Payment of Interest; Payment Dates.
Interest accrued on the outstanding principal amount of each Advance
shall be due and payable on the last day of each calendar quarter (each such
date being a "Payment Date"); except that, with respect to any Advance that
is made in the last month of a calendar quarter, payments of accrued interest
on such Advance shall begin on the second Payment Date occurring after the
date on which such Advance was made.
8. Repayment of Principal; Principal Payment Options.
The principal amount of each Advance shall be payable in accordance
with the following provisions:
(A) Except as otherwise provided in subparagraph (F)
of this paragraph 8, principal payments on each Advance
shall begin on December 31, 1995 (the "First Principal
Payment Date") and shall be made on each subsequent Payment
Date until such Advance is repaid in full on or before the
Final Maturity Date; except that, with respect to any
Advance that is made after the First Principal Payment Date,
principal payments shall begin on the second Payment Date
occurring after the date on which such Advance was made; and
except, further, that for so long as the
NEW LOAN NOTE - page 5
Borrower has not selected a method for the repayment of
principal for any of the Advances made under this Note, the
First Principal Payment Date of this Note may be deferred by
the mutual agreement of the Borrower, REA, and FFB; provided
that a written amendment to this Note reciting the new and
later First Principal Payment Date shall have been executed
by the Borrower and approved by REA and delivered to FFB not
less than 3 Business Days prior to the then-current First
Principal Payment Date.
(B) When the Borrower first selects a Maturity Date
for an Advance that occurs on or after the First Principal
Payment Date, the Borrower must also select, subject to REA
approval, a method for the repayment of principal from among
the following options:
(1) "equal principal payments" - the
amount of each quarterly principal payment
shall substantially equal the amount of
every other quarterly principal payment;
(2) "graduated principal payments"
-- the amount of each of the first one-
third (or nearest number of payments that
rounds to one-third) of the total number of
quarterly principal payments shall
substantially equal one-half of the amount
of each of the remaining quarterly
principal payments;
(3) "level debt service" - the
amount of each quarterly payment of
principal and interest shall substantially
equal the amount of every other quarterly
payment.
NEW LOAN NOTE - page 6
(C) With respect to those Advances for which the
Borrower has selected the "equal principal payments" method
for the repayment of principal, the level quarterly payments
of principal, along with accrued interest on the unpaid
principal balance, shall be paid on each Payment Date
beginning on the First Principal Payment Date and ending on
the Final Maturity Date. With respect to those Advances for
which the Borrower has selected the "graduated principal
payments" method for the repayment of principal, the
graduated quarterly payments of principal, along with
accrued interest on the unpaid principal balance, shall be
paid on each Payment Date beginning on the First Principal
Payment Date and ending on the Final Maturity Date. With
respect to those Advances for which the Borrower has
selected the "level debt service" method for the repayment
of principal, the level quarterly payments of principal and
accrued interest shall be paid on each Payment Date
beginning with the First Principal Payment Date (or the
first Payment Date following a Maturity Extension) and
ending on the Final Maturity Date.
(D) After the Borrower has selected one of the three
methods listed in subparagraph (B) above for the repayment
of principal of any Advance, the resulting principal
repayment schedule for that Advance may not be changed;
except that the Borrower may change the method of repayment
of the principal of any Advance with respect to which the
Borrower has selected a Maturity Date that occurs prior to
the Final Maturity Date from either the "equal principal
payments" method or the "graduated principal payments"
method to the "level debt service" method at the time, if
ever, of a Maturity Extension of such Advance, effective on
the date of such Maturity Extension. After the Borrower
NEW LOAN NOTE - page 7
has selected the Final Maturity Date for any Advance, no
changes in the resulting principal repayment schedule may be
made and no Maturity Extensions may occur for such Advance.
(E) The entire unpaid principal amount of any Advance
with respect to which the Borrower has selected a Maturity
Date that occurs prior to the Final Maturity Date shall be
due and payable on such Maturity Date, subject to Maturity
Extensions in accordance with paragraph 5 of this Note. In
the event of a Maturity Extension of any Advance with
respect to which the Borrower had selected a Maturity Date
that occurs on or after the First Principal Payment Date but
prior to the Final Maturity Date, the principal payment that
is due according to the resulting principal repayment
schedule shall nevertheless be due and payable on the
Maturity Date, notwithstanding such Maturity Extension.
(F) Notwithstanding which of the three methods listed
in subparagraph (B) above is selected for the repayment of
principal of any Advance, the aggregate of all quarterly
payments on such Advance shall be such as will pay the
entire principal amount of such Advance, and all interest
accrued thereon, on or before the Final Maturity Date.
9. Loan Servicing Expense Fee.
The Borrower agrees to pay FFB an annual loan servicing expense fee,
assessed by FFB pursuant to section 6(c) of the FFB Act, in the amount of one
one-thousandth of one percent (0.00001) of the aggregate unpaid principal
balance of all Advances made under this Note that are outstanding on December
31 of each year. The loan servicing expense fee for each year shall be due
and
NEW LOAN NOTE - page 8
payable by the Borrower on the March-31 Payment Date of the immediately
following year, after taking into account any payment made on such date.
10. Business Days.
Whenever any Payment Date or the Maturity Date for an Advance shall
fall on a day on which either FFB or the Federal Reserve Bank of New York is
not open for business, the payment that would otherwise be due on such
Payment Date or Maturity Date shall be due on the first day thereafter on
which both FFB and the Federal Reserve Bank of New York are open for business
(any such day being a "Business Day"). In the case of a Payment Date or the
Maturity Date for an Advance falling on a day other than a Business Day, the
extension of time for making the payment that would otherwise be due on such
Payment Date or the Maturity Date shall (a) be taken into account in
establishing the interest rate for the respective Advance, and (b) be
included in computing interest in connection with such payment and excluded
in connection with the next payment, if any.
11. Late Charges.
In the event that any payment of any amount owing under this Note is
not made when and as due (any such amount being then an "Overdue Amount"),
the amount payable shall be such Overdue Amount plus interest thereon (such
interest being the "Late Charge") computed in accordance with this paragraph
11. The Late Charge shall accrue from the scheduled date of payment for the
Overdue Amount (taking into account paragraph 10 of this Note) to the actual
date on which payment is made. The Late Charge shall be computed on the
basis of (a) actual days elapsed from (but not including) the scheduled date
of payment for such Overdue Amount (taking into account paragraph 10 of this
Note) to (and including) the date on which payment is made, and (b) a year of
NEW LOAN NOTE - page 9
365 days (except in calendar years including February 29, when the basis
shall be a 366-day year). The Late Charge shall accrue at a rate (the "Late
Charge Rate") equal to one and one-half times the rate to be determined by
the Secretary of the Treasury taking into consideration the prevailing market
yield on the remaining maturity of the most recently auctioned 13-week United
States Treasury bills. The initial Late Charge Rate shall be in effect until
either the actual date of payment or the next succeeding Payment Date,
whichever occurs first. If the Overdue Amount and the amount of accrued Late
Charge are not paid on or before the next succeeding Payment Date, then an
amount equal to the amount of accrued Late Charge shall be added to the
Overdue Amount, and the amount then payable shall be the sum of the Overdue
Amount and the amount of accrued Late Charge, plus a Late Charge on such sum
accruing at a new Late Charge Rate to be then determined in accordance with
the principles of the second preceding sentence. For so long as any Overdue
Amount remains unpaid, the Late Charge Rate shall be redetermined in
accordance with the principles of the third preceding sentence on each
succeeding Payment Date and shall be applied to the Overdue Amount and all
amounts of accrued Late Charge to the actual date of payment.
12. No Modification of Times for Payment.
Nothing in the immediately preceding paragraph shall be construed as
permitting or implying that the Borrower may, without the written consent of
FFB, modify, extend, alter or affect in any manner whatsoever (except as
explicitly provided herein) the right of FFB to receive any and all payments
on account of this Note on the dates specified in this Note.
NEW LOAN NOTE - page 10
13. Final Due Date.
Notwithstanding anything in this Note to the contrary, all amounts
outstanding under this Note remaining unpaid as of the Final Maturity Date
shall be due and payable on the Final Maturity Date.
14. Payment by Wire Transfer.
For so long as FFB is the holder of this Note and REA is the loan
servicing agent for FFB, each payment under this Note shall be paid in
immediately available funds by electronic funds transfer to the account of
the United States Treasury (for credit to the subaccount of REA) maintained
at the Federal Reserve Bank of New York, or such other account as may be
specified from time to time by FFB or by REA, as loan servicing agent for
FFB.
15. Application of Payments.
Each payment made on this Note shall be applied first to the payment
of any Late Charge payable under paragraph 11 of this Note, then to the
payment of any premium payable under paragraph 16 of this Note, then to the
payment of accrued interest, then on account of outstanding principal, and
then to the payment of the fee payable under paragraph 9 of this Note.
16. Repurchases.
With the consent of REA, the Borrower may elect to repurchase at any
time all or any portion of the outstanding principal amount of any Advance,
or to repurchase at any time this Note in its entirety, in the manner, at the
price, and subject to the limitation as next described:
NEW LOAN NOTE - page 11
(A) The Borrower shall deliver to FFB written
notification of such repurchase election not less than 5
Business Days prior to the proposed date of repurchase and,
if less than the total outstanding principal amount of an
Advance is to be repurchased, the Borrower shall specify in
such notification the amount that is proposed to be
repurchased (any such amount being a "Portion").
(B) In the event that the Borrower elects to
repurchase the entire outstanding principal amount of any
Advance, the Borrower shall pay to FFB a price for such
Advance (and all accrued interest thereon) that would, if
such Advance were purchased and held to its maturity,
produce a yield to the purchaser for the period from the
date of purchase to the maturity of such Advance
substantially equal to the interest rate that would be set
on a loan from the Secretary of the Treasury to FFB to
purchase an obligation having a payment schedule identical
to that of such Advance. In the event that the Borrower
elects to repurchase a Portion, the Borrower shall pay to
FFB a price for such Portion that would equal such Portion's
pro rata share of the price for a repurchase of the entire
Advance calculated in accordance with the principles of the
preceding sentence. In the event that the Borrower elects to
repurchase this Note in its entirety, the Borrower shall pay
to FFB a price for this Note that would equal the aggregate
amount of repurchase prices for all outstanding Advances
calculated in accordance with the principles of the first
sentence of this subparagraph. Such repurchase price shall
be calculated by the Secretary of the Treasury as of the
close of business 2 Business Days prior to the date of the
proposed repurchase, using standard calculation
NEW LOAN NOTE - page 12
methods of the United States Department of the Treasury.
(C) In the event that the Borrower elects to
repurchase a Portion of an Advance having a Maturity Date
occurring after the First Principal Payment Date, the
repurchase price paid shall be applied, first, to interest
accrued on the Portion to the date of repurchase and, then,
to principal installments in the inverse order of maturity.
Following the repurchase of a Portion, subsequent payments
of principal shall continue to be made in accordance with
the payment schedule resulting from the method for the
repayment of principal selected under subparagraph 8 (B)
above until the entire principal amount of the Advance, and
all accrued interest thereon, is paid; except that, with
respect to Advances for which the Borrower has selected the
"level debt service" method under subparagraph 8 (B) above,
payments shall continue to be made at the level debt service
amount prescribed in the original principal repayment
schedule, and such payments shall be allocated by FFB
between outstanding principal and accrued interest, as
appropriate, until the entire principal amount of such
Advance, and all interest accrued thereon, is paid.
(D) Any repurchase of a Portion shall, as to the
principal amount of such Portion, be subject to a minimum
amount equal to $100,000.00 of principal.
17. Amendments to Note.
To the extent not inconsistent with applicable law, this Note, for
so long as FFB or its agent is the holder thereof, shall be subject to
modification by such amendments, extensions,
NEW LOAN NOTE - page 13
and renewals as may be agreed upon from time to time by FFB and the Borrower,
with the approval of REA.
18. Certain Waivers.
The Borrower hereby waives any requirement for presentment, protest,
or other demand or notice with respect to this Note.
19. Effective Until Paid.
This Note shall continue in full force and effect until all principal
outstanding hereunder, all interest accrued hereunder, all Late Charges
payable under paragraph 11 of this Note, if any, all premiums payable under
paragraph 16 of this Note, if any, and all fees payable under paragraph 9 of
this Note, if any, have been paid in full.
20. REA Guarantee of Note; REA as "Holder" of Note for Purposes of REA
Mortgage.
Upon execution of the guarantee set forth below (the "Guarantee"),
the payment by the Borrower of all amounts due and payable under this Note,
when and as due, shall be guaranteed by REA pursuant to the Rural
Electrification Act of 1936, as amended (7 U.S.C. Sec. 901 et seq.). In
consideration of such Guarantee, the Borrower promises to REA to make all
payments due under this Note when and as due. For purposes of the mortgage of
the Borrower's system to REA (the "Mortgage"), REA shall be considered to be,
and shall have the rights of, the holder of this Note, and this Note shall be
secured to REA by the Mortgage and such supplements or amendments thereto as
REA may require.
NEW LOAN NOTE - page 14
21. Guarantee Payments Made by REA.
Payment made by REA in accordance with the Guarantee of any amount
due and payable under this Note, when and as due, shall be deemed to be a
payment hereunder. REA shall have any rights by way of subrogation, agreement
or otherwise which arise as a result of such payment in accordance with the
Guarantee.
22. Acceleration.
In case of a default by the Borrower under this Note or a default
under the Mortgage, then, in consideration of the obligation of REA under the
Guarantee, in that event, to make payments to FFB as provided in this Note,
the entire unpaid principal amount of this Note, and all interest thereon,
may be declared by REA, and upon such declaration shall become, due and
payable to REA, in the manner and with the effect provided in the Mortgage.
NEW LOAN NOTE - page 15
IN WITNESS WHEREOF, the Borrower has caused this Note to be signed
in its corporate name and its corporate seal to be hereunder affixed and
attested by its officers thereunto duly authorized, all as of the day and
year first above written.
DeKALB TELEPHONE COOPERATIVE, INC.
----------------------------------
BY:
Signature: /s/ Royce Martin
--------------------
Print Name: ROYCE MARTIN
-------------------
Title: President
ATTEST:
Signature: /s/ Charles D.Vinson
--------------------
(SEAL)
Print Name: CHARLES DWIGHT VINSON
---------------------
Title: Secretary
NEW LOAN NOTE - page 16
REA GUARANTEE
The United States of America, acting through the Administrator of the
Rural Electrification Administration ("REA"), hereby guarantees to the
Federal Financing Bank, its successors and assigns ("FFB"), all payments of
principal, interest, premium (if any), and late charges (if any), when and as
due in accordance with the terms of the note dated _______________________,
made by DeKalb Telephone Cooperative, Inc. (the "Borrower") payable to FFB,
to which this Guarantee is attached (such note being the "Note"), with
interest on the principal until paid, irrespective of (i) acceleration of
such payments under the terms of the Note, or (ii) receipt by REA of any sums
or property from its enforcement of its remedies for the Borrower's default.
This Guarantee is issued pursuant to section 306 of the Rural
Electrification Act of 1936, as amended (7 U.S.C. Sec. 936), section 6 of the
Federal Financing Bank of 1973 (12 U.S.C. Sec. 2285), and the Note Purchase
Commitment and Servicing Agreement dated as of January 1, 1992, between FFB
and REA, as amended.
UNITED STATES OF AMERICA
By: ______________________________
Name: ______________________________
Title: Administrator of the Rural
Electrification Administration
Date: ______________________________
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated September 1, 1999, except for Note 11, as to which the date is
October 18, 1999, and to all references made to our Firm included in or made
a part of the DTC Communications Corp. registration statement.
/s/ Arthur Andersen LLP
Nashville, Tennessee
December 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS
SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL
STATEMENTS OF DEKALB TELEPHONE
COOPERATIVE, INC. FOR THE NINE MONTHS
ENDED SEPT. 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,783,098
<SECURITIES> 14,027,819
<RECEIVABLES> 3,061,732
<ALLOWANCES> 251,088
<INVENTORY> 357,290
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0
0
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</TABLE>