As filed with the Securities and Exchange Commission on December 14, 1998
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MCLEODUSA INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 4813 42-1407240
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Identification
or organization) Code Number) Number)
---------------
MCLEODUSA TECHNOLOGY PARK
6400 C STREET, SW, P.O. BOX 3177
CEDAR RAPIDS, IA 52406-3177
(319) 364-0000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
CLARK E. MCLEOD
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MCLEODUSA INCORPORATED
MCLEODUSA TECHNOLOGY PARK
6400 C STREET, SW, P.O. BOX 3177
CEDAR RAPIDS, IA 52406-3177
(319) 364-0000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
TRACY T. LARSEN, ESQ. JOSEPH G. CONNOLLY, JR., ESQ.
WARNER NORCROSS & JUDD LLP JAMES G. MCMILLAN, ESQ.
900 OLD KENT BUILDING HOGAN & HARTSON L.L.P.
111 LYON STREET, N.W. 555 13TH STREET, N.W.
GRAND RAPIDS, MI 49503-2487 WASHINGTON, D.C. 20004
(616) 752-2000 (202) 637-5600
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
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 of 1933, please check
the following box and list the Securities Act of 1933 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 of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
---------------
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of each class of Proposed maximum Proposed maximum aggregate Amount of
securities to be registered Amount to be registered offering price per share offering price registration fee
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Class A Common Stock, $.01
par value (1) 1,295,000 (2) $1.97 (3) $5,310,251 (3) $1,477
====================================================================================================================================
(1) The Registration Statement relates to the securities of the Registrant
issuable to holders of common stock of Dakota Telecommunications Group,
Inc., a Delaware corporation ("DTG"), in the proposed merger of a wholly
owned subsidiary of the Registrant with and into DTG.
(2) The number of shares to be registered is based upon the product of (a) the
number of shares of Common Stock, no par value per share, of DTG ("DTG
Common Stock") outstanding as of October 27, 1998, assuming the exercise of
all DTG stock options (whether or not currently exercisable) multiplied by
(b) a fixed exchange ratio of 0.4328.
(3) Pursuant to Rule 457(f)(2), because there is currently no public trading
market for DTG Common Stock, the registration fee was computed on the basis
of the book value of the shares of common stock of DTG computed as of
September 30, 1998. Such book value equaled $5,310,251 in the aggregate
and, based on 2,692,321 shares outstanding September 30, 1998, equaled
$1.97237 per share.
---------------
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.
================================================================================
[DTG Logo]
29705 453rd Avenue
Irene, South Dakota 57037-0066
_______________, 1998
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
Dear fellow stockholder,
The Board of Directors of Dakota Telecommunications Group, Inc. ("DTG") is
furnishing this Prospectus and Proxy Statement to DTG stockholders to solicit
proxies to vote at a special meeting of DTG stockholders to be held on
_________, 1999 (the "SPECIAL MEETING"), and at any adjournment or postponement
of that meeting. At the Special Meeting, DTG stockholders will vote upon
adoption of an Agreement and Plan of Merger (the "MERGER AGREEMENT"). Pursuant
to the Merger Agreement, DTG would become a wholly owned subsidiary of McLeodUSA
Incorporated ("MCLEODUSA").
If the merger is completed as proposed, McLeodUSA would issue 0.4328 shares
of McLeodUSA Class A Common Stock, $.01 par value, ("MCLEODUSA COMMON STOCK") in
exchange for each share of the common stock, no par value per share, of DTG
("DTG COMMON STOCK"). There is no established public trading market for DTG
Common Stock. McLeodUSA Common Stock is quoted on The Nasdaq Stock Market under
the symbol "MCLD." The closing price for McLeodUSA Common Stock reported on The
Nasdaq Stock Market on _______________, 1998, was $____ per share, which is
equivalent to $____ per share of DTG Common Stock.
The Board of Directors of DTG (the "DTG BOARD") has received the written
opinion of Duff & Phelps LLC, DTG's financial advisor, that the Merger Agreement
is fair, from a financial point of view, to DTG stockholders.
This is a prospectus of McLeodUSA relating to its offering of up to
1,295,000 shares of McLeodUSA Common Stock to DTG stockholders in the proposed
merger and the proxy statement of DTG. It contains important information
concerning McLeodUSA, DTG, the terms of the proposed merger, and the conditions
which must be satisfied before the merger can occur. SEE "RISK FACTORS",
BEGINNING ON PAGE ____, FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN
MCLEODUSA COMMON STOCK.
THE MERGER CANNOT OCCUR UNLESS THE HOLDERS OF A MAJORITY OF THE OUTSTANDING
SHARES OF DTG COMMON STOCK VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE. YOUR VOTE IS IMPORTANT.
Sincerely,
Thomas W. Hertz
Chairman of the Board and Chief Executive Officer
THE BOARD OF DIRECTORS OF DTG UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR ADOPTION OF THE MERGER AGREEMENT.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS AND PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROSPECTUS AND PROXY STATEMENT DATED ________________, 1998
FIRST MAILED TO STOCKHOLDERS ON ______________, 1998
[LOGO OF DTG]
DAKOTA TELECOMMUNICATIONS GROUP, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Irene, South Dakota
_____________, 1998
TO THE STOCKHOLDERS OF
DAKOTA TELECOMMUNICATIONS GROUP, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Dakota
Telecommunications Group, Inc., a Delaware corporation ("DTG"), will be held on
__________________________, 1999, at _______, local time, at the Irene Public
School, 30 E. State Street, Irene, South Dakota 57037, for the following
purposes:
1. To consider and vote on a proposal to adopt the Agreement and Plan of Merger,
dated as of October 27, 1998 (the "MERGER AGREEMENT"), by and among McLeodUSA
Incorporated, a Delaware corporation ("MCLEODUSA"), West Group Acquisition
Co., a Delaware corporation and a wholly owned subsidiary of McLeodUSA
("MERGER SUB"), and DTG, pursuant to which, among other things, DTG will
become a wholly owned subsidiary of McLeodUSA, and to approve the merger and
the transactions contemplated by the Merger Agreement (the "MERGER"), as more
fully described in the Prospectus and Proxy Statement; and
2. To transact such other business as may properly be brought before the special
meeting.
The close of business on ___________, 1998 has been fixed as the record date for
determining stockholders entitled to vote at the special meeting and any
adjournments or postponements of the special meeting. A list of stockholders
entitled to receive notice of and vote at the special meeting will be available
for examination by DTG stockholders at the office of William Heaston, General
Counsel and Secretary of DTG, located at 29705 453rd Avenue, Irene, South Dakota
57037-0066 during ordinary business hours for the 10-day period before the
meeting.
BY ORDER OF THE BOARD OF DIRECTORS
_________________________
Thomas W. Hertz
Chairman of the Board
and Chief Executive Officer
____________, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
TABLE OF CONTENTS
Page
----
SUMMARY.................................................................. 1
RISK FACTORS............................................................. 12
THE SPECIAL MEETING...................................................... 21
Date, Time and Place.................................................. 21
Matters to be Considered.............................................. 21
Proxies............................................................... 21
Solicitation of Proxies............................................... 21
Record Date and Voting Rights......................................... 22
Recommendation of DTG Board........................................... 22
THE MERGER............................................................... 23
General............................................................... 23
Background of the Merger.............................................. 23
Recommendation of the DTG Board and Reasons for the Merger............ 25
Opinion of DTG's Financial Advisor.................................... 26
Interests of Certain Persons in the Merger............................ 29
Accounting Treatment.................................................. 32
Listing on The Nasdaq Stock Market.................................... 32
Governmental and Regulatory Approvals................................. 32
Certain Federal Income Tax Consequences............................... 33
Restrictions on Resales by Affiliates................................. 34
Dissenters' Appraisal Rights.......................................... 34
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS................... 35
General............................................................... 35
Structure of the Merger............................................... 35
Management After the Merger........................................... 35
Conversion of DTG Common Stock and Conversion-Merger Rights;
Treatment of Options........................................... 37
Exchange of Certificates; Fractional Shares........................... 37
Effective Time........................................................ 39
Representations and Warranties........................................ 39
Business of DTG Pending the Merger; Certain Other Agreements.......... 40
No Solicitation by DTG................................................ 43
Standstill; Certain Other Agreements of McLeodUSA..................... 44
Indemnification....................................................... 44
Conditions to Consummation of the Merger.............................. 45
Termination of the Merger Agreement; Termination Fee.................. 48
Waiver and Amendment of the Merger Agreement.......................... 49
Expenses.............................................................. 49
Voting Agreements..................................................... 49
INFORMATION ABOUT MCLEODUSA AND MERGER SUB............................... 51
INFORMATION ABOUT DTG.................................................... 60
DTG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 93
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DTG.... 108
DTG EXECUTIVE COMPENSATION............................................... 111
MCLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS............. 115
CERTAIN OTHER MATTERS.................................................... 126
Legal Matters......................................................... 126
Experts............................................................... 126
Changes in and Disagreements with Accountants on...................... 126
Accounting and Financial Disclosure................................... 126
Stockholder Proposals................................................. 127
Other Matters......................................................... 127
Independent Public Accountants........................................ 127
Where You Can Find More Information................................... 127
DTG FINANCIAL INFORMATION................................................ F-1
APPENDICES
Appendix A - Agreement and Plan of Merger................................ A-1
Appendix B - Opinion of Duff & Phelps, LLC............................... B-1
This Prospectus and Proxy Statement incorporates business and
financial information about McLeodUSA that is not included in or delivered with
this Prospectus and Proxy Statement. This information is available without
charge to DTG stockholders upon written or oral request. Stockholders may
request this information from McLeodUSA Incorporated, McLeodUSA Technology Park,
6400 C Street, SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, Attn: General
Counsel, Telephone (319) 364-0000. To obtain timely delivery, stockholders must
request such information no later than _______________, 1999.
-i-
Forward-Looking Statements
Some of the statements contained, or incorporated by reference, in this
Prospectus and Proxy Statement discuss future expectations, contain projections
of results of operations or financial condition or state other "forward-looking"
information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these so-called "forward-looking
statements" by words like "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of those words and other comparable words. You should be aware
that those statements only reflect our predictions. Actual events or results may
differ substantially. Important factors that could cause our actual results to
be materially different from the forward-looking statements are disclosed under
the heading "Risk Factors" and throughout this Prospectus and Proxy Statement.
-ii-
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SUMMARY
This document constitutes the Prospectus of McLeodUSA and the Proxy Statement of
DTG. This summary highlights selected information from the Prospectus and Proxy
Statement. It does not contain all of the information that is important to you.
You should carefully read the entire Prospectus and Proxy Statement and the
other documents to which this document refers you to fully understand the
Merger. See "Where You Can Find More Information" on page __. In this
Prospectus and Proxy Statement, "we," "us" and "our" may refer to either
McLeodUSA or DTG depending on the context in which they are used, while "you"
and "your" refer solely to stockholders of DTG.
MCLEODUSA INCORPORATED
McLeodUSA Technology Park
6400 C Street, SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
McLeodUSA provides integrated communications services to business and
residential customers in the Midwestern and Rocky Mountain regions of the United
States. Our integrated communications services include local, long distance,
Internet access, data, voice mail and paging, all from a single company on a
single bill. We believe we are the first communications provider in most of our
markets to offer ``one-stop shopping'' for communications services tailored to
customers' specific needs.
Our approach makes it easier for both our business and our residential customers
to satisfy their telecommunications needs. It also allows businesses to receive
customized services, such as competitive long distance pricing and enhanced
calling features, that might not otherwise be directly available on a cost-
effective basis. As of September 30, 1998, we served over 366,800 local lines
in 267 cities and towns.
In addition to our core business of providing competitive local, long distance
and related communications services, we also derive revenue from:
. sale of advertising space in telephone directories
. incumbent local exchange services in east central Illinois
. communications network maintenance services
. telephone equipment sales, service and installation
. video services
. special access, private line and data services
. telemarketing services
. other communications services, including cellular, operator, payphone and
paging services
In most of our markets, we compete with the incumbent local phone company by
leasing their lines and switches. This allows customers to select our local
service without changing their existing telephone numbers. In other markets,
primarily in east central Illinois, we operate our own lines and switches. We
provide long distance services by using our own facilities and leasing capacity
from long-haul and local providers. We are constructing fiber optic networks in
Iowa, Illinois, Wisconsin, Indiana, Missouri, Minnesota, South Dakota and North
Dakota to carry additional communications traffic on our own network.
WEST GROUP ACQUISITION CO.
Merger Sub is a Delaware corporation and a wholly owned subsidiary of McLeodUSA.
McLeodUSA formed Merger Sub in October 1998 to facilitate the Merger. Merger
Sub has not transacted any business other than that incident to its formation
and the completion of the Merger. Merger Sub will cease its corporate existence
upon the completion of the Merger.
DAKOTA TELECOMMUNICATIONS GROUP, INC.
29705 453rd Avenue
Irene, South Dakota 57037-0066
(605) 263-3301
DTG is a diversified communications services company serving business and
residential customers in southeastern South Dakota and neighboring areas.
Either directly or through subsidiaries we provide:
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. wireline local and network access services
. competitive local exchange telephone services
. incumbent local exchange telephone services
. long distance telephone services
. operator assisted calling services
. telecommunications equipment sale and leasing services
. cable television services
. computer networking services
. Internet access and related services
. mobile radio and paging services
We are a Delaware corporation organized in 1997. Our predecessor was Dakota
Cooperative Telecommunications, Inc., a stock-based South Dakota cooperative
association that was formed on April 3, 1952. In July 1997, the Cooperative was
converted into a South Dakota corporation and subsequently merged with and into
DTG.
THE MERGER (PAGE __)
The Merger Agreement provides that Merger Sub would merge with and into DTG and
DTG would become a wholly owned subsidiary of McLeodUSA. McLeodUSA and DTG hope
to complete the Merger by the end of the first quarter of 1999.
The Merger Agreement is included as Appendix A to this Prospectus and Proxy
Statement. It is the legal document that governs the Merger.
EXCHANGE OF SHARES (PAGE ___)
As a result of the Merger, each share of DTG Common Stock that you own would be
converted into the right to receive 0.4328 of a share of McLeodUSA Common Stock.
You would not receive fractional shares of McLeodUSA Common Stock. Instead, you
would receive a check in payment for any fractional shares based on the market
value of McLeodUSA Common Stock.
For example:
. If you own 10,000 shares of DTG Common Stock, after the Merger you would
receive 4,328 shares of McLeodUSA Common Stock.
. If you own 100 shares of DTG Common Stock, after the Merger you would
receive 43 shares of McLeodUSA Common Stock and a check for the market
value of the remaining .28 of a share.
In addition, unexercised options to buy DTG Common Stock would be replaced by
options to buy McLeodUSA Common Stock. Each option to buy a share of DTG Common
Stock would be replaced by an option to buy 0.4328 of a share of McLeodUSA
Common Stock.
Following the Merger, you will receive a letter of transmittal that will provide
instructions on the procedure for exchanging your share certificates
representing DTG Common Stock for share certificates representing McLeodUSA
Common Stock. For more information on how this exchange procedure works, see
"Exchange of Certificates; Fractional Shares" on page __.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
RECOMMENDATION OF THE DTG BOARD (PAGE __)
The DTG Board believes that the Merger is fair to and in the best interests of
DTG and DTG stockholders, and unanimously recommends that DTG stockholders vote
"FOR" the proposal to adopt the Merger Agreement.
REASONS FOR THE MERGER (PAGE ___)
The DTG Board considered a variety of factors in making its decision to approve
the Merger Agreement and to recommend to the DTG stockholders that they vote
their shares for adoption of the Merger Agreement. These factors included:
. the business and financial condition of DTG and McLeodUSA
. the business advantages of a combination
. the alternatives to the Merger
. the historical value of DTG Common Stock and the value offered by the
Merger
. that McLeodUSA Common Stock is traded on The Nasdaq Stock Market, but
there is no established public trading market for DTG Common Stock
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2
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. the terms and conditions of the Merger Agreement and the tax-free nature
of the Merger
. the presentation and opinion of Duff & Phelps, the DTG Board's financial
advisor
. the opportunity of DTG stockholders to participate in the potential
future value of McLeodUSA
After considering these and other factors, the DTG Board concluded that the
Merger is fair to and in the best interests of DTG and DTG stockholders.
OPINION OF DTG'S FINANCIAL ADVISOR (PAGE __)
Duff & Phelps has given the DTG Board its opinion that the proposed merger is
fair to the holders of DTG Common Stock from a financial point of view.
This opinion is included as Appendix B to this Prospectus and Proxy Statement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE __)
DTG expects that the exchange of shares of DTG Common Stock for shares of
McLeodUSA Common Stock in the Merger would not cause DTG stockholders generally
to recognize gain or loss for United States federal income tax purposes. DTG
stockholders would, however, have to recognize gain in connection with any cash
received for fractional shares.
The parties' obligations to complete the Merger are conditioned on their receipt
of legal opinions concerning the federal income tax treatment of the Merger.
These opinions won't bind the Internal Revenue Service (the "IRS"), which could
take a different view.
DETERMINING THE ACTUAL TAX CONSEQUENCES OF THE MERGER TO YOU CAN BE COMPLICATED.
THEY WILL DEPEND ON YOUR SPECIFIC SITUATION AND ON VARIABLES NOT WITHIN THE
CONTROL OF DTG OR MCLEODUSA. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR FOR A FULL
UNDERSTANDING OF THE MERGER'S TAX CONSEQUENCES TO YOU.
You should also refer the more detailed discussion of tax consequences and
opinions at page ___.
ACCOUNTING TREATMENT (PAGE __)
McLeodUSA and DTG expect the Merger to be accounted for using the purchase
method of accounting.
NO APPRAISAL RIGHTS (PAGE __)
DTG stockholders have no right to be paid the appraised value of their shares of
DTG Common Stock in connection with the Merger.
WHAT IS NEEDED TO COMPLETE THE MERGER (PAGE __)
Several conditions must be satisfied before the Merger will be completed. These
include:
. adoption of the Merger Agreement and approval of the Merger by the DTG
stockholders
. approval of the Merger by certain federal, state and local regulatory
authorities
. consent to the Merger by certain third parties
. receipt of certain tax opinions
. certain other contractual conditions set forth in the Merger Agreement
If the law permits, McLeodUSA or DTG may each waive conditions for the benefit
of their company and stockholders and complete the Merger even though one or
more of these conditions hasn't been met. There is no assurance that the
conditions will be satisfied or waived or that the Merger will occur.
GOVERNMENTAL AND REGULATORY APPROVALS (PAGE __)
On November 19, 1998, DTG and McLeodUSA were granted early termination of the
premerger waiting period by the Federal Trade Commission ("FTC"). However,
certain state and other regulatory authorities will also need to approve or
be notified of the Merger before it can be completed. DTG and McLeodUSA have
filed, or expect to soon file, all of the required applications or notices with
these regulatory authorities.
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While neither of us know of any reason why they would not be able to obtain the
necessary approvals in a timely manner, neither DTG nor McLeodUSA can be certain
when or if they will receive them.
TERMINATION OF THE MERGER AGREEMENT; EXPENSES (PAGE __)
McLeodUSA and DTG may mutually agree at any time to terminate the Merger
Agreement without completing the Merger, even if the DTG stockholders have
approved it. Also, either of us may decide, without the consent of the other,
to terminate the Merger Agreement if:
. The other party breaches the Merger Agreement in a way that would entitle the
terminating party not to complete the Merger, and the breaching party doesn't
correct the breach promptly
. Any court or governmental entity issues a final order or judgment preventing
the completion of the Merger
. The holders of a majority of the outstanding shares of DTG Common Stock do
not vote to adopt the Merger Agreement
. The Merger has not been completed by August 15, 1999 (subject to 60 days
extension), unless the failure to complete the Merger by that time is due to
a violation of the Merger Agreement by the party that wants to terminate the
Merger Agreement
Regardless of whether the Merger is completed, each of us will pay our own fees
and expenses. DTG will pay for the printing and mailing of this document.
McLeodUSA will pay the registration and filing fees due to the SEC and The
Nasdaq Stock Market.
If DTG terminates the Merger Agreement due to a competing acquisition offer that
is received by DTG, DTG would be required to pay McLeodUSA $500,000. In
addition, if a competing acquisition offer is accepted and completed within one
year of the termination of the Merger Agreement on this basis, then DTG would be
required to pay to McLeodUSA an additional $2,000,000. If a competing
acquisition offer is not completed within one year of the termination of the
Merger Agreement, then DTG would be required to either pay McLeodUSA $2,000,000
or issue to McLeodUSA 200,000 shares of DTG Common Stock, at DTG's option.
These termination fees could discourage other companies from making competitive
bids to combine with DTG before the Merger is completed. See "Termination Fees"
on page ___.
WAIVER AND AMENDMENT (PAGE __)
McLeodUSA and DTG may agree to amend the Merger Agreement, except that after DTG
stockholders adopt the Merger Agreement, the parties can't reduce or change the
consideration that will be received by DTG stockholders unless such change is
approved by the DTG stockholders. Either of us can waive our right to require
the other party to adhere to the terms and conditions of the Merger Agreement,
if the law allows, at any time prior to the time the Merger becomes effective.
INTERESTS OF DTG'S DIRECTORS AND OFFICERS IN THE MERGER (PAGE __)
Some of DTG's directors and officers have interests in the Merger that are
different from, or in addition to, their interests as DTG stockholders. These
interests exist because of employment and other agreements that the directors
and officers have with DTG and rights that they have under benefit and
compensation plans. Some of DTG's officers and directors have also entered into
or would enter into employment agreements, advisory arrangements or other
agreements or arrangements with McLeodUSA after the Merger. The Merger
Agreement requires McLeodUSA to indemnify directors and officers of DTG for
events occurring before the Merger, including events that are related to the
Merger Agreement. Interests of DTG's directors and officers are described under
"Interests of Certain Persons in the Merger" at page __.
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE __)
Upon completion of the Merger, you would become a stockholder of McLeodUSA.
Your rights would then be governed by Delaware law and by
the McLeodUSA Certificate of Incorporation and the McLeodUSA Bylaws, rather than
the DTG Certificate of Incorporation and the DTG Bylaws. Your rights as a
stockholder of McLeodUSA would
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4
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differ from your rights as a stockholder of DTG. To review these differences in
more detail, see "McLeodUSA Capital Stock and Comparison of Stockholder Rights"
on page __.
SPECIAL MEETING OF DTG STOCKHOLDERS (PAGE __)
The Special Meeting will be held on ___________,1999 at __________, at the Irene
Public School, 30 E. State Street, Irene, South Dakota 57037. At the Special
Meeting, you will be asked to vote to adopt the Merger Agreement and to approve
the Merger and the transactions contemplated by the Merger Agreement.
You can vote, or submit a proxy to vote, at the Special Meeting if you were a
record holder of DTG Common Stock at the close of business on ____________,
1998. You can vote your shares by attending the meeting and voting in person or
you can mark the enclosed proxy card with your vote, sign it and mail it in the
enclosed return envelope. You can revoke your proxy at any time prior to its
being exercised.
VOTE REQUIRED (PAGE ___)
The holders of a majority of the shares of DTG Common Stock outstanding must
vote in favor of adoption of the Merger Agreement before the Merger can occur.
There were ______ shares of DTG Common Stock outstanding as of _________, 1999.
Each holder of DTG Common Stock is entitled to one vote per share with respect
to all matters as to which a vote is to be taken at the Special Meeting.
Each of the directors and certain executive officers of DTG has entered into an
agreement with McLeodUSA to vote his shares of DTG Common Stock in favor of the
Merger Agreement and against any competing transaction. The _____ shares of DTG
Common Stock subject to these agreements represent approximately ___% of the
outstanding shares of DTG Common Stock.
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SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The information in the following unaudited table is based on historical
financial information included in McLeodUSA's prior SEC filings. This summary
financial information should be read in connection with this historical
financial information including the notes which accompany such financial
information. This historical financial information has also been incorporated
into this document by reference. See "Where You Can Find More Information" on
page ___. McLeodUSA's audited historical financial statements as of December
31, 1997 and 1996, and for each of the three years ended December 31, 1997 were
audited by Arthur Andersen LLP, independent public accountants.
YEAR ENDED DECEMBER 31,
-------------------------------
PRO FORMA
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5)(8) 1997(6)(7)
-------- --------- ------------ ------------ ---------------- -----------
OPERATIONS STATEMENT
DATA:
Revenue................ $ 1,550 $ 8,014 $ 28,998 $ 81,323 $ 267,886 $ 475,920
------- -------- -------- -------- ------------- ---------
Operating expenses:
Cost of service....... 1,528 6,212 19,667 52,624 155,430 261,343
Selling, general and
administrative........ 2,390 12,373 18,054 46,044 143,918 215,472
Depreciation and
amortization.......... 235 772 1,835 8,485 33,275 67,654
Other................. -- -- -- 2,380 4,632 10,191
------- -------- -------- -------- ------------- ---------
Total operating
expenses.............. 4,153 19,357 39,556 109,533 337,255 554,660
------- -------- -------- -------- ------------- ---------
Operating loss......... (2,603) (11,343) (10,558) (28,210) (69,369) (78,740)
Interest income
(expense), net......... 163 (73) (771) 5,369 (11,967) (49,831)
Other income........... -- -- -- 495 1,426 2,508
Income taxes........... -- -- -- -- -- --
------- -------- -------- -------- ------------- ---------
Net loss............... $(2,440) $(11,416) $(11,329) $(22,346) $ (79,910) $(126,063)
======= ======== ======== ======== ============= =========
Loss per common
share.................. $ (.17) $ (.53) $ (.40) $ (.55) $ (1.45) $ (2.02)
======= ======== ======== ======== ============= =========
Weighted average
common shares
outstanding............ 14,761 21,464 28,004 40,506 54,974 62,479
======= ======== ======== ======== ============= =========
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------------------
PRO FORMA
1997(1)(5) 1998(9) 1998(7)(10)
----------- ----------- ------------
OPERATIONS STATEMENT
DATA:
Revenue................ $131,595 $438,642 $ 462,864
-------- -------- ----------
Operating expenses:
Cost of service....... 77,745 239,195 254,021
Selling, general and
administrative........ 86,363 189,579 197,996
Depreciation and
amortization.......... 15,708 63,663 68,695
Other................. 2,689 5,575 5,575
-------- -------- ----------
Total operating
expenses.............. 182,505 498,012 526,287
-------- -------- ----------
Operating loss......... (50,910) (59,370) $ (63,423)
Interest income
(expense), net......... (2,686) (35,519) (50,395)
Other income........... 40 1,789 1,789
Income taxes........... -- -- --
-------- -------- ----------
Net loss............... $(53,556) $(93,100) $ (112,029)
======== ======== ==========
Loss per common
share.................. $ (1.02) $ (1.49) $ (1.75)
======== ======== ==========
Weighted average
common shares
outstanding............ 52,752 62,620 63,915
======== ======== ==========
DECEMBER 31, SEPTEMBER 30,1998
----------------------------------------------------------- --------------------
ACTUAL PRO
------ ---
1993 1994 1995(1) 1996(1)(11) 1997(1)(5)(12) ACTUAL(9) FORMA (13)
------- -------- --------- ----------- -------------- ----------- ------------
BALANCE SHEET DATA:
Current assets....................... $7,077 $ 4,862 $ 8,507 $224,401 $ 517,869 $ 570,784 $ 870,552
Working capital (deficit)............ $5,962 $ 1,659 $(1,208) $185,968 $ 378,617 $ 409,266 $ 699,627
Property and equipment, net.......... $1,958 $ 4,716 $16,119 $ 92,123 $ 373,804 $ 559,317 $ 585,621
Total assets......................... $9,051 $10,687 $28,986 $452,994 $1,345,652 $1,621,564 $2,007,949
Long-term debt....................... -- $ 3,500 $ 3,600 $ 2,573 $ 613,384 $ 939,102 $1,269,895
Stockholders' equity................. $7,936 $ 3,291 $14,958 $403,429 $ 559,379 $ 483,745 $ 529,769
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------------- ------------------------
PRO FORMA
---------
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7) 1997(1) 1998(9)
--------- -------- ----------- ---------- ------------- ---------- --------- ----------
OTHER FINANCIAL DATA:
Capital expenditures,
including business
acquisitions.................. $ 2,052 $ 3,393 $ 14,697 $ 173,782 $ 601,137 $ 631,383 $547,345 $ 251,253
EBITDA(14)..................... $(2,368) $(10,571) $ (8,723) $ (17,345) $ (31,462) $ (895) $(32,513) $ 9,868
PRO FORMA
1998(7)
---------
OTHER FINANCIAL DATA:
Capital expenditures,
including business
acquisitions.................. $ 255,421
EBITDA(14)..................... $ 10,847
- --------------------------------------------------------------------------------
6
- --------------------------------------------------------------------------------
________________________
(1) The acquisitions of MWR Telecom, Inc. ("MWR") (now part of McLeodUSA
Network Services, Inc. ("McLeodUSA Network Services")), Ruffalo, Cody &
Associates, Inc. ("Ruffalo Cody"), McLeodUSA Media Group, Inc. ("McLeodUSA
Publishing") and Consolidated Communications Inc. ("CCI") in April 1995,
July 1996, September 1996 and September 1997, respectively, affect the
comparability of the historical data presented to the historical data for
prior periods shown.
(2) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(3) Includes operations of Ruffalo Cody from July 16, 1996 to December 31, 1996
and operations of McLeodUSA Publishing from September 21, 1996 to December
31, 1996.
(4) Includes operations of CCI from September 25, 1997 to December 31, 1997.
(5) Reflects the issuance of $500 million aggregate principal amount at
maturity of 10 1/2% Senior Discount Notes due March 1, 2007 (the "1997
Senior Discount Notes") yielding net proceeds of approximately $288.9
million on March 4, 1997 (the "1997 Senior Discount Note Offering") and the
issuance of $225 million principal amount at maturity of 9 1/4% Senior
Notes due July 15, 2007 (the "1997 Senior Notes") yielding net proceeds of
approximately $217.6 million on July 21, 1997 (the "1997 Senior Note
Offering").
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997,
operations of DTG from January 1, 1997 to December 31, 1997 and certain
adjustments attributable to these acquisitions. Also reflects certain
adjustments attributable to the 1997 Senior Discount Notes, the 1997 Senior
Notes, the issuance of $300 million principal amount at maturity of 8-3/8%
Senior Notes due March 15, 2008 (the "March 1998 Senior Notes") yielding
net proceeds of approximately $291.9 million on March 10, 1998 (the "March
1998 Senior Note Offering") and the issuance of $300 million principal
amount at maturity of 9-1/2% Senior Notes due November 1, 2008 (the
"October 1998 Senior Notes") yielding net proceeds of approximately $291.9
million on October 30, 1998 (the "October 1998 Senior Note Offering")
computed as if the 1997 Senior Discount Notes, the 1997 Senior Notes, the
March 1998 Senior Notes and the October 1998 Senior Notes had been issued
on January 1, 1997.
(7) The issuance of the 1997 Senior Discount Notes in March 1997, the issuance
of the 1997 Senior Notes in July 1997, the acquisition of CCI in September
1997 (the "CCI Acquisition"), the issuance of the March 1998 Senior Notes
in March 1998, the issuance of the October 1998 Senior Notes in October
1998 and the Merger affect the comparability of the pro forma data
presented to the data for prior periods shown.
(8) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997.
(9) Reflects the issuance of the March 1998 Senior Notes on March 16, 1998.
(10) Reflects certain adjustments attributable to the March 1998 Senior Notes,
the October 1998 Senior Notes and the Merger computed as if each had
occurred on January 1, 1998.
(11) Includes Ruffalo Cody and McLeodUSA Publishing, which McLeodUSA acquired on
July 15, 1996 and September 20, 1996, respectively.
(12) Includes CCI, which McLeodUSA acquired on September 24, 1997.
(13) Includes DTG, which McLeodUSA agreed to acquire pursuant to the Merger
Agreement on October 27, 1998, and reflects the net proceeds of the October
1998 Senior Note Offering.
(14) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
- --------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA OF DTG
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
(UNAUDITED)
The information in the following unaudited table is based on DTG's
financial statements presented later in this Prospectus and Proxy Statement.
This summary financial information should be read in connection with DTG's full
financial statements including the notes which accompany them. DTG's annual
financial statements were audited by Olsen Thielen & Co., Ltd., independent
certified public accountants.
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------------------------------------------------------
1993 1994 1995 1996(1)(2) 1997(1)(3) 1997(1) 1998(1)(4)
-------- -------- ------- ---------- ----------- --------- -----------
STATEMENT OF OPERATIONS DATA:
Revenue $ 5,102 $ 5,626 $ 6,427 $ 8,101 $13,729 $ 8,441 $24,222
Costs and expenses 4,078 4,098 5,585 8,023 15,488 9,717 26,556
------- ------- ------- ------- ------- ------- -------
Operating income (loss) 1,024 1,528 842 78 (1,759) (1,276) (2,334)
Other income
(expenses), net(5)(6) (479) (86) 593 (414) (847) (552) (1,502)
Income (loss) before
income taxes 545 1,442 1,435 (336) (2,606) (1,828) (3,836)
Income taxes (benefit) 5 11 302 (176) (119) (293) (8)
------- ------- ------- ------- ------- ------- -------
Net income (loss) 540 1,431 1,133 (160) (2,487) (1,535) (3,828)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working Capital $ 3,146 $ 5,641 $ 7,243 $ 4,446 $ 3,340 $ 3,313 $ 486
Property, Plant and
Equipment - Net 11,761 11,241 11,041 14,441 25,408 23,315 26,304
Total Assets 16,871 18,494 20,122 23,505 44,040 34,198 43,671
Long-Term Debt 12,918 13,029 13,055 15,338 29,200 25,715 30,793
Stockholders' Equity 2,827 4,257 5,415 6,412 7,804 4,764 5,310
______________
(1) Reflects the acquisitions of the assets of nineteen cable service areas (now
part of Dakota Telecom, Inc.) from three companies that provided cable
service to various communities in three separate purchase transactions and
one asset exchange transaction in the first half of 1996. The acquisitions
of I-Way Partners, Inc. (DTG Internet Services, Inc.) in December 1996, TCIC
Communications, Inc. (DTG Communications, Inc.) in December 1996,
Futuristic, Inc. (DTG DataNet, Inc.) in December 1997, Vantek
Communications, Inc. and Van/Alert, Inc. (now part of Dakota Wireless
Services, Inc.) in July 1998, affect the comparability of the historical
data presented to the historical data for prior periods shown.
(2) Includes operations of the cable service areas subsequent to their purchase
in the first half of 1996 and operations of I-Way Partners, Inc. and TCIC
Communications, Inc. for the month of December 1996.
(3) Includes operations of Futuristic, Inc. (dba DataNet, Inc.) for the month of
December 1997.
(4) Includes operations of Vantek Communications, Inc. and Van/Alert, Inc. from
July 1, 1998 to September 30, 1998.
(5) Gains on sale of cellular investments were $240,811 in 1994 and $686,336 in
1995.
(6) Income (loss) from cellular partnerships were:
1993 $(33,404)
1994 125,377
1995 168,788
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
COMPARATIVE PER SHARE DATA
The following table summarizes certain per share information for McLeodUSA
and DTG on a historical, pro forma combined, and equivalent pro forma basis.
The DTG "equivalent pro forma amounts" are calculated by multiplying the
unaudited pro forma combined per share amounts by 0.4328. DTG stockholders
would receive 0.4328 shares of McLeodUSA Common Stock in exchange for each share
of DTG Common Stock in the Merger. The pro forma data do not purport to be
indicative of the results of future operations or the actual results that would
have occurred had the Merger occurred at the beginning of the period presented.
The pro forma financial data have been included in accordance with the rules of
the SEC and are provided for comparative purposes only.
AS OF OR FOR THE AS OF OR FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- -----------------
(UNAUDITED)
MCLEODUSA COMMON STOCK
Income from Continuing Operations
Basic earnings per share
Historical $(1.49) $(1.45)
Pro Forma (1) (1.75)(2) (2.02)(3)
Diluted earnings per share
Historical (1.49) (1.45)
Pro Forma (1) (1.75)(2) (2.02)(3)
Book value per share at period end
Historical 7.66 9.05
Pro Forma 8.22(4) 9.60(4)
DTG COMMON STOCK(5)
Income from Continuing Operations
Basic earnings per share
Historical $(1.65) $(1.35)
Equivalent pro forma (.76) (.87)
Diluted earnings per share
Historical (1.65) (1.35)
Equivalent pro forma (.76) (.87)
Book value per share at period end
Historical(6) 1.97 5.06
Equivalent pro forma 3.56 4.15
DIVIDENDS. Neither McLeodUSA nor DTG has ever declared or paid a cash dividend
with respect to its respective common stock.
(footnotes are located on the following page)
- --------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
_____________
(1) Earnings per share were calculated using income (loss) from continuing
operations. In calculating pro forma earnings per share, no adjustments to
the pro forma amounts have been made to reflect potential expense
reductions or revenue enhancements that may result from the Merger or the
effect of repurchases of McLeodUSA common stock or DTG common stock
subsequent to the stated period.
(2) Includes the operations of DTG from January 1, 1998 to September 30, 1998
and certain adjustments attributable to the March 1998 Senior Note Offering
and the October 1998 Senior Note Offering as if each had occurred on
January 1, 1998.
(3) Includes the operations of CCI and DTG from January 1, 1997 to December 31,
1997 and certain adjustments attributable to the 1997 Senior Discount Note
Offering, the 1997 Senior Note Offering, the March 1998 Senior Note
Offering and the October 1998 Senior Note Offering as if each had occurred
on January 1, 1997.
(4) Gives effect to the Merger as if it had occurred at the end of the period.
(5) The equivalent pro forma computations assume that for each share of DTG
common stock outstanding, DTG stockholders would receive 0.4328 shares of
McLeodUSA common stock.
(6) Calculated by dividing stockholders' equity by the actual number of shares
of DTG Common Stock outstanding at the end of the periods presented. Shares
of DTG Common Stock outstanding as of September 30, 1998 and December 31,
1997 were 2,692,331 and 1,542,348, respectively. If the 395,376 and 911,
320 shares of DTG Common Stock issuable as of September 30, 1998 and
December 31, 1997, respectively, to former shareholders Dakota
Telecommunications Cooperative, Inc. common stock and capital credit
accounts upon satisfaction by such holders of conditions to issuance were
considered issued on September 30, 1998 and December 31, 1997, the book
value per share of DTG Common Stock would have been $1.72 and $3.18,
respectively.
- --------------------------------------------------------------------------------
10
COMPARATIVE MARKET DATA
MCLEODUSA. McLeodUSA Common Stock is, and the shares of McLeodUSA Common Stock
offered to DTG stockholders are expected to be, listed on The Nasdaq Stock
Market and traded under the symbol "MCLD." McLeodUSA Common Stock has been
quoted on The Nasdaq Stock Market since McLeod's initial public offering on June
11, 1996. Prior to June 11, 1996, no established public trading market for
McLeodUSA Common Stock existed. The following table sets forth for the periods
indicated the high and low reported sales price per share of McLeodUSA Common
Stock as reported by The Nasdaq Stock Market.
HIGH LOW
---- ---
1996
Second Quarter (from June 11, 1996)..... $ 26.75 $ 22.25
Third Quarter........................... 39.50 23.50
Fourth Quarter.......................... 34.50 25.00
1997
First Quarter........................... $ 28.75 $17.375
Second Quarter.......................... 34.25 16.375
Third Quarter........................... 40.00 25.625
Fourth Quarter.......................... 41.75 32.00
1998
First Quarter........................... $46.375 $ 30.50
Second Quarter.......................... 48.312 38.00
Third Quarter........................... 40.125 21.375
Fourth Quarter (through Nov. 30, 1998).. 38.50 15.25
On October 26, 1998, the last full trading day prior to the public
announcement of the proposed Merger, the closing price of McLeodUSA Common Stock
was $35.0625 per share. On November 30, 1998, the closing price reported for
McLeodUSA Common Stock was $30.9375 per share.
As of November 30, 1998, there were 818 holders of record of McLeodUSA
Common Stock.
DTG. There is no established public trading market for DTG Common Stock. DTG
Common Stock is not actively traded, although occasional transactions occur
between individuals and local and regional brokerage firms. DTG has no reliable
and consistent source of information concerning the price at which sales of DTG
Common Stock occur in such transactions. During the first quarter of 1998,
shares of DTG Common Stock were sold to DTG stockholders and employees in an
offering by DTG at a price of $12.50 per share. During the third and fourth
quarter of 1998, DTG issued DTG Common Stock in business acquisitions in which
DTG Common Stock was valued at $12.50 per share.
COMPARISON. The following table shows closing prices for McLeodUSA Common Stock
and the estimated value of McLeodUSA Common Stock to be received for each share
of DTG Common Stock on an equivalent per share basis:
MCLEODUSA DTG
CLASS A COMMON STOCK
COMMON STOCK EQUIVALENT
DATE ACTUAL PRICE PER SHARE
- ---- ------------ ---------
October 26, 1998................... $35.0625 $15.175
November 30, 1998.................. $30.9375 $13.390
The equivalent per share value of DTG Common Stock is the closing price of
McLeodUSA Common Stock as of the date indicated multiplied by the Exchange Ratio
of 0.4328.
11
RISK FACTORS
You should carefully consider the following risk factors relating to
McLeodUSA and the other information in this Prospectus and Proxy Statement
(including the matters addressed in "Forward-Looking Statements" on page ii),
before you decide whether to approve the Merger Agreement. You should also
consider the additional information set forth in McLeodUSA's SEC Reports on
Forms 10-K, 10-Q and 8-K and in the other documents incorporated by reference in
this Prospectus and Proxy Statement. See "Where You Can Find More Information"
on page __.
LIMITED OPERATING HISTORY; RECENT AND ANTICIPATED LOSSES.
McLeodUSA began operations in 1992. McLeodUSA's limited operating history
and rapid growth may make it more difficult for you to evaluate its performance.
As a result of expenses related to the expansion of its existing businesses and
strategic acquisitions, McLeodUSA has incurred significant losses. Since January
1, 1995, McLeodUSA's net losses have been as follows:
Net Losses
----------
Period Amount
------ ------
1995 $11.3 million
1996 $22.3 million
1997 $79.9 million
1998 (through Sept. 30) $93.1 million
McLeodUSA expects to incur significant operating losses during the next several
years while it develops its businesses, expands its fiber optic network and
develops a personal communications system ("PCS") system. If McLeodUSA does not
become profitable in the future, it could have difficulty obtaining funds to
continue its operations. See "--Significant Capital Requirements."
SIGNIFICANT CAPITAL REQUIREMENTS.
McLeodUSA needs significant capital to continue to expand its operations,
facilities, network and services. As of September 30, 1998, based on McLeodUSA's
current business plan and projections, McLeodUSA estimates that it will require
$1.1 billion through 2001. This estimate includes the projected costs of:
. building its fiber optic network, including intra-city fiber
optic networks
. expanding operations in existing and new markets
. developing a PCS system
. funding general corporate expenses
McLeodUSA expects to fund these requirements with:
. approximately $291.9 million in net proceeds from its October
1998 debt offering
. approximately $402.4 million of cash and investments on hand at
September 30, 1998
. a proposed $100.0 million revolving credit facility
. projected operating cash flow
McLeodUSA cannot assure you that its capital resources will permit it to
fund its planned network deployment and operations or achieve operating
profitability.
McLeodUSA's estimate of future capital requirements is a "forward-looking
statement" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The actual amount and timing of
McLeodUSA's future capital requirements may differ substantially from its
estimate due to factors such as:
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for its services
. regulatory, technological or competitive developments
12
. new opportunities
McLeodUSA also expects to evaluate potential acquisitions, joint ventures
and strategic alliances on an ongoing basis. McLeodUSA may require additional
financing if it pursues any of these opportunities.
McLeodUSA may meet any unanticipated capital needs by issuing additional
debt or equity securities or borrowing funds from one or more lenders. McLeodUSA
cannot assure you that it will have timely access to additional financing
sources on acceptable terms. Failure to generate or raise sufficient funds may
require McLeodUSA to delay or abandon some of its expansion plans or
expenditures, which could have a material adverse effect on its business,
results of operations or financial condition.
VARIABILITY OF OPERATING RESULTS.
McLeodUSA's revenues and operating results may fluctuate significantly from
period to period for many reasons, including:
. competition
. availability or announcement of alternative technologies
. fluctuations in the results of operations of existing business
units, recently acquired subsidiaries or newly established
business units
. changes in market growth rates for different products and
services
. general economic conditions
. significant expenses associated with the construction and
expansion of its network and services, including the development,
construction and operation of a PCS system
These factors and any resulting fluctuations in McLeodUSA's operating
results will make period to period comparisons of its financial condition less
meaningful and could have a material adverse effect on its business, results of
operations and financial condition.
UNCERTAINTIES OF EXPANSION.
McLeodUSA has rapidly expanded and developed its network and services.
Further expansion and development will depend on a number of factors, including:
. cooperation of the incumbent local exchange carriers
. regulatory and governmental developments
. changes in the competitive climate in which it operates
. development of customer billing, order processing and network
management systems
. availability of financing
. technological developments
. availability of rights-of-way, building access and antenna sites
. existence of strategic alliances or relationships
. emergence of future opportunities
McLeodUSA will need to continue to improve its operational and financial
systems and its procedures and controls. McLeodUSA must also grow, train and
manage its employee base. Failure by McLeodUSA to manage its anticipated growth
effectively could have a material adverse effect on its business, results of
operations and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS.
As part of its strategy, McLeodUSA has acquired other companies. McLeodUSA
will continue to evaluate additional strategic acquisitions and alliances
principally relating to its current operations. These transactions commonly
involve a number of risks, including:
. difficulty assimilating acquired operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel
13
. inability to successfully incorporate acquired assets and rights
into McLeodUSA's service offerings
. inability to maintain uniform standards, controls, procedures and
policies
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on McLeodUSA's business,
results of operations and financial condition. In connection with these
transactions, McLeodUSA may also issue additional equity securities, incur
additional debt or incur significant amortization expenses related to goodwill
and other intangible assets.
DEPENDENCE ON REGIONAL BELL OPERATING COMPANIES.
McLeodUSA depends on the Regional Bell Operating Companies ("RBOCs") to
provide most of its core local and some of its long distance services. U S WEST
Communications, Inc. ("U S WEST"), Ameritech Corporation ("Ameritech") and
Southwestern Bell Telephone Company ("SBC") are McLeodUSA's primary suppliers of
local central office switching and local access lines. Their facilities allow
McLeodUSA to provide (1) local service, (2) long distance service and (3)
interexchange private lines. Today, without using these facilities, McLeodUSA
would be unable to provide bundled local and long distance services to most of
its customers, although it could provide stand-alone long distance service to
some customers.
McLeodUSA's plans to provide additional local services using its own
switches also depend on the RBOCs. In order to interconnect its switches and
other facilities to network elements controlled by the RBOCs, McLeodUSA must
first negotiate and enter into interconnection agreements with them. In August
1996, the Federal Communications Commission ("FCC") released an order (the "FCC
Interconnection Order") implementing the portions of the Telecommunications Act
of 1996 (the "Telecommunications Act") that impose interconnection obligations
on the RBOCs. The U.S. Eighth Circuit Court of Appeals voided certain provisions
of the FCC Interconnection Order. The U.S. Supreme Court reviewed this matter
and is expected to release its decision during the 1998-1999 term. If the U.S.
Supreme Court upholds the decision of the U.S. Eighth Circuit Court of Appeals,
negotiating interconnection agreements could become much more difficult, which
could limit or delay the expansion of McLeodUSA's local exchange switched
services. McLeodUSA cannot assure you that it will succeed in obtaining
interconnection agreements on terms that would permit it to offer local services
at profitable and competitive rates.
Any successful effort by U S WEST, SBC, Ameritech or other local exchange
carriers to deny or limit McLeodUSA's access to their network elements or
wholesale services would have a material adverse effect on its business, results
of operations and financial condition
U S WEST CENTREX ACTION AND OTHER ACTIONS BY U S WEST.
On February 5, 1996, U S WEST filed tariffs and other notices with the
public utilities commissions in its fourteen-state service region to limit
future Centrex access to its switches (the "U S WEST Centrex Action"). Centrex
access allows a large customer to aggregate lines, have control over certain
characteristics of those lines and provide a set of standard features on those
lines. Under the terms of the U S WEST Centrex Action, U S WEST would permit
McLeodUSA to use U S WEST's central office switches until April 2005, but would
not allow McLeodUSA to expand to new cities and would severely limit the number
of new lines it could partition onto U S WEST's switches in cities served by
McLeodUSA.
McLeodUSA has challenged, or is challenging, the U S WEST Centrex Action in
many of the states where McLeodUSA does business or plans to do business.
McLeodUSA has succeeded in blocking the U S WEST Centrex Action in Iowa,
Minnesota, South Dakota, North Dakota and Colorado, although U S WEST could take
further action in some of these states. In Montana, Nebraska and Idaho, however,
similar challenges to the U S WEST Centrex Action have not succeeded. In Wyoming
and Utah, challenges to the U S WEST Centrex Action remain pending before state
regulators.
14
U S WEST has introduced other measures that may make it more difficult or
expensive for McLeodUSA to use Centrex service. In January 1997, U S WEST
proposed certain interconnection surcharges in several of the states in its
service region. In February 1997, McLeodUSA joined other parties in filing a
petition with the FCC objecting to this proposal based on McLeodUSA's belief
that it violates certain provisions of the Telecommunications Act. The matter
remains pending before the FCC and various state public utilities commissions.
McLeodUSA anticipates that U S WEST will also pursue legislative
initiatives in states within McLeodUSA's target market area to reduce state
regulatory oversight over its rates and operations. If adopted, these
initiatives could make it more difficult for McLeodUSA to challenge U S WEST's
actions in the future.
McLeodUSA cannot assure you it will succeed in its challenges to the U S
WEST Centrex Action or other actions by U S WEST that would prevent or deter
McLeodUSA from using U S WEST's Centrex service or network elements. If U S WEST
prevails in any jurisdiction, McLeodUSA may not be able to offer integrated
telecommunications services in that jurisdiction, which could have a material
adverse effect on its business, results of operations and financial condition.
PCS SYSTEM IMPLEMENTATION RISKS.
McLeodUSA does not own or operate any facilities for providing PCS services
to the public. Developing a PCS system involves a high degree of risk and will
impose significant demands on McLeodUSA's management and financial resources.
McLeodUSA may not succeed in developing a PCS system. Even if McLeodUSA spends
substantial amounts to develop such a system, McLeodUSA may not make a profit
from PCS operations. To implement a PCS system successfully, McLeodUSA must,
among other things:
. Select a Digital Protocol. McLeodUSA must choose from among
several competing and potentially incompatible digital protocol
technologies. If the digital protocol technology McLeodUSA
chooses does not become widely employed, McLeodUSA's future
offering of PCS service could fail.
. Build Out its Wireless Infrastructure. FCC rules impose minimum
PCS buildout and population coverage requirements. If McLeodUSA
does not comply with these requirements, the FCC could fine
McLeodUSA or revoke its PCS licenses, even after it has spent
substantial amounts to develop a PCS system.
. Enter Into "Roaming" Arrangements. The success of McLeodUSA's PCS
system will depend on its ability to enter into "roaming"
arrangements with other PCS operators throughout the United
States. McLeodUSA has not entered into any such arrangements and
cannot assure you that it will be able to do so.
. Relocate Fixed Microwave Licensees. To secure a sufficient
unencumbered PCS spectrum, McLeodUSA may need to move
approximately 19 microwave licensees to a different spectrum. The
time and expense of negotiating with and relocating these
microwave licensees could adversely affect McLeodUSA's proposed
PCS system.
McLeodUSA's success in implementing and operating a PCS system will also
depend on a number of factors beyond McLeodUSA's control, including:
. changes in communications service rates charged by other
companies
. changes in the supply and demand for PCS services due to
competition with other wireline and wireless operators in the
same geographic area
. changes in the federal, state or local regulatory requirements
affecting the operation of PCS systems
. changes in PCS or competing wireless technologies that could
render obsolete the technology and equipment McLeodUSA chooses
for its PCS system
15
DEPENDENCE ON KEY PERSONNEL.
McLeodUSA's future success depends on the continued employment of its
senior management team, particularly Clark E. McLeod, McLeodUSA's Chairman and
Chief Executive Officer, and Stephen C. Gray, McLeodUSA's President and Chief
Operating Officer. McLeodUSA does not have term employment agreements with these
employees.
McLeodUSA believes its success also depends in large part on its ability to
attract, develop, motivate and retain experienced and innovative management. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on McLeodUSA's
business, results of operations and financial condition.
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY.
To obtain access to rights-of-way needed to install its fiber optic cables,
McLeodUSA must reach agreements with state highway authorities, local
governments, transit authorities, local exchange carriers, other utilities,
railroads, interexchange carriers and other parties. The loss of any of its
rights-of-way could have a material adverse effect on McLeodUSA's business,
results of operations and financial condition. For example, McLeodUSA may need
to spend significant sums to remove and relocate its facilities.
RAPID TECHNOLOGICAL CHANGES.
Communications technology is changing quickly. Unexpected developments, or
McLeodUSA's failure to adapt to them, could have a material adverse effect on
McLeodUSA's business, results of operations and financial condition.
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS.
As of September 30, 1998, IES Investments Inc. ("IES"), MHC Investments
Inc. ("MHC"), Richard A. Lumpkin and various trusts for the benefit of his
family, Clark and Mary McLeod, and McLeodUSA's directors and executive officers
beneficially owned approximately __% of the outstanding McLeodUSA Common Stock.
These stockholders can collectively control management policy and all corporate
actions requiring a stockholder vote, including election of the Board of
Directors. IES, MHC, Mr. Lumpkin and various trusts for the benefit of his
family, and Mr. and Mrs. McLeod have entered into various voting agreements for
the election of directors and other matters. The fact that these stockholders
hold so much McLeodUSA Common Stock could make it more difficult for a third
party to acquire McLeodUSA. McLeodUSA's certificate of incorporation contains
provisions that may have the same effect.
SIGNIFICANT DEBT.
McLeodUSA has substantial debt. As of September 30, 1998, as adjusted to
reflect McLeodUSA's October 1998 debt offering as if it had occurred on that
date, McLeodUSA had $1.2 billion of long-term debt and $483.7 million of
stockholder's equity. As a result, McLeodUSA expects its fixed charges to exceed
its earnings for the foreseeable future. This amount of debt could adversely
affect McLeodUSA in a number of ways, including:
. limiting its ability to obtain necessary financing in the future
. limiting its flexibility to plan for, or react to, changes in its
business
. requiring it to use a substantial portion of its cash flow from
operations to pay debt rather than for other purposes, such as
working capital or capital expenditures
. making it more highly leveraged than some of its competitors,
which may place it at a competitive disadvantage
. making it more vulnerable to a downturn in its business
RESTRICTIVE COVENANTS IMPOSED BY INDENTURES.
The indentures that govern the terms of McLeodUSA's debt impose operating
and financial restrictions that limit its discretion on certain
16
business matters. These restrictions limit or prohibit McLeodUSA's ability to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. create liens
. enter into transactions with affiliates or related persons
. sell assets
. consolidate, merge or sell all or substantially all of its assets
These restrictions could make it more difficult for McLeodUSA to expand,
finance its operations or engage in other business activities that may be in its
interest.
COMPETITION.
Wireline Competition. McLeodUSA faces intense competition from incumbent
local exchange carriers, including U S WEST, Ameritech, SBC and GTE. These
companies currently dominate their local telecommunications markets.
McLeodUSA's long distance services compete with hundreds of other companies
in the long distance marketplace. Three major competitors, AT&T, MCI WorldCom
and Sprint, dominate the long distance market. AT&T, MCI WorldCom and Sprint
have also indicated their intention to offer local telecommunications services,
either directly or in conjunction with competitive access providers or cable
television operators.
Other competitors may include cable television companies, competitive
access providers, microwave and satellite carriers, wireless telecommunications
providers, teleports, private networks owned by large end-users, and
telecommunications management companies.
These and other firms may enter the small and mid-sized markets where
McLeodUSA focuses its sales efforts. Many of McLeodUSA's existing and potential
competitors have financial and other resources far greater than those of
McLeodUSA.
The trend toward business combinations and strategic alliances may
strengthen certain of McLeodUSA's competitors. For example, WorldCom acquired
MCI in September 1998. AT&T acquired Teleport Communications Group Inc. in July
1998, and announced plans in June 1998 to acquire Tele-Communications, Inc. In
addition, merger plans have been announced by:
1) SBC and Ameritech
2) BellAtlantic and GTE
U S WEST and Ameritech also announced in May 1998 that each had entered into a
marketing arrangement with Qwest Communications, a long distance company. The
FCC ruled these marketing arrangements violate the Telecommunications Act, but
both U S WEST and Ameritech have appealed this ruling. If these or other
competitors enter into alliances or combinations it could put McLeodUSA at a
significant disadvantage.
The Telecommunications Act provides the incumbent local exchange carriers
with new competitive opportunities. It will permit the RBOCs, upon the
satisfaction of certain conditions, to offer out-of-region long distance
services to customers in their respective regions. In December 1997, the U.S.
District Court for the Northern District of Texas ruled certain of these
conditions unconstitutional. In September 1998, the U.S. Fifth Circuit Court of
Appeals reversed the District Court decision. In October 1998, the U.S. Supreme
Court announced it would review the matter. If ultimately upheld, the District
Court's decision would permit the RBOCs to offer out-of-region long distance
service without first demonstrating they have opened their local market to
competitors like McLeodUSA. The RBOCs could then duplicate McLeodUSA's strategy
of offering bundled local and long distance services. Additional competition
from the RBOCs could have a material adverse effect on McLeodUSA's business,
results of operations and financial condition.
Wireless Competition. The wireless telecommunications industry is
experiencing significant technological change. McLeodUSA
17
believes the market for wireless services will expand significantly as:
. equipment costs decline
. equipment becomes more convenient and functional
. wireless services become more diverse
. technology improves
. new competitors enter the market
McLeodUSA also believes wireless service providers will offer wireline
replacement products that may result in wireless services becoming the
customer's primary means of communication. McLeodUSA expects up to eight
wireless competitors in each of its proposed PCS markets. McLeodUSA could face
additional competition from mobile satellite services.
Competition with these or other providers of wireless telecommunications
services may be intense. Many of McLeodUSA's potential wireless competitors have
financial and other resources far greater than those of McLeodUSA and have more
experience testing new or improved products and services. In addition, several
wireless competitors operate or plan to operate, through joint ventures and
affiliation arrangements, wireless telecommunications systems that encompass
most of the United States.
SIGNIFICANT GOVERNMENT REGULATION.
McLeodUSA's facilities and services are subject to federal, state and local
regulation. The FCC has jurisdiction over all of McLeodUSA's facilities and
services to the extent they are used for interstate or international
communications. State regulatory commissions retain jurisdiction over the same
facilities and services to the extent they are used for intrastate
communications. Local governments generally require McLeodUSA to obtain licenses
or permits to install and operate its networks in public rights-of-way.
McLeodUSA's proposed wireless system will be subject to varying degrees of
regulation by the FCC, state regulatory commissions and local governments.
McLeodUSA's direct marketing, telemarketing and fund-raising activities are also
subject to federal and state regulatory requirements. Any of the following could
have a material adverse effect on McLeodUSA's business, results of operations
and financial condition:
. failure to maintain proper federal and state tariffs
. failure to maintain proper state certifications
. failure to comply with federal, state or local laws and
regulations
. failure to obtain and maintain required licenses and permits
. burdensome license or permit requirements to operate in public
rights-of-way
. burdensome or adverse regulatory requirements
VOLATILITY OF STOCK PRICE.
The market price of McLeodUSA Common Stock is extremely volatile and has
fluctuated over a wide range. From January 1, 1998 to November 30, 1998, the
McLeodUSA Common Stock has traded as high as $48.3125 per share and as low as
$15.25 per share. The market price may continue to fluctuate significantly in
response to various factors, including:
. low trading volume
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. market conditions in the industry
. announcements by competitors
. regulatory and judicial actions
. general economic conditions
In addition, the stock market has from time to time experienced significant
price and volume fluctuations unrelated to the operating performance of
particular companies. These fluctuations may continue to affect the stock prices
of high growth companies (such as McLeodUSA) in particular. The market price of
the McLeodUSA Common Stock may decline.
YEAR 2000 DATE CONVERSION.
McLeodUSA is currently verifying system readiness for the processing of
date-sensitive information by its computerized information systems. The Year
2000 problem impacts
18
computer programs and hardware timers using two digits (rather than four) to
define the applicable year. Some of McLeodUSA's programs and timers that have
time-sensitive functions may recognize a date using "00" as the year 1900 rather
than 2000, which could result in miscalculations or system failures.
McLeodUSA is reviewing its information technology ("IT") and non-IT
computer systems and programs to determine which are not capable of recognizing
the Year 2000 and to verify system readiness for the millennium date. The review
includes:
1. increasing employee awareness and communication of Year 2000
issues
2. inventorying hardware, software and data interfaces and
confirming Year 2000 readiness of key vendors
3. identifying mission-critical components for internal systems,
vendor relations and other third parties
4. estimating costs for remediation
5. estimating completion dates
6. correcting/remediating any identified problems
7. replacing systems or components that cannot be made Year 2000
ready
8. testing and verifying systems
9. implementing the remediation plan
10. developing contingency plans
11. training for contingency plans
McLeodUSA has completed more than 90% of the activities required for the first
three steps of this review and more than 55% of the activities required for the
fourth and fifth steps. McLeodUSA is in the initial stages of performing the
activities required to complete the remaining steps and has begun to develop
contingency plans to handle its most reasonably likely worst case Year 2000
scenarios.
McLeodUSA estimates that its Year 2000 readiness costs will not exceed
$11.5 million. McLeodUSA generally expenses these costs as incurred. While
certain costs have been incurred, McLeodUSA has not incurred any material
historical costs for remediation. McLeodUSA does not expect these costs to have
a material adverse effect on its financial position, results of operations or
cash flows.
McLeodUSA's estimate of its Year 2000 readiness costs is a "forward-looking
statement" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Costs, results, performance and
effects of Year 2000 activities described in those forward-looking statements
may differ materially from actual costs, results, performance and effects in the
future due to the interrelationship and interdependence of McLeodUSA's computer
systems and those of its vendors, material service providers, customers and
other third parties.
McLeodUSA has not yet fully identified its most reasonably likely worst
case Year 2000 scenarios. McLeodUSA continues to contact its vendors, suppliers
and third parties with which it has material relationships, regarding their
state of readiness. This activity is focused primarily on mission critical
systems and key business suppliers. Until McLeodUSA has received and analyzed
substantial responses from them it will have difficulty determining its worst
case scenarios.
McLeodUSA has begun to develop contingency plans to handle worst case
scenarios, to the extent they can be identified fully. McLeodUSA intends to
complete its contingency planning after completing its determination of worst
case scenarios. Completion of these activities depends upon the responses to the
inquiries McLeodUSA has made of its major vendors, material service providers
and third parties with which it has material relationships. McLeodUSA has also
begun work on contingency plans for certain systems identified as critical to
its operations.
If McLeodUSA, its major vendors, its material service providers or its
customers fail to address Year 2000 issues in a timely manner, such failure
could have a material adverse effect on McLeodUSA's business, results of
operations and financial condition. McLeodUSA depends on local exchange
carriers, primarily the RBOCs, to provide most of its local and some of its long
distance services. To the extent Ameritech, SBC or U S WEST fail to address Year
2000 issues which might interfere with their ability to fulfill their
19
obligations to McLeodUSA, such interference could have a material adverse effect
on McLeodUSA's future operations. If other telecommunications carriers are
unable to resolve Year 2000 issues, it is likely that we will be affected to a
similar degree as others in the telecommunications industry.
PROHIBITION ON DIVIDENDS.
The indentures governing McLeodUSA's debt prohibit McLeodUSA from paying
cash dividends. Consequently, McLeodUSA does not anticipate paying any dividends
for the foreseeable future.
20
THE SPECIAL MEETING
This Prospectus and Proxy Statement is first being mailed by DTG to the
holders of the DTG Common Stock on or about __________, 1998, and is accompanied
by the notice of the Special Meeting of DTG stockholders and a form of proxy
being solicited by the DTG Board for use at the Special Meeting and at any
adjournments or postponements thereof.
DATE, TIME AND PLACE
The Special Meeting is scheduled to be held on ____________________, 1999,
at _________, local time, at the Irene Public School, 30 E. State Street, Irene,
South Dakota 57037.
MATTERS TO BE CONSIDERED
At the Special Meeting, DTG stockholders will be asked to consider and vote
on a proposal to adopt the Merger Agreement by and among McLeodUSA, Merger Sub
and DTG, and approve the Merger and the transactions contemplated by the Merger
Agreement, and on such other matters as may properly be submitted to a vote at
the Special Meeting. Pursuant to the Merger Agreement, Merger Sub would be
merged with and into DTG and DTG would become a wholly owned subsidiary of
McLeodUSA.
PROXIES
The accompanying form of proxy is for use at the Special Meeting if a DTG
stockholder cannot or does not wish to attend and vote in person. You may
revoke your proxy at any time before it is exercised, by submitting to the
Corporate Secretary of DTG written notice of revocation or a properly executed
proxy with a later date, or by attending the Special Meeting and voting in
person. Written notices of revocation and other communications with respect to
the revocation of proxies should be addressed to Dakota Telecommunications
Group, Inc., P.O. Box 66, 29705 453rd Ave., Irene, South Dakota 57037-0066,
Attention: Corporate Secretary. All shares represented by valid proxies
received, and not revoked before they are exercised, will be voted in the manner
specified in such proxies. If no specification is made, such shares will be
voted in favor of the adoption of the Merger Agreement and approval of the
Merger and the transactions contemplated by the Merger Agreement.
The DTG Board is not currently aware of any other matters which will come
before the Special Meeting. If any other matter should be presented at the
Special Meeting for action, the persons named in the accompanying proxy card
will vote the proxy in their own discretion.
DTG STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
SOLICITATION OF PROXIES
DTG will bear the entire cost of soliciting proxies from the DTG
stockholders including the printing costs of this Prospectus and Proxy Statement
and related materials. In addition to solicitation of the proxies by mail, DTG
will request banks, brokers and other record holders to send proxies and proxy
material to the beneficial owners of DTG Common Stock and secure their voting
instructions. DTG will reimburse such record holders for their reasonable
expenses in so doing. DTG intends to use several of its officers and regular
employees, who will not be specially
21
compensated, to solicit proxies from stockholders, either personally or by
telephone, telegram, facsimile or electronic or United States mail.
RECORD DATE AND VOTING RIGHTS
Pursuant to the provisions of the Delaware General Corporation Law (the
"DGCL") and the bylaws of DTG (the "DTG Bylaws"), holders of record of shares of
DTG Common Stock at the close of business on ___________, 1998 will be entitled
to notice of and to vote at the Special Meeting (the "Record Date"). __________
shares of DTG Common Stock are entitled to vote at the Special Meeting. On the
Record Date, there were approximately __________ record holders of DTG Common
Stock.
Each share of DTG Common Stock entitles its holder to one vote. The
affirmative vote of a majority of the outstanding shares of DTG Common Stock is
required to adopt the Merger Agreement and approve the transactions contemplated
thereby.
Shares of DTG Common Stock present in person at the Special Meeting but not
voting, and shares of DTG Common Stock for which DTG has received proxies but
with respect to which holders of such shares have abstained, will be counted as
present at the Special Meeting for purposes of determining the presence of a
quorum for transacting business. Certain brokers who hold shares of DTG Common
Stock in nominee or "street" name for customers who are the beneficial owners of
such shares are prohibited from giving a proxy to vote shares held for such
customers with respect to the matters to be voted upon at the Special Meeting
without specific instructions from such customers. Shares represented by
proxies returned by a broker holding such shares in "street" name will be
counted for purposes of determining whether a quorum exists, even if such shares
are not voted in matters where discretionary voting by the broker is not allowed
("broker non-votes").
BECAUSE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE TRANSACTIONS
CONTEMPLATED THEREBY REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY
OF THE OUTSTANDING SHARES OF DTG COMMON STOCK, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE SAME EFFECT AS VOTES AGAINST ADOPTION OF THE MERGER AGREEMENT.
ACCORDINGLY, THE DTG BOARD URGES ALL STOCKHOLDERS TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
All of the members of the DTG Board and certain executive officers of DTG
have entered into voting agreements with McLeodUSA pursuant to which such
persons have agreed to vote their shares in favor of the Merger Agreement and
against any competing transaction. The _____ shares of DTG Common Stock subject
to these agreements represent approximately ___% of the outstanding shares of
DTG Common Stock.
For additional information about beneficial ownership of DTG Common Stock
by stockholders owning more than 5% of the DTG Common Stock and by directors and
executive officers of DTG, see "Security Ownership of Certain Beneficial Owners
and Management of DTG."
RECOMMENDATION OF DTG BOARD
The DTG Board has determined that the Merger is fair to DTG and its
stockholders and is in the best interests of DTG and its stockholders, and,
therefore, has approved the Merger Agreement. THE DTG BOARD UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF DTG VOTE FOR ADOPTION OF THE MERGER
AGREEMENT. See "The Merger--Recommendation of the DTG Board and Reasons for the
Merger."
22
THE MERGER
GENERAL
The Board of Directors of McLeodUSA (the "McLeodUSA Board"), the DTG Board
and the Board of Directors of Merger Sub have each unanimously approved the
Merger Agreement, which provides for the merger of Merger Sub with and into DTG,
with DTG as the surviving corporation in the Merger (the "Surviving
Corporation"). Each share of DTG Common Stock outstanding immediately prior to
the Merger (other than shares owned by DTG, McLeodUSA or any direct or indirect
wholly owned subsidiary of McLeodUSA or of DTG) would be converted into the
right to receive a number shares of McLeodUSA Common Stock equal to the Exchange
Ratio (as discussed below). Fractional shares of McLeodUSA Common Stock will not
be issued in connection with the Merger, and DTG stockholders otherwise entitled
to a fractional share would be paid in cash for such fractional share, in the
manner described under "Terms of the Merger Agreement and Related Transactions--
Exchange of Certificates; Fractional Shares."
BACKGROUND OF THE MERGER
In early June 1998, Craig A. Anderson, President and Chief Financial
Officer of DTG, received a telephone call from Steve Gray, President and Chief
Operating Officer of McLeodUSA, in which Mr. Gray suggested that they meet to
discuss areas of mutual interest in the development of advanced fiber optic
networks in South Dakota and the surrounding states. Messrs. Anderson and Gray
agreed to schedule a meeting for June 24, 1998 in DTG's offices in Sioux Falls,
South Dakota. Prior to this time, DTG and McLeodUSA had entered into a joint
construction agreement for the construction of fiber optic cables in and around
Sioux Falls.
On June 24, 1998, Mr. Gray, J. Lyle Patrick, Executive Vice President and
Chief Financial Officer of McLeodUSA, and John Wray, Senior Vice President for
Corporate Development of McLeodUSA, met with Mr. Anderson and Thomas W. Hertz,
Chairman of the Board and Chief Executive Officer of DTG, at DTG's offices in
downtown Sioux Falls. At the meeting, the common regional focus and strategies
of both companies were discussed and the possible synergistic advantages of a
business combination between DTG and McLeodUSA were first introduced. At the
conclusion of the meeting, the parties agreed that it was desirable to pursue
further discussions concerning a possible business combination.
On June 25, 1998, the parties entered into a confidentiality agreement.
Later that day, Mr. Anderson sent Mr. Wray a copy of certain financial
information concerning DTG.
On June 30, 1998, at a regularly scheduled meeting of the DTG Board,
Messrs. Anderson and Hertz informed the Board of their June 24, 1998 meeting and
the interest expressed by McLeodUSA in pursuing a possible business combination
with DTG. The DTG Board authorized Messrs. Anderson and Hertz to proceed with
further discussions with McLeodUSA.
From July 17, 1998 through July 27, 1998, numerous discussions ensued
between Mr. Anderson and various representatives of McLeodUSA concerning the
respective companies' business plans, strategies and financial results.
On July 28, 1998, at a regularly scheduled meeting of the DTG Board, Mr.
Anderson reported to the Board on his various discussions with McLeodUSA
representatives. Following significant discussions, the DTG Board again
authorized Messrs. Anderson and Hertz to proceed with further discussions with
McLeodUSA.
23
On August 3, 1998, Mr. Hertz traveled to McLeodUSA's corporate offices in
Cedar Rapids, Iowa, to meet with Clark McLeod, McLeodUSA's Chairman, and Messrs.
Gray, Patrick and Wray. At that meeting, the parties reaffirmed the common
development plans of the two companies and discussed in greater detail the
synergistic fit of DTG as part of McLeodUSA.
On August 7, 1998, in response to the various issues raised in the August
3, 1998 meeting, Mr. Anderson sent a lengthy memorandum to Messrs. Gray, Wray
and Patrick summarizing DTG's view of how a potential business combination might
proceed. On August 14, 1998, in a meeting at DTG's offices in Sioux Falls,
Messrs. Anderson and Hertz met with Messrs. Gray, Patrick and Wray to review Mr.
Anderson's memorandum and to discuss certain structural issues.
On August 19, 1998, Mr. Anderson sent a memorandum to the DTG Board
summarizing the ongoing discussions with McLeodUSA. That same day, at a meeting
of the Strategic Planning Committee of the DTG Board, Messrs. Anderson and Hertz
reviewed with the committee various issues concerning a potential business
combination with McLeodUSA. These issues were again discussed at the regularly
scheduled meeting of the DTG Board on August 25, 1998. At that meeting, DTG's
outside legal counsel also discussed with the DTG Board various legal and other
issues relating to a possible business combination with McLeodUSA, as well as
various publicly available information on McLeodUSA. Again, the DTG Board
directed DTG's executive management to proceed with further discussions with
McLeodUSA.
On August 26, 1998, Mr. Anderson received a detailed request for documents
and other information from McLeodUSA to assist McLeodUSA in its review and
analysis of DTG. The requested information was compiled and submitted to
McLeodUSA on September 14, 1998.
On September 11, 1998, DTG received a draft of a proposed merger agreement
from McLeodUSA. Review of this draft agreement led to a series of discussions
between Mr. Anderson and Mr. Wray concerning various significant transaction
issues. On September 24, 1998, Mr. Hertz called Mr. Gray to discuss various
open issues, and the parties agreed to meet in Cedar Rapids to discuss these
issues in detail.
On September 28, 1998, Mr. Hertz and William Heaston, DTG's General
Counsel, met with Messrs. Gray, Wray and Patrick in Cedar Rapids to discuss
certain issues raised by the draft merger agreement. Also in attendance at this
meeting were Randall Rings, General Counsel for McLeodUSA, and Tracy Larsen of
Warner Norcross & Judd LLP, outside legal counsel to DTG. Mr. Anderson
participated in the meeting by telephone. Extensive discussions took place at
this meeting.
On September 29, 1998, at a regularly scheduled meeting of the DTG Board,
Messrs. Anderson, Hertz and Heaston reported to the Board on the results of the
due diligence review process and their ongoing discussions with the McLeodUSA
representatives. Mr. Larsen also reviewed the terms of the draft merger
agreement with the DTG Board, and summarized the status of ongoing negotiations.
The DTG Board discussed possible advantages of a business combination with
McLeodUSA, as well as various strategic alternatives. The DTG Board again
directed DTG's executive management to proceed with further negotiations with
McLeodUSA, and authorized the engagement of Duff & Phelps, LLC ("Duff &
Phelps"), a nationally recognized investment banking firm, to render an opinion
as to the fairness from a financial point of view of any offer which might be
forthcoming from McLeodUSA. Duff & Phelps accepted such engagement and
commenced its independent analysis of DTG.
Significant negotiations and discussions ensued between DTG and McLeodUSA
and their respective legal counsel on the terms of the proposed merger
agreement.
On October 6, 1998, representatives of McLeodUSA performed an environmental
survey of DTG's properties. The following week McLeodUSA representatives met
with various representatives of DTG at DTG's facilities to review DTG and its
operations.
24
On October 10, 1998, at a special meeting, the DTG Board met with outside
legal counsel to discuss the status of a possible business combination with
McLeodUSA, as well as various strategic alternatives. At that meeting, the DTG
Board also met with independent financial advisors and reviewed a proposal
concerning the possible private placement of $20 million of preferred stock to
an institutional investor or investors.
Extensive negotiations continued between the parties concerning the terms
of a possible business combination between DTG and McLeodUSA.
During the evening of October 27, 1998, the parties resolved all
substantive terms of the Merger Agreement, and the DTG Board convened to
consider the terms of the Merger Agreement. At this meeting, Duff & Phelps
delivered its opinion to the DTG Board to the effect that the proposed merger
was fair from a financial point of view, and the DTG Board unanimously approved
the Merger Agreement and the Merger. Later that night, the parties signed the
Merger Agreement.
On the morning of October 28, 1998, before the opening of The Nasdaq Stock
Market, a joint press release was issued by McLeodUSA and DTG announcing the
execution of the Merger Agreement and the transactions contemplated by the
Merger Agreement.
DTG and McLeodUSA also entered into a 20-year dark fiber lease agreement
with an aggregate value of $5 million paid by McLeodUSA in advance on October
28, 1998. Revenues under this agreement will be reported on a deferred basis,
resulting in additional revenues in 1998 of approximately $42,000 and
approximately $250,000 per year for the remainder of the lease term.
RECOMMENDATION OF THE DTG BOARD AND REASONS FOR THE MERGER
THE DTG BOARD BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST
INTERESTS OF, DTG AND DTG STOCKHOLDERS. ACCORDINGLY, THE DTG BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT DTG
STOCKHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF
THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
In making its decision to approve the Merger Agreement and to recommend to
the holders of DTG Common Stock that they vote their shares in favor of adoption
of the Merger Agreement, the DTG Board considered a number of factors,
including, among others, the following material considerations:
(i) The directors' familiarity with and review of the business,
financial condition and result of operations of DTG, DTG's competitive position
in its business, and other financial information and general economic
conditions;
(ii) The advantages of a strategic combination with McLeodUSA in
enhancing DTG's product and service offerings, growth prospects and competitive
position;
(iii) The possible alternatives to the Merger including, among others,
continuing to operate DTG as an independent entity and the associated risks;
(iv) The historical values of DTG Common Stock relative to the value
represented by the consideration to be received in the Merger;
(v) The anticipated costs associated with pursuing other strategic
alternatives;
(vi) The directors' belief that the consideration payable in the Merger
represented the highest value per share that could be negotiated with McLeodUSA;
25
(vii) The presentation by Duff & Phelps, including the opinion of Duff &
Phelps to the effect that the proposed merger is fair to the DTG stockholders
from a financial point of view;
(viii) The timing of the transaction and premiums currently reported to be
obtained in comparable transactions;
(ix) That shares of McLeodUSA Common Stock are traded on The Nasdaq
Stock Market while there is no established market for shares of DTG Common
Stock;
(x) The proposed structure of the transaction, including its tax-free
nature;
(xi) The terms and conditions of the Merger Agreement, including, among
others, the right of the DTG Board (i) in connection with the discharge of its
fiduciary duties to DTG and its stockholders, to withdraw, modify or amend its
recommendation to the stockholders to accept the Merger and pursue a competing
transaction with another party, and (ii) in certain circumstances to terminate
the Merger Agreement, and the financial consequences of such termination; and
(xii) The financial condition of McLeodUSA.
The DTG Board also recognized that holders of DTG Common Stock will be
entitled to receive shares of McLeodUSA Common Stock in the Merger, and that
this would allow such holders the opportunity to participate in the benefits, if
any, of increases in the value of McLeodUSA's business and properties following
the Merger. Accordingly, the DTG Board gave consideration to McLeodUSA's future
prospects, as well as its historical results of operations.
The DTG Board did not assign relative weights to the foregoing factors or
determine that any factor was of specific importance relative to any other
factor. Rather, the DTG Board viewed its position and recommendation as being
based on the totality of the information presented to it and considered by it.
The full text of the opinion of Duff & Phelps dated as of October 27, 1998
is attached to this Prospectus and Proxy Statement and is incorporated herein by
reference. A description of the assumptions made, matters considered, analyses
used and limitations on the review undertaken by Duff & Phelps in connection
with the opinion is set forth below under the caption "Opinion of DTG's
Financial Advisor." STOCKHOLDERS ARE URGED TO READ THE OPINION AND THE RELATED
DESCRIPTION IN THEIR ENTIRETY. The DTG Board was aware that Duff & Phelps would
be entitled to receive certain fees described under "Opinion of DTG's Financial
Advisor" in connection with rendering its opinion, regardless of the conclusions
reached and regardless of whether the Merger is consummated.
OPINION OF DTG'S FINANCIAL ADVISOR
Duff & Phelps has rendered a written opinion to the DTG Board to the effect
that, as of October 27, 1998, the proposed Merger is fair to the stockholders of
DTG from a financial point of view. Duff & Phelps' opinion is attached as
Appendix B and is incorporated herein by reference. HOLDERS OF DTG COMMON STOCK
ARE ENCOURAGED TO READ THIS OPINION IN ITS ENTIRETY.
Pursuant to an agreement dated September 29, 1998 (the "Duff & Phelps
Agreement"), Duff & Phelps was engaged by the DTG Board to render an opinion as
to whether the proposed Merger was fair to the stockholders of DTG from a
financial point of view. In rendering the opinion, it was Duff & Phelps'
understanding that DTG was considering a proposed Merger wherein DTG would be
acquired by McLeodUSA, and each share of DTG Common Stock would be exchanged for
0.4328 shares of McLeodUSA Common Stock (the "Exchange Ratio"). Duff & Phelps
further understood
26
that the proposed Merger would be submitted to the stockholders of DTG for
adoption at the Special Meeting.
Duff & Phelps is a nationally recognized investment banking firm that is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and valuations for
corporate and other purposes. The DTG Board retained Duff & Phelps as its
financial advisor on the basis of Duff & Phelps' familiarity with DTG and the
telecommunications industry, its reputation and qualifications, as well as its
experience and expertise in transactions similar to the proposed Merger. Duff &
Phelps has previously provided financial advisory services to the trustee of
DTG's Employee Stock Ownership Plan. No limitations were imposed by the DTG
Board upon Duff & Phelps with respect to the investigations made or procedures
followed by Duff & Phelps.
Duff & Phelps' opinion is directed to the DTG Board only and is directed
only to the fairness of the proposed Merger to the stockholders of DTG from a
financial point of view and does not constitute a recommendation to any of DTG's
stockholders as to how they should vote on any matter at the Special Meeting.
The analysis of the fairness of the Merger assumes that the transaction takes
place on the terms described in the Merger Agreement.
For purposes of its opinion and in connection with its review of the
proposed Merger, Duff & Phelps, among other things: (i) reviewed a draft dated
as of October 22, 1998 of the Merger Agreement, including drafts of exhibits and
schedules thereto; (ii) discussed the history, current operations and future
outlook of DTG as well as the history and terms of the proposed Merger with DTG
management; (iii) reviewed DTG's Form 10-KSB for the year ended December 31,
1997; (iv) reviewed DTG's Form 10-QSB for the period ended June 30, 1998; (v)
reviewed the DTG CLEC Facilities Expansion Plan dated as of July 1998; (vi)
reviewed a Private Placement Memorandum dated as of May 1998 prepared in
conjunction with a proposed offering of DTG's preferred stock; (vii) reviewed a
1998-2002 Development Forecast dated as of May 1998; (viii) reviewed the market
prices and trading activity of the McLeodUSA Common Stock; (ix) reviewed the
McLeodUSA Form 10-K for the year ended December 31, 1997; (x) reviewed the
McLeodUSA Form 10-Q for the period ended June 30, 1998; and (xi) performed such
other reviews and analyses as Duff & Phelps deemed necessary.
In connection with Duff & Phelps' opinion, with DTG's permission and
without any independent verification, Duff & Phelps has relied on the accuracy
and completeness of all the financial and other information reviewed by Duff &
Phelps or furnished or otherwise communicated to Duff & Phelps by DTG or
obtained by Duff & Phelps from publicly available sources. Duff & Phelps has
not made an independent valuation or appraisal of the assets or liabilities of
DTG and has not been furnished with such valuation or appraisal. Any
inaccuracies in the information on which Duff & Phelps relied could materially
affect its opinion.
In conjunction with rendering its written opinion dated October 27, 1998 to
the DTG Board, Duff & Phelps presented a summary of its analysis to the DTG
Board on October 27, 1998. Set forth below is a brief summary of the analyses
performed by Duff & Phelps in reaching its October 27, 1998 opinion.
VALUE OF PROPOSED TRANSACTION. Duff & Phelps examined the history of
trading prices and volume for McLeodUSA Common Stock. Duff & Phelps' analysis
presumed a $30 to $35 per share trading price range for McLeodUSA Common Stock
which implied a $13 to $15 per share price for DTG Common Stock.
COMPARABLE PUBLIC COMPANY ANALYSIS. Duff & Phelps compared selected
financial and other operating ratios for DTG to the corresponding ratios of
certain independent local exchange carriers ("ILEC"), competitive local exchange
carriers ("CLEC") and cable companies. These comparable public companies are
listed in the following table.
27
- ----------------------------------------------------------------------------------------------------------------------
ILEC Group CLEC Group Cable Group
- ----------------------------------------------------------------------------------------------------------------------
Commonwealth Telephone Enterprises, Inc. e. spire Communications, Inc. Cablevision Systems Corp.
Conestoga Enterprises, Inc. GST Telecommunications, Inc. Comcast Corp.
CT Communications, Inc. ICG Communications, Inc. Cox Communications, Inc.
D & E Communications, Inc. Intermedia Communications, Inc. Jones Intercable, Inc.
Roseville Communications Company McLeodUSA Incorporated MediaOne Group, Inc.
Shenandoah Telecommunications Company NEXTLINK Communications, Inc. TCA Cable TV, Inc.
Tele-Communications, Inc.
Time Warner, Inc.
- ----------------------------------------------------------------------------------------------------------------------
Such ratios included: revenue, operating cash flow, net income and
earnings per share ("EPS") growth rates; operating cash flow, earnings before
interest and taxes ("EBIT") and net income margins; returns on assets, invested
capital and equity; total debt to total capital; and value to sales, value to
earnings before interest, taxes, depreciation and amortization ("EBITDA"), value
to invested capital, and value to net property plant and equipment ("PPE"). The
statistics were generally based on financial and operating data up to, at or for
the twelve months ended June 30, 1998 and market prices as of October 16, 1998.
Duff & Phelps compared the typical range of valuation multiples for the
comparable public companies with the valuation multiples for DTG that were
implied by the proposed Merger. The results of this analysis are summarized in
the following table.
- --------------------------------------------------------------------------------------------------------------------
DTG Typical of Comparable Companies
Implied by
Transaction ILEC CLEC Cable
--------------- ---------- ---------- ---------
- --------------------------------------------------------------------------------------------------------------------
Value / Sales 2.4 x 1.9x 3.6x 3.8x 7.4x 4.1x 7.5x
Value / Sales (1) 4.9 x 1.9x 3.6x 3.8x 7.4x 4.1x 7.5x
Value / EBITDA 52.9 x 5.5x 9.3x NM 11.1x 24.5x
Value / Invested Capital 2.3 x 1.2x 2.3x 1.2x 2.7x 1.7x 3.0x
Value / Net PPE 2.9 x 1.6x 3.4x 2.4x 5.0x 3.8x 7.6x
(1) Adjusted for DataNet acquisition
NM = Not meaningful
- --------------------------------------------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS. Duff & Phelps performed a discounted cash
flow analysis of DTG based on the forecasted information provided by DTG's
management. The projected cash flows and terminal value were discounted to
present values as of October 1998, using discount rates ranging from 15% to 17%,
which reflect different assumptions regarding the required rates of return of
lenders as well as holders and prospective buyers of DTG Common Stock. The
terminal value of DTG was estimated by applying a range of multiples to DTG's
projected 2003 EBITDA. The range of present values per fully diluted share of
DTG Common Stock resulting from this analysis was $10 to $13.
LIQUIDATION ANALYSIS. Duff & Phelps performed a business segment analysis
of DTG based on revenue and customer by business line. Representative levels of
revenue were based on annualized latest quarter results (June 1998). Valuation
multiples applied were based on analyst reports, merger transaction data and
other observations. The range of value per fully diluted share of DTG Common
Stock resulting from this analysis was $7 to $12.
No company or transaction used in the above analyses is identical to DTG or
the proposed Merger. Accordingly, an analysis of the results of the foregoing
is not mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other facts that could affect the public trading value of the
companies to which they are being compared.
28
The material analyses performed by Duff & Phelps have been summarized
above. Nonetheless, the summary set forth above does not purport to be a
complete description of the analyses performed by Duff & Phelps. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances. Therefore, such an opinion is
not readily susceptible to a summary description. Duff & Phelps did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to fairness. Rather, in reaching
its conclusion, Duff & Phelps considered the results of the analyses in light of
each other and ultimately reached its opinion based on the results of all
analyses taken as a whole. Duff & Phelps did not place a particular reliance or
weight on any particular analysis, but instead concluded that its analyses,
taken as whole, supported its opinion.
In performing its analyses, Duff & Phelps made numerous assumptions with
respect to DTG's performance, general business and economic conditions and other
matters. The analyses performed by Duff & Phelps are not necessarily indicative
of future actual values or future results, which may be significantly more or
less favorable than suggested by such analyses. The analyses do not purport to
be appraisals or to reflect prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. Duff & Phelps used in its analyses various projections of future
performance prepared by the management of DTG. The projections were based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those assumed in the projections and any
related analyses. Duff & Phelps' opinion does not address the relative merits
of the proposed Merger as compared to any alternative business strategies that
might exist for DTG or the effect of any other business combination in which DTG
might engage.
Pursuant to the terms of the Duff & Phelps Agreement, DTG has agreed to pay
Duff & Phelps a fee of $90,000 for financial advisory services in connection
with the proposed Merger, including the rendering of its opinion. DTG has also
agreed to reimburse Duff & Phelps for reasonable out-of-pocket expenses and to
indemnify Duff & Phelps against certain expenses and liabilities incurred in
connection with the performance of its duties under the Duff & Phelps Agreement.
Duff & Phelps' opinion to the DTG Board was one of many factors taken into
consideration by the DTG Board in making its determination to approve the
proposed Merger. See "Recommendation of the DTG Board and Reasons for the
Merger," on page__.
THE FULL TEXT OF THE OPINION OF DUFF & PHELPS, DATED AS OF OCTOBER 27,
1998, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITS ON THE REVIEW UNDERTAKEN BY DUFF & PHELPS, IS ATTACHED TO THIS
PROSPECTUS AND PROXY STATEMENT AS APPENDIX B, AND IS INCORPORATED HEREIN BY
REFERENCE. DTG STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION IN ITS
ENTIRETY. THE SUMMARY SET FORTH IN THIS PROSPECTUS AND PROXY STATEMENT OF THE
OPINION OF DUFF & PHELPS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINION ATTACHED HERETO.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of DTG's management and the DTG Board may be deemed to have
certain interests in the Merger that are in addition to their interests as DTG
stockholders generally. The DTG Board was aware of these interests and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
29
EMPLOYMENT AGREEMENTS. It is expected that, at the time the Merger
becomes effective (the "Effective Time"), McLeodUSA would enter into employment
agreements ("Employment Agreements") with Thomas W. Hertz, Chairman and Chief
Executive Officer of DTG, Craig A. Anderson, President, Chief Financial Officer
and Treasurer of DTG, William Heaston, Assistant Secretary and General Counsel
of DTG, and Paul Blide, Executive Vice President and Chief Operating Officer of
DTG.
Mr. Hertz's Employment Agreement would provide that he would be employed
following the Effective Time of the Merger on an "at will" basis as Vice
President of McLeodUSA and McLeodUSA Telecommunications Services, Inc., a wholly
owned subsidiary of McLeodUSA ("MTSI"), and as Chairman and Chief Executive
Officer of DTG. Mr. Hertz's base salary would be $120,000 per year. In addition,
Mr. Hertz would receive a bonus of $60,000 for the year ending December 31,
1999, determined in accordance with McLeodUSA's bonus program and, upon signing
his Employment Agreement, Mr. Hertz would be entitled to receive as a bonus
25,000 restricted shares of McLeodUSA Common Stock. Furthermore, Mr. Hertz's
Employment Agreement would provide that he would be granted options ("Initial
Options") to acquire 45,000 shares of McLeodUSA Common Stock not later than 10
days after he signs his Employment Agreement and that he would be granted
options ("Subsequent Options") to acquire 25,000 shares of McLeodUSA Common
Stock on each of the first, second and third anniversaries of his Employment
Agreement. Mr. Hertz's Initial Options would vest at the rate of 20% on each of
the first five anniversaries of such grants and his Subsequent Options would
vest at the rate of 25% on each of the first four anniversaries of such grants.
Mr. Hertz's Employment Agreement would also contain confidentiality,
noncompetition and nonsolicitation provisions. McLeodUSA also agreed to honor
indemnification provisions contained in Mr. Hertz's employment agreement with
DTG.
Mr. Anderson's Employment Agreement would provide that he would be employed
following the Effective Time of the Merger on an "at will" basis as Vice
President of McLeodUSA and MTSI and as President, Chief Financial Officer and
Treasurer of DTG. Mr. Anderson's base salary would be $120,000 per year. In
addition, Mr. Anderson would receive the same bonuses, Initial Options and
Subsequent Options as would be granted to Mr. Hertz. Mr. Anderson's Employment
Agreement would also contain confidentiality, noncompetition and nonsolicitation
provisions. McLeodUSA also agreed to honor indemnification provisions contained
in Mr. Anderson's employment agreement with DTG.
Mr. Heaston's Employment Agreement would provide that he would be employed
following the Effective Time of the Merger until February 28, 2001 (the "Initial
Term") as Associate General Counsel of McLeodUSA and as Vice President and
Corporate Counsel of DTG. Upon expiration of the Initial Term, Mr. Heaston's
employment would be on an "at will" basis. Mr. Heaston's base salary would be
$100,000 per year. Mr. Heaston's Employment Agreement would provide that he
would be granted Initial Options to acquire 10,000 shares of McLeodUSA Common
Stock not later than 10 days after he signs the Employment Agreement. Mr.
Heaston's Initial Options would vest at the rate of 25% on each of the first
four anniversaries of such grants. Mr. Heaston's Employment Agreement does not
provide for Subsequent Options. Mr. Heaston's Employment Agreement would also
contain confidentiality, noncompetition and nonsolicitation provisions.
Mr. Blide's Employment Agreement would provide that he would be employed on
an "at will" basis following the Effective Time of the Merger as Vice President
of McLeodUSA and MTSI and as Executive Vice President of DTG. Mr. Blide's base
salary would be $110,000 per year. In addition, Mr. Blide would receive a bonus
of $30,000 for the year ending December 31, 1999. Mr. Blide's Employment
Agreement would provide that he would be granted Initial Options to acquire
20,000 shares of McLeodUSA Common Stock not later than 10 days after he signs
the Employment Agreement and that he would be granted Subsequent Options to
acquire 10,000 shares of McLeodUSA Common Stock on the first anniversary of his
Employment Agreement. Mr. Blide's Initial Options would vest at the rate of 20%
on each of the first five anniversaries of such grants and his Subsequent
Options would vest at the rate of 25% on each of the first four anniversaries of
such
30
grants. Mr. Blide's Employment Agreement would also contain confidentiality,
noncompetition and nonsolicitation provisions.
The exercise price for all of the Initial Options and Subsequent Options
described above would be established in accordance with McLeodUSA's 1996
Employee Stock Option Plan to be the higher of the fair market value of the
shares of McLeodUSA Common Stock on the trading day immediately preceding the
grant date or the average trading value of such stock during the 30 trading days
immediately preceding the grant date. All options will be subject to the terms
of McLeodUSA's 1996 Employee Stock Option Plan.
BONUSES. Upon consummation of the Merger, the officers and employees of
DTG will be paid bonuses not to exceed $500,000 in the aggregate. Mr. Hertz and
Mr. Anderson will not participate in these bonuses. The allocation of the bonus
pool among DTG officers and employees has not yet been determined.
ADVISORY COMMITTEE COMPENSATION. As discussed in "Terms of the Merger
Agreement and Related Transactions--Management After the Merger" on page ___,
McLeodUSA and DTG have agreed that following the Effective Time an advisory
committee will be established by and provide certain consulting services to the
Board of Directors of the Surviving Corporation at its request and direction.
Each person accepting such a position on the advisory committee, which generally
will consist of the current members of the DTG Board and Edward D. Christiansen,
Jr., would receive as compensation (1) a one-time grant of an option to purchase
2,000 shares of McLeodUSA Common Stock with such option vesting at a rate of 25%
per year and (2) a quarterly fee of $2,000, plus reimbursement for reasonable
out-of-pocket travel expenses incurred in connection with service on the
advisory committee. In addition, each member of the advisory committee will be
entitled to participate, at such member's expense, in the medical and health
insurance plans of the Surviving Corporation as in effect from time to time, to
the extent permitted by the terms of such plans. DTG and McLeodUSA have agreed
that the advisory committee will continue until the fifth anniversary of the
Effective Time unless terminated earlier by decision of McLeodUSA and the
unanimous vote of the advisory committee.
STOCK-BASED RIGHTS. Pursuant to the terms of certain DTG stock option
agreements and in connection with the Merger, certain stock options held by
Messrs. Hertz, Anderson, Blide and Heaston will become fully vested and
exercisable at the Effective Time. The number of stock options to acquire
shares of DTG Common Stock held by each of Messrs. Hertz and Anderson that will
become fully vested and exercisable as a result of the transactions contemplated
by the Merger Agreement is 140,180 (of which, 123,980 have an exercise price of
$6.19 per share and 16,200 have an exercise price of $12.50 per share). The
number of stock options to acquire shares of DTG Common Stock held by Messrs.
Blide and Heaston is 10,100 and 5,100, respectively, all of which have an
exercise price of $12.50 per share. The stock options shall become options to
purchase shares of McLeodUSA Common Stock and the number of shares of McLeodUSA
Common Stock subject to these options will be adjusted for the Exchange Ratio as
discussed in "Terms of the Merger Agreement and Related Transactions--Conversion
of DTG Common Stock and Conversion-Merger Rights; Treatment of Options."
INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE. McLeodUSA has agreed
that for the period from the Effective Time until at least six years after the
Effective Time, (1) it will cause the Surviving Corporation to maintain and to
honor (including, without limitation, by providing the Surviving Corporation
with sufficient funding) DTG's current directors' and officers' insurance and
indemnification policy and related arrangements, or an equivalent policy and
related arrangements, for all present and former directors and officers of DTG,
covering claims made and insurable events occurring prior to or within six years
after the Effective Time (provided that the Surviving Corporation will not be
required to maintain such policy except to the extent that the aggregate annual
cost of maintaining such policy is not in excess of 200% of the current annual
cost, in which case the Surviving Corporation shall maintain such policies up to
an annual cost of 200% of the current annual cost); and (2) it will cause the
Surviving Corporation to maintain and to honor
31
(including, without limitation, by providing the Surviving Corporation with
sufficient funding) indemnification provisions, including, without limitation,
provisions for expense advances, for present and former officers and directors
in the Surviving Corporation's certificate of incorporation and bylaws and
certain agreements to the fullest extent permitted by Delaware law. McLeodUSA
has also agreed to, or to cause the Surviving Corporation to, indemnify and hold
harmless, from and after the Effective Time, to the full extent that the
Surviving Corporation would be permitted by applicable law (and as to matters
arising from or relating to the Merger Agreement and the possible change in
control of DTG, to the full extent that McLeodUSA would be permitted under
applicable law), each present or former officer or director of DTG against any
losses, claims, damages, liabilities, costs, expenses (including reasonable
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation to which such person
is, or is threatened to be made, a party by reason of the fact that such person
is or was a director, officer, employee or agent of DTG, or is or was serving at
the request of DTG as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other entity, except that
neither DTG nor McLeodUSA or the Surviving Corporation will be liable for any
settlement effected without its prior written consent (which consent may not be
unreasonably withheld).
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting.
McLeodUSA will be deemed the acquiror for financial reporting purposes. Under
the purchase method of accounting, the purchase price in the Merger is allocated
among DTG assets acquired and DTG liabilities assumed to the extent of their
fair market value, with any excess purchase price being allocated to goodwill.
Due to the size of McLeodUSA relative to the purchase price, the purchase method
of accounting and the related amortization of goodwill will have an immaterial
effect on McLeodUSA's financial statements.
LISTING ON THE NASDAQ STOCK MARKET
McLeodUSA has agreed to cause the shares of McLeodUSA Common Stock to be
issued in the Merger to be approved for listing on The Nasdaq Stock Market. It
is a condition to the consummation of the Merger that such shares of McLeodUSA
Common Stock be authorized for listing on The Nasdaq Stock Market, subject to
official notice of issuance.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules and regulations promulgated thereunder (the "HSR Act") by the FTC,
the Merger may not be consummated until notifications have been given and
certain information has been furnished to the FTC and the Antitrust Division of
the Department of Justice (the "Antitrust Division") and specified waiting
period requirements have been satisfied. McLeodUSA and DTG filed premerger
notification and report forms with the FTC and the Antitrust Division on
November 6, 1998 and were granted early termination of the waiting period by the
FTC on November 19, 1998.
However, at any time before or after the Effective Time, the Antitrust
Division, the FTC or a private person or entity could seek under antitrust laws,
among other things, to enjoin the Merger or to cause McLeodUSA to divest itself,
in whole or in part, of the Surviving Corporation or of certain businesses
conducted by the Surviving Corporation. There can be no assurance that a
challenge to the Merger will not be made or that, if such a challenge is made,
McLeodUSA will prevail. The obligations of McLeodUSA and DTG to consummate the
Merger are subject to the condition that the applicable waiting period under the
HSR Act shall have expired without action by the Antitrust Division or the FTC
to prevent consummation of the Merger. See "Conditions to Consummation of the
Merger" and "Termination of the Merger Agreement; Effects of Termination."
32
In connection with the Merger, McLeodUSA will be required to submit
regulatory notices and may be required to take further actions in one or more of
the states in which McLeodUSA and its subsidiaries operate including the
Minnesota Public Utilities Commission. In some instances, these regulatory
notices and/or actions are required to be filed or taken a specified period in
advance of the Effective Time of the Merger. In addition, while not required,
McLeodUSA intends to provide courtesy notices prior to the Effective Time to
government entities which have issued certain licenses, certifications and
similar telecommunications regulatory approvals to McLeodUSA and its
subsidiaries. McLeodUSA and DTG believe that any material regulatory approvals
will be obtained in the normal course; however, there can be no assurance that
all such approvals will be obtained by the Effective Time. McLeodUSA and DTG are
aware of no other governmental or regulatory approvals required for consummation
of the Merger, other than compliance with applicable federal and state laws
referred to above.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax consequences of the Merger to holders of DTG Common Stock who hold
DTG Common Stock as a capital asset (generally, property held for investment)
within the meaning of Section 1221 of the United States Internal Revenue Code of
1986, as amended (the "Code"). This discussion does not address the individual
tax consequences to any holder of DTG Common Stock whose tax consequences may be
affected by such person's individual circumstances, including without limitation
insurance companies, financial institutions, dealers in securities, holders that
are not citizens or residents of the United States, tax-exempt entities and
holders that acquired DTG Common Stock upon the exercise of employee stock
options or otherwise as compensation. The discussion, moreover, does not address
any consequences arising under any state, local or foreign laws. Finally, the
tax consequences to holders of stock options or restricted stock are not
discussed. The following discussion is based on the Code, the United States
Department of Treasury regulations promulgated thereunder, and administrative
rulings and court decisions as of the date of this Prospectus and Proxy
Statement. All of the foregoing are subject to change, possibly with a
retroactive effect, and any such change could affect the accuracy of the
following discussion. No ruling has been or will be sought from the IRS
concerning the tax consequences of the Merger. Holders of DTG Common Stock are
urged to consult their tax advisors regarding the tax consequences of the Merger
to them, including the effects of United States federal, state, local, foreign
and other tax laws.
Warner Norcross & Judd LLP, counsel to DTG, has delivered to DTG an
opinion, dated on or about the date of this Prospectus and Proxy Statement, to
the effect that, for United States federal income tax purposes,
(i) the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code;
(ii) no gain or loss will be recognized by holders of DTG Common Stock
upon the exchange of their DTG Common Stock solely for shares of McLeodUSA
Common Stock pursuant to the Merger, except with respect to cash, if any,
received in lieu of fractional shares of McLeodUSA Common Stock;
(iii) the aggregate tax basis of the McLeodUSA Common Stock received by
the holders of DTG Common Stock pursuant to the Merger (including fractional
shares of McLeodUSA Common Stock for which cash is received) will be the same as
the aggregate tax basis of the DTG Common Stock exchanged therefor;
(iv) the holding period of the McLeodUSA Common Stock in the hands of the
former holders of DTG Common Stock will include the holding period of such
stockholders' DTG Common Stock exchanged therefor pursuant to the Merger; and
33
(v) a holder of DTG Common Stock who receives cash in lieu of a
fractional share of McLeodUSA Common Stock will recognize gain or loss equal to
the difference, if any, between such stockholder's tax basis in such fractional
share (as described in clause (iii) above) and the amount of cash received.
Such opinion assumes that the Merger will take place as described in the
Merger Agreement. In rendering such opinion, Warner Norcross & Judd LLP has
relied upon certain facts and customary representations contained in
certificates by officers of DTG and McLeodUSA. This opinion was provided as a
basis for the tax discussion contained in this Prospectus and Proxy Statement
only. It does not satisfy the conditions in the Merger Agreement that DTG and
McLeodUSA each receive tax opinions from their respective counsel as of the
Effective Time.
An opinion of tax counsel does not guarantee favorable tax treatment.
There is a risk that the IRS might determine that DTG and/or holders of DTG
Common Stock must recognize gain or loss for federal income tax purposes in the
Merger. ACCORDINGLY, HOLDERS OF DTG COMMON STOCK ARE STRONGLY URGED TO CONSULT
WITH THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR UNITED STATES FEDERAL,
STATE, LOCAL, OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES OF THE MERGER TO THEM.
RESTRICTIONS ON RESALES BY AFFILIATES
The McLeodUSA Common Stock to be issued to DTG stockholders pursuant to the
Merger Agreement will be freely transferable under the Securities Act of 1933,
as amended (the "Securities Act"), except for shares issued to any person who
may be deemed to be an "affiliate" of DTG within the meaning of Rule 145 under
the Securities Act or who will become an "affiliate" of McLeodUSA within the
meaning of Rule 144 under the Securities Act after the Merger. Shares of
McLeodUSA Common Stock received by persons who are deemed to be DTG affiliates
or who become McLeodUSA affiliates may be resold by such persons only in
transactions permitted by the resale provisions of Rule 145 (permitting limited
sales under certain circumstances) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of DTG generally
include individuals or entities that, directly or indirectly through one or more
intermediaries, control, are controlled by or are under common control with DTG
and may include certain officers, directors and principal stockholders of DTG.
All DTG stockholders who may be deemed to be affiliates of DTG will be so
advised prior to the Effective Time.
It is a condition to the consummation of the Merger that McLeodUSA receive
an agreement from each affiliate of DTG prior to the Effective Time (each, an
"Affiliate Agreement"), pursuant to which each such DTG affiliate shall
undertake not to make any sale of McLeodUSA Common Stock received upon
consummation of the Merger in violation of the Securities Act or the rules and
regulations promulgated thereunder. Generally, this will require that such sales
be made in accordance with Rule 145 under the Securities Act, which in turn
requires that, for specified periods, such sales be made in compliance with the
volume limitations, manner of sale provisions and current information
requirements of Rule 144 under the Securities Act.
The certificates evidencing McLeodUSA Common Stock issued to DTG affiliates
pursuant to the Merger Agreement will bear a legend summarizing the foregoing
restrictions until a sale, transfer or other disposition of such McLeodUSA
Common Stock has been registered under the Securities Act or is made in
compliance with Rule 145 under the Securities Act.
Persons who are not affiliates of DTG may sell their McLeodUSA Common
Stock without restrictions and without the necessity to deliver this Prospectus
and Proxy Statement.
NO APPRAISAL RIGHTS
Under the DGCL, DTG stockholders are not entitled to appraisal rights
pursuant to which such stockholders could dissent from the Merger and obtain
payment for their shares of DTG Common Stock.
34
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The following summary of the material terms and provisions of the Merger
Agreement is qualified in its entirety by reference to the Merger Agreement.
The Merger Agreement is attached as Appendix A to this Prospectus and Proxy
Statement and is incorporated herein by reference.
GENERAL
The Merger Agreement provides that Merger Sub will be merged with and into
DTG at the Effective Time. Pursuant to the Merger Agreement, DTG will become a
wholly owned subsidiary of McLeodUSA. The DTG Board has unanimously approved
the Merger Agreement and the Merger. With certain limited exceptions described
below, each share of DTG Common Stock outstanding at the Effective Time will be
converted pursuant to the Exchange Ratio into the right to receive 0.4328 of a
share of McLeodUSA Common Stock.
In addition, as a result of certain former holders of common stock and
certain former holders of non-allocated capital credit accounts of the Dakota
Cooperative Telecommunications, Inc., a stock-based South Dakota cooperative
association and DTG's predecessor, not exchanging such interests during the
conversion-merger pursuant to which the Cooperative converted to a South Dakota
corporation and then by merger reincorporated in the State of Delaware (the
"Conversion-Merger"), there are currently outstanding certain rights evidenced
by the unexchanged shares of common stock and non-allocated capital credit
accounts of the Cooperative (the "Conversion-Merger Rights") entitling such
former holders to receive shares of DTG Common Stock. Pursuant to the Merger
Agreement, at the Effective Time, each outstanding Conversion-Merger Right
entitling the holder thereof to receive one share of DTG Common Stock will be
converted pursuant to the Exchange Ratio into the right to receive 0.4328 of a
share of McLeodUSA Common Stock. The Merger Agreement provides the maximum
number of shares of McLeodUSA Common Stock issuable pursuant to the Merger shall
be 1,295,000.
This section of the Prospectus and Proxy Statement describes certain
aspects of the Merger, including the material provisions of the Merger
Agreement. Certain capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Merger Agreement.
STRUCTURE OF THE MERGER
Subject to the terms and conditions of the Merger Agreement and in
accordance with the DGCL, at the Effective Time Merger Sub will merge with and
into DTG. DTG will continue its corporate existence under the laws of the State
of Delaware under the name "Dakota Telecommunications Group, Inc." At the
Effective Time, the separate corporate existence of Merger Sub will terminate.
The DTG Certificate of Incorporation will be amended in its entirety to conform
to the certificate of incorporation of Merger Sub and will become the
certificate of incorporation of the Surviving Corporation. The DTG Bylaws will
be amended in their entirety to conform to the bylaws of Merger Sub and will
become the bylaws of the Surviving Corporation.
MANAGEMENT AFTER THE MERGER
Immediately following the Effective Time, the Board of Directors of the
Surviving Corporation will be reconstituted to include a total of five
directors. The initial directors will be:
Name Principal occupation
---- --------------------
Clark E. McLeod Chairman of the Board of Directors and Chief Executive
Officer of McLeodUSA
35
Stephen C. Gray President and Chief Operating Officer of McLeodUSA
J. Lyle Patrick Group Vice President, Chief Financial Officer and
Treasurer of McLeodUSA
Thomas W. Hertz Chairman of the Board of Directors and Chief Executive
Officer of DTG
Craig A. Anderson President and Chief Financial Officer of DTG
Each will hold office in accordance with the certificate of incorporation and
bylaws of the Surviving Corporation. The initial officers of the Surviving
Corporation will be the officers of DTG immediately prior to the Effective Time,
in each case until their respective successors are duly elected or appointed and
qualified. Mr. Hertz and Mr. Anderson will become Vice Presidents of McLeodUSA
after the Merger.
McLeodUSA and DTG have agreed that following the Effective Time an advisory
committee will be established by and provide certain consulting services to the
board of directors of the Surviving Corporation at its request and direction.
McLeodUSA and DTG have further agreed that: (1) those persons serving as members
of the DTG Board as of the date of the Merger Agreement who are also serving as
members of the DTG Board immediately prior to the Effective Time, and (2) Edward
D. Christensen, Jr., will be offered positions on the advisory committee,
provided such individuals do not become employees of McLeodUSA, the Surviving
Corporation or any of McLeodUSA's other subsidiaries following the Effective
Time. See "The Merger--Interests of Certain Persons in the Merger," on page
___.
As discussed in "Interests of Certain Persons in the Merger" on page ___,
it is expected that at the Effective Time, McLeodUSA would enter into Employment
Agreements with Messrs. Hertz and Anderson pursuant to which these persons would
become officers of McLeodUSA after the Merger. The following sets forth certain
biographical information concerning Messrs. Hertz and Anderson:
Thomas W. Hertz (age 52). Mr. Hertz has been Chairman of the Board of
DTG since April 1998 and a director and Chief Executive Officer of DTG
since its formation (February 1997). Mr. Hertz was President of DTG from
February 1997 until April 1998. Mr. Hertz was Chief Executive Officer of
the Cooperative from July 1996 until the Conversion-Merger and was General
Manager of the Cooperative from December 1995 until the Conversion-Merger.
Prior to December 1995, Mr. Hertz was an attorney in private practice with
the law firm of Ulmer, Hertz & Bertsch, P.C.
Craig A. Anderson (age 43). Mr. Anderson has been President of DTG since
April 1998 and a director, Chief Financial Officer and Treasurer of DTG
since its formation (February 1997). From February 1997 until April 1998,
Mr. Anderson was Executive Vice President of DTG. Mr. Anderson was
Executive Vice President - Marketing and Chief Financial Officer of the
Cooperative from January 1, 1997 until the Conversion-Merger. Prior to
January 1, 1997, Mr. Anderson was Vice President - Marketing of the
Cooperative from September 1996 to January 1, 1997. From January 1994 until
September 1996, Mr. Anderson was an independent business consultant and
from May 1994 until December 1995 he attended the University of South
Dakota, earning a Masters of Business Administration and Masters in
Professional Accounting. From November 1992 until January 1994, Mr.
Anderson was a director and Vice President - Chief Financial Officer and
Secretary of the Austad Company (a catalog retailer of golf equipment).
From July 1989 to September 1992, Mr. Anderson served as a director and
Vice President - Chief Financial Officer, General Counsel and Secretary of
Dial-Net, Inc. (a long distance reseller).
36
CONVERSION OF DTG COMMON STOCK AND CONVERSION-MERGER RIGHTS; TREATMENT OF
OPTIONS
At the Effective Time, each issued and outstanding share of DTG Common
Stock, other than shares held in the treasury of DTG, held by McLeodUSA or held
by any direct or indirect wholly owned subsidiary of McLeodUSA or DTG, and each
outstanding Conversion-Merger Right entitling the holder thereof to receive one
share of DTG Common Stock, will be converted into the right to receive a number
of shares of McLeodUSA Common Stock equal to the Exchange Ratio (0.4328),
subject to customary antidilution adjustments as provided in the Merger
Agreement and described below. Because the Exchange Ratio is fixed and because
the market price of McLeodUSA Common Stock is subject to fluctuation, the value
of the shares of McLeodUSA Common Stock that the stockholders of DTG and the
holders of Conversion-Merger Rights will receive in the Merger may increase or
decrease, both before and after the Merger.
Each share of DTG Common Stock held in the treasury of DTG, held by
McLeodUSA or held by any direct or indirect wholly owned subsidiary of McLeodUSA
or of DTG will be canceled and extinguished at the Effective Time without the
payment of any consideration. Each share of common stock of Merger Sub issued
and outstanding immediately prior to the Effective Time will be converted into
and exchanged for one share of common stock of the Surviving Corporation.
If, prior to the Effective Time, the outstanding shares of McLeodUSA
Common Stock are changed into or exchanged for a different number of shares or a
different class as a result of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the nature of the consideration and the Exchange Ratio will be appropriately and
correspondingly adjusted.
Each stock option to acquire DTG Common Stock granted under DTG's 1997
Stock Incentive Plan (the "DTG Stock Plan") or granted to certain officers
independent of the DTG Stock Plan (collectively, the "DTG Stock Options") that
is outstanding and unexercised immediately prior to the Effective Time will be
assumed by McLeodUSA and at the Effective Time will become or be replaced by a
stock option to purchase McLeodUSA Common Stock. In each case, the number of
shares of McLeodUSA Common Stock subject to the new McLeodUSA option will be
equal to the number of shares of DTG Common Stock subject to the DTG Stock
Option multiplied by the Exchange Ratio (and eliminating any fractional share).
The duration and other terms of each such McLeodUSA option (including the option
price per share) will be the same as the prior DTG Stock Option. The DTG Stock
Plan and the DTG Stock Options granted to certain officers independent of the
DTG Stock Plan will become 100% vested at the Effective Time.
EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
McLeodUSA has agreed to deposit with Norwest Bank Minnesota, N.A., or
another bank or trust company selected by McLeodUSA and reasonably acceptable to
DTG (the "Exchange Agent"), as of the Effective Time, for the benefit of the
holders of issued and outstanding shares of DTG Common Stock, certificates
representing the shares of McLeodUSA Common Stock and cash in lieu of any
fractional shares (such certificates and cash, together with any dividends or
distributions with respect thereto, being referred to herein as the "Exchange
Fund") to be issued pursuant to the Merger Agreement in exchange for such
outstanding shares of DTG Common Stock. McLeodUSA has further agreed to reserve
and keep available out of its authorized and unissued McLeodUSA Common Stock, as
of the Effective Time, for the benefit of the holders of outstanding Conversion-
Merger Rights, the number of shares of McLeodUSA Common Stock that will be
sufficient to permit the exercise and exchange in full of all Conversion-Merger
Rights outstanding immediately prior to the Effective Time.
Promptly after the Effective Time, the Exchange Agent will mail a letter of
transmittal to each holder of DTG Common Stock or Conversion-Merger Rights. The
letter of transmittal will
37
contain instructions with respect to (1) the surrender to the Exchange Agent of
certificates representing DTG Common Stock and (2) the surrender to McLeodUSA of
certificates or other instruments representing Conversion-Merger Rights.
YOU SHOULD NOT RETURN DTG COMMON STOCK CERTIFICATES WITH THE ENCLOSED
PROXY NOR SHOULD YOU FORWARD THEM TO THE EXCHANGE AGENT UNLESS AND UNTIL YOU
RECEIVE THE LETTER OF TRANSMITTAL FOLLOWING THE EFFECTIVE TIME. YOU MAY RETURN
CERTIFICATES OR OTHER INSTRUMENTS REPRESENTING CONVERSION-MERGER RIGHTS TO DTG
PRIOR TO THE EFFECTIVE TIME FOR EXCHANGE FOR DTG COMMON STOCK PURSUANT TO THE
CONVERSION-MERGER, BUT YOU SHOULD NOT FORWARD THEM TO MCLEODUSA UNLESS AND UNTIL
YOU RECEIVE THE LETTER OF TRANSMITTAL FOLLOWING THE EFFECTIVE TIME.
Until the certificates representing DTG Common Stock and the certificates
or other instruments representing Conversion-Merger Rights are surrendered for
exchange after the Effective Time, holders of such certificates or other
instruments will accrue but will not be paid dividends or other distributions
declared after the Effective Time with respect to McLeodUSA Common Stock into
which their DTG Common Stock or Conversion-Merger Rights have been converted.
When such certificates or other instruments are surrendered, any unpaid
dividends or other distributions will be paid, without interest. Certificates
representing shares of DTG Common Stock and the certificates or other
instruments representing Conversion-Merger Rights presented after the Effective
Time will be canceled and exchanged for the relevant certificate representing
the applicable number of shares of McLeodUSA Common Stock.
No fractional shares of McLeodUSA Common Stock will be issued to any
holder of DTG Common Stock or Conversion-Merger Rights upon consummation of the
Merger. For each fractional share that would otherwise be issued, the Exchange
Agent (in the case of holders of DTG Common Stock) or McLeodUSA (in the case of
holders of Conversion-Merger Rights) will pay cash in an amount equal to such
fractional share multiplied by the average closing price of McLeodUSA Common
Stock on The Nasdaq Stock Market for the 10 trading days immediately preceding
the closing date of the Merger (the "Closing Date"). No interest will be paid
or accrue on the cash in lieu of fractional shares payable to such holders.
Any portion of the Exchange Fund that remains undistributed one year after
the Effective Time will be delivered to McLeodUSA upon demand. Certificates
representing DTG Common Stock must thereafter be surrendered for exchange to
McLeodUSA. Any shares of McLeodUSA Common Stock, any dividends or other
distributions with respect thereto, and any cash in lieu of fractional shares to
which any holder of DTG Common Stock or Conversion-Merger Rights would otherwise
be entitled pursuant to the Merger which remain unclaimed on the fourth
anniversary of the Effective Time (or such earlier date as such property would
otherwise escheat to or become the property of any governmental entity) will, to
the extent permitted by law, become the property of McLeodUSA. None of
McLeodUSA, Merger Sub, DTG or the Exchange Agent will be liable for any shares
of McLeodUSA Common Stock, dividends or distributions with respect thereto, or
cash in lieu of fractional shares delivered to a public official pursuant to any
abandoned property, escheat or similar laws.
If a certificate representing DTG Common Stock, or a certificate or other
instrument representing Conversion-Merger Rights, has been lost, stolen or
destroyed, the Exchange Agent (in the case of certificates representing DTG
Common Stock) or McLeodUSA (in the case of certificates or other instruments
representing Conversion-Merger Rights) will issue the consideration properly
payable in accordance with the Merger Agreement upon the making of an affidavit
of such loss, theft or destruction by the claimant, and, if required by the
Exchange Agent or McLeodUSA, the posting of a bond as indemnity against any
claim that may be made against McLeodUSA, the Surviving Corporation or the
Exchange Agent with respect to such certificate or instrument.
For a description of the McLeodUSA Common Stock and a description of the
differences between the rights of the holders of DTG Common Stock, on the one
hand, and holders of
38
McLeodUSA Common Stock, on the other, see "McLeodUSA Capital Stock and
Comparison of Stockholder Rights."
EFFECTIVE TIME
The Effective Time will be the date and time of the filing of the articles
of merger to be filed with the Secretary of State of the State of Delaware on
the Closing Date. The Closing Date will occur no later than the fifth business
day after the satisfaction or waiver of the conditions precedent to the Merger
set forth in Article VII of the Merger Agreement. DTG and McLeodUSA each
anticipate that, if the Merger is approved at the Special Meeting, the Merger
will be consummated during the fiscal quarter ending March 31, 1999. However,
the consummation of the Merger could be delayed if there is a delay in obtaining
the requisite Third Party Consents (as defined below). There can be no
assurances as to if or when such consents will be obtained or that the Merger
will be consummated. If the Merger is not consummated by August 15, 1999
(subject to up to 60 days extension by McLeodUSA or DTG), the Merger Agreement
may be terminated by either McLeodUSA or DTG, unless the failure to consummate
the Merger by such date is due to the willful failure of the party seeking to
terminate the Merger Agreement to fulfill any of its obligations thereunder.
See "--Conditions to Consummation of the Merger."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations of DTG, McLeodUSA and
Merger Sub. The respective representations and warranties of the parties will
not survive beyond the Effective Time.
Representations and Warranties of DTG. The Merger Agreement contains
representations and warranties of DTG as to, among other things: (1) the
corporate organization and existence of DTG and its subsidiaries (including that
each is duly organized, validly existing and in good standing with the corporate
power and authority to own, operate and lease its properties and to carry on its
business as currently conducted); (2) ownership by DTG of all outstanding shares
of capital stock of its subsidiaries; (3) the certificate or articles of
incorporation and bylaws of DTG and its subsidiaries; (4) the capitalization of
DTG (including the number of shares of capital stock authorized, the number of
shares and rights to acquire shares outstanding and the number of shares
reserved for issuance); (5) the corporate power and authority of DTG to execute
and deliver the Merger Agreement and related documents and to consummate the
transactions contemplated thereby; (6) the compliance of the Merger Agreement
and related documents with (a) the DTG Certificate of Incorporation and the DTG
Bylaws, (b) applicable laws, and (c) certain material agreements of DTG and its
subsidiaries, including the absence of events of default or acceleration
thereunder; (7) the absence of any required governmental and third-party
consents; (8) the possession and validity of all required licenses, timely
filing of required regulatory reports and compliance with applicable laws by DTG
and its subsidiaries; (9) DTG's financial statements and filings with the SEC
(including that such information is a fair presentation of the financial
condition and results of operations of DTG and its subsidiaries and is in
compliance with GAAP); (10) the absence of undisclosed liabilities; (11) the
absence of certain changes in DTG's business since December 31, 1997; (12) the
absence of material legal proceedings, injunctions and disputes; (13) the
validity of and absence of defaults under, certain debt instruments, leases and
other agreements of DTG and its subsidiaries; (14) compliance with laws relating
to employees or the workplace, and the absence of material disputes with
employees; (15) DTG's employee benefit plans and related matters (including
operation and administration of such plans in accordance with applicable law);
(16) the filing and accuracy of DTG's tax returns; (17) significant customers of
DTG and its subsidiaries; (18) the absence of certain business practices of DTG
and its subsidiaries; (19) insurance; (20) the absence of certain potential
conflicts of interests with employees, directors, officers and significant
stockholders; (21) the collectability of accounts receivable of DTG and its
subsidiaries; (22) the ownership and condition of the real property owned,
operated or used by DTG or any of its subsidiaries; (23) complete and correct
books and records; (24) the title to and condition of material assets owned by
DTG and its subsidiaries; (25) the absence of
39
intellectual property infringement or contests; (26) the receipt by DTG of the
written opinion of its financial advisor to the effect that the consideration to
be received pursuant to the Merger is fair to the stockholders of DTG from a
financial point of view; (27) the adoption by the DTG Board, by unanimous vote,
of a resolution approving the Merger Agreement and the Merger and recommending
adoption of the Merger Agreement and approval of the Merger by the stockholders
of DTG; (28) the vote required to approve the Merger; (29) DTG's and its
subsidiaries' banks and powers of attorney; (30) the validity of voting
agreements entered into by each of the directors and certain executive officers
of DTG; (31) the absence of brokers; (32) the absence of environmental
liabilities; (33) the accuracy and completeness of the information furnished by
DTG; (34) compensation and benefits of all directors and executive officers of
DTG and its subsidiaries; (35) true and complete copies of all documents; (36)
the absence of certain industry practices; (37) the intention of certain
executive officers, each director and certain stockholders of DTG to enter into
affiliate agreements; (38) the amendment of DTG's rights agreement to render it
inapplicable to the Merger; (39) the qualification of the Merger as a
reorganization under Section 368(a) of the Code; (40) the exemption of the
Merger from Section 203 of the DGCL; (41) the absence of appraisal or
dissenter's rights; and (42) DTG's "Year 2000" risk management plans.
Representations and Warranties of McLeodUSA and Merger Sub. The Merger
Agreement contains representations and warranties of McLeodUSA and Merger Sub as
to, among other things: (1) the corporate organization and existence of
McLeodUSA, Merger Sub and McLeodUSA's significant subsidiaries (including that
each is duly organized, validly existing and in good standing with the corporate
power and authority to own, operate and lease its properties and to carry on its
business as currently conducted); (2) the McLeodUSA Certificate of Incorporation
and the McLeodUSA Bylaws and the certificate of incorporation and bylaws of
Merger Sub; (3) the corporate power and authority of McLeodUSA and Merger Sub to
execute and deliver the Merger Agreement and related documents and to consummate
the transactions contemplated thereby; (4) the compliance of the Merger
Agreement and related documents with (a) the McLeodUSA Certificate of
Incorporation and the McLeodUSA Bylaws and the certificate of incorporation and
bylaws of Merger Sub, (b) applicable laws, and (c) certain material agreements
of McLeodUSA, Merger Sub and McLeodUSA's significant subsidiaries, including the
absence of events of default or acceleration thereunder; (5) the absence of any
required governmental and third-party consents; (6) the absence of prior
activities of Merger Sub; (7) the absence of brokers; (8) McLeodUSA's financial
statements and filings with the SEC (including that such information is a fair
representation of the financial condition and results of operations of McLeodUSA
and its consolidated subsidiaries and is in compliance with GAAP); (9) the
authorization and approval for listing on The Nasdaq Stock Market of the
McLeodUSA Common Stock to be issued pursuant to the Merger; (10) the
capitalization of McLeodUSA (including the number of shares of capital stock
authorized, the number of shares and the right to acquire shares outstanding and
the numbers of shares reserved for issuance); (11) the qualification of the
Merger as a reorganization under Section 368(a) of the Code; (12) the absence of
any fact that could be expected to delay obtaining required governmental or
third-party consents; and (13) the accuracy of information furnished by
McLeodUSA and Merger Sub.
BUSINESS OF DTG PENDING THE MERGER; CERTAIN OTHER AGREEMENTS
Pursuant to the Merger Agreement, DTG has agreed to, and to cause each of
its subsidiaries to, (1) conduct its business in the ordinary course consistent
with past practice and (2) use reasonable efforts to maintain and preserve
intact its business organization, employees and business relationships and
retain the services of its officers and key employees. In addition, DTG has
agreed that, except as expressly contemplated by the Merger Agreement or
specified in a schedule thereto, without McLeodUSA's prior written consent, it
will not, and will cause each of its subsidiaries not to, among other things:
(1) (a) increase in any manner the compensation or fringe benefits
of, or pay any bonus to, any director, officer or employee, except for
increases in the ordinary course of business consistent with past practice
to employees who are not directors or officers; (b) grant any severance or
termination pay (other than pursuant to the normal severance practices or
40
existing agreements in effect on the date of the Merger Agreement) to, or
enter into any severance agreement with, any director, officer or employee,
or enter into any employment agreement with any director, officer or
employee; (c) establish, adopt, enter into or amend any benefit plan or
arrangement, except as may be required to comply with applicable law; (d)
pay any benefits exceeding $10,000 in the aggregate not provided for under
any benefit plan or arrangement; (e) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or benefit
plan or arrangement (including the grant of stock options, stock
appreciation rights, stock-based or stock-related awards, performance units
or restricted stock, or the removal of existing restrictions in any benefit
plan or arrangement or agreement or awards made thereunder), except for
grants in the ordinary course of business consistent with past practice or
as required under certain existing agreements, or (f) take any action to
fund or in any other way secure the payment of compensation or benefits
under any agreement, except as required under certain existing agreements;
(2) declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock;
(3) (a) redeem, purchase or otherwise acquire any shares of capital
stock of DTG or any of its subsidiaries or any securities or obligations
convertible into or exchangeable for any shares of capital stock of DTG or
any of its subsidiaries, or any options, warrants or conversion or other
rights to acquire any shares of capital stock of DTG or any of its
subsidiaries or any such securities or obligations, or any other securities
thereof; (b) effect any reorganization or recapitalization; or (c) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of, or
in substitution for, shares of its capital stock;
(4) except (a) in connection with Conversion-Merger Rights, (b) upon
the exercise of DTG Stock Options in accordance with their terms, (c) as
required by the terms of certain existing agreements, or (d) for grants of
DTG Stock Options to directors and new employees in the ordinary course of
business consistent with past practice, to the extent that the aggregate
number of shares of DTG Common Stock issuable under all DTG Stock Options
(whether or not vested) outstanding at any given time does not exceed
400,120, issue, deliver, award, grant or sell, or authorize the issuance,
delivery, award, grant or sale (including the grant of any limitations in
voting rights or other encumbrances) of, any shares of any class of its
capital stock (including shares held in treasury), any securities
convertible into or exercisable or exchangeable for any such shares, or any
rights, warrants or options to acquire, any such shares, or amend or
otherwise modify the terms of any such rights, warrants or options the
effect of which shall be to make such terms more favorable to the holders
thereof;
(5) except as contemplated by certain existing agreements, acquire or
agree to acquire, by merging or consolidating with, by purchasing an equity
interest in or a portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets of any other person (other than the purchase of assets from
suppliers or vendors in the ordinary course of business consistent with
past practice);
(6) sell, lease, exchange, mortgage, pledge, transfer or otherwise
subject to any encumbrance or dispose of, or agree to sell, lease,
exchange, mortgage, pledge, transfer or otherwise subject to any
encumbrance or dispose of, any of its assets, except for sales,
dispositions or transfers in the ordinary course of business consistent
with past practice;
(7) adopt any amendments to its articles or certificate of
incorporation, bylaws or other comparable charter or organizational
documents;
41
(8) make or rescind any express or deemed election relating to taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ended December 31, 1997, except in
either case as may be required by law, the IRS or GAAP;
(9) make or agree to make any new capital expenditure or expenditures
which are not included in DTG's July 1998 CLEC Facilities Expansion Plan
(and, if the Effective Time has not occurred prior to the expiration of
DTG's July 1998 CLEC Facilities Expansion Plan, DTG's subsequent capital
budget, which budget shall have been approved by McLeodUSA (such approval
not to be unreasonably withheld)), or which are in excess of $20,000,000 in
equity in the aggregate;
(10) (a) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person (other than DTG or any of its wholly
owned subsidiaries), issue or sell any debt securities or warrants or other
rights to acquire any debt securities of DTG or any of its subsidiaries,
guarantee any debt securities of another person (other than DTG or any of
its wholly owned subsidiaries), enter into any "keep well" or other
agreement to maintain any financial statement condition of another person
(other than DTG or any of its wholly owned subsidiaries) or enter into any
agreement having the economic effect of any of the foregoing, except for
short-term borrowings incurred in the ordinary course of business
consistent with past practice, or (b) make any loans, advances or capital
contributions to, or investments in, any other person other than intra-
group loans, advances, capital contributions or investments between or
among DTG and any of its wholly owned subsidiaries and other than the
extension of credit to customers of DTG or any of its subsidiaries in the
ordinary course of business consistent with past practice;
(11) pay, discharge, settle or satisfy any claims, liabilities or
obligations (whether absolute or contingent, matured or unmatured, known or
unknown), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, DTG's most recent financial statements or incurred in the
ordinary course of business consistent with past practice, or waive any
material benefits of, or agree to modify in any material respect, any
confidentiality, standstill or similar agreements to which DTG or any of
its subsidiaries is a party;
(12) except in the ordinary course of business consistent with past
practice, waive, release or assign any rights or claims, or modify, amend
or terminate any agreement to which DTG or any of its subsidiaries is a
party;
(13) make any change in any method of accounting or accounting
practice or policy other than those required by GAAP or a governmental
entity;
(14) take any action or fail to take any action which could reasonably
be expected to have a Company Material Adverse Effect (as defined in the
Merger Agreement) prior to or after the Effective Time or an Acquiror
Material Adverse Effect (as defined in the Merger Agreement) after the
Effective Time, or that could reasonably be expected to adversely affect
the ability of DTG or any of its subsidiaries prior to the Effective Time,
or McLeodUSA or any of its subsidiaries after the Effective Time, to obtain
consents of third parties or approvals of governmental entities required to
consummate the transactions contemplated in the Merger Agreement; or
(15) authorize, or commit or agree to do any of the foregoing.
42
DTG has also agreed promptly to take all action necessary in accordance
with the DGCL and the DTG Certificate of Incorporation and the DTG Bylaws to
duly call, give notice of, convene and hold the Special Meeting, and has agreed
to use its reasonable best efforts to solicit from the stockholders of DTG
proxies or consents to adopt the Merger Agreement and approve the Merger,
subject to certain exceptions in the event of a Competing Transaction (as
defined below). DTG has further agreed to mail this Prospectus and Proxy
Statement to its stockholders and the holders of Conversion-Merger Rights
promptly after the registration statement of which this Prospectus and Proxy
Statement forms a part (the "Registration Statement") becomes effective, and to
comply with the proxy solicitation rules and regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") in connection with the
solicitation of proxies from such persons. DTG has agreed to, and to cause each
of its subsidiaries to, give McLeodUSA access to all of its properties,
agreements, books, records and personnel and DTG has agreed to furnish McLeodUSA
with monthly unaudited consolidated financial statements and other information
concerning its business, operations, prospects, conditions, assets, liabilities
and personnel. DTG has further agreed to use its reasonable best efforts to
take the actions required under the South Dakota Codified Laws for the
forfeiture of unclaimed cooperative credits arising from the status of DTG's
predecessor in interest as a cooperative prior to the Conversion-Merger.
Pursuant to the Merger Agreement, DTG and McLeodUSA have agreed not to, and
not to permit any of their subsidiaries to, knowingly take any action that could
result in any of their respective representations and warranties becoming untrue
or any of the conditions to the Merger not being satisfied. DTG and McLeodUSA
have also agreed to use all reasonable efforts promptly to make all filings
under applicable laws and to obtain all authorizations, permits, consents and
approvals of all third parties and governmental entities necessary or advisable
to consummate the transactions contemplated by the Merger Agreement (the "Third
Party Consents"). DTG and McLeodUSA have agreed to use all reasonable efforts to
take all necessary, proper or appropriate actions to consummate the transactions
contemplated by the Merger Agreement.
NO SOLICITATION BY DTG
DTG has agreed to, and to use its reasonable best efforts to cause its
directors, and to cause its officers, employees, representatives, agents and
subsidiaries and their respective directors, officers, employees,
representatives and agents to, immediately cease as of the date of the Merger
Agreement any discussions or negotiations with any person with respect to a
Competing Transaction. DTG has agreed not to, and to cause its subsidiaries not
to, initiate, solicit or encourage (including by way of furnishing information
or assistance), or take any other action to facilitate, any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Competing Transaction, or enter into discussions or furnish any
information or negotiate with any person or otherwise cooperate in any way in
furtherance of such inquiries or to obtain a Competing Transaction, or agree to
or endorse any Competing Transaction, or authorize any of its directors,
officers, employees, agents or representatives to take any such action; except
that the DTG Board may (1) furnish information to, or enter into discussions or
negotiations with, any person in connection with an unsolicited bona fide
written proposal for a Competing Transaction from such person if (a) the DTG
Board, after consultation with and based upon the written advice of independent
legal counsel, determines in good faith that such action is necessary for the
DTG Board to comply with its fiduciary duties to the stockholders of DTG under
applicable law, (b) DTG and such person enter into a confidentiality agreement
in reasonably customary form and terms, and (c) the DTG Board reasonably
believes in its good faith judgment after consultation with independent
financial advisors that such person has the financial ability to consummate a
Competing Transaction; and (2) fail to make or withdraw or modify its
recommendation of the Merger or make or disclose any position or take any other
action if the DTG Board, after consultation with and based on the written advice
of independent legal counsel, determines in good faith that such action is
necessary for the DTG Board to comply with its fiduciary duties to the
stockholders of DTG under applicable law. DTG has agreed (1) promptly to notify
McLeodUSA if any inquiries or proposals that constitute, or may reasonably be
expected to lead to, a Competing Transaction are received by DTG or any of its
subsidiaries, or any of its or their respective directors, officers, employees,
agents,
43
investment bankers, financial advisors, attorneys, accountants or other
representatives, (2) promptly to inform McLeodUSA as to the material terms of
such inquiry or proposal and, if in writing, promptly to deliver or cause to be
delivered to McLeodUSA a copy of such inquiry or proposal (unless the DTG Board,
after consultation with and based upon the written advice of independent legal
counsel, determines in good faith that such delivery would cause the DTG Board
to breach its fiduciary duties to the stockholders of DTG), and (3) to keep
McLeodUSA informed, on a current basis, of the nature of any such inquiries and
the status and terms of any such proposals. For purposes of the Merger
Agreement, "Competing Transaction" means any of the following involving DTG or
its subsidiaries (other than the transactions contemplated by the Merger
Agreement): (1) any merger, consolidation, share exchange, business combination,
or other similar transaction; (2) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 15% or more of the assets of DTG and its
subsidiaries, taken as a whole, or issuance of 15% or more of the outstanding
voting securities of DTG or any of its subsidiaries in a single transaction or
series of transactions; (3) any tender offer or exchange offer for 15% or more
of the outstanding shares of capital stock of DTG or any of its subsidiaries or
the filing of a registration statement under the Securities Act in connection
therewith; (4) any solicitation of proxies in opposition to approval by the
stockholders of DTG of the Merger Agreement or the Merger; (5) any person shall
have acquired beneficial ownership or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under Section 13(d) of the Exchange
Act) shall have been formed after the date of the Merger Agreement which
beneficially owns or has the right to acquire beneficial ownership of, 15% or
more of the then outstanding shares of capital stock of DTG or any of its
subsidiaries; or (6) any agreement or public announcement by DTG or any other
person of a proposal, plan or intention to do any of the foregoing.
STANDSTILL; CERTAIN OTHER AGREEMENTS OF MCLEODUSA
McLeodUSA has agreed that if the Merger Agreement is terminated for any
reason other than as a result of DTG's willful failure to perform any covenant
or agreement or willful breach of any representation or warranty contained in
the Merger Agreement, and subject to payment by DTG of any applicable
termination fees and expenses, then, for a period of three years from the date
of the Merger Agreement, McLeodUSA will not, directly or indirectly, except
pursuant to the Merger Agreement: (1) acquire or agree, offer, seek or propose
to acquire, or cause to be acquired, ownership of 15% or more of DTG's assets or
businesses or 15% or more of the voting securities of DTG, or any other rights
or options to acquire such ownership (including from a third party); (2) seek or
propose to influence or control DTG's management or policies, except that
McLeodUSA may vote any voting securities of DTG owned by it; or (3) enter into
any discussions, negotiations, arrangements or understandings with any third
party with respect to any of the foregoing.
McLeodUSA has agreed to make a capital contribution to the Surviving
Corporation promptly following the closing of the Merger (the "Closing") in the
amount of $20 million. McLeodUSA has also agreed to use its reasonable best
efforts to insure that any shares of McLeodUSA Common Stock issued upon exercise
of the McLeodUSA stock options replacing the DTG Stock Options in the Merger
will be registered under the Securities Act pursuant to a registration statement
on Form S-8 and will be approved for listing (subject to official notice of
issuance) by The Nasdaq Stock Market. McLeodUSA has further indicated its
present intention regarding certain post-Merger operations of the Surviving
Corporation.
INDEMNIFICATION
McLeodUSA has agreed that for the period from the Effective Time until at
least six years after the Effective Time, (1) it will cause the Surviving
Corporation to maintain and to honor (including, without limitation, by
providing the Surviving Corporation with sufficient funding) DTG's current
directors' and officers' insurance and indemnification policy and related
arrangements, or an equivalent policy and related arrangements, for all present
and former directors and officers of DTG, covering claims made and insurable
events occurring prior to or within six years after the Effective Time (provided
that the Surviving Corporation will not be required to maintain such policy
except to
44
the extent that the aggregate annual cost of maintaining such policy is not in
excess of 200% of the current annual cost, in which case the Surviving
Corporation shall maintain such policies up to an annual cost of 200% of the
current annual cost); and (2) it will cause the Surviving Corporation to
maintain and to honor (including, without limitation, by providing the Surviving
Corporation with sufficient funding) indemnification provisions, including,
without limitation, provisions for expense advances, for present and former
officers and directors in the Surviving Corporation's certificate of
incorporation and bylaws and certain agreements to the fullest extent permitted
by the DGCL. McLeodUSA has also agreed to, or to cause the Surviving
Corporation to, indemnify and hold harmless, from and after the Effective Time,
to the full extent that the Surviving Corporation would be permitted by
applicable law (and as to matters arising from or relating to the Merger
Agreement and the possible change in control of DTG, to the full extent that
McLeodUSA would be permitted under applicable law), each present or former
officer or director of DTG against any losses, claims, damages, liabilities,
costs, expenses (including reasonable attorneys' fees), judgments, fines and
amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation to which such person is, or is threatened to be
made, a party by reason of the fact that such person is or was a director,
officer, employee or agent of DTG, or is or was serving at the request of DTG as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other entity, except that neither McLeodUSA nor the
Surviving Corporation will be liable for any settlement effected without its
prior written consent (which consent may not be unreasonably withheld).
CONDITIONS TO CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligation to Effect the Merger. Each party's
obligation to effect the Merger is subject to the satisfaction or waiver, where
permissible, of the following conditions at or prior to the Effective Time:
(1) the Registration Statement shall have become effective and no
stop order suspending its effectiveness shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC;
(2) McLeodUSA shall have received all federal or state securities
permits and other authorizations necessary to issue McLeodUSA Common Stock
in the Merger;
(3) the Merger Agreement and the Merger shall have been adopted and
approved by the requisite vote of the stockholders of DTG;
(4) no governmental entity or court shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, judgment, injunction or other order which is in effect and
prevents or prohibits consummation of the Merger;
(5) the applicable waiting period under the HSR Act shall have
expired or been terminated; and
(6) all consents, waivers, approvals and authorizations required to
be obtained, and all filings or notices required to be made, by McLeodUSA
or DTG prior to consummation of the transactions contemplated in the Merger
Agreement (other than the filing of the articles of merger in accordance
with the DGCL) shall have been obtained from and made with all required
governmental entities, except for such consents, waivers, approvals or
authorizations which the failure to obtain, or such filings or notices
which the failure to make, would not have a Company Material Adverse Effect
or an Acquiror Material Adverse Effect or be reasonably likely to subject
DTG or any of its subsidiaries, McLeodUSA, Merger Sub or any of their
respective directors or officers to criminal liability or substantial
penalties.
45
Conditions to the Obligation of McLeodUSA and Merger Sub to Effect the
Merger. The obligation of McLeodUSA and Merger Sub to effect the Merger is
subject to the satisfaction or waiver, where permissible, of the following
conditions at or prior to the Effective Time:
(1) the representations and warranties of DTG shall be true and
correct as of the date of the Merger Agreement and shall be true and
correct in all material respects (except that where any statement in a
representation expressly includes a standard of materiality, such statement
shall be true and correct in all respects giving effect to such standard)
as of the Closing Date as though made on the Closing Date, except in a
representation or warranty that does not expressly include a standard of a
Company Material Adverse Effect, any untrue or incorrect statements therein
that, considered in the aggregate, do not indicate a Company Material
Adverse Effect, and McLeodUSA shall have received a certificate of the
chief executive officer or chief financial officer of DTG to that effect;
(2) certain updated disclosures by DTG shall not disclose any Company
Material Adverse Effect as compared with the comparable disclosures as of
the date of the Merger Agreement;
(3) DTG shall have performed or complied in all material respects
with all agreements required to be performed or complied with by it under
the Merger Agreement at or prior to the Effective Time, and McLeodUSA shall
have received a certificate of the chief executive officer or chief
financial officer of DTG to that effect;
(4) DTG or its appropriate subsidiary shall have obtained the consent
or approval of each person whose consent or approval is required in
connection with the Merger under any agreement to which DTG or any of its
subsidiaries is a party, except where the failure to obtain any such
consents or approvals, considered in the aggregate, would not have a
Company Material Adverse Effect or an Acquiror Material Adverse Effect;
(5) McLeodUSA shall have received the opinion of Warner Norcross &
Judd LLP as to certain corporate matters, the opinion of David Buechler,
Esq. as to certain South Dakota law matters, and the opinion of Latham &
Watkins as to certain regulatory matters;
(6) there shall not be pending any action, proceeding or
investigation by any governmental entity (a) challenging or seeking
material damages in connection with the Merger or the conversion of DTG
Common Stock into McLeodUSA Common Stock pursuant to the Merger, or seeking
to place limitations on the ownership of shares of DTG Common Stock (or
shares of common stock of the Surviving Corporation) by McLeodUSA or Merger
Sub, (b) seeking to restrain or prohibit the consummation of the Merger or
otherwise limit the right of DTG, any of its subsidiaries, McLeodUSA or any
of its subsidiaries to own or operate all or any portion of the business or
assets of DTG and its subsidiaries, or (c) which otherwise is likely to
have a Company Material Adverse Effect or an Acquiror Material Adverse
Effect;
(7) McLeodUSA shall have received from DTG "cold comfort" letters of
Olsen Thielen & Co. LLC dated the date on which the Registration Statement
becomes effective and the Effective Time, respectively, reasonably
customary in scope and substance for letters delivered by independent
public accountants in connection with similar transactions;
(8) the aggregate of the fractional share interests in McLeodUSA
Common Stock to be paid in cash pursuant to the Merger Agreement shall not
be more than 5% of the maximum aggregate number of shares of McLeodUSA
Common Stock which could be issued as a result of the Merger;
46
(9) McLeodUSA shall have received executed copies of Employment,
Confidentiality and Non-Competition Agreements from certain key employees
of DTG and its subsidiaries;
(10) since December 31, 1997, there shall not have occurred a Company
Material Adverse Effect (or any development that, insofar as reasonably can
be foreseen, is reasonably likely to result in any Company Material Adverse
Effect) not disclosed by DTG in the disclosure schedules to the Merger
Agreement;
(11) McLeodUSA shall have received a signed Affiliate Agreement from
each "affiliate" of DTG (under Rule 145 of the Securities Act); and
(12) McLeodUSA shall have received the opinion of Hogan & Hartson
L.L.P. to the effect that the Merger will not result in taxation to
McLeodUSA or Merger Sub under the Code.
Conditions to the Obligation of DTG to Effect the Merger. The obligation of
DTG to effect the Merger is subject to the satisfaction or waiver, where
permissible, of the following conditions at or prior to the Effective Time:
(1) the representations and warranties of McLeodUSA and Merger Sub
shall be true and correct as of the date of the Merger Agreement and shall
be true and correct in all material respects (except that where any
statement in a representation expressly includes a standard of materiality,
such statement shall be true and correct in all respects giving effect to
such standard) as of the Closing Date as though made on the Closing Date,
except in a representation or warranty that does not expressly include a
standard of an Acquiror Material Adverse Effect, any untrue or incorrect
statements therein that, considered in the aggregate, do not indicate an
Acquiror Material Adverse Effect, and DTG shall have received a certificate
of the chief executive officer or chief financial officer of McLeodUSA to
that effect;
(2) McLeodUSA and Merger Sub shall have performed or complied in all
material respects with all agreements required to be performed or complied
with by them under the Merger Agreement on or prior to the Effective Time,
and DTG shall have received a certificate of the chief executive officer or
chief financial officer of McLeodUSA and Merger Sub to that effect;
(3) DTG shall have received the opinion of Hogan & Hartson L.L.P. as
to certain corporate matters;
(4) there shall not be pending any action, proceeding or
investigation by any governmental entity (a) challenging or seeking
material damages in connection with the Merger or the conversion of DTG
Common Stock into McLeodUSA Common Stock pursuant to the Merger, or (b)
seeking to restrain or prohibit the consummation of the Merger;
(5) DTG shall have received evidence reasonably satisfactory to DTG
that the shares of McLeodUSA Common Stock to be issued in the Merger will
be quoted on The Nasdaq Stock Market immediately after the Effective Time;
(6) DTG shall have received the opinion of Warner Norcross & Judd LLP
to the effect that the Merger will not result in taxation to DTG or the
stockholders of DTG under the Code; and
(7) the average closing price of McLeodUSA Common Stock on The Nasdaq
Stock Market as reported by Nasdaq for the 10 trading days immediately
preceding the Closing Date shall be greater than $10 per share, subject to
adjustment in the event of any stock dividend,
47
subdivision, reclassification, recapitalization, split, combination or
exchange of shares affecting the McLeodUSA Common Stock.
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEE
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the stockholders of DTG:
(1) by mutual written consent of DTG and McLeodUSA;
(2) by McLeodUSA, if there has been a breach by DTG of any of its
representations, warranties, covenants or agreements contained in the
Merger Agreement, or any such representation and warranty shall have become
untrue, in any such case such that the conditions to Closing will not be
satisfied and such breach or condition has not been cured within 10
business days following receipt by DTG of written notice of such breach;
(3) by DTG, if there has been a breach by McLeodUSA or Merger Sub of
any of its representations, warranties, covenants or agreements contained
in the Merger Agreement, or any such representation and warranty shall have
become untrue, in any such case such that the conditions to Closing will
not be satisfied and such breach or condition has not been cured within 10
business days following receipt by McLeodUSA of written notice of such
breach;
(4) by either McLeodUSA or DTG if any decree, permanent injunction,
judgment, order or other action by any court of competent jurisdiction or
any governmental entity preventing or prohibiting consummation of the
Merger shall have become final and non-appealable;
(5) by either McLeodUSA or DTG if the adoption of the Merger
Agreement shall fail to receive the requisite vote by the stockholders of
DTG at the Special Meeting;
(6) by either McLeodUSA or DTG if the Merger shall not have been
consummated by August 15, 1999, except that (a) the Merger Agreement may be
extended not more than 60 days by McLeodUSA or DTG, by written notice to
the other, if the Merger shall not have been consummated as a direct result
of DTG having failed by such date to receive all regulatory approvals or
consents required to be obtained by DTG with respect to the Merger, and (b)
this right to terminate the Merger Agreement will not be available to any
party whose willful failure to fulfill any obligation under the Merger
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date; and
(7) by DTG, if in connection with a proposal for a Competing
Transaction the DTG Board determines in good faith, after consultation with
and based upon the written advice of independent legal counsel, that such
action is necessary for the DTG Board to comply with its fiduciary duties
under applicable law.
In the event of termination of the Merger Agreement, the Merger Agreement
will become void and there will be no liability or obligation on the part of
McLeodUSA, Merger Sub or DTG or any of their respective directors or officers,
and each party will release and waive any claim that may otherwise exist in
connection with the Merger Agreement upon such termination, except for (1)
liability for fraud or any willful or bad faith breach of the Merger Agreement,
(2) the obligation to maintain the confidentiality of certain information, and
(3) the obligation of DTG to pay termination fees in certain circumstances, and
except that no party shall be prevented from challenging the effectiveness of
such termination. DTG has agreed that if it terminates the Merger Agreement
pursuant to clause (7) above: (1) it will promptly, but in no event later than
three business days after such termination, pay to McLeodUSA $500,000; and (2)
(a) if a Competing Transaction is consummated prior to the first anniversary of
such termination, then simultaneously with the
48
consummation of such Competing Transaction it will pay to McLeodUSA $2,000,000,
or (b) if a Competing Transaction is not consummated prior to the first
anniversary of such termination, then on the first anniversary of such
termination it will, at its option, (i) pay to McLeodUSA $2,000,000, or (ii)
issue to McLeodUSA 200,000 shares of DTG Common Stock (subject to adjustment in
certain circumstances) free of any encumbrances.
WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
Waiver. At any time prior to the Effective Time, DTG, McLeodUSA and Merger
Sub may agree to (1) extend the time for the performance of any obligation or
other act required to be performed under the Merger Agreement, (2) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto, and (3) waive
compliance with any of the agreements or conditions contained in the Merger
Agreement subject to applicable law.
Amendment. The Merger Agreement may be amended by DTG, McLeodUSA and Merger
Sub at any time prior to the Effective Time, except that after approval and
adoption of the Merger Agreement by the stockholders of DTG, no amendment may be
made which would reduce the amount or change the type of consideration into
which each share of DTG Common Stock will be converted pursuant to the Merger
Agreement upon consummation of the Merger.
EXPENSES
The Merger Agreement provides that each of McLeodUSA and DTG will pay its
own costs and expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby, including the preparation of the Registration
Statement, this Prospectus and Proxy Statement and all other documents
contemplated by the Merger Agreement, except that expenses incurred in
connection with printing the documents distributed to stockholders of DTG
(including this Prospectus and Proxy Statement) will be paid by DTG and the
registration and filing fees incurred in connection with the Registration
Statement and the listing of the shares of McLeodUSA Common Stock to be issued
in the Merger on The Nasdaq Stock Market, and the fees, costs and expenses
associated with compliance with applicable state securities laws in connection
with the Merger will be paid by McLeodUSA.
VOTING AGREEMENTS
Each of the directors and certain executive officers of DTG have entered
into voting agreements with McLeodUSA and Merger Sub. Under the terms of these
voting agreements, until the date on which the Merger is consummated or the
Merger Agreement is terminated in accordance with its terms, each such person
has agreed, among other things:
(1) to cast all votes attributable to the capital stock of DTG over
which such person has voting power at any annual or special meeting of
stockholders of DTG in favor of the approval and adoption of the Merger
Agreement and approval of the Merger, and against any Competing
Transaction;
(2) to grant to the persons designated by the DTG Board as attorneys-
in-fact or proxies with respect to such meeting, a specific written proxy
to vote all capital stock of DTG which such person is entitled to vote in
favor of the approval and adoption of the Merger Agreement and approval of
the Merger, and against any Competing Transaction;
(3) not to sell, transfer, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the
49
sale, transfer, pledge, encumbrance, assignment or other disposition of,
any shares of capital stock of DTG except to the extent a transferee of
such shares, prior to and as a condition to transfer, executes and delivers
an agreement in substantially the form hereof or such transfer is otherwise
approved in advance in writing by McLeodUSA and Merger Sub;
(4) not to grant any proxies, deposit any shares of capital stock of
DTG into a voting trust or enter into a voting agreement with respect to
any such shares; or
(5) not to voluntarily take any action which would have the effect of
preventing or inhibiting such person from performing his obligations under
the voting agreement.
Pursuant to these voting agreements, the holders of approximately __% of
the shares of DTG Common Stock entitled to vote at the Special Meeting have
agreed to vote in favor of the Merger Agreement. The voting agreements do not
restrict or limit the rights or obligations of any such person solely and
exclusively in such person's capacity as a director of DTG with respect to
failing to make or withdrawing or modifying a recommendation for the Merger or
making or disclosing any position or taking any other action if the DTG Board,
after consultation with and based on the written advice of independent legal
counsel, determines in good faith that such action is necessary for the DTG
Board to comply with its fiduciary duties to the stockholders of DTG under
applicable law.
50
INFORMATION ABOUT MCLEODUSA AND MERGER SUB
GENERAL
McLeodUSA. McLeodUSA provides integrated communications services to business
and residential customers in the Midwestern and Rocky Mountain regions of the
United States. McLeodUSA's integrated communications services include local,
long distance, Internet access, data, voice mail and paging, all from a single
company on a single bill. McLeodUSA believes it is the first communications
provider in most of its markets to offer "one-stop shopping" for
communications services tailored to customers' specific needs.
McLeodUSA's approach makes it easier for both its business and its
residential customers to satisfy their telecommunications needs. It also allows
businesses to receive customized services, such as competitive long distance
pricing and enhanced calling features, that might not otherwise be directly
available on a cost-effective basis. As of September 30, 1998, McLeodUSA served
over 366,800 local lines in 267 cities and towns.
In addition to McLeodUSA's core business of providing competitive local,
long distance and related communications services, it also derives revenue from:
. the sale of advertising space in telephone directories
. incumbent local exchange services in east central Illinois
. communications network maintenance services
. telephone equipment sales, service and installation
. video services
. special access, private line and data services
. telemarketing services
. other communications services, including cellular, operator, payphone
and paging services
In most of its markets, McLeodUSA competes with the incumbent local phone
company by leasing their lines and switches. This allows customers to select
McLeodUSA's local service without changing their existing telephone numbers. In
other markets, primarily in east central Illinois, McLeodUSA operates its own
lines and switches. McLeodUSA provides long distance services by using its own
facilities and leasing capacity from long-haul and local providers. McLeodUSA
is constructing fiber optic networks in Iowa, Illinois, Wisconsin, Indiana,
Missouri, Minnesota, South Dakota and North Dakota to carry additional
communications traffic on its own network.
McLeodUSA wants to be the leading and most admired provider of integrated
communications services in its markets. McLeodUSA is:
. aggressively capturing customer share and generating revenue using
leased network capacity
. concurrently constructing its own network
. migrating customers to its network to provide enhanced services and
reduce operating costs
The principal elements of McLeodUSA's business strategy include:
. Provide integrated communications services. McLeodUSA believes it can
rapidly penetrate its target markets and build customer loyalty by
providing a "bundled" product offering. McLeodUSA intends to add
personal communications services to its current array of integrated
communications services over the next several years.
. Build customer share through branding. McLeodUSA believes it will
create and strengthen brand awareness in its target markets by
branding its communications services with the
51
trade name McLeodUSA in combination with the distinctive black-and-
yellow motif of its directories.
. Provide outstanding customer service. McLeodUSA customer service
representatives are available 24 hours a day, seven days a week, to
answer customer calls. McLeodUSA's customer-focused software and
systems allow its representatives immediate access to its customer and
network data, enabling a rapid and effective response to customer
requests.
. Focus on small and mid-sized markets. McLeodUSA primarily targets
small and mid-sized markets because it believes it can rapidly capture
customer share by providing face to face sales and service support to
its customers before intense competition develops.
. Expand its fiber optic network. McLeodUSA is building a state-of-the-
art digital fiber optic network to deliver multiple services and
reduce operating costs.
. Expand intra-city fiber network build. Within selected cities,
McLeodUSA plans to extend its network directly to its customers'
locations. This will allow McLeodUSA to provide expanded services and
reduce the expense of leasing facilities from the local exchange
carrier.
. Explore acquisitions and strategic alliances. McLeodUSA plans to
pursue acquisitions, joint ventures and strategic alliances to expand
or complement its business.
. Leverage proven management team. McLeodUSA's executive management team
consists of veteran telecommunications managers who successfully
implemented similar customer-focused telecommunications strategies in
the past.
_____________
As of September 30, 1998, McLeodUSA estimated, based on its current
business plan and projections, its aggregate capital requirements through 2001
would be $1.1 billion. McLeodUSA's estimated capital requirements include the
projected cost of:
. building its fiber optic network, including intra-city fiber optic
networks
. expanding operations in existing and new markets
. developing a PCS system
. funding general corporate purposes
McLeodUSA expects to fund these capital requirements with:
. approximately $291.9 million in net proceeds from its senior note
offering in October 1998
. approximately $402.4 million of cash and investments on hand at
September 30, 1998
. a proposed $100.0 million revolving credit facility
. projected operating cash flows of McLeodUSA
The actual amount and timing of McLeodUSA's future capital requirements is
subject to risks and uncertainties and may differ materially from the its
estimates. See "Risk Factors Significant Capital Requirements."
_____________
McLeodUSA's principal executive offices are located at McLeodUSA Technology
Park, 6400 C Street, SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and its
phone number is (319) 364-0000.
Merger Sub. Merger Sub is a Delaware corporation and a wholly owned subsidiary
of McLeodUSA. McLeodUSA formed Merger Sub in October 1998 to facilitate the
Merger. Merger Sub has not
52
transacted any business other than that incident to its formation and the
completion of the Merger. Merger Sub will cease its corporate existence upon
the completion of the Merger.
ADDITIONAL INFORMATION
A detailed description of McLeodUSA's business, executive compensation,
various benefit plans (including stock option plans), voting securities and the
principal holders thereof, certain relationships and related transactions,
financial statements and other matters related to McLeodUSA is incorporated by
reference or set forth in McLeodUSA's Annual Report on Form 10-K for the year
ended December 31, 1997 or on Form 10-Q for the quarter ended September 30,
1998, incorporated herein by reference. Stockholders desiring copies of such
documents may contact McLeodUSA at its address or telephone number indicated
under "Where You Can Find More Information."
53
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The information in the following unaudited table is based on historical
financial information included in McLeodUSA's prior SEC filings. This summary
financial information should be read in connection with this historical
financial information including the notes which accompany such financial
information. This historical financial information has also been incorporated
into this document by reference. See "Where You Can Find More Information" on
page ___. McLeodUSA's audited historical financial statements as of December
31, 1997 and 1996, and for each of the three years ended December 31, 1997 were
audited by Arthur Andersen LLP, independent public accountants.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
PRO FORMA
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5)(8) 1997(6)(7)
-------- -------- ---------- ---------- ---------------- ----------
OPERATIONS STATEMENT
DATA:
Revenue..................... $ 1,550 $ 8,014 $ 28,998 $ 81,323 $ 267,886 $ 475,920
------- -------- -------- -------- ------------- ---------
Operating expenses:
Cost of service............ 1,528 6,212 19,667 52,624 155,430 261,343
Selling, general and
administrative............ 2,390 12,373 18,054 46,044 143,918 215,472
Depreciation and
amortization.............. 235 772 1,835 8,485 33,275 67,654
Other...................... -- -- -- 2,380 4,632 10,191
------- -------- -------- -------- ------------- ---------
Total operating
expenses.................. 4,153 19,357 39,556 109,533 337,255 554,660
------- -------- -------- -------- ------------- ---------
Operating loss.............. (2,603) (11,343) (10,558) (28,210) (69,369) (78,740)
Interest income
(expense), net............. 163 (73) (771) 5,369 (11,967) (49,831)
Other income................ -- -- -- 495 1,426 2,508
Income taxes................ -- -- -- -- -- --
------- -------- -------- -------- ------------- ---------
Net loss.................... $(2,440) $(11,416) $(11,329) $(22,346) $ (79,910) $(126,063)
======= ======== ======== ======== ============= =========
Loss per common
share...................... $ (.17) $ (.53) $ (.40) $ (.55) $ (1.45) $ (2.02)
======= ======== ======== ======== ============= =========
Weighted average
common shares
outstanding................ 14,761 21,464 28,004 40,506 54,974 62,479
======= ======== ======== ======== ============= =========
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------------------
PRO FORMA
1997(1)(5) 1998(9) 1998(7)(10)
------------ -------------- -------------
OPERATIONS STATEMENT
DATA:
Revenue...................... $131,595 $438,642 $ 462,864
-------- -------- ----------
Operating expenses:
Cost of service............. 77,745 239,195 254,021
Selling, general and
administrative............. 86,363 189,579 197,996
Depreciation and
amortization............... 15,708 63,663 68,695
Other....................... 2,689 5,575 5,575
-------- -------- ----------
Total operating
expenses................... 182,505 498,012 526,287
-------- -------- ----------
Operating loss............... (50,910) (59,370) $ (63,423)
Interest income
(expense), net.............. (2,686) (35,519) (50,395)
Other income................. 40 1,789 1,789
Income taxes................. -- -- --
-------- -------- ----------
Net loss..................... $(53,556) $(93,100) ($ 112,029)
======== ======== ==========
Loss per common
share....................... $ (1.02) $ (1.49) $ (1.75)
======== ======== ==========
Weighted average
common shares
outstanding................. 52,752 62,620 63,915
======== ======== ==========
DECEMBER 31, SEPTEMBER 30,1998
-------------------------------------------------------------- -----------------
ACTUAL PRO
---
1993 1994 1995(1) 1996(1)(11) 1997(1)(5)(12) ACTUAL(9) FORMA (13)
------- -------- ----------- ----------- -------------- --------- ---------
BALANCE SHEET DATA:
Current assets....................... $7,077 $ 4,862 $ 8,507 $224,401 $ 517,869 $ 570,784 $ 870,552
Working capital (deficit)............ $5,962 $ 1,659 $(1,208) $185,968 $ 378,617 $ 409,266 $ 699,627
Property and equipment, net.......... $1,958 $ 4,716 $16,119 $ 92,123 $ 373,804 $ 559,317 $ 585,621
Total assets......................... $9,051 $10,687 $28,986 $452,994 $1,345,652 $1,621,564 $2,007,949
Long-term debt....................... -- $ 3,500 $ 3,600 $ 2,573 $ 613,384 $ 939,102 $1,269,895
Stockholders' equity................. $7,936 $ 3,291 $14,958 $403,429 $ 559,379 $ 483,745 $ 529,769
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
PRO FORMA
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7)
------- -------- ----------- ------------- -------------- ------------
OTHER FINANCIAL DATA:
Capital expenditures,
including business
acquisitions........................ $ 2,052 $ 3,393 $14,697 $173,782 $ 601,137 $ 631,383
EBITDA(14)........................... $(2,368) $(10,571) $(8,723) $(17,345) $ (31,462) $ (895)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
PRO FORMA
----------
1997(1) 1998(9) 1998(7)
------------ ------------ ----------
$547,345 $251,253 $255,421
$(32,513) $ 9,868 $ 10,847
54
_________________
(1) The acquisitions of MWR, Ruffalo Cody, McLeodUSA Publishing and CCI in
April 1995, July 1996, September 1996 and September 1997, respectively,
affect the comparability of the historical data presented to the historical
data for prior periods shown.
(2) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(3) Includes operations of Ruffalo Cody from July 16, 1996 to December 31, 1996
and operations of McLeodUSA Publishing from September 21, 1996 to December
31, 1996.
(4) Includes operations of CCI from September 25, 1997 to December 31, 1997.
(5) Reflects the 1997 Senior Discount Note Offering and the 1997 Senior Note
Offering
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997,
operations of DTG from January 1, 1997 to December 31,1997 and certain
adjustments attributable to these acquisitions. Also reflects certain
adjustments attribute to the 1997 Senior Discount Notes, the 1997 Senior
Notes, the March 1998 Senior Notes and the October 1998 Senior Notes
computed as if the 1997 Senior Discount Notes, the 1997 Senior Notes, the
March 1998 Senior Notes and the October 1998 senior Notes had been issued
on January 1, 1997.
(7) The issuance of the 1997 Senior Discount Notes in March 1997, the issuance
of the 1997 Senior Notes in July 1997, the CCI acquisition, the issuance of
the March 1998 Senior Notes in March 1998, the issuance of the October 1998
Senior Notes in October 1998 and the Merger affect the comparability of the
pro forma data presented to the data for prior periods shown.
(8) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997.
(9) Reflects the issuance of the March 1998 Senior Notes on March 16, 1998.
(10) Reflects certain adjustments attributable to the March 1998 Senior Notes,
the October 1998 Senior Notes and the Merger computed as if each had
occurred on January 1, 1998.
(11) Includes Ruffalo Cody and McLeodUSA Publishing, which McLeodUSA acquired on
July 15, 1996 and September 20, 1996, respectively.
(12) Includes CCI, which McLeodUSA acquired on September 24, 1997.
(13) Includes DTG, which McLeodUSA agreed to acquire pursuant to the Merger
Agreement on October 27, 1998, and reflects the net proceeds of the October
1998 Senior Note Offering.
(14) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
55
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to (i) the Merger, (ii) the CCI Acquisition, (iii) the 1997 Senior
Discount Note Offering in March 1997, (iv) the 1997 Senior Note Offering in July
1997, (v) the March 1998 Senior Note Offering in March 1998, and (vi) the
October 1998 Senior Note Offering in October 1998. The Unaudited Pro Forma
Condensed Consolidated Balance Sheet assumes that the Merger and the October
1998 Senior Note Offering were consummated on September 30, 1998. The Unaudited
Pro Forma Condensed Consolidated Statements of Operations reflects the Merger
and the CCI Acquisition using the purchase method of accounting, and assumes
that the Merger and the CCI Acquisition, the 1997 Senior Discount Note Offering,
the 1997 Senior Note Offering, the March 1998 Senior Note Offering, and the
October 1998 Senior Note Offering were consummated at the beginning of the
periods presented. The unaudited pro forma financial information is derived
from and should be read in conjunction with the Consolidated Financial
Statements of the Company and CCI and the related notes thereto incorporated by
reference in this Prospectus and Proxy Statement. The pro forma adjustments are
based upon available information and certain assumptions that management
believes to be reasonable. For purposes of this pro forma presentation, the
1997 Senior Discount Note Offering, the 1997 Senior Note Offering, the March
1998 Senior Note Offering, and the October 1998 Senior Note Offering are
collectively referred to as the "Notes Offerings" and the March 1998 Senior Note
Offering and the October 1998 Senior Note Offering are collectively referred to
as the "1998 Notes Offerings."
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the CCI Acquisition been consummated at the beginning of
the periods presented, nor is it necessarily indicative of future operating
results or financial position.
56
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF SEPTEMBER 30, 1998
ADJUSTMENTS PRO FORMA
----------- ---------
PRO FOR THE FOR THE
--- ------- -------
ADJUSTMENTS FORMA OCTOBER 1998 OCTOBER 1998
----------- ----- ------------ ------------
FOR THE FOR THE SENIOR NOTES SENIOR NOTES
------- ------- ------------ ------------
MCLEODUSA DTG MERGER (1) MERGER OFFERING OFFERING
----------- --------- ------------ ----------- -------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 230,991 $ 1,805 $ -- $ 232,796 $291,875 $ 524,671
Other current assets ....................... 339,793 6,088 345,881 -- 345,881
---------- ------- -------- ---------- -------- ----------
TOTAL CURRENT ASSETS ...................... 570,784 7,893 -- 578,677 291,875 870,552
Property and Equipment ..................... 559,317 26,304 585,621 -- 585,621
Intangible assets .......................... 398,971 6,444 42,714 448,129 -- 448,129
Other assets................................. 92,492 3,030 95,522 8,125 103,647
---------- ------- -------- ---------- -------- ----------
TOTAL ASSETS .............................. $1,621,564 $43,671 $ 42,714 $1,707,949 $300,000 $2,007,949
========== ======= ======== ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current Liabilities: $ 161,518 $ 7,407 $ 2,000 $ 170,925 $ -- $ 170,925
Long-term debt, less current liabilities..... 939,102 30,793 969,895 300,000 1,269,895
Other long-term liabilities ................ 37,199 161 37,360 -- 37,360
---------- ------- -------- ---------- -------- ----------
TOTAL LIABILITIES........................... 1,137,819 38,361 2,000 1,178,180 300,000 1,478,180
---------- ------- -------- ---------- -------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock............................. -- -- -- -- -- --
Common stock .............................. 631 10,980 (10,967) 644 -- 644
Additional paid-in capital.................. 707,022 164 45,847 753,033 -- 753,033
Retained earnings (deficit)................. (220,835) (5,834) 5,834 (220,835) -- (220,835)
Accumulated other comprehensive
income..................................... (3,073) -- -- (3,073) -- (3,073)
---------- ------- -------- ---------- -------- ----------
TOTAL STOCKHOLDERS' EQUITY................ 483,745 5,310 40,714 529,769 -- 529,769
---------- ------- -------- ---------- -------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $1,621,564 $43,671 $ 42,714 $1,707,949 $300,000 $2,007,949
========== ======= ======== ========== ======== ==========
____________
(1) Reflects the preliminary allocation of the net purchase price of DTG to the
assets of DTG that are to be acquired including intangible assets, and
records the issuance of 1,295,000 shares of McLeodUSA Common Stock valued at
$35.54 per share (the average closing price of McLeodUSA Common Stock on The
Nasdaq Stock Market for the eleven trading days beginning five days prior to the
date the Merger Agreement was announced, October 27, 1998, and ending five days
after such announcement). For purposes of allocating the net purchase price
among the various assets to be acquired, McLeodUSA has tentatively considered
the carrying value of the acquired assets to approximate their fair value, with
all of the excess of the net purchase price being attributed to intangible
assets. McLeodUSA intends to more fully evaluate the acquired assets following
consummation of the Merger and, as a result, the allocation of the net purchase
price among the acquired tangible and intangible assets may change. The
adjustments include the elimination of the DTG equity components, including
common stock, treasury stock, other capital, retained deficit and unearned
Employee Stock Ownership Plan shares of DTG Common Stock.
57
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
PRO FORMA CONSOLIDATED
----------------------
ADJUSTMENTS FOR THE COMMUNI- ADJUSTMENTS PRO FORMA
------------- --------- --------- ----------- -----------
FOR THE NOTES NOTES CATIONS FOR CCI FOR CCI
------------- --------- --------- ----------- -----------
MCLEODUSA OFFERINGS OFFERINGS INC.(1) ACQUISITION ACQUISITION
--------- ------------- --------- --------- ----------- -----------
Operations Statement Data:
Revenue........................... $ 267,886 $ -- $ 267,886 $ 194,305 $ -- $ 462,191
--------- ------------- --------- --------- ----------- ---------
Operating expenses:
Cost of service.................. 155,430 -- 155,430 100,364 -- 255,794
Selling, general and
administrative.................. 143,918 -- 143,918 65,063 -- 208,981
Depreciation and amortization.... 33,275 -- 33,275 17,913 10,728(3) 61,916
Other............................ 4,632 -- 4,632 -- 5,559(4) 10,191
--------- ------------- --------- --------- ----------- ---------
Total operating expenses........ 337,255 -- 337,255 183,340 16,287 536,882
--------- ------------- --------- --------- ----------- ---------
Operating income (loss).......... (69,369) -- (69,369) 10,965 (16,287) (74,691)
Interest expense, net............ (11,967) (34,045)(5) (46,012) (2,972) -- (48,984)
Other non-operating income....... 1,426 -- 1,426 1,082 -- 2,508
Income taxes..................... -- -- -- (3,477) 3,477(6) --
--------- ------------- --------- --------- ---------- ---------
Net income (loss)................ $ (79,910) $ (34,045) $(113,955) $ 5,598 $(12,810) $(121,167)
========= ============= ========= ========= ========== =========
Loss per common share............ $ (1.45) $ (2.07) $ (1.98)
========= ========= =========
Weighted average common
shares outstanding.............. 54,974 54,974 61,184
========= ========= =========
Other Financial Data:
EBITDA(7)......................... $ (31,462) $ -- $ (31,462) $ 28,878 $ -- $ (2,584)
---------------------------------
PRO
---------
ADJUSTMENTS FORMA
----------- ---------
FOR THE FOR THE
----------- ---------
THE MERGER(2) MERGER MERGER
------------- ----------- ---------
Operations Statement Data:
Revenue........................... $ 13,729 $ -- $ 475,920
--------- ----------- ---------
Operating expenses:
Cost of service.................. 5,549 -- 261,343
Selling, general and
administrative.................. 6,491 -- 215,472
Depreciation and amortization.... 3,448 2,290(3) 67,654
Other............................ -- -- 10,191
--------- ----------- ---------
Total operating expenses........ 15,488 2,290(3) 554,660
--------- ----------- ---------
Operating income (loss).......... (1,759) (2,290) (78,740)
Interest expense, net............ (847) -- (49,831)
Other non-operating income....... -- -- 2,508
Income taxes..................... 119 (119)(6) --
--------- ----------- ---------
Net income (loss)................ $ (2,487) $ (2,409) $(126,063)
========= =========== =========
Loss per common share............ $ (2.02)
=========
Weighted average common
shares outstanding.............. 62,479
=========
Other Financial Data:
EBITDA(7)......................... $ (1,689) $ -- $ (895)
(Table continued on following page.)
58
McleodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
Nine Months Ended September 30, 1998
------------------------------------
PRO
---
ADJUSTMENTS FORMA PRO
----------- ----- ---
FOR THE 1998 FOR THE 1998 FORMA ADJUSTMENTS
------------ ------------ ----- -----------
NOTES NOTES FOR THE FOR THE
----- ----- ------- -------
MCLEODUSA OFFERINGS OFFERINGS MERGER(8) MERGER TOTAL
---------- --------- --------- -------- ------ -----
Operations Statement Data:
Revenue................................. $ 438,642 $ -- $ 438,642 $ 24,222 $ -- $ 462,864
---------- ------------ ----------- ---------- ---------- ---------
Operating expenses:
Cost of service........................ 239,195 -- 239,195 14,826 -- 254,021
Selling, general and administrative.... 189,579 -- 189,579 8,417 -- 197,996
Depreciation and amortization.......... 63,663 -- 63,663 3,313 1,719(9) 68,695
Other.................................. 5,575 -- 5,575 -- -- 5,575
---------- ------------ ----------- ---------- ---------- ---------
Total operating expenses.............. 498,012 -- 498,012 26,556 1,719 526,287
---------- ------------ ----------- ---------- ---------- ---------
Operating loss......................... (59,370) -- (59,370) (2,334) (1,719) (63,423)
Interest expense, net.................. (35,519) (13,374)(10) (48,893) (1,502) -- (50,395)
Other non-operating income............. 1,789 -- 1,789 -- -- 1,789
Income taxes........................... -- -- -- 8 (8) (6) --
---------- ------------ ----------- ---------- ---------- ---------
Net loss............................... $ (93,100) $ (13,374) $ (106,474) $ (3,828) $ (1,727) $(112,029)
========== ============ =========== ========== ========== =========
Loss per common share.................. $ (1.49) $ (1.70) $ (1.75)
========== =========== =========
Weighted average common 62,620 62,620 63,915
shares outstanding.................... ========== =========== =========
Other Financial Data:
EBITDA(7)............................... $ 9,868 -- $ 9,868 979 $ -- $ 10,847
(1) Includes operations of CCI from January 1, 1997 to September 24, 1997.
(2) Includes operations of DTG from January 1, 1997 to December 31, 1997.
(3) To adjust depreciation and amortization to include amortization of
intangibles acquired in the CCI Acquisition and the Merger. The acquired
intangibles will be amortized over periods ranging from 3 to 30 years.
(4) To recognize the costs associated with the directories in progress at the
time of the CCI Acquisition.
(5) To record the interest expense on the 1997 Senior Discount Notes at 10
1/2%, the 1997 Senior Notes at 9 1/4%, the March 1998 Senior Notes at
83/8% and the October 1998 Senior Notes at 9 1/2% all reduced by an
estimated annual yield of approximately 5% on the net proceeds from
these offerings.
(6) Net income (loss) includes pro forma adjustments for income taxes due to
the availability of net operating loss carryforwards and a valuation
allowance.
(7) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. The Company has included EBITDA
data because it is a measure commonly used in the industry. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
(8) Includes operations of DTG from January 1, 1998 to September 30, 1998.
(9) To adjust depreciation and amortization to include amortization of
intangibles acquired in the Merger. The acquired intangibles will be
amortized over periods ranging from 3 to 30 years.
(10) To record interest expense on the March 1998 Senior Notes at 8 3/8% and
the October 1998 Senior Notes at 9 1/2% reduced by an estimated annual
yield of approximately 5% on the net proceeds from these offerings
59
INFORMATION ABOUT DTG
GENERAL
DTG is a Delaware corporation that was organized in 1997. Its predecessor
was Dakota Cooperative Telecommunications, Inc., a stock-based South Dakota
cooperative association that was formed on April 3, 1952 (as previously defined,
the "Cooperative"). In July 1997, the Cooperative was converted into a South
Dakota business corporation and then merged with and into DTG (as previously
defined, the "Conversion-Merger"). DTG was the surviving corporation in the
Conversion-Merger. The mailing address of the DTG's principal executive office
is Post Office Box 66, 29705 453rd Avenue, Irene, South Dakota 57037-0066, and
the phone number is (605) 263-3301.
BUSINESS
DTG is a diversified communications services company specializing in the
design, construction and operation of broadband telecommunications systems for
communities in South Dakota and the surrounding states. DTG currently operates
13 telephone exchanges in Southeastern South Dakota, four of which were built in
1997, and 26 cable television systems in South Dakota, Iowa and Minnesota
incorporating over 2,240 miles of copper plant, 300 miles of coaxial cable and
approximately 9,100 fiber miles of fiber optic lines. DTG's main growth strategy
is to continue to expand and build new systems in South Dakota, Minnesota, Iowa
and Nebraska.
DTG provides a full range of bundled telecommunications products and
services to its customers including switched local dial tone and enhanced
services, network access services, long distance telephone services, operator
assisted calling services, telecommunications equipment sale and leasing
services, cable television services, Internet access and related services and
computer networking services. DTG's customer base includes approximately 7,350
local service access lines, 5,930 cable television subscribers, 7,200 Internet
users, and over 2,000 active computer networking business customers located
primarily in South Dakota, Northwestern Iowa and Southwestern Minnesota. DTG and
its predecessors have been engaged in the telecommunications business since
1903.
DTG was originally incorporated as a stock cooperative in South Dakota
on April 3, 1952, through the consolidation of several small independent
telephone companies in Southeastern South Dakota. From the date of formation
through 1979, DTG operated principally as a telephone company. Today, DTG
continues these operations and has expanded into cable television and other
related telecommunications services. In 1979, DTG expanded into community
antenna television cable ("CATV") by building cable systems in its local
markets. In the mid-1980s, DTG expanded into the cellular market through
partnerships with cellular companies serving DTG's market area. DTG sold its
rural cellular operations in 1994 and its Sioux Falls, South Dakota cellular
operations in 1995, in an effort to focus on new wireless technologies. DTG
expanded its cable operations in 1995 and 1996, and further expanded with the
acquisitions in 1996 of TCIC Communications, Inc. ("TCIC") (long distance and
operator services), I-way Inc. ("I-way") (Internet services), and in 1997 of
Futuristic, Inc. dba DataNet ("DataNet") (computer network integration
services). All three companies continue to operate as wholly-owned subsidiaries
of DTG under the names DTG Communications, Inc., DTG Internet, Inc. and DTG
DataNet, Inc., respectively. In July 1998 DTG acquired by merger Vantek
Communications, Inc. and Van/Alert, Inc., two South Dakota corporations
(collectively, "Vantek"). Vantek is a leading mobile radio operator and operates
one of the largest paging businesses in South Dakota. Furthermore, in November
1998, DTG completed its acquisition of Hurley Communications, Inc. See
"Information About DTG--Recent Developments." As a result of this expansion,
today DTG is a diversified telecommunications services company,
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offering product and service bundles which currently cannot be matched by any
single competitor in its existing and selected target markets. DTG intends to
continue to explore expansion through strategic acquisitions and business
alliances in an effort to facilitate the growth of DTG.
TELECOMMUNICATIONS INDUSTRY OVERVIEW. From the formation of the telephone
industry in the late 1800s until the breakup of AT&T in 1984, the
telecommunications industry was largely dominated by AT&T through its ownership
and operation of the Bell operating companies. Rural areas which provided little
market share for AT&T were left to be served by small independent telephone
companies like DTG and its predecessors. In 1984, the structure of the industry
was significantly changed by the AT&T divestiture decree, which required the
divestiture by AT&T of its 22 Bell operating companies and divided the country
into 201 local access and transport areas ("LATAs") (the "AT&T Divestiture
Decree"). The Bell operating companies were combined into seven RBOCs and were
permitted to provide local telephone service, local access service to long
distance carriers and long distance ("intra-LATA") service within the LATAs.
However, the Bell operating companies were prohibited from providing inter-LATA
long distance service, or service between LATAs.
The AT&T Divestiture Decree had a profound effect on the long distance
portion of the telecommunications industry in the United States. To encourage
competition in the long distance market, the AT&T Divestiture Decree and certain
FCC regulations require most local exchange companies ("LECs") to provide
carriers with access to local exchange service that is "equal in type, quality
and price" to that provided by AT&T and to allow customers to select their
preferred long distance service provider. As a result, a large number of
companies specializing in long distance services entered the market.
For each long distance call, the originating and terminating local exchange
carriers ("LECs") charge an access fee to the long distance carrier. The long
distance carrier charges its customers a fee for its transmission of the call, a
portion of which covers the cost of the access fees charged by the LECs. Access
charges represent a significant portion of DTG's gross revenues from its local
exchange operations as well as a significant portion of DTG's cost of providing
long distance services. Generally, the FCC and the states regulate such access
charges. The FCC has undertaken a comprehensive review of its regulation of LEC
access charges to better account for increasing levels of local competition.
In February 1996, President Clinton signed the Telecommunications Act. The
Telecommunications Act significantly changed the telecommunications industry by
(among other things) removing certain of the restrictions concerning the
provision of long distance service by the RBOCs. The RBOCs, however, are
required to obtain specific FCC approval and satisfy other conditions, including
a checklist of interconnection and other requirements applicable to LECs, prior
to providing long distance service in the regions in which the LECs provide
local exchange service. In addition, the Telecommunications Act opened local
service telecommunications markets to competition by preempting state and local
laws to the extent that such laws prevent competition in the provision of any
telecommunications service, and by imposing a variety of new duties on LECs to
promote competition in local exchange services. Among other requirements, all
LECs, including DTG, are required, on a non-discriminatory basis, to permit
resale of their telecommunications services without unreasonable restrictions or
conditions. The law and its accompanying regulations will enable DTG, upon
receipt of all necessary regulatory approvals, to resell local
telecommunications services in exchanges outside of DTG's traditional service
territories in addition to its existing long distance services. The basis upon
which such local services will be available to carriers such as DTG for resale
are to be determined in proceedings of various state public utilities
commissions. DTG believes that the opening of the local telecommunications
services market to resellers provides DTG with significant growth opportunities
while posing a much smaller threat in its small rural local exchanges.
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BUSINESS STRATEGY. DTG's business strategy is to attempt to achieve
continued growth through the construction and operation of new broadband
telecommunications systems and by developing and marketing a broad array of
competitively priced telecommunications services over these systems. DTG's
primary objectives in pursuing this strategy are to:
(i) develop new and enhanced products and services through upgrading
DTG's existing network and expanding this network, where feasible,
into new markets. DTG substantially rebuilt its existing network in
1997 and plans to continue expanding this infrastructure;
(ii) expand DTG's sales and marketing activities by increasing its
advertising and promotional activities and enlarging its sales force
to include direct and independent sales representatives. DTG intends
to supplement its sales force by rebuilding its customer support
functions, enhancing its strong field service operations and
improving its direct billing capabilities; and
(iii) expand its revenue base through selected acquisitions of companies
and facilities in the telecommunications and cable television
industries and other related industries.
There can be no assurance that DTG will be successful in implementing its
business strategy or attaining the profitable growth that is desired.
LOCAL TELECOMMUNICATIONS SERVICES. DTG's local telecommunications services
are provided directly by DTG. As of October 31, 1998, DTG provided services to
approximately 7,500 access lines located in Southeastern South Dakota. DTG's
service area is generally rural, covering approximately 1,100 square miles, with
an average of 5.4 access lines per square mile. DTG is classified as a "rural
company" under the Telecommunications Act and receives Universal Service Fund
monies, although such funds constituted less than one percent of DTG's gross
revenues in 1997.
DTG's local telecommunications services include: (i) local dial tone; (ii)
local private line and public telephone services (including dial tone service
for pay telephones owned by DTG and other pay phone providers); (iii) dedicated
and switched data transmission services; (iv) the sale, installation and
maintenance of customer premise equipment; and (v) related services such as
directory listing services. In connection with DTG's continuing strategy to
provide a greater selection of value-added products, DTG has also introduced
advanced services such as Caller ID, distinctive ringing, call waiting, call
forwarding and three-way calling. DTG also introduced its new Distance Learning
program, which links 12 local schools with the University of South Dakota's
School of Education to allow these local schools to share interactive televised
classroom sessions.
In addition to providing local telephone service, DTG also provides network
access services to national and regional interexchange carriers ("IXCs").
Network access service refers to the link provided by LECs between a customer's
premises and the transmission facilities of other telecommunications carriers,
generally inter-LATA long distance carriers. Examples of exchange access
services include switched access and special access services. Network access
revenues are billed directly to long distance carriers based on the number of
conversation minutes generated by their customers located in DTG's exchanges.
The interstate portion of these revenues is based on switched, common-line and
special access tariffs approved by the FCC. The tariffs imposed by the FCC
include end-user access charges to residential and business customers. State
access is based on similar rate structures that are subject to approval by the
South Dakota Public Utilities Commission. Unlike many LECs, DTG does not
provide billing or collection services for interexchange long distance carriers
operating in DTG's local exchanges.
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Local service, including network access services, has historically been
DTG's core business. In 1997, revenues from local services were approximately
$5.4 million, representing approximately 39% of DTG's aggregate revenues. As a
result of DTG's diversification through the acquisitions described above, this
percentage has changed. For the nine months ended September 30, 1998, local
exchange service revenues accounted for only 22% of DTG's total revenues.
Although network bypass and alternative local access telephone service providers
are potential competitive threats to DTG, no significant competition has
occurred to date in DTG's incumbent local exchange communities. Competition is
very active in the new communities DTG enters as part of its CLEC expansion
strategy.
LONG DISTANCE TELECOMMUNICATION SERVICES. DTG provides a wide range of
long distance telecommunications services to approximately 3,700 residential and
commercial customers located primarily in South Dakota. These services include:
(i) basic long distance calling service; (ii) voice and data services; (iii)
dedicated private line services; (iv) collect calling, operator assistance and
calling card services, including prepaid calling cards; (v) toll free or 800
services; and (vi) switched and dedicated Internet access services. DTG offers
these services individually and in combinations. Through combined offerings, DTG
is able to provide customers with added benefits such as single billing, unified
services for multi-location companies and customized calling plans.
DTG operates its own switches, develops and implements its own products,
monitors and deploys its transmission facilities and prepares and designs its
own billing and reporting systems. All of DTG's customers are identified by
their telephone number, dedicated trunk or validated access code, and have a
rating which is used to determine the price per minute that they pay on their
outbound or inbound long distance calls. Rates typically vary by the type of
service, the volume of usage, the distance of the calls, the time of day that
calls are made, the region that originates the call and whether the product is
being provided on a promotional basis. In 1997, long distance revenues were
approximately $3.5 million, representing 25% of DTG's gross revenues. For the
nine months ended September 30, 1998, this percentage had decreased to 11% due
primarily to the acquisition of DataNet. DTG anticipates that its long distance
revenues will continue to grow, due to the construction of new
telecommunications systems and DTG's sales efforts.
DTG provides long distance services in various ways. For customers located
in DTG's local South Dakota exchanges, long distance services are provided
primarily by DTG as part of its local service. For customers located outside of
DTG's local exchanges or using operator assisted services, all long distance
services are provided by DTG Communications, Inc., DTG's wholly owned
subsidiary. Currently DTG Communications, Inc. is authorized to sell long
distance services in North Dakota, South Dakota, Iowa, Nebraska, Minnesota,
Montana and several other states. However, most of DTG's long distance revenues
are derived from South Dakota. Internet long distance access services are
provided by DTG Internet, Inc.
WIRELESS SERVICES. On July 1, 1998, DTG completed the merger of Vantek
Communications, Inc., a small mobile radio systems operator, and Van/Alert,
Inc., a paging operation under common ownership with Vantek, into Dakota
Wireless Systems, Inc., a wholly owned subsidiary of DTG. As of October 31,
1998, the company had 256 small mobile radio customers and approximately 1,200
paging customers located in southeastern South Dakota.
In addition, DTG has deployed a wireless local loop operation in certain of
its small telephone exchanges in Southeastern South Dakota. Wireless local loop
uses specialized radio frequency transmissions to replace the wireline
connections to the company's subscribers. The company plans to continue to test
and deploy this technology as it expands its CLEC operations.
INTERNET SERVICES. DTG is the largest provider of Internet services in
South Dakota. DTG provides a wide range of Internet services including Internet
access options (both dial-up and dedicated), Web page development and hosting
services, Internet applications development and
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training and consulting services to businesses, professionals and other on-line
services providers. As of September 30, 1998, DTG hosted approximately 170 Web
sites with additional sites under development. DTG estimates that its access
services are used by approximately 6,800 users. Total Internet revenues in 1997
were approximately $1 million, representing approximately 7% of DTG's total
gross revenues. This percentage has decreased to approximately 5% of total
revenues for the nine months ended September 30, 1998 due to the acquisition of
DataNet in December 1997.
In December 1994, I-way started its Internet operations, which DTG
purchased in December 1996. I-way, now renamed DTG Internet, Inc., operates as
a wholly owned subsidiary of DTG. DTG anticipates that in the future it may
attempt to consummate additional acquisitions to expand its Internet service
base.
The Internet is a global collection of computer networks cooperating to
enable commercial organizations, educational institutions, government agencies
and individuals to communicate electronically, access and share information and
conduct business. The Internet originated with the ARPAnet, a restricted
network started in 1969 by the United States Department of Defense Advanced
Research Projects Agency to provide efficient and reliable long distance data
communications among the disparate computer systems used by government-funded
researchers and organizations. Unlike other public and private
telecommunications networks that are managed by businesses, government agencies
and other entities, the Internet is a cooperative interconnection of many such
public and private networks. The networks that comprise the Internet are
connected in a variety of ways, including public switched telephone network and
high-speed, dedicated leased lines. Communications on the Internet are enabled
by transmission control protocol/Internet protocol ("TCP/IP"), an Internet-
working standard that enables communications across the Internet regardless of
the hardware and the software used.
Recent technological advances, including increased microprocessor speeds
and the development of easy-to-use graphic interfaces, combined with cultural
and business changes, have led to the Internet being integrated into the
activities of a multitude of individuals and the operations and strategies of
numerous business organizations. For example, a growing number of employees
within organizations have access to corporate networks, thereby increasing the
amount of electronic communication both within and between organizations. In
addition, the rapid growth of the installed base of home personal computers
equipped with communication devices such as modems has created the ability to
communicate electronically from home. These technological and business trends
have led to an increase in the number of on-line services and Internet access
providers.
More recently, the development of World Wide Web technology and associated
easy-to-use software has made the Internet easier to navigate and more
accessible to a larger number of users and for a broader range of applications.
While there has been significant media interest in the use of the Internet by
consumers, business and professional organizations currently represent a more
significant percentage of Internet use. These organizations increasingly are
recognizing that the Internet can enhance communications, both among their
geographically distributed locations and employees, and with their business
partners and customers. In addition, businesses are realizing that the Internet
can enable many applications which were previously unavailable or cost-
prohibitive. For example, small and medium-sized businesses can establish and
maintain a global presence and market and distribute their products and services
electronically.
Despite the growing interest in the many commercial uses of the Internet,
DTG believes that many businesses, especially small businesses, have been
deterred from purchasing Internet access services for a number of reasons,
including: (i) inconsistent quality of service; (ii) lack of availability of
cost-effective high-speed options; (iii) limited number of local access points
for corporate users and customers; (iv) inability to integrate business
applications on the Internet; (v) need to deal with multiple and frequently
incompatible vendors; (vi) inadequate protection of the confidentiality of
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stored data and information moving across the Internet; and (vii) lack of tools
to simplify Internet access and use.
To address the needs of small businesses in South Dakota and surrounding
states, DTG offers a comprehensive range of Internet access options,
applications, training and consulting services tailored to meet the needs of
small and medium-sized businesses and their customers. The products and services
provided by DTG include dial-up and dedicated access, Web page development, Web
page hosting, client software and security products and training. This array of
products and services enables Internet users to purchase access, applications
and services, including integration services, through a single source. DTG's
products and services are supported by a technical staff that it believes is
highly experienced in Internet operations and services, especially as they
relate to small businesses. DTG's objective is to continue to develop and market
value-added Internet services in the smaller markets in South Dakota and the
surrounding states. Rates for DTG's Internet services vary depending on the type
and range of service options.
CABLE TELEVISION SERVICES. Through its subsidiaries, DTG owns and operates
26 cable television systems located in Southeastern South Dakota, Northwestern
Iowa and Southwestern Minnesota ranging in capacity from 300 to 750 MHZ. As of
October 31, 1998, these systems provided service to approximately 5,930
subscribers. No single community accounts for more than 12% of DTG's total basic
CATV subscribers. DTG believes that this geographic diversity reduces its
exposure to adverse economic, competitive and regulatory factors in any
particular community.
Total cable revenues in 1997 were approximately $1.5 million, representing
approximately 11% of DTG's total gross revenues. For the nine months ended
September 30, 1998, this percentage had decreased to 5% due primarily to the
acquisition of DataNet in December 1997.
DTG has been engaged in the cable television business since 1979. In 1996,
as part of its expansion strategy, DTG acquired the assets of 19 of its total
cable television systems, accounting for approximately 3,600 of the 5,500
current subscribers. DTG anticipates that in the future it may attempt to
consummate additional acquisitions to expand its customer base and service
markets.
Cable television systems receive video, audio and data signals transmitted
by nearby television and radio broadcast stations, terrestrial microwave relay
services and communications satellites. Such signals are then amplified and
distributed by coaxial cable and optical fiber to the premises of customers who
pay a monthly fee for the service. DTG does not hold any dedicated spectrum
licenses issued by the FCC related to its cable television operations, although
DTG believes that it holds all other necessary licenses to operate its systems.
The number of channels provided by DTG varies by service area. The sources of
DTG's cable television programming consist of the signals received from national
television networks, local and other independent television stations that
operate in or near DTG's service areas, satellite-delivered non-broadcast
channels and public service channels and announcements.
DTG provides programming to its subscribers pursuant to contracts with
programming suppliers. DTG generally pays a flat monthly fee per subscriber for
programming on its basic and premium services. A number of programming suppliers
provide volume discount pricing structures and/or offer marketing support to DTG
through DTG's participation in a purchasing pool with other small cable system
operators. DTG's programming contracts generally are for fixed periods of time
ranging from 3 to 10 years and are subject to negotiated renewal. The costs to
DTG to provide cable programming have increased in recent years and are expected
to continue to increase due to additional programming being provided to basic
subscribers, increased costs to produce or purchase cable programming,
inflationary increases and other factors. Effective in May 1994, the FCC's rate
regulations under the Cable Television Consumer Protection and Competition Act
of 1992 (the "1992 Cable Act") permitted operators to pass through to customers
increases in programming costs in excess of the inflation rate. Management
believes that DTG will continue to have access to
65
programming services at reasonable price levels, although there can be no
assurance that DTG can in the future maintain its access at reasonable price
levels.
Monthly fees for cable services vary depending on the nature and type of
service. DTG offers a basic cable service package (primarily comprised of local
broadcast signals, popular national satellite channels and public, educational
and governmental access channels) and premium movie channels. The monthly fee
for basic service generally ranges from $17.95 to $24.95 depending on the number
of channels offered, and the monthly service fee for premium channels is $7.95
per channel. Also, DTG generally assesses a nonrecurring installation charge of
up to $35.00. Customers are free to discontinue service at any time without
penalty. DTG currently does not offer Pay-TV or "pay-per-view" services but
anticipates doing so in the future as it upgrades the capacity of its systems.
DTG's cable television business is dependent to a large extent on its
ability to obtain and renew its franchise agreements with local government
authorities on acceptable terms. DTG believes that it has maintained good
relations with its local franchise authorities and has never had a franchise
revoked. Most of DTG's present franchises had initial terms of approximately 10
to 15 years. As of September 30, 1998, all of DTG's franchises have been renewed
or extended, generally at or prior to their stated expirations and on terms
which are acceptable to DTG. In this regard, during 1996, DTG completed
negotiations with 19 communities resulting in franchise renewals. Federal law,
including the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and
the 1992 Cable Act, limits the power of the franchising authorities to impose
certain conditions upon cable television operators as a condition of the
granting or renewal of a franchise. DTG has 26 franchises, three of which are up
for franchise renewal within the next three years. No one cable television
franchise accounts for more than 10% of DTG's total cable television revenue.
Franchise agreements generally contain varying provisions relating to
construction and operation of cable television systems, including: (i) time
limitations on the commencement and/or completion of construction; (ii) quality
of service, including (in certain circumstances) requirements as to the number
of channels and broad categories of programming offered to subscribers; (iii)
rate regulation; (iv) provision of services to certain institutions; (v)
provision of channels for public access and commercial leased-use; and (vi)
maintenance of insurance and/or indemnity bonds. DTG's franchises also
typically provide for periodic payments of fees, generally ranging from zero to
three percent of revenues, to the governmental authority which grants the
franchise. Franchises usually require the consent of the franchising authority
prior to a transfer of the franchise or a transfer or change in ownership or
operating control of the franchisee.
Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions of the franchise. Under the 1984 Cable Act, if a
franchise is lawfully terminated, and if the franchising authority acquires
ownership of the cable television system or effects a transfer of ownership to a
third party, such acquisition or transfer must be at an equitable price or, in
the case of a franchise existing on the effective date of the 1984 Cable Act, at
a price determined in accordance with the terms of the franchise, if any.
In connection with a renewal of a franchise, the franchising authority may
require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the 1984
Cable Act and other applicable federal, state and local law. The 1984 Cable
Act, as supplemented by the renewal provisions of the 1992 Cable Act,
establishes an orderly process for franchise renewal which protects cable
operators against unfair denial of renewal when the operator's past performance
and proposal for future performance meet the standards established by the 1984
Cable Act. DTG believes that its cable television systems generally have been
operated in a manner which satisfies such standards and allows for the renewal
of such franchises; however, there can be no assurance that the franchises for
such systems will be successfully renewed as they expire.
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COMPUTER NETWORKING SERVICES. Through its DataNet subsidiary, DTG is a
leading provider of services and products designed to build and manage personal
computer network infrastructures for businesses throughout its service
territories. DTG provides customized, integrated solutions for its customers'
distributed computing networks by combining a comprehensive offering of value-
added services with its expertise in sourcing and distributing PCs, network
products, computer peripherals and software from a variety of vendors. DTG
endeavors to provide a one-stop source for integrating the design and
consulting, acquisition and deployment, operation and support, and enhancement
and migration of computer network operations. Typical services provided by DTG
include the review of customer system requirements; the selection, design and
planning of system components; the procurement, configuration, distribution,
installation, cabling and connectivity of complete computer networks; and
operating and network support services such as equipment adds, moves, and
changes, repair and maintenance, help desk operations, and network monitoring.
DTG's computer networking customer base extends to approximately 6,000 business
customers throughout South Dakota and the surrounding states, with approximately
2,000 accounts active at any one time. In 1997, total revenues from computer
networking services were approximately $1.8 million, representing approximately
13% of DTG's total gross revenues. However, DTG operated its DataNet subsidiary
for only one month in 1997. For the nine months ended September 30, 1998,
computer networking services accounted for approximately 54% of DTG's total
revenues.
MAIN NETWORK OPERATIONS. DTG provides its local services and related long
distance services primarily over its own network. DTG operates an advanced
digital telecommunications network consisting of one Lucent 5ESS switch with
nine subtending switches for its local services network, one Summa Logic digital
switch for operator services and advanced long distance services, leased
transmission lines to complete calls for its domestic and international long
distance services and sophisticated network management systems designed to
optimize traffic routing. DTG's network encompasses approximately 2,240 miles of
copper trunk lines and customer connections and about 290 route miles of fiber
optic cabling.
DTG seeks to actively manage and improve its network. DTG spent
approximately $10 million in 1997 to complete the deployment of Synchronous
Optical Network ("SONET") fiber rings within its network and centralize and
upgrade its switching equipment through the construction of a new switching
center and the installation of a Lucent 5ESS switching platform with advanced
digital switching technologies. DTG currently plans to continue to expand its
SONET network backbone in 1998 as it builds networks in communities as part of
its CLEC expansion plan.
SONET technology substantially increases the speed at which data is carried
on DTG's network, thereby allowing DTG to provide high-speed multimedia
applications and information services throughout its network. In addition, SONET
permits DTG to install customer circuits more quickly and improves monitoring of
the network by anticipating certain problems before they occur. Further, when
deployed in a ring design, SONET allows DTG to provide its customers with
millisecond restoration of traffic in the event of a network outage.
INTERNET NETWORK OPERATIONS. DTG's Internet network is based on leased
circuits and frame-relay based network access to the Internet National Access
Points ("NAPs") in Denver, Colorado, and Willow Springs, Illinois (a southern
suburb of Chicago). This gives DTG full physical redundancy to the main MCI
WorldCom Internet backbone. This network is controlled by a Bay Networks router
located in DTG's Internet network operations center in Sioux Falls, South
Dakota. Customers are able to access this network through dedicated lines, by
dialing into existing frame relay circuits or by placing a local or long
distance call (dial-up) through modems to the Sioux Falls switching center. Once
connected, the customer's traffic is routed through the operation center modem
banks to the Bay Networks router and into the Internet via DTG's NAP
connections.
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DTG continues to upgrade its network infrastructure in response to the
increased number of customers purchasing Internet access and Web page hosting
services. DTG also currently plans to increase its NAP access speeds to handle
larger levels of customer traffic at higher data transfer speeds.
CABLE NETWORK OPERATIONS. DTG uses a combination of coaxial cable and
optical fiber for transmission of television signals to subscribers. Optical
fiber is a technologically advanced transmission medium capable of carrying
cable television signals via light waves generated by a laser. DTG currently
uses fiber optic technology to serve 10 communities with a single CATV head-end
facility. DTG anticipates that it will convert several additional systems over
the next several years. It is anticipated that the systems, which facilitate
digital transmission of voice, video and data signals as discussed below, will
have optical fiber to neighborhood nodes tied to DTG's telecommunications
network with coaxial cable distribution downstream to subscribers' homes from
that point.
The balance of DTG's cable systems currently operate on a stand-alone basis
with each community system supported by its own signal processing center, known
as a cable "head-end." A typical Company system consists of signal receiving,
encoding and decoding apparatus, distribution systems and subscriber house-drop
equipment. The signal receiving apparatus typically includes a tower, antenna,
ancillary electronic equipment and earth stations for reception of satellite
signals. Head-ends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, are located near the
receiving devices. DTG's distribution systems consist of coaxial cables and
related electronic equipment. Subscriber equipment consists of taps, house
drops, converters and analog addressable converters.
In 1997, DTG rebuilt four of its cable systems using advanced digital fiber
optic/coax cabling techniques that allow it to offer both cable television and
additional telecommunications services, such as local and long distance calling
and high speed data transmission and Internet access services, over the same
network. These systems are interconnected to DTG SONET fiber optic network and
switched from its new centralized switching facility. DTG also currently plans
to install digital advertising insertion equipment in its central switching
center. This equipment would allow DTG to significantly enhance the flexibility
and reliability of its advertising sales. These enhancements enable DTG to offer
increased programming channels with a higher quality signal at a lower per
channel cost.
COMPETITION
The telecommunications industry is highly competitive and affected by rapid
regulatory and technological change. Regulatory trends have had, and may have in
the future, significant effects on competition in DTG's industry. New technology
is continuing to expand the types of available communications services and
equipment and the number of competitors offering such services. DTG faces actual
and potential competition in all of its businesses. Most of DTG's competitors
are large companies which have considerably greater financial, technological,
marketing and other resources than DTG.
DTG believes that the factors critical to a customer's choice of a
telecommunications services provider are cost, ease of use, speed of
installation, quality, reputation and, in some cases, geography and network
size. DTG's objective is to be one of the most responsive service providers in
the telecommunications industry, particularly when providing customized
communications services. DTG recognizes that it must grow to be able to compete
effectively in the changing telecommunications industry and to avail itself of
greater economies of scale and increased scope in its transport and local access
requirements and in its back office operations. It is for this reason that DTG
expanded its business through the purchase of additional cable television
systems and the
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acquisition of companies in the long distance and Internet long distance
industries (i.e., TCIC and I-way) and through the DataNet acquisition. These
additions have expanded DTG's product line and service abilities and should
enhance its ability to compete more effectively in its changing business and
regulatory environment.
LOCAL SERVICE COMPETITION. Historically, DTG's local telephone operations
have not experienced significant competition. DTG's local telephone operations
may experience increased competition from various sources, including resellers
of DTG's local exchange services, large end-users installing their own networks,
IXCs, satellite transmission services, cellular communications providers, cable
television companies, radio-based personal communications service companies,
competitive access providers and other systems capable of completely or
partially bypassing local telephone facilities. In 1996, the South Dakota
Public Utilities Commission approved numerous applications to provide and resell
local exchange services, including applications made by DTG to compete in other
local exchanges throughout South Dakota. Numerous such applications are pending
and DTG anticipates that other companies will make additional filings. DTG
cannot predict the specific effects of competition on its local telephone
business, but intends to attempt to take advantage of the various opportunities
that competition should provide, including expanding into additional market
areas, if it is able to do so. DTG is currently attempting to address potential
competition by focusing on improved customer satisfaction, reducing costs,
increasing efficiency, improving its digital network, restructuring rates and
examining new product offerings and new markets for entry.
LONG DISTANCE AND OPERATOR SERVICE COMPETITION. The long distance and
operator services industries are highly competitive and dominated on a volume
basis by the nation's three largest long distance providers: AT&T, Sprint, and
MCI Worldcom. These companies, and many of the other long distance providers,
surpass DTG in size and available financial, technological, marketing and other
resources. All of these companies potentially can compete with DTG in the long
distance and operator services markets in which DTG currently operates.
In addition, the Telecommunications Act permits RBOCs to provide long
distance telecommunications services internationally and domestically in
territories outside of the RBOCs' respective local service regions. RBOCs also
may provide long distance telecommunications services that are incidental to
certain other services, such as wireless and video services, in their local
regions. The authority to provide long distance telecommunications services
originating outside of the RBOCs' respective regions does not currently include
calls that terminate in-region, such as private line services, 800 services or
any equivalent service, and allows the contacted party to choose the inter-LATA
carrier. RBOCs are prohibited from providing a full range of long distance
telecommunication services in their local regions until certain important
conditions are met. RBOCs own extensive facilities in their regions and have
long-standing customer relationships and substantial capital resources, which
permit them to expend funds on technological and marketing improvements. DTG
believes that in the future RBOCs will become substantial competitors for long
distance telecommunications services, especially in their local regions.
INTERNET COMPETITION. The market for data communications services,
including Internet access, computer networking services and on-line services, is
extremely competitive. There are no substantial barriers to entry, and DTG
expects that competition will intensify in the future. DTG believes that its
ability to compete successfully will depend on a number of factors, including:
(i) market presence; (ii) the ability to execute a rapid expansion strategy;
(iii) the capacity, reliability and security of its network infrastructure; (iv)
ease of access to and navigation of the Internet; (v) the pricing policies of
its competitors and suppliers; (vi) the timing of the introduction of new
products and services by DTG and its competitors; (vii) DTG's ability to support
industry standards; and (viii) industry and general economic trends. DTG
believes that its success in the data communications services market will depend
heavily upon its ability to provide high-quality Internet connectivity and
value-added Internet services at competitive prices.
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DTG's current and potential competitors headquartered in the United States
may be divided into the following three groups: (i) telecommunications
companies, such as AT&T, MCI, Sprint, RBOCs and @Home (a joint venture between
Tele-Communications, Inc. and a venture capital firm), and various other cable
companies; (ii) other Internet access providers, such as BBN Corporation
("BBN"), NETCOM On-Line Communication Services, Inc. ("NETCOM"), PSINet, Inc.
("PSI") and other national and regional providers; and (iii) on-line services
providers, such as America Online, Inc. ("America Online"), CompuServe
Corporation ("CompuServe"), Intuit Inc., Microsoft Corporation and Prodigy
Services Company. Most of these competitors have greater market presence,
engineering and marketing capabilities, and financial, technological, personnel
and other resources than those available to DTG. As a result, they may be able
to develop and expand their communications and network infrastructures more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily and devote greater resources to the marketing and sale of their
services.
DTG expects that most of the major on-line services providers and
telecommunications companies will expand their current services to compete fully
in the Internet access market. DTG believes that new competitors, including
large computer hardware, software, media and other technology and
telecommunications companies, will enter the Internet access market, resulting
in even greater competition to DTG. Certain companies, including America
Online, AT&T, BBN and PSI, have obtained or expanded their Internet access
products and services as a result of acquisitions and strategic investments.
Such acquisitions or investments may permit these companies to devote greater
resources to the development and marketing of new competitive products and
services and the marketing of existing competitive products and services. DTG
expects acquisitions and strategic investments by its competitors to increase,
thus creating significant new competitors. In addition, the ability of some of
DTG's competitors to bundle other services and products with Internet access
services, such as the Internet service offerings recently offered by AT&T and
MCI, could place DTG at a further competitive disadvantage.
As a result of increased competition in the Internet access and on-line
services industry, DTG expects that it will continue to encounter significant
pricing pressure, which in turn could result in significant reductions in the
average selling price of its Internet services. DTG previously has reduced
prices on certain of its Internet access options and may consider doing so in
the future. There can be no assurance that DTG will be able to offset the
effects of any such price reductions with an increase in the number of its
customers, higher revenue from enhanced services, cost reductions or otherwise.
In addition, DTG believes that the data communications business, and in
particular the Internet access and on-line services businesses, are likely to
encounter consolidation in the near future, which could result in increased
price and other competition in the industry. Increased price or other
competition could erode DTG's market share and could have a material adverse
effect on its business, financial condition and results of operations. There
can be no assurance that DTG will have the financial resources, technical
expertise, marketing and support capabilities or the expansion and acquisition
possibilities to continue to compete successfully in this or any market.
CABLE TELEVISION COMPETITION. Cable television competes for customers in
local markets with other providers of entertainment, news and information. The
competitors in these markets include broadcast television and radio, newspapers,
magazines and other printed material, motion picture theaters, video cassettes
and other sources of information and entertainment, including directly
competitive cable television operations.
Cable television service initially was offered as a means of improving
television reception in markets where terrain factors or distance from major
cities limited the availability of off-air television. In some of the areas
served by cable television systems, a substantial variety of television
programming can be received off-air, including low-power UHF television
stations, which have
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increased the number of television signals in the country and provided off-air
television programs to limited local areas. The extent to which cable television
service is competitive depends upon a cable television system's ability to
provide, on a cost-effective basis, a greater variety of programming than that
available off-air or through other alternative delivery sources. Regulatory
changes also impact competition in the cable industry. Both the 1992 Cable Act
and the Telecommunications Act are designed to increase competition in the cable
television industry.
There are alternative methods of distributing the same or similar video
programming offered by cable television systems. Further, these technologies
have been encouraged by Congress and the FCC to offer services in direct
competition with existing cable systems. A significant competitive impact is
expected from medium power and higher power direct broadcast satellites ("DBS")
that use high frequencies to transmit signals that can be received by dish
antennas much smaller in size than traditional home satellite dishes ("HSDs").
There are multiple DBS providers offering services in the United States. These
services are generally available throughout the continental U.S., including
areas in which DTG operates its cable systems.
DBS has both advantages and disadvantages as an alternative means of
distributing video signals to a customer's home. Among the advantages are that:
(i) the capital investment (although initially high) for the satellite and
uplinking segment of a DBS system is fixed and does not increase with the number
of subscribers receiving satellite transmissions; (ii) DBS is not currently
subject to local regulation of service and prices or required to pay franchise
fees; and (iii) the capital costs for the ground segment of a DBS system (the
reception equipment) are directly related to, and limited by, the number of
service subscribers. DBS's disadvantages presently include: (i) limited ability
to tailor the programming package to the interests of different geographic
markets, such as providing local news, other local origination services and
local broadcast stations; (ii) signal reception being subject to line-of-sight
angles; and (iii) intermittent interference from atmospheric conditions and
terrestrially generated radio frequency noise.
Although the effect of competition from DBS services cannot be specifically
predicted, there has been significant growth in DBS subscribers and DTG
anticipates that such DBS competition will increase in the future as
developments in technology continue to increase satellite transmitter power,
decrease the cost and size of equipment needed to receive these transmissions
and enable DBS to overcome the disadvantages discussed above. Further, the
extensive national advertising of DBS programming packages, including certain
sports packages not currently available on cable television systems, will likely
continue the rapid growth in DBS subscribers.
The Telecommunications Act eliminated the statutory and regulatory
restrictions that prevented telephone companies from competing with cable
operators for the provision of video services. The Telecommunications Act
allows local telephone companies, including RBOCs, to compete with cable
television operators both inside and outside of their telephone service areas.
DTG expects that it may face substantial competition from telephone companies
for the provision of video services, whether it is through the acquisition of
cable systems, the provision of wireless cable or the provision of upgraded
telephone networks. Most major telephone companies have greater financial
resources than DTG, and the 1992 Cable Act ensures that telephone company
providers of video services will be able to acquire significant cable television
programming services. The specific manner in which telephone company provision
of video services will be regulated is discussed later in this Prospectus and
Proxy Statement. Additionally, the Telecommunications Act eliminates certain
federal restrictions on utility holding companies and thus permits all utility
companies to provide cable television services. DTG expects that the
elimination of these federal restrictions could result in another source of
significant competition in the delivery of video services.
Another alternative method of distributing cable television is multi-
channel, multi-point distribution systems ("MMDS"), which deliver programming
services over microwave channels received by subscribers with special antennas.
MMDS systems are less capital intensive, are not
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required to obtain local franchises or pay franchise fees and are subject to
fewer regulatory requirements than cable television systems. The 1992 Cable Act
also ensures that MMDS systems have the ability to provide all significant cable
television programming services. Although there are relatively few MMDS systems
in the United States currently in operation, virtually all markets have been
licensed or tentatively licensed.
The FCC has taken a series of actions intended to facilitate the
development of wireless cable systems as an alternative means of distributing
video programming, including reallocating the use of certain frequencies to
these services and expanding the permissible use of certain channels reserved
for educational purposes. The FCC's actions enable a single entity to develop
MMDS systems with a potential of up to 35 channels, which permits the MMDS
systems to compete more effectively with cable television. Developments in
compression technology will significantly increase the number of channels that
MMDS can offer. Further, in 1995, several large telephone companies acquired
significant ownership in numerous MMDS companies. Recently, DTG has experienced
increased competition from an MMDS provider operating in several of DTG's
existing cable system communities.
Within the cable television industry, cable operators may compete with
other cable operators or other entities seeking franchises for competing cable
television systems at any time during the terms of existing franchises or upon
expiration of such franchises in the expectation that an existing franchise will
not be renewed. The 1992 Cable Act promotes the grant of competitive
franchises. Furthermore, an increasing number of cities are exploring the
feasibility of owning their own cable systems in a manner similar to city-
provided utility services.
Although there is no legal prohibition preventing long distance telephone
companies from providing video services, historically they have not provided
such services in competition with cable systems. However, such companies may
prove to be a source of competition in the future. The long distance companies
are expected to expand into local markets with local telephone and other
offerings (including video services) in competition with RBOCs, which under the
terms and conditions of the Telecommunications Act are permitted to enter the
long distance service market in their regions subject to satisfying certain
requirements.
In addition to competition for subscribers, the cable television industry
competes for advertising revenue with broadcast television, radio, print media
and other sources of information and entertainment. As the cable television
industry has developed additional programming, its advertising revenue has
increased. Cable operators sell advertising spots primarily to local and
regional advertisers. To date, DTG's advertising efforts have been limited to
local public service announcements due to the limited capabilities of its
existing systems. DTG currently intends to expand its advertising efforts as it
completes the upgrade of many of its systems.
DTG has no basis upon which to estimate the number of cable television
companies and other entities with which it competes or may potentially compete.
There are a large number of individual and multiple system cable television
operators in the United States that are capable of competing with DTG and that
have substantially greater financial, technological, marketing and other
resources.
The full extent to which other media or home delivery services will compete
with cable television systems may not be known for some time and there can be no
assurance that existing, proposed or as yet undeveloped technologies will not
become dominant in the future.
COMPUTER NETWORKING SERVICES. The markets in which DTG operates its
computer integration business are also intensely competitive. Barriers to entry
are generally very low and many different types of technical service providers
are attempting to enter the PC network market. These competitors include
mainframe and mid-range computer manufacturers and outsourcers such
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as Digital Equipment Corporation, Electronic Data Systems Corporation, Hewlett-
Packard Company and IBM. Other competitors include regional value added
resellers, systems integrators and third-party service companies. DTG expects to
face further competition from new market entrants and possible alliances between
competitors in the future. Most of these competitors have greater financial,
technical, marketing and other resources than DTG and are therefore able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products and services then DTG. There is no assurance that DTG
will be able to successfully compete against current and future competitors.
REGULATION
OVERVIEW. DTG operates in a highly regulated industry and its services are
subject to varying degrees of federal, state and local regulation. The FCC
exercises jurisdiction over all facilities of, and services offered by,
telecommunications common carriers to the extent that they involve the
provision, origination or termination of interstate or international
communications. The FCC also regulates many aspects of DTG's cable television
operations. The South Dakota Public Utilities Commission retains jurisdiction
over DTG's telecommunications operations in South Dakota while other state
public utilities commissions regulate the intrastate aspects of DTG's long
distance business in their states. Finally, certain cities and municipal
governments regulate by franchise DTG's cable television operations within their
jurisdictions.
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 DTG. Recent developments include, without
limitation: (i) enactment of the Telecommunications Act which modifies the AT&T
Divestiture Decree restrictions on the provision of long distance services by
RBOCs between LATAs as defined in the AT&T Divestiture Decree; (ii) FCC and
state public utilities commission actions changing access rates charged by LECs
and making other related changes to access and interconnection policies, certain
of which could have adverse consequences for DTG's long distance and local
service businesses; (iii) related FCC and state regulatory proceedings
considering additional deregulation of LEC access pricing; and (iv) various
legislative and regulatory proceedings that would result in new local exchange
competition.
As the following discussion illustrates, the regulation of the
telecommunications and cable industries at the federal, state and local levels
is subject to the political process and has been in constant flux over the past
decade. Material changes in the law and regulatory requirements must be
anticipated and there can be no assurance that DTG's business will not be
affected adversely by future legislation, new regulation or deregulation.
TELECOMMUNICATIONS ACT OF 1996. On February 8, 1996, President Clinton
signed into law the Telecommunications Act. Among other things, this
legislation: (i) permits RBOCs to provide domestic and international long
distance services in their own regions upon a finding that the petitioning RBOC
has satisfied certain criteria for opening up its local exchange network to
competition and that its provision of long distance services would further the
public interest; (ii) removes existing barriers to entry into local service
markets; (iii) significantly changes the manner in which carrier-to-carrier
interconnection arrangements are regulated at the federal and state level; and
(iv) establishes procedures to revise universal service standards.
The Telecommunications Act has particular relevance to DTG in four areas.
First, the Telecommunications Act creates a duty on the part of DTG to
interconnect its networks with those of its competitors and, in particular,
creates a duty on the part of DTG's local exchange operations to negotiate in
good faith the terms and conditions of such interconnection. On August 8, 1996,
the FCC released its FCC Interconnection Order. In the FCC Interconnection
Order, the FCC adopted a
73
national framework for interconnection but left to the individual states the
task of implementing the FCC's rules. Petitions for review of the FCC
Interconnection Order were consolidated before the United States Court of
Appeals for the Eighth Circuit, which on July 18, 1997 overturned substantial
parts of the FCC's order as it relates to the ability of the FCC to set
interconnection rates. The FCC has appealed the ruling to the Supreme Court,
which accepted the case and heard oral argument on October 13, 1998. A decision
is not expected before the end of 1998.
Second, the Telecommunications Act contains a number of provisions that are
intended to reduce barriers to entry and promote competition in a variety of
telecommunications markets, including both long distance and local exchange
operations. As a part of this effort, the Telecommunications Act provides a
framework under which RBOCs may enter the interexchange communications business
from which they were barred under the terms of the AT&T Divestiture Decree.
Under this framework, an RBOC may provide long distance services in the states
where it provides telephone service upon demonstrating to the affected state
regulatory authority and to the FCC that: (i) it faces competition for local
telephone service from at least one facilities-based competitor and (ii) that it
satisfies a 14 point checklist that would purport to show that the affected
RBOC's local exchange operations are open to competition. The
Telecommunications Act establishes deadlines within which both the affected
state regulatory agency and the FCC must act upon applications filed by an RBOC
to enter the long distance business. Certain of the RBOCs already have taken
steps to provide in-region long distance services and have filed applications
with the FCC seeking authority to provide such services in certain states. DTG
expects that most or all of the RBOCs will file applications for authority to
provide in-region long distance service. To date, the FCC has rejected each of
those applications, however. The RBOCs can provide long distance services
immediately in other states and also, with certain restrictions, cellular, video
and incidental services.
Third, although the Telecommunications Act generally prohibits long
distance companies from marketing their services jointly with local telephone
services provided by an RBOC (at least until that RBOC is permitted to enter the
long distance business in its own region), it contains an exception for
companies, such as DTG, that serve less than five percent of the nation's
presubscribed access lines. Thus, the Telecommunications Act permits DTG to
continue to market its long distance services jointly with local telephone
services whether provided by DTG or provided by an RBOC or non-affiliated
company.
Finally, the Telecommunications Act modifies certain of the regulations
governing DTG's cable television operations and addresses some of the issues
arising out of the combination of cable and telephone service.
DTG cannot predict the effect that this legislation and the FCC's
implementing regulations, many of which are still forthcoming or subject to
judicial challenges, will have on DTG or the industry as a whole. However, DTG
believes that it is positioned to pursue business opportunities in the rapidly
changing telecommunications market.
LOCAL SERVICE REGULATION. Historically, DTG's local telephone operations
have been governed by regulation and oversight of the South Dakota Public
Utilities Commission. The South Dakota Public Utilities Commission has had
primary jurisdiction over various matters including intrastate toll and access
rates, quality of service, issuance of securities, depreciation rates,
disposition of public utility property, issuance of debt and accounting systems
used by DTG. DTG has, however, been statutorily exempt from many of these
requirements by virtue of its size. The FCC historically has had primary
jurisdiction over the interstate toll and access rates of DTG 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
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of local telephone service. The Telecommunications Act required the FCC to
develop regulations to implement various sections of the Telecommunications Act
including: (i) the obligations imposed on incumbent LECs to interconnect with
the networks of other telecommunications carriers (including competing
telecommunications carriers); (ii) unbundling of services into network elements;
(iii) repricing of their services at wholesale rates for the purpose of
permitting resale of those services; (iv) allowing other telecommunications
carriers physically to collocate their equipment on the premises of the
incumbent LEC; and (v) requiring telecommunications carriers to compensate each
other based on their own costs for the transport and termination of calls on the
other carriers' networks.
As a rural telephone company, DTG is currently exempt from certain of the
foregoing obligations unless, in response to a bona fide request, the South
Dakota Public Utilities Commission removes that exemption. DTG, by petitioning
the South Dakota Public Utilities Commission, also may qualify for exemption
from certain other obligations under the Telecommunications Act. 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. Appeals of the FCC's Report and Order have been
consolidated before the United States Court of Appeals for the Fifth Circuit and
currently are pending. On October 28, 1998, the FCC released its Fifth Report
and Order establishing a universal service support mechanism for non-rural
carriers based on the forward-looking economic cost of constructing and
operating the network used to provide the supported services. The FCC also is
considering the establishment of forward-looking economic cost mechanisms for
rural carriers. Non-rural carriers would begin to receive support based on
forward-looking economic cost on January 1, 1999, whereas rural carriers would
shift to such an approach beginning no sooner than January 1, 2001. DTG cannot
predict the terms or the effect that the FCC's actions will have on DTG or on
the industry as a whole. However, DTG believes that it is taking proper steps
to reduce its exposure to potential declines in universal service support.
The Telecommunications Act requires that all telecommunications carriers
that provide interstate telecommunications services (including cable operators
that provide telecommunications services) contribute equitably to a universal
service fund ("USF"), although the FCC may exempt an interstate carrier or class
of carriers if their contribution would be minimal under the USF formula. The
Telecommunications Act allows states to determine which intrastate
telecommunications providers contribute to the USF. The purpose of the USF is
to provide consumers in all regions, including low-income consumers and those
consumers in rural, insular and high-cost areas, access to telecommunications
and information services that are reasonably comparable to those services in
urban areas at reasonably comparable rates. DTG is a contributor to, and a
recipient of, USF funds. DTG currently anticipates that it will receive more
from USF funding than it will contribute.
NETWORK ACCESS REGULATION. DTG is subject to the jurisdiction of the FCC
with respect to its provision of interstate network access services and certain
related services. The FCC prescribes a uniform system of accounts for telephone
companies, interstate depreciation rates and the principles and standard
procedures used to separate plant investment, expenses, taxes and reserves of
interstate services under the jurisdiction of the FCC and of intrastate services
under the jurisdiction of the respective state regulatory authorities
("separations procedures"). The FCC also prescribes procedures for allocating
costs and revenues between regulated and unregulated activities. A proceeding
to review separations reform currently is pending before the FCC.
The FCC has prescribed structures for exchange access tariffs to specify
the access charges for use and availability of DTG's facilities for the
origination and termination of interstate long distance service. In general,
the tariff structures prescribed by the FCC provide that interstate costs
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which do not vary based on usage ("non-traffic sensitive costs") are recovered
from subscribers through flat monthly charges ("subscriber line charges") and
from IXCs through usage-sensitive Carrier Common Line ("CCL") charges. Traffic-
sensitive interstate costs are recovered from carriers through variable access
charges based on several factors, primarily usage.
On December 24, 1996, the FCC initiated a rulemaking proceeding to address
access charge reform. On May 16, 1997, the FCC released its First Report and
Order adopting changes to the existing access charge structure. With limited
exceptions, those modifications apply only to price cap incumbent LECs, which
generally are the nation's largest telephone companies. The FCC also has issued
several orders to provide additional rules to implement access charge reform and
has initiated separate proceedings to examine historical cost recovery issues
and access charge reform for rate-of-return carriers, such as DTG. Appeals of
the FCC's First Report and Order were consolidated before the Eighth Circuit
which on August 18, 1998 affirmed the FCC. The FCC is continuing to review and
amend its rules in this area and there can be no assurance that the FCC will not
adopt rules that would have a material adverse effect on DTG.
The FCC authorizes a rate-of-return ("ROR") that telephone companies such
as DTG may earn on the interstate services they provide. The current ROR is
11.25% for companies remaining under ROR regulation. The FCC is currently
considering changing the 11.25% ROR as a result of lower market interest rates.
Effective January 1, 1991, the FCC replaced ROR regulation with price-cap
regulation for the RBOCs and GTE Corporation and allowed all other companies
that did not remain in the National Exchange Carrier Association ("NECA") Common
Line and Traffic Sensitive Pools the option of price-cap regulation. DTG, like
most small local exchange carriers, has elected to remain within the NECA tariff
scheme.
In 1992, the FCC initiated a rulemaking proceeding (CC Docket No. 92-135)
to address regulatory alternatives for mid-size and small LECs. This proceeding
resulted in rules, adopted in September 1993, that provide for a non-price cap
form of alternative regulation. DTG would be eligible for this form of
regulation. DTG has not elected price cap regulation for interstate purposes
and continues to evaluate the various forms of alternative regulation.
The effect of the Telecommunications Act on the FCC's regulations
concerning ROR regulation and alternative regulation is not yet clear, although,
as a result of the enactment of the Telecommunications Act, the FCC is
reexamining its rules to reflect the provisions of the Telecommunications Act.
The Telecommunications Act requires each LEC to continue to provide access
services in accordance with requirements effective on the date immediately
preceding the effective date of the Telecommunications Act, until those
requirements are specifically superseded by FCC regulations. Pursuant to the
Telecommunications Act, the FCC established regulations to implement the
interconnection, unbundled access, resale and collocation requirements of the
Telecommunications Act. The Telecommunications Act requires that
interconnection and unbundled network elements be priced at just and reasonable
rates based on costs and that compensation for transport and termination of
traffic be reciprocal among carriers and be just and reasonable.
In addition to the matters discussed above, FCC rules also govern: (i) the
allocation of costs between the regulated and unregulated activities of a
communications common carrier and (ii) transactions between the regulated and
unregulated affiliates of a communications common carrier.
The cost allocation rules apply to certain activities that have never been
regulated as communications common carrier offerings and to activities that have
been preemptively deregulated by the FCC. The costs of these activities are
removed prior to the separations procedures process and are assigned to
unregulated activities in the aggregate, rather than to specific services, for
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pricing purposes. Other activities must be accounted for as regulated
activities, and their costs are subject to separations procedures.
The affiliate transaction rules govern the pricing of assets transferred to
and services provided by affiliates. These rules generally require that assets
be transferred between affiliates at "market price," if such price can be
established through a tariff or a prevailing price actually charged to third
parties. In the absence of a tariff or prevailing price, "market price" cannot
be established, in which case: (i) asset transfers from a regulated to an
unregulated affiliate must be valued at the higher of cost or fair market value
and (ii) asset transfers from an unregulated to a regulated affiliate must be
valued at the lower of cost or fair market value. DTG prices transactions to
and between its subsidiaries at cost where appropriate and at fair market value
where appropriate.
The FCC has not attempted to make its cost allocation or affiliate
transaction rules preemptive. State regulatory authorities are free to use
different cost allocation methods and affiliate transaction rules for intrastate
rate-making and to require carriers to keep separate allocation records.
DTG's local and intrastate operations are regulated by the South Dakota
Public Utilities Commission. Like many state regulatory authorities, the South
Dakota Public Utilities Commission is conducting proceedings concerning the
rules under which carriers may operate in an increasingly competitive
environment. The issues that the South Dakota Public Utilities Commission is
examining include unbundling and interconnection, dialing parity for intra-LATA
(or short-haul) toll traffic, number portability, resale of local exchange
service and universal service. The Telecommunications Act has begun to have an
effect on the timing and outcome of proceedings in many states, including South
Dakota. DTG actively monitors the South Dakota proceedings as well as the
proceedings in other states. However, DTG cannot, at this time, predict how
these proceedings will ultimately be resolved and their effect on DTG or when a
decision will be forthcoming.
DTG's telephone operating subsidiaries currently receive compensation from
long distance companies for intrastate long distance services through access
charges or toll settlements that are subject to state regulatory commission
approval. The South Dakota Public Utilities Commission approved an intrastate
access rate increase for DTG effective December 10, 1996. There are no rate
requests of DTG currently pending before any regulatory commission.
LONG DISTANCE REGULATION. The FCC has classified DTG as a non-dominant IXC
for purposes of all long distance operations conducted outside of its existing
local service exchanges. As a non-dominant carrier, DTG may provide domestic
interstate communications in these areas without prior FCC authorization,
although FCC authorization is required for the provision of international
telecommunications by non-dominant carriers. Generally, the FCC has chosen not
to exercise its statutory power to closely regulate the charges or practices of
non-dominant carriers. Nevertheless, non-dominant carriers are required by
statute to offer interstate and international services under rates, terms and
conditions that are just, reasonable and not unduly discriminatory, and the FCC
acts upon complaints against such carriers for failure to comply with statutory
obligations or with the FCC's rules, regulations and policies. The FCC also has
the power to impose more stringent regulatory requirements on DTG and to change
its regulatory classification, although DTG believes that, in the current
regulatory environment, the FCC is unlikely to do so.
Historically, both domestic and international non-dominant long distance
carriers maintained tariffs on file with the FCC. Pursuant to this requirement,
DTG filed and maintained with the FCC a tariff for its interstate and
international services. DTG also has obtained FCC authority to provide
international services through the resale of switched services of various
carriers. On March 21, 1996, the FCC initiated a rulemaking proceeding in which
it proposed to eliminate the requirement that non-dominant interstate carriers,
such as DTG, maintain tariffs on file with the
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FCC for domestic interstate services. On October 29, 1996, the FCC announced
that, following a nine-month transition period, long distance carriers were no
longer required to file tariffs for interstate domestic long distance service,
and that the relationship between carriers and their customers would be governed
by individual contracts. Carriers also had the option immediately to cease
filing tariffs. DTG did not elect to cease filing interstate tariffs. Following
a judicial stay of the FCC's detariffing order, the FCC on March 6, 1997,
released a public notice stating that the tariffing rules in place prior to
December 22, 1996, were once again in effect. Thus, nondominant carriers
providing interstate, domestic interexchange services, such as DTG, continue to
be required to file tariffs pursuant to the FCC's rules.
The FCC also imposes prior approval requirements on transfers of control
and assignments of operating authorizations. The FCC has the authority to
generally condition, modify, cancel, terminate or revoke operating authority for
failure to comply with federal laws and/or the rules, regulations and policies
of the FCC. Fines or other penalties also may be imposed for such violations.
Although DTG believes that it has complied in all material respects with
applicable laws and regulations, there can be no assurance that the FCC or third
parties will not raise issues with regard to DTG's compliance with applicable
laws and regulations.
The intrastate long distance telecommunications operations of DTG also are
subject to various state laws and regulations, including certification
requirements. Generally, DTG must obtain and maintain certificates of public
convenience and necessity from regulatory authorities as well as file tariffs in
most states in which it offers intrastate long distance services and, in most of
these jurisdictions, also must file and obtain prior regulatory approval of
tariffs for its intrastate offerings. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of certified
carriers and/or for: corporate reorganizations; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; carrier stock offerings; and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities. Fines and other penalties
also may be imposed for such violations.
At the present time, DTG is authorized to provide originating long distance
services to customers in all states except Alaska and Hawaii. Those services
may terminate in any state in the United States and may also terminate in
countries abroad. Only 31 states have public utility commissions that actively
assert regulatory oversight over intrastate services such as those currently
offered by DTG. Like the FCC, many of these regulating jurisdictions are
relaxing the regulatory restrictions currently imposed on telecommunications
carriers for intrastate service. While some of these states restrict the
offering of intra-LATA services by DTG and other IXCs, the general trend is
toward opening up these markets to DTG and other IXCs. Those states that permit
the offering of intra-LATA services by IXCs generally require that end-users
desiring to access these services dial special access codes which place DTG and
other IXCs at a disadvantage as compared to LEC intra-LATA toll service which
generally requires no access code.
WIRELESS SERVICES. DTG, through its wholly owned subsidiary, Dakota
Wireless Systems, Inc. ("DWS"), had a Spectrum Agreement with U S WEST Wireless
for participation in the FCC's PCS D- and E-Block spectrum auction. This
auction concluded on January 14, 1997, with U S WEST Wireless being the
successful bidder on BTA-421 (Sioux City) for the E-Block at $2.44 per
population point. DTG's agreement covers 104,900 population points in DTG's
area of interest in Southeastern South Dakota and Northwestern Iowa outside of
the municipal boundaries of Sioux City. DTG has a total investment of $255,956
in these licenses. DTG has entered into negotiations with U S WEST Wireless for
additional portions of the BTA, but there is no assurance that these
negotiations will be successful for DTG.
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The licensing, construction, operation, acquisition and sale of wireless
networks, as well as the number of PCS, cellular and other wireless licensees
permitted in each market, are regulated by the FCC. Federal law prohibits the
states from regulating the rates charged by wireless telecommunications carriers
(including PCS and cellular). Although some states have petitioned the FCC for
authority to regulate wireless rates, thus far no such petitions have been
successful. Federal law also expressly prohibits the states from regulating the
entry of wireless carriers. However, to the extent not otherwise preempted, the
states are permitted to regulate any other terms and conditions of wireless
services, including but not limited to customer billing information and
practices; consumer protection matters; bundling of service and equipment;
availability of wholesale capacity; and facilities siting issues. There can be
no assurance that state agencies having jurisdiction over DTG's business will
not adopt regulations, impose taxes on PCS licenses or take other actions that
would adversely affect the business of DTG. Federal and state regulators also
will determine important aspects of DTG's operations, such as technical aspects
of and payments for interconnection with landline and other wireless networks.
On July 26, 1996, the FCC released a report and order establishing
timetables for making emergency 911 services available by PCS and other mobile
services providers, including "enhanced 911" services that provide the caller's
telephone number, location and other useful information. In several subsequent
orders, the FCC has modified its requirements and postponed the deadlines for
compliance. Upon implementation of the requirements, PCS providers must be able
to process and transmit 911 calls (without call validation), including those
from callers with speech or hearing disabilities. Providers must also be able
to relay a caller's automatic number identification and cell site, and by 2001
they must be able to identify the location of a 911 caller within 125 meters in
67% of all cases. State actions incompatible with these FCC rules are subject
to preemption. Various parties have petitioned the FCC to reconsider certain
requirements imposed in the order and in subsequent proceedings.
On August 1, 1996, the FCC released a report and order expanding the
flexibility of PCS and other commercial mobile radio services to provide fixed
as well as mobile services. Such fixed services include, but need not be
limited to, "wireless local loop" services and wireless backup of private branch
exchanges ("PBXs") and local area networks, to be used in the event of
interruptions due to weather or other emergencies. A petition for
reconsideration or clarification of aspects of the FCC's order presently is
pending.
The FCC limits the aggregate amount of spectrum in which a licensee may
have an attributable interest. In general, licensees in the PCS, cellular or
specialized mobile radio ("SMR") services may not have an attributable interest
in a total of more than 45 MHz of PCS, cellular and SMR spectrum in a geographic
area. On November 19, 1998, the FCC adopted a Notice of Proposed Rulemaking to
reevaluate the need for the spectrum aggregation limit.
DTG must obtain a number of approvals, licenses and permits for the
operation of its wireless paging and mobile radio business, including land use
regulatory approvals and licenses from the Federal Aviation Administration in
connection with its PCS towers. Additionally, the wireless telecommunications
industry is subject to certain state and local governmental regulations.
Operating costs also are affected by other government actions that are beyond
DTG's control. There is no assurance that the various federal, state and local
agencies responsible for granting such licenses, approvals and permits will do
so or that, once granted, those agencies will not revoke or fail to renew them.
Failure to obtain such licenses, approvals and permits would adversely affect,
delay commencement of or prohibit certain business operations proposed by DTG.
CABLE TELEVISION REGULATION. The operation of cable television systems is
extensively regulated through a combination of federal legislation and FCC
regulations, by some state governments and by most local government franchising
authorities such as municipalities and counties. The Telecommunications Act
also affected the regulation of cable television operations. The
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new law alters federal, state and local laws and regulations regarding
telecommunications providers and cable television service providers, including
DTG. The discussion below summarizes the relevant provisions of the
Telecommunications Act and reviews the pre-existing federal cable television
regulation as revised by the Telecommunications Act.
THE TELECOMMUNICATIONS ACT OF 1996. The following is a summary of certain
provisions of the Telecommunications Act which could materially affect the
growth and operation of the cable television industry and the cable and
telecommunications services provided by DTG. The FCC has undertaken, and
continues to undertake, numerous rulemaking proceedings to interpret and
implement the provisions discussed below. It is not possible at this time to
predict the effects of such rulemaking proceedings on DTG.
CABLE RATE REGULATION. Rate regulation of DTG's cable television services
is divided between the FCC and local units of government, primarily the local
municipalities in which DTG provides services. The FCC's jurisdiction extends
to the cable programming service tier ("CPST"), which consists largely of
satellite-delivered programming (excluding basic tier programming and
programming offered on a per-channel or per-program basis). Local units of
government (commonly referred to as "local franchising authorities" or "LFAs")
are primarily responsible for regulating rates for the basic tier of cable
service ("BST"), which typically will contain at least the local broadcast
stations and public access, educational and government ("PEG") channels.
Equipment rates are also regulated by LFAs. The FCC retains appeal jurisdiction
from LFA decisions. Cable services offered on a per-channel or per-program-only
basis remain unregulated. By virtue of its small size, DTG is currently exempt
from these regulations.
Because of DTG's rate structure and small size, there is no CPST regulation
of DTG's rates at the current time. If DTG's cable operations were to increase
above the thresholds established in 1996 or if DTG were to change its rate
structure with respect to cable services, additional regulations may apply.
Those additional regulations would include, through March 31, 1999, CPST rate
regulations, which would be triggered only by an LFA complaint. An LFA
complaint must be based upon more than one subscriber complaint. Prior to the
Telecommunications Act, an FCC review of CPST rates could be occasioned by a
single subscriber complaint to the FCC. The Telecommunications Act does not
disturb existing or pending CPST rate settlements between DTG and the FCC.
DTG's BST rates remain subject to LFA regulation under the Telecommunications
Act. Existing law precludes rate regulation wherever a cable operator faces
effective competition. The Telecommunications Act expands the definition of
effective competition to include any franchise area where a LEC (or affiliate)
provides video programming services to subscribers by any means other than
through direct broadcast satellite service. There is no penetration minimum for
the LEC to qualify as an effective competitor, but it must provide comparable
programming services (12 channels including some broadcast channels) in the
franchise area. By virtue of its small size, DTG is currently exempt from most
of these requirements.
Under the Telecommunications Act, DTG will be allowed to aggregate on a
franchise, system, regional or company level its equipment costs into broad
categories, such as converter boxes, regardless of the varying levels of
functionality of the equipment within each such broad category. The
Telecommunications Act allows DTG to average together costs of different types
of converters including non-addressable, addressable and digital. The statutory
changes will also facilitate the rationalizing of equipment rates across
jurisdictional boundaries. These cost-aggregation rules do not apply to the
limited equipment used by "BST-only" subscribers.
CABLE UNIFORM RATE REQUIREMENTS. The Telecommunications Act immediately
relaxes the uniform rate requirements of the 1992 Cable Act by specifying that
such requirements do not apply where the operator faces effective competition,
and by exempting bulk discounts to multiple dwelling units, although complaints
regarding predatory pricing may be made to the FCC. Upon a prima
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facie showing that there are reasonable grounds to believe that the discounted
price is predatory, the cable system operator will have the burden of proving
otherwise.
DEFINITION OF CABLE SYSTEM. The Telecommunications Act changes the
definition of a cable system so that competitive providers of video services
will only be regulated and franchised as a cable system if they use public
rights-of-way.
CABLE POLE ATTACHMENTS. Under the Telecommunications Act, investor-owned
utilities must make poles and conduits available to cable systems under
delineated terms. Electric utilities are given the right to deny access to
particular poles on a nondiscriminatory basis for lack of capacity, safety,
reliability and generally accepted engineering purposes. On March 14, 1997, the
FCC released a notice of proposed rulemaking to amend its rules and policies
governing pole attachments. In its notice, the FCC proposed a new formula for
determining rates applicable to attachments on poles, within ducts, conduits or
rights-of-way by both cable systems and telecommunications carriers until a
separate methodology is proposed for telecommunications carriers. In the
Telecommunications Act, Congress directed the FCC to issue a new pole attachment
formula relating to telecommunications carriers within two years of the
effective date of the Telecommunications Act, to become effective five years
after enactment. On February 6, 1998, the FCC released a Report and Order
implementing a methodology for determining pole attachment rates for
telecommunications carriers. Those rules will result in higher pole rental
rates for cable operators. Any increases pursuant to this formula may not begin
for five years and will be phased-in in equal increments over the fifth through
the tenth years. This new FCC formula does not apply in states which certify
that they regulate pole rents. Pole owners must impute pole rentals to
themselves if they offer telecommunications or cable services. Cable operators
need not pay future make-ready on poles currently contracted if the make-ready
is required to accommodate the attachments of another user, including the pole
owner.
CABLE ENTRY INTO TELECOMMUNICATIONS. The Telecommunications Act declares
that no state or local laws or regulations may prohibit or have the effect of
prohibiting the ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose competitively
neutral requirements regarding universal service, public safety and welfare,
service quality and consumer protection. The Telecommunications Act further
provides that cable operators and affiliates providing telecommunications
services are not required to obtain a separate franchise from LFAs for such
services. The Telecommunications Act prohibits LFAs from requiring cable
operators to provide telecommunications service or facilities as a condition of
a grant of a franchise, franchise renewal or franchise transfer, except that
LFAs can seek institutional networks as part of such franchise negotiations.
The Telecommunications Act clarifies that traditional cable franchise fees may
only be based on revenues related to the provision of cable television services.
However, when cable operators provide telecommunications services, LFAs may
require reasonable, competitively neutral compensation for management of the
public rights-of-way.
To facilitate the entry of new telecommunications providers (including
cable operators), the Telecommunications Act imposes interconnection obligations
on all telecommunications carriers. All carriers must interconnect their
networks with other carriers and may not deploy network features and functions
that interfere with interoperability. Existing LECs also have the following
obligations: (i) good faith negotiation with carriers seeking interconnection;
(ii) unbundling, equal access and non-discrimination requirements; (iii) resale
of services, including resale at wholesale rates (with an exception for certain
low-priced residence services to business customers); (iv) notice of changes in
the network that would affect interconnection and interoperability; and (v)
physical collocation unless the LEC demonstrates that practical technical
reason, or space limitation, make physical collocation impractical. The
Telecommunications Act also directs the FCC, within one year of enactment, to
adopt regulations for existing LECs to share infrastructure with qualifying
carriers, and the FCC released those regulations on February 7, 1997. Under the
Telecommunications Act, individual interconnection rates must be just and
reasonable, based on cost, and may include a
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reasonable profit. Cost of interconnection will not be determined in an ROR
proceeding. Traffic termination charges shall be mutual and reciprocal. The
Telecommunications Act contemplates that interconnection agreements will be
negotiated by the parties and submitted to a state public utilities commission
for approval. A public utilities commission may become involved, at the request
of either party, if negotiations fail. If the state regulator refuses to act,
the FCC may determine the matter. If the public utilities commission acts, an
aggrieved party's remedy is to file a case in federal district court.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The Telecommunications Act
allows telephone companies to compete directly with cable operators by repealing
the previous telephone company/cable cross-ownership ban and the FCC's video
dialtone regulations. This will allow LECs, including the RBOCs, to compete
with cable operators both inside and outside of their telephone service areas.
If a LEC provides video via radio waves, it is subject to broadcast
jurisdiction. If a LEC provides common carrier channel service it is subject to
common carrier jurisdiction. A LEC providing video programming to subscribers
is otherwise regulated as a cable operator (including franchising, leased access
and customer service requirements), unless the LEC elects to provide its
programming via an open video system. LEC owned programming services will also
be fully subject to program access requirements.
The Telecommunications Act replaces the FCC's video dialtone rules with an
open video system ("OVS") plan by which LECs can provide cable service in their
telephone service area. LECs complying with the FCC OVS regulations will
receive relaxed oversight. The Telecommunications Act requires the FCC to act
on any such OVS certification within 10 days of its filing. Only the program
access, negative option billing prohibition, subscriber privacy, PEG, must-carry
and retransmission consent provisions of the Communications Act of 1934, as
amended, will apply to LECs providing OVS. Franchising, rate regulation,
consumer service provisions, leased access and equipment compatibility will not
apply. Cable copyright provisions will apply to programmers using OVS. LFAs
may require OVS operators to pay franchise fees only to the extent that the OVS
provider or its affiliates provide cable services over the OVS. OVS operators
will be subject to LFA general right-of-way management regulations. Such fees
may not exceed the franchise fees charged to cable operators in the area, and
the OVS provider may pass through the fees as a separate subscriber bill item.
The FCC has adopted regulations prohibiting an OVS operator from
discriminating among programmers and ensuring that OVS rates, terms and
conditions for service are reasonable and nondiscriminatory. Further, the FCC
has adopted regulations prohibiting a LEC-OVS operator, or its affiliates, from
occupying more than one-third of the system's activated channels when demand for
channels exceeds supply, although there are no numeric limits. The
Telecommunications Act also mandates OVS regulations governing channel sharing,
extending the FCC's sports exclusivity, network nonduplication and syndicated
exclusivity regulations and controlling the positioning of programmers on menus
and program guides. The Telecommunications Act does not require LECs to use
separate subsidiaries to provide incidental inter-LATA video or audio
programming services to subscribers or for their own programming ventures. The
validity of the FCC's rules currently is under review in consolidated cases
pending before the United States Court of Appeals for the Fifth Circuit.
While there remains a general prohibition on LEC buyouts of cable systems
(any ownership interest exceeding 10%), cable operator buyouts of LEC systems
and joint ventures between cable operators and LECs in the same market, the
Telecommunications Act provides exceptions to this prohibition. A rural
exception permits buyouts where the purchased system serves an area with fewer
than 35,000 inhabitants outside an urban area. Where a LEC purchases a cable
system, that system, in addition to any other system in which the LEC has an
interest, may not serve 10% or more of the LEC's telephone service area.
Additional exceptions are also provided for similar buyouts. The
Telecommunications Act also provides the FCC with the power to grant waivers of
the
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buyout provisions in cases where: (i) the cable operator or LEC would be subject
to undue economic distress; (ii) the system or facilities would not be
economically viable; or (iii) the anticompetitive effects of the proposed
transaction are clearly outweighed by the effect of the transaction in meeting
community needs. The LFA must approve any such waiver.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The
Telecommunications Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as exempt
telecommunications companies, and must apply to the FCC for operating authority.
DTG anticipates that large utility holding companies will become significant
competitors to both cable television and other telecommunications providers as a
result of the Telecommunications Act.
CROSS-OWNERSHIP AND MUST CARRY. The Telecommunications Act eliminates
broadcast/cable cross-ownership restrictions (including broadcast network/cable
restrictions) but leaves in place FCC regulations prohibiting local cross-
ownership between television stations and cable systems. The FCC is empowered
by the Telecommunications Act to adopt rules to ensure carriage, channel
positioning and non-discriminatory treatment of non-affiliated broadcast
stations by cable systems affiliated with a broadcast network. Previous
satellite master antenna television ("SMATV") and MMDS cable cross-ownership
restrictions have been eliminated for cable operators subject to effective
competition. By virtue of its small size, DTG is currently exempt from these
regulations. The Telecommunications Act preserves local television
broadcasters' rights to signal carriage on cable systems ("must-carry") and
clarifies that the geographic scope of must-carry is to be based on commercial
publications which delineate television markets based on viewing patterns. The
FCC is directed to grant or deny must-carry requests within 120 days of a
complaint being filed with the FCC.
CABLE EQUIPMENT COMPATIBILITY AND SCRAMBLING REQUIREMENTS. The
Telecommunications Act directed the FCC to establish an equipment comparability
rule emphasizing that: (i) narrow technical standards, mandating a minimum
degree of common design among televisions, VCRs and cable systems, and relying
heavily on the open marketplace, should be pursued; (ii) competition for all
converter features unrelated to security descrambling should be maximized; and
(iii) adopted standards should not affect unrelated telephone and computer
features. Pursuant to the Telecommunications Act, the FCC has adopted
regulations which assure the competitive availability of converters ("navigation
devices") from vendors other than cable operators without impinging upon signal
security concerns or theft of service protections. Waivers from these
requirements will be available if the cable operator shows the waiver is
necessary for the introduction of new services. Once the equipment market
becomes competitive, FCC regulations in this area will be terminated.
The Telecommunications Act requires cable operators, upon subscriber
request, to fully scramble or block at no charge the audio and video portion of
any channel not specifically subscribed to by a household. Further, the
Telecommunications Act provides that sexually explicit programming must be fully
scrambled or blocked. If the cable operator cannot fully scramble or block its
signal, it must restrict transmission to those hours of the day when children
are unlikely to view such programming.
PRE-EXISTING FEDERAL REGULATION. The 1984 Cable Act and the 1992 Cable Act
regulated the cable television industry and the vast majority of that regulation
remains unchanged by the Telecommunications Act. The 1984 Cable Act created
uniform national standards and guidelines for the regulation of cable systems.
Among other things, the 1984 Cable Act generally preempted local control over
cable rates in most areas. In addition, the 1984 Cable Act affirmed the right
of a franchising authority (state or local, depending on the practice in
individual states) to award one or more franchises within its jurisdiction. It
also prohibited non-grandfathered cable systems from
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operating without a franchise in such jurisdiction. The 1984 Cable Act: (i)
requires cable television systems with 36 or more activated channels to reserve
a percentage of such channels for commercial use by unaffiliated third parties;
(ii) permits franchise authorities to require the cable operator to provide
channel capacity, equipment and facilities for public, educational and
governmental access; and (iii) regulates the renewal of franchises.
The 1992 Cable Act greatly expanded federal and local regulation of the
cable television industry. Certain of the more significant areas of regulation
imposed by the 1992 Cable Act are discussed below.
REGULATION OF PROGRAM LICENSING. The 1992 Cable Act directed the FCC to
issue regulations regarding the sale and acquisition of cable programming
between multichannel video program distributors (including cable operators) and
programming services in which a cable operator has an attributable interest.
The legislation and the implementing regulations adopted by the FCC preclude
most exclusive programming contracts (unless the FCC first determines the
contract serves the public interest) and generally prohibit a cable operator
that has an attributable interest in a programmer from improperly influencing
the terms and conditions of sale to unaffiliated multichannel video program
distributors. Further, the 1992 Cable Act requires that such cable affiliated
programmers make their programming services available to cable operators and
competing video technologies such as MMDS and DBS, and to telephone company
providers of video services, on terms and conditions that do not unfairly
discriminate among such competitors.
REGULATION OF CARRIAGE OF PROGRAMMING. Under the 1992 Cable Act, the FCC
adopted regulations prohibiting cable operators from requiring a financial
interest in a program service as a condition to carriage of such service,
coercing exclusive rights in a programming service or favoring affiliated
programmers so as to restrain unreasonably the ability of unaffiliated
programmers to compete.
REGULATION OF CABLE SERVICE RATES. The 1992 Cable Act subjected DTG's
cable systems to rate regulation, except in those cases where they face
"effective competition." The FCC was required to establish standards and
procedures governing regulation of rates for basic cable service, equipment and
installation, which were then to be implemented by state and local franchising
authorities. The 1992 Cable Act also required the FCC, upon complaint from a
franchising authority or a cable subscriber, to review the reasonableness of
rates for CPSTs. The Telecommunications Act amended the 1992 Cable Act to allow
only LFAs to file complaints. Services offered on an individual basis, such as
pay television and pay-per-view services, were not subject to rate regulation.
On April 1, 1993, the FCC adopted rate regulations governing virtually all
cable systems, which were revised on February 22, 1994. Under these
regulations, existing basic and CPST service rates typically are evaluated
against benchmark rates established by the FCC and are subject to mandatory
reductions. Equipment and installation charges are regulated based on actual
costs. As noted above, the Telecommunications Act provides that rate regulation
of the CPST automatically sunsets on March 31, 1999.
The FCC also allowed cable operators to elect to justify rates under cost-
of-service rules, which allow high cost systems to establish rates in excess of
the benchmark level. The FCC's interim cost-of-service rules allowed a cable
operator to recover, through rates for regulated cable services, its normal
operating expenses plus a rate of return equal to 11.25% on the rate base.
However, the FCC significantly limited the inclusion in the rate base of
acquisition costs in excess of the book value of tangible assets. As a result,
DTG pursued cost-of-service justifications in only a few cases. On December 15,
1995, the FCC adopted slightly more favorable cost-of-service rules.
The FCC's rate regulations generally permit cable operators to adjust rates
to account for inflation and increases in certain external costs, including
programming costs, to the extent such
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increases exceed the rate of inflation. However, a cable operator may pass
through increases in the cost of programming services affiliated with such cable
operator, to the extent such costs exceed the rate of inflation only if the
price charged by the programmer to the affiliated cable operator reflects either
prevailing prices offered in the marketplace by the programmer to unaffiliated
third parties or the fair market value of the programming. The FCC's revised
regulations confirm that increases in pole attachment fees ordinarily will not
be accorded external cost treatment. The FCC recently adopted a method for
recovering external costs and inflation on an annual basis. The new method
minimizes the need for frequent rate adjustments and the regulatory lag problems
associated with the previous rate adjustment methodology.
The regulations also provide mechanisms for adjusting rates when regulated
tiers are affected by channel additions or deletions. Additional programming
costs resulting from channel additions can be accorded the same external
treatment as other programming costs increases, and cable operators presently
are permitted to recover a mark-up on their programming expenses. Under one
option, operators were allowed a flat fee increase ($.20) per channel added to
an existing CPST, with an aggregate cap on such increases ($1.20) plus a license
fee reserve ($.30) through 1996. In 1997, an additional flat fee increase
($.20) was available, and the license fees for additional channels and for
increases in existing channels were no longer subject to the aggregate cap. This
optional approach for adding services expired on December 31, 1997.
The FCC adopted additional rules that permit channels of new programming
services to be added to cable systems in a separate new product tier which the
FCC has determined that it will not rate regulate at this time. The FCC also
has adopted rules allowing operators to raise rates based on costs incurred in
connection with a substantial upgrade of the cable system. The FCC provided
additional rate relief for small operators, including DTG, and to any additional
systems that DTG acquires to the extent that the systems are already eligible
for this favorable treatment.
REGULATION OF CUSTOMER SERVICE. As required by the 1992 Cable Act, the FCC
has adopted comprehensive regulations establishing minimum standards for
customer service and technical system performance. Local franchising
authorities are allowed to enforce stricter customer service requirements than
the FCC standards.
REGULATION OF CARRIAGE OF BROADCAST STATIONS. The 1992 Cable Act granted
commercial broadcasters a choice of must-carry rights or retransmission-consent
rights and gave noncommercial educational broadcasters must-carry rights. By
October 1993, cable operators were required to secure permission from
broadcasters that elected retransmission-consent rights before retransmitting
the broadcasters' signals. Local and distant broadcasters can require cable
operators to make a payment as a condition to carriage of such broadcasters'
stations on a cable system. Established superstations were not granted such
rights. Commercial broadcasters make a new election between must carry
retransmission consent rights every three years.
The 1992 Cable Act also imposed obligations to carry local broadcast
stations for such stations which chose a must-carry right, as distinguished from
the retransmission-consent right described above. The 1992 Cable Act and the
rules adopted by the FCC generally provided for mandatory carriage by cable
systems of all local full-power commercial television broadcast signals
selecting must-carry, including the signals of stations carrying home-shopping
programming and, depending on a cable system's channel capacity, non-commercial
television broadcast signals. On March 31, 1997, the United States Supreme
Court upheld the constitutionality of the must-carry provisions of the 1992
Cable Act.
OWNERSHIP REGULATIONS. The 1992 Cable Act required the FCC to: (i)
promulgate rules and regulations establishing reasonable limits on the number of
cable subscribers which may be served by a single multiple system cable operator
or entities in which it has an attributable interest; (ii) prescribe rules and
regulations establishing reasonable limits on the number of channels on a
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cable system that will be allowed to carry programming in which the owner of
such cable system has an attributable interest; and (iii) consider the necessity
and appropriateness of imposing limitations on the degree to which multichannel
video programming distributors (including cable operators) may engage in the
creation or production of video programming. On September 23, 1993, the FCC
adopted regulations establishing a 30% limit on the number of homes nationwide
that a cable operator may reach through cable systems in which it holds an
attributable interest (attributable for these purposes is defined as a five
percent or greater ownership interest or the existence of any common directors),
with an increase to 35% if the additional cable systems are minority controlled.
However, the FCC stayed the effectiveness of its ownership limits pending the
appeal of a September 16, 1993, decision by the United States District Court for
the District of Columbia which, among other things, found unconstitutional the
provision of the 1992 Cable Act requiring the FCC to establish such ownership
limits. On appeal, however, the United States Court of Appeals for the District
of Columbia Circuit upheld the provision. As a result, DTG's ability to acquire
interests in additional cable systems may be affected.
On September 23, 1993, the FCC also adopted regulations limiting carriage
by a cable operator of national programming services in which that operator
holds an attributable interest (using the same attribution standards as
discussed above) to 40% of the first 75 activated channels on each of the cable
operator's systems. The rules provide for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. Channels beyond the first 75
activated channels are not subject to such limitations, and the rules do not
apply to local or regional programming services.
In the same rulemaking proceeding, the FCC concluded that additional
restrictions on the ability of multichannel distributors to engage in the
creation or production of video programming presently are unwarranted.
Under the 1992 Cable Act and the FCC's regulations, a cable operator could
not hold a license for MMDS and DBS systems within the same geographic area in
which it provides cable service. The Telecommunications Act would allow such
ownership if effective competition exists in that geographic area.
The 1992 Cable Act contains numerous other provisions which, together with
the 1984 Cable Act, create a comprehensive regulatory framework. Violation by a
cable operator of the statutory provisions or the rules and regulations of the
FCC can subject the operator to substantial monetary penalties and other
significant sanctions such as suspension of licenses and authorizations,
issuance of cease and desist orders and imposition of penalties. Many of the
specific obligations imposed on the operation of cable television systems under
these laws and regulations are complex, burdensome and increase DTG's cost of
doing business.
COPYRIGHT REGULATIONS. The Copyright Revision Act of 1976 (the "Copyright
Act") provides cable television operators with a compulsory license for
retransmission of broadcast television programming without having to negotiate
with the stations or individual copyright owners for retransmission consent for
the programming. The availability of the compulsory license is conditioned upon
the cable operators' compliance with applicable FCC regulations, certain
reporting requirements and payment of appropriate license fees, including
interest charges for late payments, pursuant to the schedule of fees established
by the Copyright Act and regulations issued thereunder. The Copyright Act also
empowers the Copyright Office to periodically review and adjust copyright
royalty rates based on inflation and/or petitions for adjustments due to
modifications of FCC rules. The FCC has recommended to Congress the abolition
of the compulsory license for cable television carriage of broadcast signals, a
proposal that has received substantial support from members of
86
Congress. Any material change in the existing statutory copyright scheme could
significantly increase the costs of programming and be adverse to the business
interests of DTG.
PRIVACY. The 1984 Cable Act imposes a number of restrictions on the manner
in which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator must
periodically provide all customers with written information about its policies
regarding the collection and handling of customer data, their privacy rights
under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements are strengthened to require
that cable operators take such actions as are necessary to prevent unauthorized
access to personally identifiable information.
STATE AND LOCAL REGULATION. Because cable television systems use local
streets and rights-of-way, cable television systems are generally licensed or
franchised by local municipal or county governments and, in some cases, by
centralized state authorities with such franchises being given for fixed periods
of time subject to extension or renewal largely at the discretion of the issuing
authority. The specific terms and conditions of such franchises vary
significantly depending on the locality, population, competitive services and a
number of other factors. While this variance takes place among systems of
essentially the same size in the same state, franchises generally are
comprehensive in nature and impose requirements on the cable operator relating
to all aspects of cable service including franchise fees, technical
requirements, channel capacity, subscriber rates, consumer and service
standards, access channel and studio facilities, insurance and penalty
provisions. Local franchise authorities generally must approve the sale or
transfer of cable systems to third parties. The franchising process, like the
federal regulatory climate, can become highly politicized and no assurances can
be given that DTG's franchises will be extended or renewed or that other
problems will not be encountered at the local level. In connection with the
franchise renewal process, LFAs commonly request the provision of enhanced cable
system technology as a condition of franchise renewal. The 1984 Cable Act grants
certain protective procedures in connection with renewal of cable franchises,
which procedures were further clarified by the renewal provisions of the 1992
Cable Act.
PROPOSED CHANGES IN REGULATION. The regulation of cable television systems
at the federal, state and local levels is subject to the political process and
has been in constant flux over the past decade. Material changes in the law and
regulatory requirements must be anticipated and there can be no assurance that
DTG's business will not be affected adversely by future legislation, new
regulation or deregulation. Legislative, administrative and/or judicial action
may change all or portions of the foregoing statements relating to competition
and regulation.
CABLE PROVISION OF INTERNET SERVICES. Transmitting indecent material via
the Internet is made criminal by the Telecommunications Act. However, on-line
access providers are exempted from criminal liability for simply providing
interconnection service; they are also granted an affirmative defense from
criminal or other action where in "good faith" they restrict access to indecent
materials. The Telecommunications Act further exempts on-line access providers
from civil liability for actions taken in good faith to restrict access to
obscene, excessively violent or otherwise objectionable material. On June 26,
1997, the United States Supreme Court held unconstitutional the provisions of
the Telecommunications Act criminalizing indecent on-line transmissions.
REGULATION OF INTERNET SERVICES. Internet-related services are not
currently subject to direct regulation by the FCC or any other United States
agency, other than regulation applicable to businesses generally. The FCC
recently rejected requests that it regulate certain voice transmissions over the
Internet as telecommunications services. Changes in the regulatory environment
relating to the telecommunications or Internet-related services industry could
have an adverse effect on DTG's Internet-related services business. The
Telecommunications Act may permit
87
telecommunications companies, RBOCs or others to increase the scope or reduce
the cost of their Internet access services. In its recent access charge reform
proceeding, the FCC concluded that incumbent LECs may not assess interstate
access charges on information service providers but stated that it planned to
address issues relating to information service providers' use of the public
switched network as part of a broader set of issues under review in a related
proceeding. Given the present unsettled nature of the regulation of Internet
services, DTG cannot predict the effect that the Telecommunications Act or any
future legislation, regulation or regulatory changes may have on its business.
In addition to the regulatory uncertainties, the law relating to the
liability of on-line services providers and Internet access providers for
information carried on, disseminated through or hosted on their systems is
currently unsettled. Several private lawsuits seeking to impose such liability
are currently pending. In one action brought against an Internet access
provider, Religious Technology Center v. Netcom On-Line Communication Services,
Inc., the United States District Court for the Northern District of California
ruled in a preliminary phase that under certain circumstances Internet access
providers could be held liable for copyright infringement. The case has been
settled by the parties.
The Telecommunications Act prohibits and imposes criminal penalties and
civil liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. On June 12, 1996, however, a panel of three federal judges
granted a preliminary injunction barring enforcement of this portion of the
Telecommunications Act to the extent that enforcement is based upon allegations
other than obscenity or child pornography as an impermissible restriction on the
First Amendment's right of free speech. That decision was appealed to the
United States Supreme Court, which held the provisions unconstitutional. In
addition, Congress, in consultation with the United States Patent and Trademark
Office and the Clinton Administration's National Information Infrastructure Task
Force, is currently considering legislation to address the liability of on-line
service providers and Internet access providers, and numerous states have
adopted or are currently considering similar types of legislation. The
imposition upon Internet access providers or Web hosting sites of potential
liability for materials carried on or disseminated through their systems could
require DTG to implement measures to reduce its exposure to such liability,
which may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings. DTG believes that it is
currently unsettled whether the Telecommunications Act prohibits and imposes
liability for any services provided by I-way should the content or information
transmitted be subject to the Telecommunications Act.
The law relating to the liability of on-line service providers and Internet
access providers in relation to information carried, disseminated or hosted also
is being discussed by the World Intellectual Property Organization in the
context of ongoing consideration of updating existing, and adopting new,
international copyright treaties. Similar developments are ongoing in the
United Kingdom and other jurisdictions. The scope of authority of various
regulatory bodies in relation to on-line services is currently uncertain.
The Office of Telecommunications in the United Kingdom recently has
published a consultative document setting out a number of issues for discussion,
including the roles of traditional telecommunications and broadcasting
regulators with respect to on-line services. The Securities Investment Board in
the United Kingdom is investigating the status of on-line services and the
transmission of investment information over networks controlled by access
providers. Such transmissions may make an access provider liable for any
violation of securities and other financial services legislation and
regulations. Decisions regarding regulation, enforcement, content liability and
the availability of Internet access in other countries may significantly affect
the ability to offer certain services worldwide and the development and
profitability of companies offering Internet and on-line services in the future.
For example, it has been reported that CompuServe recently removed certain
content from its services worldwide in reaction to law enforcement activities in
Germany, and
88
it has been reported that an Internet access provider in Germany has been
advised by prosecutors that it may have liability for disseminating neo-Nazi
writings by providing access to the Internet where these materials are
available.
The increased attention focused upon liability issues as a result of these
lawsuits, legislation and legislative proposals could affect the growth of
Internet use. Any costs incurred as a result of liability or asserted liability
for information carried on or disseminated through its systems could have a
material adverse effect on the business, financial condition and results of
operations of DTG.
SUMMARY ONLY. The foregoing is only a summary of some of the present and
proposed federal, state and local regulations and legislation relating to DTG's
businesses. Other existing federal regulations, copyright licensing and, in
many jurisdictions, state and local regulatory requirements, currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which DTG operates. Neither the outcome of these proceedings nor
their impact upon DTG can be predicted at this time.
EMPLOYEES
As of September 30, 1998, DTG employed 166 employees, 147 of whom were
full-time employees and none of whom was subject to any collective bargaining
agreement.
ENVIRONMENTAL AND OTHER MATTERS
Except for site-specific issues, environmental issues tend to impact
members of the telecommunications industry in consistent ways. The United
States Environmental Protection Agency ("EPA") and other agencies regulate a
number of chemicals and substances that may be present in facilities used in the
provision of telecommunications services. These include preservatives which may
be present in certain wood poles, asbestos which may be present in certain
underground duct systems and lead which may be present in certain cable
sheathing. Components of DTG's network may include one or more of these
chemicals or substances. DTG believes that in their present uses, none of such
facilities of DTG poses any significant environmental or health risk that
derives from EPA regulated substances. If EPA regulation of any such substance
is increased, or if any facilities are disturbed or modified in such a way as to
require removal of the substance(s), special handling, storage and disposal may
be required for any such facilities removed from use.
RECENT DEVELOPMENTS
In July 1998, DTG and its wholly owned subsidiary DWS acquired by merger
Vantek. Vantek is a leading mobile radio operator and operates one of the
largest paging businesses in South Dakota. Under the terms of the merger
agreement, Vantek was merged with and into DWS, which is now a wholly owned
subsidiary of DTG, operating both DWS' current PCS business and Vantek's
existing mobile radio and paging business. In addition, on November 1, 1998 DTG,
through DWS, acquired substantially all of the assets of Hurley Communications,
a regional specialized mobile radio company and a cellular telephone agent
serving an area complementary to that served by DWS.
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PROPERTIES
The tangible assets of DTG include a substantial investment in
telecommunications and cable equipment. The net book value of DTG's fixed
assets was $26.3 million as of September 30, 1998. No single property
represents 10% or more of DTG's total assets.
The principal properties of DTG do not lend themselves to simple
description by character and location. DTG's investment in property, plant and
equipment consisted of the following at December 31, 1996 and 1997, and
September 30, 1998:
DAKOTA TELECOMMUNICATIONS GROUP, INC.
(IN THOUSANDS)
FIXED ASSETS SEP. 30, 1998 DEC. 31, 1997 DEC. 31, 1996
- ------------ ------------- ------------- -------------
Telecommunications Plants $ 25,111 $ 23,948 $ 16,923
Cable Systems 5,693 5,352 4,870
Other Equipment 5,744 4,327 2,510
Land and Buildings 2,805 3,014 1,604
Construction in Progress 1,238 289 354
Telecommunications plants consists of switching equipment, transmission
equipment and related facilities, aerial cable, underground cable, conduit and
wiring. Cable systems consist of head-end, distribution and subscriber
equipment. Other equipment consists of public telephone instruments and
telephone equipment (including PBXs) used or leased by DTG in its operations,
poles, furniture, office equipment, vehicles and other work equipment. Land and
buildings consist of land owned in fee and improvements thereto, principally
central office buildings. Other property consists primarily of plant under
construction, capital leases and leasehold improvements.
DTG's rights-of-way for its telecommunications and cable transmission
systems are typically held under leases, easements, licenses or governmental
permits. All other major equipment and physical facilities are owned in fee and
are operated, constructed and maintained pursuant to rights-of-way, easements,
permits, licenses or consents on or across properties owned by others.
DTG believes that standard practices prevailing in the telephone industry
are followed by DTG's telephone operating subsidiaries in the construction and
maintenance of plant and facilities and that all properties presently being used
for operations of DTG are suitable, well maintained and adequately equipped for
the purposes for which they are used. Substantially all of DTG's properties are
subject to mortgage liens held by the Rural Telephone Finance Cooperative (the
"RTFC").
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The following property is owned in fee by DTG and its subsidiaries:
. Headquarters building - Irene, South Dakota
13,000 sq. ft., single story brick structure, with 11,800 sq. ft.
for offices, and 1,200 sq. ft. for storage. Originally built in
1977 and expanded twice since then.
. Main warehouse - Irene, South Dakota
5,000 sq. ft., metal structure.
. Service building - Irene, South Dakota
3,000 square feet, metal structure, with 600 sq. ft. for offices
and 2,400 sq. ft. for storage.
. Network switching center - Viborg, South Dakota
7,000 sq. ft., single story brick structure, on six-acre site in
an industrial park.
. Network service buildings (2) - Lennox, South Dakota
3,360 sq. ft. total, with 1,360 sq. ft. for switching (building
1), 2,000 sq. feet for storage (building 2).
. Switching center - Canton, South Dakota (owned by Dakota Telecom,
Inc.) Concrete block building 2,760 sq. ft., with 2,100 sq. ft.
for office and 660 sq. ft. for switching.
. Switching and equipment buildings
Irene, South Dakota (telephone) - 900 sq. ft.
Wakonda, South Dakota - 800 sq. ft.
Gayville, South Dakota - 600 sq. ft.
Parker, South Dakota - 1,400 sq. ft.
Alsen, South Dakota - 1,000 sq. ft., plus 400 sq. ft. for storage.
Flyger, South Dakota - 900 sq. ft.
Worthing, South Dakota - 1,100 sq. ft.
Beresford, South Dakota - 700 sq. ft.
Hurley, South Dakota - 900 sq. ft.
. Sundowner site - Sioux Falls, South Dakota - 100 ft. wireless
equipment tower with a 250 sq. ft. portage building on a 2.5 acre
site.
The following property is leased by DTG:
. Beresford, South Dakota - 250 sq. ft. (office)
. 9th & Phillips site - Sioux Falls, South Dakota - approx. 5,500 sq.
ft. (office)
. DataNet office lease - Sioux Falls, South Dakota - approx. 7,175 sq.
ft. (office)
. VanTek office space - Sioux Falls, South Dakota - approx. 4,000 sq.
ft. (office)
. Marshall County, Minnesota - approx. 1,200 sq. ft. (customer service
center)
. Rapid City, South Dakota - approx. 1,500 sq. ft. (sales office and
Internet access center)
DTG also has various CATV equipment buildings, all of which are small (less
than 300 sq. ft.) and most of which are on leased land in various communities
served by DTG.
All properties owned by DTG are subject to liens for loans obtained in the
ordinary course of business. DTG does not ordinarily acquire or hold as
investments real estate, interests in real estate, real estate mortgages or
securities of companies primarily engaged in real estate activities.
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LEGAL PROCEEDINGS
DTG and its subsidiaries are parties, as plaintiff or defendant, to a
number of legal proceedings. Except as described below, all of these
proceedings are considered to be ordinary routine litigation incidental to their
businesses and none is considered to be a material pending legal proceeding.
The incumbent cable provider in Marshall, Minnesota, Bresnan Communications
("Bresnan"), filed an appeal with the Minnesota Court of Appeals (File No. C8-
98-1139) on June 26, 1998, of the grant of a competitive franchise by the City
of Marshall to DTG. The parties to the appeal are Bresnan, the City of Marshall
and DTG. The appeal seeks to have the appellate court reverse the decision
granting the franchise.
In addition, on June 26, 1998, Bresnan filed an action in state court
(Fifth Judicial Circuit) directly against the City of Marshall alleging a
failure to provide certain requested information and a violation of the open
meeting laws by the Marshall Municipal Utilities Commission and the City in the
consideration of the grant of the franchise to DTG. Bresnan alleges that this
conduct has so tainted the granting of the franchise that the court should find
the franchise to be void. DTG is not a party to this lawsuit but will continue
to monitor its progress. Based on information presently available, DTG believes
that neither legal action is meritorious. Because DTG is a party to the appeal,
it will file briefs and orally argue its position before the appellate court.
However, in light of the possible negative outcomes to either of these actions,
DTG has suspended further work in the Marshall area. Construction efforts and
funds intended for Marshall equipment have been shifted to other areas where DTG
has been awarded franchises. If Bresnan is successful in either action, the
financial impact on DTG for work already completed is not expected to be
material and is not expected to have a materially adverse effect on future
periods.
In addition, on October 1, 1998, Bresnan filed an action in the District
Court of the State of Minnesota (Fifth District) against DTG alleging, among
other things, defamation and disparagement of Bresnan's business. The action is
based on the publication of a letter by DTG in the Marshall Independent
--------------------
newspaper. Bresnan seeks damages in an amount in excess of $50,000, together
with interest and attorney's fees. DTG believes it has meritorious defenses and
plans to vigorously defend this action.
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DTG MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is provided by DTG management as its analysis of
DTG's financial condition and results of operations. This analysis should be
read in conjunction with the separate consolidated financial statements of DTG
and its subsidiaries as of December 31, 1997 and 1996 and the notes thereto (the
"DTG Annual Financial Statements") and the unaudited consolidated financial
statements of DTG and its subsidiaries as of September 30, 1998 and the notes
thereto (the "DTG Interim Financial Statements") included in this Prospectus and
Proxy Statement.
OVERVIEW
DTG is a diversified communications services company specializing in the
design, construction and operation of broadband hybrid fiber optic
communications systems for small communities in South Dakota and the surrounding
states. DTG provides a full range of bundled products and services to its
customers, including switched local dial tone and enhanced services, network
access services, long distance telephone services, operator assisted calling
services, telecommunications equipment sale and leasing services, cable
television services, computer equipment sales, mobile radio, paging, Internet
access and related services and computer and computer networking products and
services, using both wireline and wireless technologies.
In 1996 DTG began a major reorganization and expansion program. This
program included the conversion of DTG from a stock cooperative into a publicly
held Delaware corporation, the redesign and rebuilding of DTG's switching center
and fiber backbone network, which was completed in 1997, and the expansion of
DTG's operations through selected acquisitions. During 1996, DTG purchased the
assets of 19 cable television systems. In December 1996, DTG, through a wholly
owned subsidiary, merged with TCIC, a South Dakota-based provider of long
distance and operator services. Also in December 1996, in a similar
transaction, DTG merged with I-way, one of South Dakota's largest Internet
service providers. In December 1997, DTG merged with DataNet, a leading
regional LAN/WAN computer integrator located in Sioux Falls, South Dakota.
These companies continue to operate as wholly owned subsidiaries of DTG under
the names DTG Communications, Inc., DTG Internet, Inc. and DTG DataNet, Inc.,
respectively.
In July 1998, DTG, through a wholly owned subsidiary, merged with Vantek, a
regional specialized mobile radio and paging company in southeastern South
Dakota. Vantek continues to operate as a wholly owned subsidiary of DTG under
the name DWS. On November 1, 1998 DTG, through DWS, acquired substantially all
of the assets of Hurley Communications, a regional specialized mobile radio
company and a cellular telephone agent serving an area complementary to that
served by DWS.
In conjunction with the Merger Agreement, DTG and McLeodUSA entered into a
20-year dark fiber lease agreement with an aggregate value of $5 million paid by
McLeodUSA in advance on October 28, 1998. Revenues under this agreement will be
reported on a deferred basis, resulting in additional revenues in 1998 of
approximately $42,000 and approximately $250,000 per year for the remainder of
the lease term.
DTG's reorganization and expansion plans have had, and will continue to
have, significant impacts on DTG's financial condition and results of
operations. As part of its network-rebuilding project, in 1995 DTG reassessed
the remaining useful life of its old facilities. In 1996 and 1997, DTG incurred
approximately $5.8 million and $13.6 million in new capital expenditures,
respectively. During the first nine months of 1998, DTG incurred an additional
$3.9 million in capital expenditures and purchased $703,000 of additional
materials for its 1998 developments. DTG anticipates spending substantial
additional funds for its continuing development programs. These
93
expenditures have been, and future expenditures are anticipated to be, financed
through substantial increases in DTG's long-term debt. These changes are
expected to combine to result in substantially higher depreciation and interest
expenses with corresponding reductions in DTG's net income. In addition, to
implement its growth plans, DTG completed the acquisitions described above and
increased its employee base from 34 employees at December 31, 1995 to 185
employees at September 30, 1998, resulting in additional increases in
amortization expense and employee-related operating expenses. While DTG
anticipates that its revenue base would continue to grow as it completes its new
facilities and markets new services, the resultant higher expense levels from a
combination of higher depreciation, amortization and interest expense, as well
as additional employee expenses, would likely cause DTG to recognize and report
net after-tax losses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The implementation of DTG's reorganization plans has had a significant
impact on DTG's balance sheet and financial condition. The following discussion
reviews the material changes in DTG's balance sheet accounts.
SEPTEMBER 30, 1998 COMPARED TO DECEMBER 31, 1997
Cash and Cash Equivalents and Temporary Cash Investments decreased from
$4,598,000 at December 31, 1997, to $1,805,000 at September 30, 1998, a decrease
of $2,793,000. The decrease was used for capital expenditures, investment in
acquisitions and to fund operating expenses.
Net Accounts Receivable decreased from $4,216,000 at December 31, 1997, to
$3,749,000 at September 30, 1998, a decrease of $467,000. This decrease was
primarily due to the payments of additional funds due to DTG from the National
Exchange Carriers Association for final adjustments to DTG's access revenue
requirements from its 1996 and 1997 telephone operation cost studies.
Materials and Supplies inventories increased from $1,109,000 at December
31, 1997 to $1,884,000 at September 30, 1998, an increase of $775,000. Of the
increase, $72,000 was a non-cash transaction related to the acquisition of
Vantek. The balance of this increase represents additional materials on hand to
be used in DTG's 1998 and 1999 development projects.
Prepaid Expenses increased from $276,000 at December 31, 1997 to $427,000
at September 30, 1998, an increase of $151,000. This increase was due to an
increase in prepaid insurance.
Other Investments decreased from $2,038,000 at December 31, 1997 to
$1,524,000 at September 30, 1998, a decrease of $514,000. This decrease was
primarily due to a sale of a treasury bill by DTG during the first quarter of
1998.
Deferred Charges increased from $653,000 at December 31, 1997 to $1,507,000
at September 30, 1998, an increase of $854,000, which was primarily related to
software purchases and development for DTG's new billing system and construction
project deposits.
Current Liabilities increased from $6,922,000 at December 31, 1997 to
$7,407,000, at September 30, 1998, a net increase of $485,000. The increase is
primarily related to an increase in accrued liabilities for DTG contributions to
DTG's Employee Stock Ownership Plan, which was adopted in December 1997.
Long-Term Debt increased from $29,200,000 at December 31, 1997 to
$30,793,000, at September 30, 1998, an increase of $1,593,000. This increase is
the result of $2,400,000 in advances made under a $6,000,000 revolving credit
line with the RTFC, offset by payments on existing Long-Term Debt. The advances
were used to fund DTG's 1998 construction projects. See Notes 2 and 3 to the
DTG Interim Financial Statements.
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Total Stockholders' Equity decreased from $7,804,000 at December 31, 1997
to $5,310,000 at September 30, 1998, a decrease of approximately $2,494,000.
This decrease was caused by DTG's operating losses of $3,828,000 during the
first nine months of 1998 offset by additional equity raised by DTG from the
exercise of outstanding warrants and the sale of stock to DTG's existing
stockholders. See Note 6 to the DTG Interim Financial Statements.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
---------- ----------
Selected Balance Sheet Items
- ----------------------------
Cash and Temporary Cash Investments $ 4,597.9 $ 2,870.4
Accounts Receivable, Net 4,216.0 1,784.9
Materials and Supplies 1,109.2 694.1
Excess of Cost Over Net Assets Acquired 4,869.1 1,831.0
Other Investments 2,037.6 625.7
Property, Plant and Equipment, Net 25,408.3 14,441.1
Current Liabilities 6,921.8 1,594.8
Selected Cash Flow Items
- ------------------------
Capital Expenditures $13,564.0 $ 5,751.6
Cash Provided From Operations 1,851.7 1,961.8
Cash Used for Investment 15,608.2 7,516.2
Cash Provided From Financing 15,933.0 1,353.0
Selected Capital Structure Items
- --------------------------------
Long-Term Debt $29,200.5 $15,338.4
Total Capital 38,394.5 22,448.3
Long-Term Debt to Total Capital 76% 68%
Cash and Temporary Cash Investments increased from $2,870,400 at December
31, 1996, to $4,597,900 at December 31, 1997, an increase of $1,727,500.
Approximately $200,000 of this increase was attributable to DataNet, which was
acquired by DTG in December 1997. The balance represents long-term debt
borrowings by DTG in late December 1997 in anticipation of the repayment of
DTG's $1,500,000 short-term revolving loan from the RTFC in early January 1998.
See Note 4 to the DTG Annual Financial Statements.
Net Accounts Receivable increased from $1,784,900 at December 31, 1996, to
$4,216,000 at December 31, 1997, an increase of $2,431,100. Of this increase,
$1,779,600 was attributable to net receivables from DataNet, which was acquired
in December 1997. The balance of this increase is primarily related to
additional funds due to DTG from final adjustments to its access revenue
requirements from its 1996 and 1997 telephone operation cost studies. See Note
1(M) to the DTG Annual Financial Statements.
Materials and Supplies inventories increased from $694,100 at December 31,
1996, to $1,109,200 at December 31, 1997, an increase of $415,100. Of this
increase, $187,000 was related to the inventories of goods held for resale in
DTG's DataNet operation. The balance represents materials on hand to be used in
DTG's planned development projects.
Excess of Cost Over Net Assets Acquired increased from $1,831,000 at
December 31, 1996, to $4,869,100 at December 31, 1997, an increase of
$3,038,100. This increase is due to DTG's acquisition of DataNet in December
1997, which was accounted for using the purchase method. See Note 13 to the DTG
Annual Financial Statements.
95
Other Investments increased from $625,700 at December 31, 1996, to
$2,037,600 at December 31, 1997, an increase of $1,411,900. This increase was
primarily due to the purchase by DTG of RTFC subordinated capital certificates
in connection with the long-term financing agreement reached with the RTFC in
July 1997. These certificates bear no interest and will be refunded to DTG upon
retirement of the associated debt. See the discussion of the RTFC financing
agreement, below, and Note 6 to the DTG Annual Financial Statements. DTG
anticipates making further investments in RTFC capital certificates as it
continues to borrow additional long-term funds from the RTFC.
Net fixed assets increased from $14,441,100 at December 31, 1996, to
$25,408,300 at December 31, 1997, a net increase of $10,967,200. This increase
primarily represents additional telecommunications plant assets constructed by
DTG in 1997. See Note 3 to the DTG Annual Financial Statements. DTG currently
plans to make substantial additional investments in new telecommunications
facilities and accordingly expects net fixed assets to significantly increase in
future years as these facilities are constructed.
Current Liabilities increased from $1,594,800 at December 31, 1996, to
$6,921,800 at December 31, 1997, an increase of $5,327,000. Approximately
$1,500,000 of this increase was attributable to normal current liabilities
associated with DataNet. These liabilities included approximately $569,300 in
floor plan financing arrangements. See Note 5 to the DTG Annual Financial
Statements. An additional $1,500,000 of the increase represents amounts due
under DTG's short-term revolving loan arrangement with the RTFC, which was
repaid in full in early January 1998. See Note 4 to the DTG Annual Financial
Statements. The current portion of DTG's long-term debt increased $692,300 due
to the overall increase in DTG's total long-term debt. The remaining increase
related primarily to current amounts due suppliers and contractors in connection
with DTG's 1997 development projects.
Long-Term Debt increased from $15,338,400 at December 31, 1996, to
$29,200,500 at December 31, 1997. At December 31, 1997, this debt consisted of
approximately $29,600,000 under a series of loans from the RTFC and $1,000,000
in long-term financing from Home Federal Savings Bank associated with the
guarantee by DTG of long-term debt incurred by DTG's Employee Stock Ownership
Plan to fund the acquisition of DTG Common Stock in December 1997, net of
$1,390,000 in associated current maturities. See Note 6 to the DTG Annual
Financial Statements. On June 24, 1997, DTG entered into a long-term loan
arrangement with the RTFC in the aggregate amount of $28,421,000. Of this
amount, $13,092,089 was used to refinance the then outstanding long-term debt
from the Rural Utilities Service on July 15, 1997. The remaining amounts are
allocated to refinance the $1,000,000 in debt assumed by DTG in the TCIC and I-
way acquisitions and to cover DTG's 1997 capital expenditures program.
Substantially all of DTG's 1997 capital expenditures were financed by the RTFC.
Total Stockholders' Equity increased from $6,412,200 at December 31, 1996,
to $7,804,100 at December 31, 1997, an increase of approximately $1,400,000.
This increase was primarily caused by the issuance of stock in connection with
the DataNet acquisition, reduced by DTG's 1997 operating loss. The presentation
of the Stockholders' Equity account structure changed substantially during 1997
due to the conversion of DTG from a South Dakota stock cooperative into a
Delaware corporation in July 1997 in the Conversion-Merger. The primary change
was the reclassification of the capital accounts from preferred stock and
cooperative capital credits into common stock. The Conversion-Merger, by
itself, did not change overall total equity. The Conversion-Merger process is
discussed in more detail above and in Notes 2, 7 and 15 to the DTG Annual
Financial Statements.
96
LIQUIDITY AND CAPITAL RESOURCES
DTG believes that it has adequate internal resources available to finance
its current operating requirements. Net Cash Used In Operations was $284,000 in
the first nine months of 1998. See the Consolidated Statement of Cash Flows
included in the DTG Interim Financial Statements. As discussed above, DTG
entered into a 20-year dark fiber lease agreement with McLeodUSA in October 1998
under which McLeodUSA made a one-time payment of $5 million. In addition, DTG
maintains two lines of credit with the RTFC, a $1.5 million revolving credit
line which was fully drawn at September 30, 1998 and a $6 million project
development line of credit with the RTFC, $3.6 million of which was available as
of September 30, 1998. Finally, DTG uses a combination of the floor plan
financing arrangements and a $2,000,000 working capital line of credit to fund
inventory holding costs in its DataNet operation. See Notes 2 and 3 to the DTG
Interim Financial Statements.
DTG's 1999 expansion plans will require it to substantially expand its
employee base beginning in November 1998, resulting in additional employee
expenses which will likely cause DTG to experience negative monthly operating
cash flows until its new development projects are completed and new subscribers
are added in late 1999 and in the year 2000. In addition, DTG currently
anticipates investing between $50 and $55 million in new capital expenditures in
1999 in connection with its new development projects. DTG currently plans to
fund these requirements through a combination of additional equity and long-term
project debt.
DTG's primary long-term lender is the RTFC, which provided the funds for
DTG's 1997 and 1998 construction projects. On July 17, 1998, the RTFC agreed to
additional long-term financing in the amount of $35,263,128. This financing is
contingent on DTG raising an additional $20 million in equity. Under the terms
of the Merger Agreement with McLeodUSA, McLeodUSA is required to make a capital
contribution to DTG of $20 million immediately following the completion of the
Merger. DTG currently plans to use this equity to support the additional long-
term debt financing from the RTFC, and to use the combination of these funds to
finance its operations and capital expenditure program in 1999. While the Merger
with McLeodUSA is expected to be completed within three to six months, it is
subject to a number of conditions outside of DTG's control including, but not
limited to, approval by DTG's stockholders, FCC license transfers and various
other regulatory approvals. There can be no assurance that the Merger will be
completed. If the Merger is not completed, DTG would be unable to finance its
expansion plans and would likely stop its ongoing development activities and
substantially reduce the size of its operations. In such an event, management
believes that DTG's operations would return to positive operating cash flow
within three months.
As part of DTG's expansion program, DTG routinely enters into cable
television franchise agreements with new communities. Some of these agreements
require DTG to post performance and development bonds. As of September 30,
1998, DTG has secured performance and payment bonds and irrevocable letters of
credit totaling $832,500 to various cities that have granted franchise
agreements to DTG. Of this amount, $650,000 is secured by promissory notes
between DTG and one of its lenders. In addition, DTG has had issued an
additional $25,000 in performance bonds since the end of the third quarter. See
Note 9 to the DTG Interim Financial Statements. Prior to the start of
construction in the various markets that have granted franchise agreements, DTG
will be required to post an additional $1.6 million in construction bonds. As
new franchise agreements are granted there will be corresponding increases in
the bonding requirements of DTG. While DTG has not experienced any difficulty
in posting these bonds in the past, absent the completion of the Merger with
McLeodUSA or another transaction providing additional equity to DTG, there is no
assurance that it will be able to continue to provide the financial resources to
post additional bonds in the future.
97
RESULTS OF OPERATIONS
DTG's reorganization plans have also significantly changed its results of
operations, primarily due to the additional entities acquired by DTG in the
mergers described above. As a result, the comparison of the financial results
of DTG's present operations to its past operations should be carefully analyzed.
The following discussion summarizes DTG's results of operations.
Nine Months ended September 30, 1998 and 1997
Total Operating Revenues increased from $8,441,000 during the first nine
months of 1997 to $24,222,000 in the same period during 1998, an increase of
$15,781,000, or approximately 187%. Of this increase, $13,440,000 reflects the
addition of revenues from DTG's DataNet and DWS operations acquired in December
1997 and July 1998. Of this increase, $1,301,000 represents additional access
revenues, discussed in more detail below. The balance reflects other internal
growth in DTG's operations.
Plant Operations expense increased from $2,673,000 during the first nine
months of 1997 to $4,449,000 during the same period of 1998, an increase of
$1,776,000, or approximately 66%. Approximately $62,000 of this increase was
due to the additional costs and expenses associated with the operation of the
DataNet and DWS operations. Approximately $1,398,000 is related to increased
access costs from DTG's long distance and Internet operations. The remaining
increase is related primarily to the start-up and operational costs associated
with DTG's CLEC operations in its new markets.
Cost of Goods Sold, a new category of operating expense, was $10,377,000 in
the first nine months of 1998, reflecting expenses associated with DTG's DataNet
and DWS operations.
Depreciation and Amortization expense increased from $2,380,000 in the
first nine months of 1997 to $3,313,000 in the same period of 1998, an increase
of $933,000 or approximately 39%. Approximately $230,000 of this increase was
due to the amortization of the excess of cost over net assets acquired in the
acquisition of DataNet and DWS, as well as the depreciation expense of assets
used in these operations. The balance of this increase was due primarily to the
depreciation of additional assets placed in service by DTG during 1997 and in
the first nine months of 1998 as part of its network expansion program.
Customer operating expenses increased from $828,000 in the first nine
months of 1997 to $2,370,000 in the same period of 1998, an increase of
$1,542,000, or approximately 186%. Of this increase, $901,000 related to the
customer service expenses associated with the DataNet and DWS operations. The
remaining increase is primarily due to increased costs in DTG's CLEC operations
in its new markets.
Other costs and expenses, including General and Administrative and Other
Operating Expenses, increased from $3,837,000 during the first nine months of
1997 to $6,047,000 in the same period of 1998, an increase of $2,210,000, or
approximately 58%. Of these expenses, $90,951 in 1997 was due to the inclusion
of one-time, nonrecurring charges associated with the Conversion-Merger of DTG
into a publicly traded business corporation in 1997. Of these expenses, $57,000
in 1998 was due to the inclusion of one-time, nonrecurring charges associated
with the registration and sale of stock to DTG's stockholders during the first
quarter. See Note 6 to the DTG Interim Financial Statements. Of the remaining
$2,169,000 increase in other costs and expenses, approximately $796,000 was due
to the additional costs and expenses from the operations of DataNet and DWS. The
remaining increase is primarily due to increased costs in DTG's CLEC operations
in its new markets.
Interest Expense increased from $791,000 for the first nine months of 1997
to $1,653,000 during the same period in 1998, an increase of $862,000, or
approximately 109%. This increase is
98
primarily due to the increase in long-term debt incurred by DTG to fund its 1997
and 1998 capital expenditures.
Basic loss per share for the first nine months of 1998, based on 2,692,321
outstanding shares, was $1.42. This compares with a loss of $1.56 per share for
the first nine months of 1997 on 985,216 average outstanding shares. See Note
8 to the DTG Interim Financial Statements.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
---------- ----------
Summary of Consolidated Operations
- ----------------------------------
Total Operating Revenues $13,729.0 $8,101.3
Depreciation and Amortization 3,448.1 2,434.4
Other Costs and Expenses 12,039.6 5,589.1
--------- --------
Operating Income (Loss) (1,758.7) 77.9
Other Income (Expense) (846.6) (413.8)
Income Tax Expense (Benefit) (118.5) (175.7)
--------- --------
Net Loss $(2,486.8) $ (160.2)
In 1997, revenues increased substantially to $13,729,000, up from
$8,101,300 in 1996, an increase of $5,627,700 or 69.5%. Of this increase,
$1,481,000, $1,021,000, and $1,788,100 was attributable to revenues from DTG's
TCIC, I-way and DataNet operations, respectively. The balance of the increase
represents primarily revenues from access rate increases put into effect by DTG
during 1996.
Depreciation and Amortization expense increased from $2,434,400 in 1996 to
$3,448,100 in 1997, an increase of approximately $1,000,000 or 41%.
Approximately $133,300 of this increase is attributable to the amortization of
the excess of cost over the net assets acquired in the merger transactions with
TCIC and I-way in December 1996 and with DataNet in December 1997. The balance
represents additional depreciation for assets placed in service during 1997.
Other Costs and Expenses increased to $12,039,600 in 1997, up from
$5,589,100 in 1996, an increase of $6,450,500 or 115%. Of this increase,
$1,214,100, $2,170,100, and $1,732,700 represent additional costs and expenses
associated with the I-way, TCIC and DataNet operations, respectively. An
additional $611,342 of this increase represents one-time, nonrecurring charges
associated with the Conversion-Merger in July 1997. These reorganization
expenses do not arise from and are not representative of DTG's ongoing business.
See Note 2 to the DTG Annual Financial Statements included in this Prospectus
and Proxy Statement. The balance of the increase is primarily due to increased
employee costs in DTG's telephone and cable operations.
Other Income and Expense consists primarily of interest and dividend income
and interest expense. Interest expense in 1997 was $1,122,807 (total interest
expense of 1,294,607 net of $171,800 that was capitalized as construction period
interest related to DTG's 1997 developments) compared to $723,778 in 1996, an
increase of $399,029 or 55%. The increase in interest expense was caused
primarily by increased long-term borrowings used by DTG to finance its 1997
construction projects.
On a pro forma basis, assuming that all shares issuable in the
reorganization were outstanding for all of 1997, and assuming all capital stock
and capital credits were converted into shares of DTG Common Stock at a rate of
$2.50 per share at the beginning of 1996, loss per share would have been $1.19
for 1997 and $.09 for 1996. Also on a pro forma basis, assuming that only those
shares that were actually issued and outstanding as of March 16, 1998, had been
outstanding for all of 1997, loss per share for 1997 would have been $1.30.
99
RESULTS OF BUSINESS SEGMENT OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
As of December 31, 1997, DTG operated with three major business segments:
telephone operations, which includes all operations other than cable television
and computer networking operations; cable television operations; and the
computer networking services acquired by DTG in the DataNet transaction in
December 1997.
The following sections discuss the operating results for these three
segments in 1997 and 1996.
TELEPHONE OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
---------- ----------
Local Service $ 1,221.8 $1,058.7
Long Distance Toll Service 3,478.7 1,996.3
Access Service 4,176.7 3,267.0
Internet Services 1,021.3 72.4
Other Revenues 149.8 357.8
--------- --------
Total Revenue $10,048.3 $6,752.2
Depreciation and Amortization 2,728.0 2,011.0
Other Costs and Expenses 8,703.6 4,287.1
--------- --------
Operating Income (Loss) $(1,383.3) $ 454.1
Access revenues are received by LECs for intrastate and interstate exchange
services provided to IXCs which enable IXCs to provide long distance service to
end users in the local exchange network. Access revenues are determined, in the
case of interstate calls, according to rules issued by the FCC and administered
by the National Exchange Carriers Association ("NECA") and, in the case of
intrastate calls, by state regulatory agencies. See "Access Revenues," on page
__. A relatively small portion of DTG's access revenues are derived from
subscriber line fees determined by the FCC and billed directly to end users for
access to long distance carriers. The balance of DTG's interstate access
revenues are received from NECA, which collects payments from IXCs and
distributes settlement payments to LECs based on a number of factors, including
the cost of providing service and the amount of time the local network is
utilized to provide long distance services. A variety of factors, including
increased subscriber counts, cultural and technological changes and rate
reductions by IXCs, have resulted in a consistent pattern of increasing use of
the nation's telephone network since 1984. This growth has produced higher
revenues for NECA and increased settlements for its participating LECs. Access
revenues increased from $3,267,000 in 1996 to $4,176,700 in 1997, an increase of
$909,700 or 27.8%. DTG reassesses its access rates and underlying cost studies
annually and adjusts its tariff rate filings and participation in NECA and
Universal Service Fund revenue pools accordingly. In late 1996, DTG received
approval from the South Dakota Public Utilities Commission to increase its
intrastate access rates approximately 20%, which increase, combined with
increased settlements from the NECA pool, primarily accounts for the overall
increase in access revenue in 1997.
Local service revenues are earned by providing customers with local service
to connecting points within the local exchange boundaries and, in certain cases,
to nearby local exchanges under extended area service ("EAS") plans that
eliminate long distance charges to the neighboring exchanges. Local service
revenues for 1997 were $1,221,800 compared to $1,058,700 in 1996, an increase of
15%. This increase was due primarily to a local service rate increase approved
by the DTG Board in December 1995 and implemented in February and July 1996.
There are no local rate requests currently pending for DTG nor does DTG
currently anticipate any local rate increases.
100
DTG's local service rates are not currently regulated by the FCC or the South
Dakota Public Utilities Commission, although certain regulatory policies of both
agencies indirectly impact local rate levels.
Long distance toll revenues rose from $1,996,300 in 1996 to $3,478,700 in
1997, an increase of $1,482,400 or 74%. This increase was primarily due to long
distance revenues from the TCIC long distance reselling operation acquired by
DTG in December 1996.
Internet service revenue rose from $72,447 in 1996 to $1,021,344 in 1997,
an increase of $951,897 or 1,314% due to the inclusion of revenues from the I-
way Internet operations acquired in December 1996 and internal growth in
revenues from DTG's Internet operations.
Other revenues decreased from $357,800 in 1996 to $149,800 in 1997, a
decrease of $208,000 or 58%. Most of this decrease is due to the transfer of
DTG's unregulated customer premises equipment business from its Telephone
Operations segment to its Cable Television Operations segment in January 1997.
Depreciation and amortization expenses rose from $2,011,000 in 1996 to
$2,728,000 in 1997, an increase of $717,000 or 36% as a result of DTG's
additional capital expenditures for the year and the amortization of costs
associated with its acquisitions of TCIC and I-way. See Note 13 to the DTG
Annual Financial Statements.
Other costs and expenses were $8,703,600 in 1997 compared to $4,287,100 in
1996, an increase of $4,416,500 or 103%. Of this increase, $1,214,100 and
$2,170,100 represent additional costs and expenses associated with the Internet
and long distance operations acquired in December 1996. An additional $611,342
of this increase represents one-time, nonrecurring charges associated with the
Conversion-Merger in July 1997. These reorganization expenses do not arise from
and are not representative of DTG's ongoing business. See Note 2 to the DTG
Annual Financial Statements. The balance of the increase is primarily due to
increased employee expense.
CABLE TELEVISION OPERATIONS
(DOLLARS IN THOUSANDS)
For the Year Ended December 31,
---------------------------------
1997 1996
-------- --------
Cable Service Revenue $1,517.0 $1,300.5
Other Revenue 375.6 48.7
-------- --------
Total Revenue 1,892.6 1,349.2
Depreciation and Amortization 702.8 423.4
Other Costs and Expenses 1,620.5 1,302.0
-------- --------
Operating Income (Loss) $ (430.7) $ (376.2)
DTG's cable service revenues increased from $1,300,500 in 1996 to
$1,517,000 in 1997, an increase of $216,500 or 17%. This increase primarily
reflects additional revenues for the entire year of 1997 from the 19 cable
systems purchased by DTG during 1996.
Other revenue increased from $48,700 in 1996 to $375,600 in 1997, an
increase of $326,900 or 6,713%. This increase was due to the transfer of DTG's
unregulated customer premises equipment business from its Telephone Operations
segment to its Cable Television Operations segment in January 1997.
Depreciation and amortization expenses were $702,800 in 1997 compared to
$423,400 in 1996, an increase of $279,400 or 66%. This increase was primarily
due to the depreciation of additional assets used to operate the 19 cable
systems added by DTG in 1996 for the entire year of 1997.
101
Other costs and expenses were $1,620,500 in 1997 compared to $1,302,000 in
1996, an increase of $318,500 or 24%. This increase primarily reflects
additional expenses for the entire year of 1997 from the operation of the 19
cable systems purchased by DTG during 1996.
COMPUTER NETWORKING OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
---- ----
Computer Network Sales Revenue $ 1,778.1 $ ---
Other Costs and Expenses 1,722.7 ---
------------ -----------
Operating Income $ 55.4 $ ---
The Computer Networking Operations segment operating results reflect the
operations of DTG's DataNet subsidiary for the month of December 1997. DTG
acquired DataNet on December 1, 1997. See Note 13 to the DTG Annual Financial
Statements.
ACCESS REVENUES
Access revenues are the result of tariffs developed, filed and imposed by
local exchange companies for allowing long distance carriers (generally referred
to as IXCs) to access their end user customers in the local exchange network.
For small ILECs like DTG who are members of the NECA, access revenues are
determined, in the case of interstate calls, according to rules issued by the
FCC and administered by NECA and, in the case of intrastate calls, by state
regulatory agencies. The entire access charge environment for small ILECs is
subject to a complex and changing set of state and federal regulations, with
some of the revenues directly billed to end users in the form of subscriber line
fees and federal/state access charges, and some of the revenues coming directly
from NECA. Current rules also result in different calculations of revenue
requirements depending on (i) company size; (ii) whether a company is a RBOC or
non-RBOC company; and (iii) whether a company is a rural or non-rural company.
For NECA members like DTG, NECA acts as a pooling mechanism and imposes a
uniform tariff on IXC's for NECA-member companies. NECA collects payments from
IXCs and distributes settlement payments to its members based on a number of
factors, including the allocated cost of providing service. A variety of
factors, including increased subscriber counts, cultural and technological
changes and rate reductions by IXCs, have resulted in a consistent pattern of
increasing use of the nation's telephone network since 1984. This growth has
produced higher revenues for NECA and increased settlements for its
participating members, including the ILEC division of DTG. These increases,
notwithstanding the increase in DTG's ILEC operating expenses, resulted in the
increase in DTG's access revenues. DTG cannot ensure that future changes in
the rules, both for interstate and intrastate calls, will not adversely affect
the calculated revenue requirement of, and the resulting revenues to, DTG.
For CLECs, which include DTG's new competitive developments, there are
varying rules between federal and state jurisdictions, and substantial
uncertainty exists as to if and how the existing access charge environment (that
has historically determined revenue requirements for ILECs) should apply to
CLECs. DTG is aware that AT&T has requested the FCC to issue a declaratory
ruling that IXCs may elect not to purchase switched access services offered
under tariff by CLECs. AT&T claims that a substantial number of CLECs are
attempting to impose switched access charges that are higher than those charged
by ILECs in the areas where the CLECs operate. Comments on AT&T's request were
due December 7, 1998, and reply comments are due December 22, 1998. DTG
believes that it has, for its CLEC operations, based its filed access tariffs on
appropriate, historical allocated cost data from its ILEC operations. DTG had
only nominal CLEC access revenues in the comparable 1997 period. For 1998, the
CLEC access revenue has increased in
102
direct proportion to its increase in DTG's CLEC customer base. There can be
no assurance that future changes in the rules, both for interstate and
intrastate calls, either as a result of the AT&T petition or otherwise, will not
adversely affect the calculated revenue requirement, and the resulting revenues
to DTG from its CLEC operations.
INCOME TAXES
DTG historically operated as a stock cooperative and was granted tax-exempt
status under Section 501(c)(12) of the Code. Accordingly, income tax expense
was related only to certain ancillary operations, such as DTG's cable television
operations. Beginning with DTG's conversion from a cooperative to a Delaware
corporation in July 1997, all of DTG's operations became taxable. However,
because of DTG's consolidated net losses, DTG has accumulated income tax loss
carryovers. See Note 4 to the DTG Interim Financial Statements for a full
discussion of DTG's income tax issues.
EFFECTS OF INFLATION
DTG is subject the effects of inflation upon its operating costs. DTG's
local exchange telephone operations are subject to the jurisdiction of the South
Dakota Public Utilities Commission with respect to a variety of matters,
including rates for intrastate access services and the conditions and quality of
service. Rates for local telephone service are not established directly by
regulatory authorities, but their authority over other matters may limit DTG's
ability to implement rate increases. In addition, the regulatory process
inherently restricts the ability of the ILEC division of DTG's operations to
immediately pass cost increases along to customers, unless the cost increases
are anticipated and the rate increases are implemented prospectively. The CLEC
and other non-ILEC divisions of DTG are subject to competitive pressures, which
may limit DTG's ability to pass through inflation related costs to its non-
captive customer base.
All of DTG's long-term debt from the RTFC bears interest on a floating rate
set by the RTFC on a monthly basis. This variable rate was 6.65% at September
30, 1998. Effective November 1, 1998, the RTFC decreased the interest rate on
all obligations with them by 0.55%. DTG has the option to fix the interest rate
on all or a portion of these loans on a quarterly basis. Should inflation rates
significantly exceed DTG's expectations, interest rates could increase and DTG's
debt service expenses could increase beyond acceptable limits or make the RTFC
or any other lender unwilling to extend additional credit to DTG.
COMPETITION
In February 1996, President Clinton signed into law the Telecommunications
Act. The new law represents the biggest change in the rules governing local
telephone service since Congress imposed federal regulation and established the
FCC in 1934. Under the Telecommunications Act, the monopoly on local service
enjoyed by LECs is eliminated and LECs must allow competitors access to their
local network facilities. DTG does not know to what extent it will be subject
to local competition in the markets it serves under the new rules. The final
results of the changes made by the new law will not be known for some time until
new rulemaking by the FCC and state regulatory agencies has been completed. DTG
is monitoring developments regarding the new regulatory climate closely and
expects its operations may be materially affected by the new rules, but DTG
cannot predict what effect the new rules will have on its business.
DTG is presently the only provider of local telephone service in its
historical nine local communities and directly competes with each ILEC in the
new communities it is developing. Technological developments in competing
technologies, such as cellular telephone, digital microwave, coaxial cable,
fiber optics and other wireless and wired technologies, may result in new forms
of competition to DTG's landline services. DTG and many other members of the
local exchange carrier industry are seeking to maintain a strong, universally
affordable public telecommunications network through policies and programs that
are sensitive to the needs of small communities and rural areas
103
served by DTG. However, there is no assurance that DTG will be able to continue
to do so in the future.
All of DTG's cable television franchises are non-exclusive. In addition to
competition from off-air television, other technologies also supply services
provided by cable television. These include low power television stations,
multi-point distribution systems, over-the-air subscription television and
direct broadcast satellites. DTG believes that cable television presently
offers a wider variety of programming at a lower cost than any competing
technology. However, DTG is unable to predict the effect current or developing
sources of competition may have on its cable business.
DTG's unregulated Internet, long distance, operator services and computer
network services businesses are subject to intense competition from many
different companies, many of which have substantially greater resources than
DTG.
YEAR 2000 READINESS DISCLOSURE
AN INTRODUCTION TO THE YEAR 2000 PROBLEM
DTG is highly dependent upon advanced computer systems and specialized
software for the conduct of its business. These systems include switching and
network operations, billing and customer care, accounting and reporting and
Internet operating systems, as well as a wide assortment of personal computer
productivity software. In 1997, as part of its reorganization plan, DTG
installed new accounting and reporting systems and began the installation of a
new billing and customer service system, currently scheduled for completion in
1999. It also rebuilt its Internet operating systems and installed a new
switching platform and software system.
As part of its systems replacement process, DTG addressed an issue that is
facing all users of automated information systems. The issue is that many
computer systems that process date sensitive information based on two digits
representing the year of the event may recognize a date using "00" as the year
1900 rather than the Year 2000. The inability to correctly recognize "00" as
the Year 2000 could affect a wide variety of automated information systems, such
as mainframe applications, invoicing and receivables tracking systems, event
scheduling systems, personal computers and telecommunication systems, in the
form of software failure, errors or miscalculations.
The discussion below describes DTG's efforts to address this problem. This
Year 2000 readiness disclosure is based upon and partially repeats information
provided by DTG's outside consultants, vendors and others regarding the Year
2000 readiness of DTG and its customers, vendors and other parties. Although
DTG believes this information to be accurate, it has not in each case
independently verified such information.
This Year 2000 readiness disclosure is a "forward-looking statement" within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Costs, results, performance and effects of Year 2000
activities described in those forward-looking statements may differ materially
from actual costs, results, performance and effects in the future due to the
interrelationship and interdependence of DTG's computer systems and those of its
vendors, material service providers, customers and other third parties.
Readers are cautioned not to place undue reliance on the following forward-
looking statements. Furthermore, DTG undertakes no obligation to update, amend
or clarify these forward-looking statements, whether as a result of new
information, future events or otherwise.
104
YEAR 2000 COMPLIANCE PROGRAM
It is difficult to predict with certainty what will happen to DTG's
operations when the Year 2000 date is triggered. While DTG has received written
certifications from its vendors that its new software systems are Year 2000
compliant, given the complexity of the specialized software used by DTG and the
relative newness of the Year 2000 problem, there can be no assurance that
unanticipated operating problems will not occur in DTG's systems. Further, like
all telecommunications companies, DTG relies on the continuing operations of
other telecommunications companies to provide worldwide communications services.
DTG must be concerned not only with its own internal systems, but also with the
inter-related systems of many other companies over which it exercises no
control. Given these circumstances, DTG believes that it is likely that certain
of its services will be adversely affected by this problem, although the extent
and impact of these service disruptions are virtually impossible to estimate at
this time.
In an attempt to minimize the disruption to the extent possible, DTG has
formed a Year 2000 Oversight Committee (the "Committee") with the full authority
to establish methodologies, recommend expenditures, and to marshal additional
resources as necessary to address the Year 2000 problem. The Committee has the
full support of senior management and includes high-level representation from
many of DTG's major internal business functions. The Committee is responsible
for researching, planning, executing, implementing and completing the Year 2000
compliance goals of DTG. The systems being evaluated by the Committee include
DTG's telecommunications network (the "Network"), which processes voice and
data information relating to its communications operations, IT internal business
systems, which include certain operational, financial and administrative
functions, and non-IT systems, which include certain systems that use embedded
micro controllers in their operation. As discussed in more detail below, the
Committee's assessment of DTG's Year 2000 issues is not yet complete and is not
expected to be completed until next year.
The review includes the following:
1. increasing employee awareness and communication of Year 2000 issues
2. inventorying hardware, software and data interfaces and confirming
Year 2000 readiness of key vendors
3. identifying mission-critical components for internal systems, vendor
relations and other third parties
4. estimating costs for remediation
5. estimating completion dates
6. correcting/remediating any identified problems
7. replacing systems or components that cannot be made Year 2000 ready
8. testing and verifying systems
9. implementing the remediation plan
DTG has completed approximately 40% of the activities required for the first
step of this review and approximately 29% of the activities required for the
second step. DTG is in the initial stages of performing the activities required
to complete the remaining steps and has begun to develop contingency plans to
handle its most reasonably likely worst case Year 2000 scenarios.
A component of assessing DTG's ILEC, CLEC and cable networks includes an
assessment and survey of Year 2000 readiness of key business partners. The
network relies significantly on the provisioning and switching capabilities of
the other ILECs and IXCs in those markets in which DTG provides services. DTG
has not received certification from these carriers indicating that they are Year
2000 compliant, but has been notified that some of the carriers have initiated
programs to
105
mitigate their Year 2000 issues in 1999. However, there can be no assurance
that the systems of the carriers will become Year 2000 compliant before January
1, 2000.
YEAR 2000 READINESS COSTS
To date, DTG's primary costs for its Year 2000 compliance program are
employee costs associated with DTG's internal management information systems
employees and other personnel, which DTG expenses as part of its General and
Administrative Expense. Such costs to date have not been material. DTG currently
estimates that the total cost to make DTG's internal systems Year 2000 compliant
is approximately $250,000, most of which will be expensed by DTG as the costs
are incurred.
DTG's estimate of its Year 2000 readiness costs is a "forward-looking
statement" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Costs, results and effects of Year
2000 activities described in this forward-looking statement may differ
materially from actual costs, results and effects in the future due to the
interrelationship and interdependence of DTG's computer systems and those of its
vendors, material service providers, customers and other third parties.
CONTINGENCY PLANS
DTG believes that the design of its network and support systems could
provide DTG with certain operating contingencies in the event material external
systems fail. DTG's major network operating facilities and systems are backed up
with auxiliary power generators believed to be capable of operating all
equipment and systems for indeterminate periods should power supplies fail.
Certain ancillary systems are backed up by emergency battery systems. In
addition, contingency plans are currently being developed to address other
problem areas. Because of the inability of DTG's contingency plans to eliminate
the negative impact that disruptions in other carriers' services would create,
there can be no assurance that DTG will not experience disruptions in its
services.
DTG believes that with modifications to existing software and conversions
to new software, the Year 2000 issue will not pose material, unremediable
operational problems for its internal systems. However, given the current
uncertainty about the possible extent of the Year 2000 problem, management
cannot provide assurance that these efforts will be successful or that the
remediation costs will not be materially different from DTG's current estimates.
At worst case, failure by DTG or by certain of its interconnected service
providers or software vendors to remediate Year 2000 compliance issues could
result in the disruption of DTG's operations, possibly impacting operation of
the network and DTG's ability to bill or collect revenues. A prolonged network
outage could have a material adverse effect on DTG's results of operations, cash
flows, and could possibly affect its ability to service its indebtedness.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). This pronouncement,
effective for calendar year 1998 financial statements, requires reporting
segment information consistent with the way executive management of an entity
disaggregates its operations internally to assess performance and make decisions
regarding resource allocations. Among information to be disclosed, SFAS 131
requires an entity to report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. SFAS 131 also requires
reconciliations of total segment revenues, total segment profit or loss and
total segment assets to the corresponding amounts shown in the entity's
consolidated financial statements. DTG expects that the adoption of SFAS 131
will require DTG to discontinue reporting segments currently disclosed in its
annual consolidated financial statements due to the increasing convergence of
its computer, telephone and cable television businesses.
106
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS 133 as of the beginning of any fiscal quarter
after issuance (fiscal quarters beginning June 16, 1998 and thereafter). SFAS
133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative
instruments, and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at DTG's election, before January 1, 1998).
DTG does not expect the impact of the adoption of SFAS 133 to be material
to DTG's results of operations as DTG does not currently hold any derivative
instruments or engage in hedging activities.
No other recently issued accounting pronouncements are expected to have a
significant effect on future financial statements.
107
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF DTG
Holders of record of DTG Common Stock at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting and any
adjournment of that meeting. As of the Record Date, there were ___________
shares of DTG Common Stock issued and outstanding. Each share of DTG Common
Stock is entitled to one vote on each matter submitted for stockholder action.
The following table sets forth information concerning the number of shares
of DTG Common Stock held by each stockholder who is known to DTG's management to
be the beneficial owner of more than five percent of the outstanding DTG Common
Stock as of ______________, 1998.
Beneficial McLeodUSA Common
Name and Address Ownership of Stock to be received
of Beneficial Owner DTG Common Percent in connection with
of Common Stock Stock(1)(2) of Class(3) the Merger
- --------------------------- ---------------- ----------- --------------------
Gery Baar 171,154 7.9% 74,076
c/o DTG
P.O. Box 66
Irene, South Dakota 57037
Douglas English 171,516 7.9% 74,233
c/o DTG
P.O. Box 66
Irene, South Dakota 57037
Jeffrey G. Parker 115,194 5.3% 49,856
c/o DTG
P.O. Box 66
Irene, South Dakota 57037
_______________________________
Footnotes begin on page __.
108
The following table sets forth information concerning the number of shares
of DTG Common Stock held as of the Record Date by each of DTG's directors, each
of the named executive officers and all of DTG's directors and executive
officers as a group.
Amount and Nature of Beneficial Ownership
of DTG Common Stock (1)(2)
--------------------------
McLeodUSA Common
Sole Shared Stock to be
Voting and Voting or Total Percent received in
Dispositive Dispositive Beneficial of connection with
Name of Beneficial Owner Power Power(4) Ownership Class(3) the Merger
- ----------------------------- ----------- -------------- ---------- ---------- -----------------
Craig A. Anderson(5)......... 80,860 --- 80,860 3.6% 87,061
Ross L. Benson(6)............ 1,500 2,000 3,500 * 1,515
Dale Q. Bye(6)............... 1,200 2,269 3,469 * 1,500
Jeffrey J. Goeman(6)......... 1,200 3,684 4,884 * 2,114
William P. Heaston........... 1,020 3,212 4,232 * 1,832
Thomas W. Hertz(5)........... 82,072 --- 82,072 3.6% 87,585
James H. Jibben(6)........... 1,712 2,000 3,712 * 1,607
Palmer O. Larson(6).......... 1,200 2,186 3,386 * 1,466
Jeffrey G. Parker(7)......... 115,194 --- 115,194 5.3% 49,856
John A. Roth(6).............. 3,054 2,000 5,054 * 2,188
John A. Schaefer(6).......... 1,584 2,000 3,584 * 1,552
All directors and executive
officers as a group
(12 persons)................ 290,596 19,346 309,942 13.2% 240,051
- ---------------------------
*Less than one percent
(1) The numbers of shares stated are based on information furnished by each
person listed and include shares personally owned of record by that person
and shares that, under applicable regulations, are considered to be
otherwise beneficially owned by that person. Under these regulations, a
beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship
or otherwise has or shares voting power or dispositive power with respect to
the security. Voting power includes the power to vote or to direct the
voting of the security. Dispositive power includes the power to dispose or
to direct the disposition of the security. A person also will be considered
the beneficial owner of a security if the person has a right to acquire
beneficial ownership of the security within 60 days.
(2) In connection with the acquisitions by the Cooperative of TCIC and I-way,
the Cooperative entered into Standstill Agreements (the "Cooperative
Standstill Agreements") with each of the former shareholders of TCIC and I-
way (collectively, the "Sellers"). The Sellers received shares of
Cooperative preferred stock and warrants to purchase additional shares of
Cooperative preferred stock. Under the Cooperative Standstill Agreements,
the Sellers agreed to refrain from certain actions, including: (i) acquiring
any DTG Common Stock in excess of five percent of DTG Common Stock
outstanding at any time during the term of the Cooperative Standstill
Agreements, with certain exceptions such as the sale or transfer of shares
among the Sellers; (ii) making or participating in any "solicitation of
proxies," as that term is defined in Regulation 14A under the Exchange Act;
(iii) forming, joining or participating in a "group," as that term is
defined in Section 13(d)(3) of the Exchange Act, with respect to any DTG
Common Stock; (iv) initiating or participating in any stockholder proposal
to be voted upon by the holders of DTG Common Stock or calling any special
meeting of stockholders of DTG; (v) depositing any shares of DTG Common
Stock into a voting trust or subjecting such shares to a voting agreement;
or (vi) seeking in any way to gain control of DTG or the DTG Board or
seeking to influence DTG's management or policies.
The Cooperative Standstill Agreements further provide that the Sellers
will not dispose of any shares of DTG Common Stock (with certain exceptions)
except in accordance with certain provisions of the Cooperative Standstill
Agreements. The Cooperative Standstill Agreements grant to DTG a "First
Purchase Option" to buy all, but not less than all, of the Sellers' shares
of DTG Common Stock that they wish to sell ("First Option Shares") for a
period of three years following the date that the Cooperative preferred
stock was converted into shares of DTG Common Stock. Under
109
the First Purchase Option, if a Seller desires to sell any of the person's
shares of DTG Common Stock, the Seller must first notify DTG, which then
has 30 days to determine whether to purchase the First Option Shares. If
DTG exercises its option, it must purchase all of the First Option Shares.
If DTG does not exercise its First Purchase Option, the Seller who gave the
notice may then sell those First Option Shares to a third party at the same
price specified in the person's initial notice to DTG. However, if the
Seller fails to sell the First Option Shares to a third party within 60
days after DTG's option expires, then the process must start over.
Under the Cooperative Standstill Agreements, in the event that a third
party makes a tender offer (a "Tender Offer") for shares of DTG Common
Stock, then the Sellers must grant DTG an option (the "Tender Offer
Option") to purchase all, but not less than all, of the shares that the
Sellers wish to sell in the Tender Offer. This process works much the same
as for a First Purchase Option, except that the deadlines are shorter. In
addition, if a competing tender offer arises prior to the closing of the
sale pursuant to the Tender Offer Option at a higher per-share price, the
Sellers can withdraw their notice of the Tender Offer Option, after which
the process starts over. The price per share pursuant to the Tender Offer
Option is the product of (i) the number of shares subject to the Tender
Offer Option with respect to which DTG exercises its option, multiplied by
(ii) the Tender Offer price per share as in effect on the last day
specified in the Tender Offer on which the offeror may accept shares of DTG
Common Stock for payment or exchange. If DTG fails to exercise its Tender
Offer Option, then the Sellers can sell their shares in the Tender Offer,
but at a price not less than that specified in the notice of the Tender
Offer Option.
The provisions of the Cooperative Standstill Agreements described in
the first paragraph above apply for a period of five years beginning on
July 25, 1997. The provisions described in the second paragraph above apply
for three years after July 25, 1997. The Cooperative Standstill Agreements
do not contain any specific termination provisions.
In connection with the DataNet acquisition, DTG entered into
Cooperative Standstill Agreements with the former shareholders of DataNet.
The terms of these Cooperative Standstill Agreements are substantially the
same as those of the Sellers' Cooperative Standstill Agreements with the
exception that the various time periods, instead of running from July 25,
1997, run from December 1, 1997.
(3) The percentages reflected in this column were computed with reference to a
total of 2,174,472 shares of DTG Common Stock outstanding as of November
30, 1998 plus, where applicable, options to purchase shares of DTG Common
Stock currently outstanding that are currently exercisable or that may be
exercised within 60 days. The number of shares outstanding does not include
an aggregate of 383,568 shares of DTG Common Stock that are issuable to
former holders of Cooperative common stock and capital credit accounts upon
satisfaction by them of the exchange and informational conditions to the
issuance of such shares.
(4) These numbers include shares over which the listed person is legally
entitled to share voting or dispositive power by reason of joint ownership,
trust or other contract or property right, and shares held by spouses and
children over whom the listed person may have influence by reason of
relationship.
(5) The number of shares includes options to purchase shares of DTG Common
Stock exercisable within 60 days held by the following persons:
Name Number of Shares
---- ----------------
Craig A. Anderson 77,648
Thomas W. Hertz 77,648
(6) Includes (i) 2,000 shares awarded as outside director compensation for
serving as a director for five years or more, issued effective January 1,
1998, (ii) options to acquire 800 shares that are immediately exercisable
and were granted pursuant to DTG's 1997 Stock Incentive Plan, and (iii)
options to aquire 800 shares that are immediately exercisable that will be
granted effective January 1, 1999 under DTG's 1997 Stock Purchase Plan.
(7) Includes (i) shares acquired pursuant to the exercise of options granted in
connection with the acquisitions of TCIC and I-way, (ii) options to acquire
800 shares that are immediately exercisable and were granted pursuant to
DTG's 1997 Stock Incentive Plan, and (iii) options to aquire 800 shares
that are immediately exercisable that will be granted effective January 1,
1999 under DTG's 1997 Stock Purchase Plan.
(8) Reflects McLeodUSA Common Stock to be received in connection with the
Merger (i) in exchange for currently owned shares of DTG Common Stock, (ii)
in exchange for currently owned options to purchase shares of DTG Common
Stock, and (iii) as awards made by McLeodUSA directly to certain officers
of DTG pursuant to the Merger Agreement.
110
DTG EXECUTIVE COMPENSATION
The following table shows certain information concerning the compensation
paid to Messrs. Hertz and Anderson ("named executive officers") for services
rendered to DTG or the Cooperative, as applicable, during the years ended
December 31, 1997, 1996 and 1995. No other executive officer of DTG or the
Cooperative earned cash compensation in excess of $100,000 during 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
AWARDS
---------------------
ANNUAL COMPENSATION NUMBER OF SECURITIES ALL OTHER
---------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) UNDERLYING OPTIONS COMPENSATION(2)
- ----------------------------- ---- --------- ---------- -------------------- ---------------
THOMAS W. HERTZ 1997 $129,808 $15,000 123,980 $15,702
President and Chief 1996 118,940 -- -- 1,439
Executive Officer 1995 20,455 -- -- 72
CRAIG A. ANDERSON 1997 $ 96,154 $ 7,500 123,980 $ 7,105
Executive Vice President, 1996 28,725 -- -- 1,195
Chief Financial Officer
and Treasurer(3)
______________________________
(1) This column represents the cash value of shares of DTG Common Stock awarded
to the above individuals.
(2) All other compensation represents (i) premiums paid by DTG or the
Cooperative, as applicable, for life insurance on Mr. Hertz ($1,445 in
1997) and Mr. Anderson ($1,445 in 1997) and (ii) DTG or Cooperative
contributions to pension and 401(k) plans for Mr. Hertz ($14,257 in 1997)
and Mr. Anderson ($5,660 in 1997).
(3) Mr. Anderson began his employment with the Cooperative on September 15,
1996.
111
The following tables set forth information regarding stock options granted
to the named executive officers during the last fiscal year and stock options
held by the named executive officers at the end of the last fiscal year. None
of the named executive officers exercised any stock options during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN
NAME OPTIONS GRANTED(1) FISCAL YEAR EXERCISE PRICE EXPIRATION DATE
- ------------------- ----------------------- ----------------- -------------- ---------------
THOMAS W. HERTZ 123,980 46.3% $6.19 12-31-2006
CRAIG A. ANDERSON 123,980 46.3% $6.19 12-31-2006
____________________
(1) To provide an incentive for Thomas W. Hertz, then Chief Executive Officer
and General Manager of the Cooperative, and Craig A. Anderson, then
Executive Vice President-Marketing and Chief Financial Officer of the
Cooperative (collectively, the "Optionees"), to operate the Cooperative to
promote the Cooperative's long-term growth and profitability and to help
align their economic interests with those of the Cooperative's members and
security holders, effective as of January 1, 1997, the Board of Directors of
the Cooperative adopted stock option agreements granting options to each
Optionee to purchase up to an aggregate of 767 shares of Cooperative
preferred stock at a price of $1,000 per share. Upon consummation of the
Conversion-Merger, these options automatically became options to purchase
DTG Common Stock (converted on an approximately 80.8-to-1 basis). Thus, Mr.
Anderson and Mr. Hertz each now hold options to acquire 123,980 shares of
DTG Common Stock at a price of $6.19 per share.
The options call for delayed vesting so that 20 percent of each option
became exercisable on July 25, 1997. Thereafter, an additional 20 percent of
each option becomes exercisable on each anniversary date of the stock option
agreements if the Optionees are then employed by DTG until the total number
of shares subject to each option become exercisable. Thus, [__] percent of
the options are presently exercisable. Each option remains outstanding for
10 years from the date it was granted. The options are non-transferable.
Under the terms of the stock option agreements, the options are not
incentive stock options under Section 422 of the Code. The options were not
subject to tax when they were granted. Upon exercise, the Optionee will
recognize compensation income in the amount of the spread between the market
value of the options and the option exercise price. DTG will receive a
corresponding deduction. The option price must be paid in cash or shares of
stock of DTG, valued at the market value on the date of exercise.
On a fully diluted basis, assuming that all vesting periods and other
restrictions contained in the options have been satisfied or lapsed and all
the options were exercised in full, each Optionee would own approximately
5% of the total number of shares of outstanding DTG Common Stock. The
exercise price of DTG Common Stock under the stock option agreements is
$6.19 per share.
FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END (1)
--------------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- --------------- ---------------- ----------- -------------
THOMAS W. HERTZ 49,592 74,388 $312,925.57 $469,388.28
CRAIG A. ANDERSON 49,592 74,388 $312,925.57 $469,388.28
_____________________
(1) Based on a market value of $12.50 per share at December 31, 1997.
During 1998, DTG compensated its directors at the rate of $500 per regular
monthly board meeting attended, $250 per special board meeting attended, $100
per special telephonic board
112
meeting attended, and $250 for attendance by teleconference at regular monthly
board meetings. Directors also are provided with travel and accident insurance
at a cost of $125 per year per director. Directors are eligible to participate
in the medical reimbursement plan. Directors are reimbursed for travel expenses
for attending meetings.
Under DTG's 1997 Stock Incentive Plan, each non-employee director of DTG is
entitled to receive semi-annually, on June 30 and December 31 of each year,
stock options to purchase 400 (as adjusted to reflect the effect of the stock
split) shares of DTG Common Stock at 100 percent of the market value on the date
of grant. The stock options will be issued for a term of 10 years. The formula
grant provisions for non-employee directors may be amended by the Board of
Directors not more than once every six months, other than to comport with
changes in the Code, the Exchange Act or the rules thereunder. Non-employee
directors may pay the exercise price using previously held shares of DTG Common
Stock to the extent that other plan participants are permitted to do so.
In November 1997, the DTG Board adopted the Director Stock Plan of 1997,
under which each non-employee director who has or will have served more than
five years on the DTG Board (including service as a director of the Cooperative)
will receive a one-time award of 2,000 shares (as adjusted to reflect the effect
of the stock split) of DTG Common Stock. This award was payable on January 1,
1998 to directors who had previously served five years, and will be payable on
the fifth anniversary of service to all other non-employee directors.
Employment Agreements. DTG has separate but substantially identical
Employment Agreements ("Agreements") with Mr. Hertz and Mr. Anderson (the
"Executives"). Each Agreement is for a three-year term of employment. However,
the employment term under each Agreement will be automatically extended for an
additional year at the end of each year, unless either party gives written
notice that the employment term under the Agreement is not to be extended
further, in which case the employment term under the Agreement will expire at
the end of two additional years, except that the employment term under the
Agreement will also be extended automatically for three years following the date
of any Change in Control (as defined in the Agreements) occurring during the
employment term under the Agreement. The current terms of the Agreements are
until December 31, 2000.
The Agreements provide minimum salaries of $135,000 per year for Thomas W.
Hertz and $100,000 per year for Craig A. Anderson, and also provide for an
annual bonus to each of the Executives equal to 15% of the increase, if any, in
corporate net income over prior year net income. "Net income," for purposes of
the bonus calculations, is pre-tax net income before depreciation, amortization
and other non-cash expenses, before annual bonuses under the two Agreements and
after eliminating the effect of extraordinary items. Under the formula, no
bonuses were paid for 1997.
Under the Agreements, DTG or the Executive may terminate the Executive's
employment at any time upon 30 days' notice. If DTG terminates the Executive's
employment involuntarily during the employment term under the Agreements other
than as the result of a Disability or for Cause, or if the Executive terminates
the employment for Good Reason during the employment term under the Agreements,
the Agreements entitle the terminated Executive to Severance Pay. "Disability"
is defined as the Executive's inability to substantially perform his duties for
a continuous period of nine months. "Cause" is defined as willful and continued
failure by the Executive to substantially perform his duties after notice of the
deficiency, or willful misconduct by the Executive that is materially injurious
to DTG and occurs without the good-faith belief by the Executive that the
action was in the best interests of DTG. Termination for Cause requires the
affirmative vote of two-thirds of the Board of Directors. "Good Reason" is
defined to include: (i) a material breach by DTG of the Agreements or any other
agreement with the Executive; (ii) assignment to the Executive of duties
inconsistent with his position; (iii) removal of the Executive from his
position; (iv) relocation of DTG's principal executive offices outside a 60-mile
radius from Irene, South Dakota or any requirement by DTG that the Executive be
located other than at the executive offices or that he
113
engage in substantially increased job related travel; or (v) failure of DTG to
obtain the agreement of any successor to assume the Agreements. The Executive
may not terminate his employment with Good Reason without first giving DTG
notice and ten days' opportunity to cure any occurrence constituting Good
Reason.
"Severance Pay" under the Agreements consists of continuation of the
Executive's salary, bonus and benefits for the unexpired employment term under
the Agreements at the time of the termination (with a minimum annual bonus each
year equal to that of the year before the termination), reasonable out-placement
services and immediate vesting of all restricted stock and stock option rights.
Severance Pay is not reduced by any post-termination employment or other income
of the Executive. If the Executive dies while entitled to receive Severance Pay,
the remaining Severance Pay is to be paid to the Executive's estate. If a
termination entitling the Executive to Severance Pay occurs after a Change in
Control, or if DTG defaults on Severance Pay obligations, the monthly salary and
bonus payments are accelerated and become payable immediately in a lump sum.
The Agreements prohibit the Executive from competing with DTG during his
employment, and after his employment while he is receiving Severance Pay. The
Executive may end the post-employment noncompetition period at any time by
renouncing any right to further Severance Pay.
The Agreements provide for payment of the Executive's reasonable legal fees
and expenses incurred in seeking to enforce the Executive's rights under the
Agreements, to the extent the Executive is successful in his claims, with
payment made contemporaneously but with the Executive required to repay any
amount to which he is ultimately found not to be entitled. The Agreements also
provide that DTG will make the Executive whole for any taxes, interest or
penalties incurred by the Executive on account of the characterization of any
payment to which the Executive is entitled from DTG as an "excess parachute
payment" under Section 280G of the Code or any successor provision of the Code,
so that the net payments to the Executive after all such taxes, interest and
penalties will be the same as if no such characterization had occurred.
Indemnity Agreements. DTG has entered into indemnity agreements with each
director and executive officer of DTG (collectively, "Leaders"). The indemnity
agreements indemnify each Leader against all expenses incurred in connection
with any action or investigation involving the Leader by reason of his or her
position with DTG (or with another entity at DTG's request). The Leader will
also be indemnified for costs, including judgments, fines and penalties,
indemnifiable under Delaware law or under the terms of any current or future
liability insurance policy maintained by DTG that covers the Leaders. A Leader
involved in a derivative suit will be indemnified for expenses and amounts paid
in settlement. Indemnification is dependent in every instance on the Leader
meeting the standards of conduct set forth in the indemnity agreements. If a
change in control or potential change in control occurs, DTG will fund a trust
to satisfy its anticipated indemnification obligations.
Stock Plan Provisions. DTG's 1997 Stock Incentive Plan provides that,
unless the DTG Board or its Compensation Committee determines otherwise, upon a
"change in control" of DTG as defined in that plan all outstanding stock option
and other awards of stock and restricted stock shall become immediately
exercisable and fully vested and nonforfeitable. In addition, upon a change in
control of DTG, the Compensation Committee may, in its discretion, determine
that some or all participants holding outstanding stock options shall receive
cash in lieu of some or all of the stock subject to such options in an amount
equal to the excess of the highest price per share actually paid in connection
with the change in control of DTG over the exercise price per share under such
options.
114
MCLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS
If the Merger is completed, shares of DTG Common Stock will be converted
into shares of McLeodUSA Common Stock. As a result, DTG stockholders, whose
rights are currently governed by the DGCL, the DTG Certificate of Incorporation
and the DTG Bylaws, would become McLeodUSA stockholders, whose rights are
governed by the DGCL, the McLeodUSA Certificate of Incorporation and the
McLeodUSA Bylaws.
The following is a description of the capital stock of McLeodUSA, including
the McLeodUSA Common Stock to be issued in the Merger, and a summary of the
material differences between the rights of DTG stockholders and McLeodUSA
stockholders. These differences arise from the differences between the governing
instruments of McLeodUSA (the McLeodUSA Certificate of Incorporation and the
McLeodUSA Bylaws) relative to the governing instruments of DTG (the DTG
Certificate of Incorporation and the DTG Bylaws). Although it is impractical to
compare all of the aspects in which the companies' governing instruments differ
with respect to stockholders' rights, the following discussion summarizes the
significant differences between them.
DESCRIPTION OF MCLEODUSA CAPITAL STOCK
The following summary description of the capital stock of McLeodUSA does
not purport to be complete and is qualified in its entirety by the provisions of
the McLeodUSA Certificate of Incorporation and the McLeodUSA Bylaws and by the
applicable provisions of the DGCL. For information on how to obtain copies of
the McLeodUSA Certificate of Incorporation and the McLeodUSA Bylaws, see "Where
You Can Find More Information."
AUTHORIZED AND OUTSTANDING CAPITAL STOCK OF MCLEODUSA
Pursuant to the McLeodUSA Certificate of Incorporation, McLeodUSA has
authority to issue 274,000,000 shares of capital stock, consisting of
250,000,000 shares of McLeodUSA Common Stock, 22,000,000 shares of Class B
Common Stock, par value $.01 per share (the "McLeodUSA Class B Common Stock"),
and 2,000,000 shares of Preferred Stock, par value $.01 per share (the
"McLeodUSA Preferred Stock"). As of November 30, 1998, 63,498,849 shares of
McLeodUSA Common Stock, no shares of McLeodUSA Class B Common Stock and no
shares of McLeodUSA Preferred Stock were issued and outstanding.
The rights of the holders of McLeodUSA Common Stock and McLeodUSA Class B
Common Stock discussed below are subject to such rights as the McLeodUSA Board
may hereafter confer on holders of McLeodUSA Preferred Stock that may be issued
in the future. Such rights may adversely affect the rights of holders of
McLeodUSA Common Stock or McLeodUSA Class B Common Stock, or both.
MCLEODUSA COMMON STOCK
Voting Rights. Each holder of McLeodUSA Common Stock is entitled to attend all
special and annual meetings of the stockholders of McLeodUSA and, together with
the holders of shares of McLeodUSA Class B Common Stock and the holders of all
other classes of stock entitled to attend and vote at such meetings, to vote
upon any matter (including, without limitation, the election of directors)
properly considered and acted upon by the stockholders of McLeodUSA. Holders of
McLeodUSA Common Stock are entitled to one vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding up
of McLeodUSA, whether voluntary or involuntary, the holders of McLeodUSA Common
Stock, the holders of McLeodUSA Class B Common Stock and holders of any class or
series of stock entitled to participate
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therewith, shall become entitled to participate in the distribution of any
assets of McLeodUSA remaining after McLeodUSA has paid, or provided for payment
of, all debts and liabilities of McLeodUSA and after McLeodUSA has paid, or set
aside for payment, to the holders of any class of stock having preference over
the McLeodUSA Common Stock in the event of dissolution, liquidation or winding
up the full preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the McLeodUSA Common Stock, the McLeodUSA
Class B Common Stock and on any class or series of stock entitled to participate
therewith when and as declared by the McLeodUSA Board.
No Preemptive or Conversion Rights. The holders of McLeodUSA Common Stock have
no preemptive or subscription rights to purchase additional securities issued by
McLeodUSA nor any rights to convert their McLeodUSA Common Stock into other
securities of McLeodUSA or to have their shares redeemed by McLeodUSA.
MCLEODUSA CLASS B COMMON STOCK
Voting Rights. Each holder of McLeodUSA Class B Common Stock is entitled to
attend all special and annual meetings of the stockholders of McLeodUSA and,
together with the holders of shares of McLeodUSA Common Stock and the holders of
all other classes of stock entitled to attend and vote at such meetings, to vote
upon any matter or thing (including, without limitation, the election of
directors) properly considered and acted upon by the stockholders of McLeodUSA.
Holders of McLeodUSA Class B Common Stock are entitled to .40 vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding up
of McLeodUSA, whether voluntary or involuntary, the holders of McLeodUSA Class B
Common Stock, the holders of McLeodUSA Common Stock and the holders of any class
or series of stock entitled to participate therewith, shall become entitled to
participate in the distribution of any assets of McLeodUSA remaining after
McLeodUSA has paid, or provided for payment of, all debts and liabilities of
McLeodUSA and after McLeodUSA has paid, or set aside for payment, to the holders
of any class of stock having preference over the McLeodUSA Class B Common Stock
in the event of dissolution, liquidation or winding up the full preferential
amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the McLeodUSA Class B Common Stock, the
McLeodUSA Common Stock and on any class or series of stock entitled to
participate therewith when and as declared by the McLeodUSA Board.
Conversion Into Common Stock; No Other Preemptive or Conversion Rights. The
shares of McLeodUSA Class B Common Stock may be converted at any time at the
option of the holder into fully paid and nonassessable shares of McLeodUSA
Common Stock at the rate of one share of Common Stock for each share of Class B
Common Stock (as adjusted for any stock split). Except for this conversion
right, the holders of McLeodUSA Class B Common Stock have no preemptive or
subscription rights to purchase additional securities issued by McLeodUSA nor
any rights to convert their McLeodUSA Class B Common Stock into other securities
of McLeodUSA or to have their shares redeemed by McLeodUSA.
MCLEODUSA PREFERRED STOCK
The McLeodUSA Certificate of Incorporation authorizes the McLeodUSA Board,
from time to time and without further stockholder action, to provide for the
issuance of up to 2,000,000 shares of McLeodUSA Preferred Stock, in one or more
series, and to fix the relative rights and preferences of the shares, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date hereof, the McLeodUSA Board has not
provided for the issuance of any series of such McLeodUSA Preferred Stock and
there are no agreements or understandings for the issuance of any such McLeodUSA
Preferred Stock. Because of its broad discretion with respect to
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the creation and issuance of McLeodUSA Preferred Stock without stockholder
approval, the McLeodUSA Board could adversely affect the voting power of the
holders of McLeodUSA Common Stock and, by issuing shares of McLeodUSA Preferred
Stock with certain voting, conversion and/or redemption rights, could discourage
any attempt to obtain control of McLeodUSA.
INVESTOR AGREEMENT AND STOCKHOLDERS' AGREEMENT
McLeodUSA has entered into an agreement (as amended, the "Investor
Agreement") with IES, MHC and Clark E. and Mary E. McLeod (collectively, the
"Investor Stockholders") and certain other stockholders. The Investor Agreement
provides that each Investor Stockholder, for so long as such Investor
Stockholder owns at least 10% of the outstanding capital stock of McLeodUSA,
shall vote such Investor Stockholder's stock and take all action within its
power to (i) establish the size of the McLeodUSA Board at nine directors; (ii)
cause to be elected to the McLeodUSA Board one director designated by IES (for
so long as IES owns at least 10% of the outstanding capital stock of McLeodUSA);
(iii) cause to be elected to the McLeodUSA Board one director designated by MHC
(for so long as MHC owns at least 10% of the outstanding capital stock of
McLeodUSA); (iv) cause to be elected to the McLeodUSA Board three directors who
are executive officers of McLeodUSA designated by Clark E. McLeod (for so long
as Clark E. and Mary E. McLeod collectively own at least 10% of the outstanding
capital stock of McLeodUSA); and (v) cause to be elected to the McLeodUSA Board
four independent directors nominated by the McLeodUSA Board. The Investor
Agreement also provides that, for a period ending in March 1999 and subject to
certain exceptions, each of IES and MHC will refrain from acquiring, or agreeing
or seeking to acquire, beneficial ownership of any securities issued by
McLeodUSA.
In the event that either IES or MHC becomes the beneficial owner of 50% or
more of the shares of capital stock of McLeodUSA beneficially owned by the other
(the "Acquired Investor Stockholder"), the Investor Agreement provides that
(i) the Acquired Investor Stockholder will lose the right to nominate a director
to the McLeodUSA Board, (ii) until October 23, 1999, the acquiring party (the
"Acquiring Investor Stockholder") will vote all shares beneficially owned by
such party in excess of 25% of the voting power of the outstanding capital stock
of McLeodUSA either (A) in accordance with the recommendations of the McLeodUSA
Board or (B) for or against or abstaining in the same proportion as the shares
owned by all other stockholders, (iii) the Acquiring Investor Stockholder will
cause, or use its best efforts to cause, all shares of capital stock of
McLeodUSA beneficially owned by it to be represented in person or by proxy at
all stockholder meetings through October 23, 1999, and (iv) the Acquiring
Investor Stockholder will not, and will use its best efforts to cause its
affiliates and associates not to, deposit any such shares of capital stock of
McLeodUSA in a voting trust or enter into a voting agreement or other agreement
of similar effect with any other person prior to October 23, 1999.
In the event a third party becomes the beneficial owner of 50% or more of
the shares of capital stock of McLeodUSA beneficially owned by MHC and 50% or
more of the shares of capital stock of McLeodUSA beneficially owned by IES, the
Investor Agreement provides that IES and MHC (i) will lose the right to nominate
any directors to the McLeodUSA Board, (ii) until October 23, 1999, will vote, or
use their respective best efforts to direct the voting of, all shares
beneficially owned by such third party in excess of 25% of the voting power of
the outstanding capital stock of McLeodUSA either (A) in accordance with the
recommendations of the McLeodUSA Board or (B) for or against or abstaining in
the same proportion as the shares owned by all other stockholders, (iii) will
cause, or use their best efforts to cause, all shares of capital stock of
McLeodUSA beneficially owned by them to be represented in person or by proxy at
all meetings of McLeodUSA's stockholders through October 23, 1999, and (iv) will
not, and will use their respective best efforts to cause their affiliates and
associates not to, deposit any such shares of capital stock of McLeodUSA in a
voting trust or enter into a voting agreement or other agreement of similar
effect with any other person prior to October 23, 1999.
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On June 14, 1997, certain shareholders of CCI (collectively, the "CCI
Shareholders"), McLeodUSA and the Investor Stockholders entered into a
Stockholders' Agreement (as amended, the "Original Stockholders' Agreement"),
which became effective on September 24, 1997. Pursuant to the Original
Stockholders' Agreement, which amends and restates the Investor Agreement among
the parties thereto, each Investor Stockholder and the CCI Shareholders, for so
long as each such party owns at least 10% of the outstanding McLeodUSA Common
Stock, shall, for a period of three years after September 24, 1997, vote such
party's shares and take all action within its power to (i) establish the size of
the McLeodUSA Board at up to eleven directors; (ii) cause to be elected to the
McLeodUSA Board one director designated by IES (for so long as IES owns at least
10% of the outstanding McLeodUSA Common Stock); (iii) cause to be elected to the
McLeodUSA Board one director designated by MHC (for so long as MHC owns at least
10% of the outstanding McLeodUSA Common Stock); (iv) cause to be elected to the
McLeodUSA Board three directors who are executive officers of McLeodUSA
designated by Clark E. McLeod (for so long as Clark and Mary McLeod collectively
own at least 10% of the McLeodUSA Common Stock); (v) cause Richard A. Lumpkin to
be elected to the McLeodUSA Board (for so long as the CCI Shareholders
collectively own at least 10% of the McLeodUSA Common Stock); and (vi) cause to
be elected to the McLeodUSA Board four non-employee directors nominated by the
McLeodUSA Board. The Original Stockholders' Agreement provides that, for a
period ending in June 1999 and subject to certain exceptions each of IES and MHC
will refrain from acquiring, or agreeing or seeking to acquire beneficial
ownership of any securities issued by McLeodUSA. The Original Stockholders'
Agreement also provides that, until September 24, 1998, and subject to certain
exceptions, no Investor Stockholder or CCI Shareholder will offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, directly
or indirectly, ("Transfer"), any equity securities of McLeodUSA without the
consent of the McLeodUSA Board. In addition, the Original Stockholders'
Agreement provides that if McLeodUSA grants any Investor Stockholder or CCI
Shareholder the opportunity to register equity securities of McLeodUSA under the
Securities Act, McLeodUSA will grant all other Investor Stockholders and CCI
Shareholders the same opportunity to register their pro rata portion of
McLeodUSA equity securities owned by them. The other operative provisions of the
Investor Agreement remain unchanged in the Original Stockholders' Agreement.
On November 18, 1998, McLeodUSA entered into a Stockholders' Agreement (the
"Stockholders' Agreement") with IES, Clark E. and Mary E. McLeod, and Richard A.
Lumpkin, Gail G. Lumpkin and certain other parties affiliated or related thereto
(collectively, the "Lumpkins," and together with IES and Clark E. and Mary E.
McLeod, the "Principal Stockholders").
The Stockholders' Agreement provides that until December 31, 2001, the
Principal Stockholders will not Transfer any equity securities of McLeodUSA, or
any other securities convertible into or exercisable for such equity securities,
beneficially owned by such Principal Stockholder without receiving the prior
written consent of the McLeodUSA Board, except for certain permitted transfers
as provided in the Stockholders' Agreement. The Stockholders' Agreement further
provides that the McLeodUSA Board shall determine on a quarterly basis
commencing with the quarter ending December 31, 1998 and ending on December 31,
2001, the aggregate number, if any, of shares of McLeodUSA Common Stock (not to
exceed in the aggregate 150,000 shares per quarter) that the Principal
Stockholders may Transfer during certain designated trading periods following
the release of McLeodUSA's quarterly or annual financial results.
The Stockholders' Agreement provides that to the extent the McLeodUSA Board
grants registration rights to a Principal Stockholder in connection with a
Transfer of securities of McLeodUSA by such Principal Stockholder, it will grant
similar registration rights to the other parties as set forth in the
Stockholders' Agreement. In addition, the Stockholders' Agreement provides that
the McLeodUSA Board shall determine on an annual basis commencing with the year
ending December 31, 1999 and ending on December 31, 2001 (each such year, an
"Annual Period"), the aggregate number, if any, of shares of McLeodUSA Common
Stock (not to exceed in the aggregate on an annual basis a number of shares
equal to 15% of the total number of shares of McLeodUSA Common Stock
beneficially owned by the Principal Stockholders as of December 31,
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1998) (the "Registrable Amount"), to be registered by McLeodUSA under the
Securities Act, for Transfer by the Principal Stockholders. The Stockholders'
Agreement also provides that in any underwritten primary offering (other than
pursuant to a registration statement on Form S-4 or Form S-8 or any successor
forms thereto or other form which would not permit the inclusion of shares of
McLeodUSA Common Stock of the Principal Stockholders), McLeodUSA will give
written notice of such offering to the Principal Stockholders and will undertake
to register the shares of McLeodUSA Common Stock of such parties up to the
Registrable Amount, if any, as determined by the McLeodUSA Board. The
Stockholders' Agreement provides that McLeodUSA may subsequently determine not
to register any shares of the Principal Stockholders under the Securities Act
and may either not file a registration statement or otherwise withdraw or
abandon a registration statement previously filed.
The Stockholders' Agreement terminates on December 31, 2001. In addition,
if during any Annual Period McLeodUSA has not provided a Principal Stockholder a
reasonable opportunity to Transfer pursuant to the registration of securities
under the Securities Act or pursuant to certain other provisions of the
Stockholders' Agreement on the terms therein specified an aggregate number of
shares of McLeodUSA Common Stock equal to not less than 15% of the total number
of shares of McLeodUSA Common Stock beneficially owned by such Principal
Stockholder as of December 31, 1998, then such Principal Stockholder may
terminate the Stockholders' Agreement as it applies to such Principal
Stockholder within 10 business days following the end of any such Annual Period.
The Stockholders' Agreement also contains provisions relating to the
designation and election of directors to the McLeodUSA Board which provisions
take effect on the terms and under the circumstances specified therein.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability. Section 102(b)(7) of the DGCL authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. Although Section 102(b)(7) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The McLeodUSA Certificate
of Incorporation limits the liability of directors to McLeodUSA or its
stockholders to the full extent permitted by Section 102(b)(7). Specifically,
directors of McLeodUSA are not personally liable for monetary damages to
McLeodUSA or its stockholders for breach of the director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to McLeodUSA or its stockholders; (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or (iv) for any transaction
from which the director derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the McLeodUSA
Bylaws provide for mandatory indemnification of directors and officers of
McLeodUSA against any expense, liability or loss to which they may become
subject, or which they may incur as a result of being or having been a director
or officer of McLeodUSA. In addition, McLeodUSA must advance or reimburse
directors and officers for expenses incurred by them in connection with
indemnifiable claims.
McLeodUSA also maintains directors' and officers' liability insurance.
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CERTAIN CHARTER AND STATUTORY PROVISIONS
Classified Board. The McLeodUSA Certificate of Incorporation provides for
the division of the McLeodUSA Board into three classes of directors, serving
staggered three-year terms. The McLeodUSA Certificate of Incorporation further
provides that the approval of the holders of at least two-thirds of the shares
entitled to vote thereon and the approval of a majority of the entire McLeodUSA
Board are necessary for the alteration, amendment or repeal of certain sections
of the McLeodUSA Certificate of Incorporation relating to the election and
classification of the McLeodUSA Board, limitation of director liability,
indemnification and the vote requirements for such amendments to the McLeodUSA
Certificate of Incorporation. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of McLeodUSA.
Certain Statutory Provisions. McLeodUSA is subject to the provisions of
Section 203 of the DGCL. In general, this statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to such date, the corporation's board of directors approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
that resulted in such person becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by certain directors
or certain employee stock plans), or (iii) on or after the date the stockholder
became an interested stockholder, the business combination is approved by the
corporation's board of directors and authorized by the affirmative vote (and not
by written consent) of at least two-thirds of the outstanding voting stock of
the corporation excluding that stock owned by the interested stockholder. A
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who (other than the corporation and any direct or
indirect wholly owned subsidiary of the corporation), together with affiliates
and associates, owns (or, as an affiliate or associate, within three years
prior, did own) 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the DGCL, McLeodUSA's original certificate of
incorporation provided that it would not be governed by Section 203. Certain
stockholders, including Clark E. McLeod, Mary E. McLeod, IES and MHC, became
interested stockholders within the meaning of Section 203 while that certificate
of incorporation was in effect. Accordingly, future transactions between
McLeodUSA and any of such stockholders will not be subject to the requirements
of Section 203.
The McLeodUSA Certificate of Incorporation empowers the McLeodUSA Board to
redeem any of McLeodUSA's outstanding capital stock at a price determined by the
McLeodUSA Board, which price shall be at least equal to the lesser of (i) fair
market value (as determined in accordance with the McLeodUSA Certificate of
Incorporation) or (ii) in the case of a "Disqualified Holder," such holder's
purchase price (if the stock was purchased within one year of such redemption),
to the extent necessary to prevent the loss or secure the reinstatement of any
license, operating authority or franchise from any governmental agency. A
"Disqualified Holder" is any holder of shares of stock of McLeodUSA whose
holding of such stock may result in the loss of, or failure to secure the
reinstatement of, any license or franchise from any governmental agency held by
McLeodUSA or any of its subsidiaries to conduct any portion of the business of
McLeodUSA or any of its subsidiaries. Under the Telecommunications Act, non-
U.S. citizens or their representatives, foreign governments or their
representatives, or corporations organized under the laws of a foreign country
may not own, in the aggregate, more than 20% of a common carrier licensee or
more than 25% of the parent of a common carrier licensee if the FCC determines
that the public interest would be served by prohibiting such ownership.
Additionally, the FCC's rules may under certain conditions limit the size of
investments by foreign telecommunications carriers in U.S. international
carriers.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the McLeodUSA Common Stock is Norwest
Bank Minnesota, N.A.
COMPARISON OF MCLEODUSA COMMON STOCK AND DTG COMMON STOCK
The rights of DTG stockholders are currently governed by the DGCL, the DTG
Certificate of Incorporation and the DTG Bylaws. In accordance with the Merger
Agreement, at the Effective Time each issued and outstanding share of DTG Common
Stock will be converted into the right to receive 0.4328 of a share of McLeodUSA
Common Stock with a maximum of 1,295,000 shares of McLeodUSA Common Stock being
issuable pursuant to the Merger Agreement (assuming the exercise of all DTG
Stock Options prior to the Effective Time). Accordingly, upon consummation of
the Merger, the rights of DTG stockholders who become stockholders of McLeodUSA
will be governed by the DGCL and the McLeodUSA Certificate of Incorporation and
the McLeodUSA Bylaws. The following are summaries of the material differences
between the rights of DTG stockholders and the rights of McLeodUSA stockholders.
The following discussions are not intended to be complete and are qualified
by reference to the DTG Certificate of Incorporation, the DTG Bylaws, the
McLeodUSA Certificate of Incorporation and the McLeodUSA Bylaws. Copies of these
documents will be sent to stockholders of DTG and McLeodUSA upon request. See
"Where You Can Find More Information."
AUTHORIZED CAPITAL
DTG. As of November 30, 1998, the authorized capital stock of DTG
consisted of (i) 10,000,000 shares of DTG Common Stock, of which (a) 2,174,472
shares were issued and outstanding (b) 986 shares were held in the treasury of
DTG; (c) 400,000 shares were reserved for issuance pursuant to outstanding
options to purchase shares of DTG Common Stock; and (d) 383,568 shares were
reserved for issuance in connection with the Conversion-Merger; and (ii) 250,000
shares of DTG Preferred Stock, of which (a) 15,000 were designated "Series A
Junior Participating Preferred Stock"; (b) no shares were issued and
outstanding; (c) no shares were held in the treasury of DTG; and (d) 15,000
shares were reserved for issuance pursuant to a Rights Agreement, dated as of
July 22, 1997 between DTG and Norwest Bank Minnesota, N.A.
McLeodUSA. As of September 30, 1998, the authorized capital stock of
McLeodUSA consisted of (i) 250,000,000 shares of McLeodUSA Common Stock, of
which 63,244,064 shares were issued and outstanding; (ii) 22,000,000 shares of
McLeodUSA Class B Common Stock, of which no shares were issued and outstanding;
and (iii) 2,000,000 shares of McLeodUSA Preferred Stock, of which no shares were
issued and outstanding.
BOARD OF DIRECTORS
DTG. Pursuant to the DTG Certificate of Incorporation and the DTG Bylaws,
the number of directors of DTG shall be not less than three and shall be
determined from time to time by resolution adopted by the DTG Board. The
current number of DTG directors is 10. The DTG Board is divided into three
classes as nearly equal in number as possible, and the DTG directors are elected
for three-year terms by a plurality vote at the annual stockholders meeting by
the holders of shares present at the meeting or represented by proxy and
entitled to vote in the election. A quorum at any meeting of the DTG Board
consists of a majority of the total number of directors, and a majority of the
directors present at any meeting at which a quorum is present is required to
approve DTG Board action.
McLeodUSA. Pursuant to the McLeodUSA Certificate of Incorporation and the
McLeodUSA Bylaws, the number of McLeodUSA directors shall be between three and
fifteen. The
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current number of McLeodUSA directors is nine. The McLeodUSA Bylaws provide that
the election and term of the McLeodUSA directors is determined pursuant to the
McLeodUSA Certificate of Incorporation. The McLeodUSA Board is divided into
three classes as nearly equal in number as possible, and the McLeodUSA directors
are elected for three-year terms by a plurality of the voting rights represented
by the shares present in person or represented by proxy at the annual
stockholders meeting and entitled to vote in the election. A quorum at any
meeting of the McLeodUSA Board consists of a majority of the total number of
directors, and a majority of the directors present at any meeting at which a
quorum is present is required to approve McLeodUSA Board action.
COMMITTEES OF THE BOARD OF DIRECTORS
DTG. Under the DTG Certificate of Incorporation, the DTG Board may appoint
one or more committees. The DTG Bylaws provide that the DTG Board may appoint
an Executive Committee composed of two or more members of the DTG Board
appointed by the DTG Board by resolution. The DTG Bylaws provide that the DTG
Board may appoint other committees to exercise the authority delegated to them.
The DTG Board currently has an Executive Committee, an Audit Committee, a
Compensation Committee and a Nominating Committee. It is expected that these
committees will be dissolved subsequent to the Effective Time.
McLeodUSA. Pursuant to the McLeodUSA Certificate of Incorporation, the
McLeodUSA Board may designate one or more committees, which must consist of
McLeodUSA directors. The McLeodUSA Board currently has an Audit Committee and a
Compensation Committee.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
DTG. Pursuant to the DTG Certificate of Incorporation, subject to the
rights of any class of DTG preferred stock then outstanding, newly created
directorships resulting from an increase in the number of directors and
vacancies resulting from resignation, removal, death, disqualification or other
incapacity shall be filled by a majority of the votes of directors then in
office whether or not a quorum and shall not be filled by the DTG stockholders.
When the number of directors is changed, any newly created or eliminated
directorship shall be apportioned among the classes of directors as to make all
classes as nearly equal in number as possible. A decrease in the number of
directors may not shorten the term of an incumbent director.
McLeodUSA. Pursuant to the McLeodUSA Certificate of Incorporation,
vacancies and newly created directorships resulting from an increase in the
authorized number of McLeodUSA directors elected by all of the holders of
McLeodUSA Common Stock and McLeodUSA Class B Common Stock may be filled by a
majority of the McLeodUSA directors then in office, even if less than a quorum,
or by a sole remaining director. When the number of directors is changed, any
newly created or eliminated directorship shall be apportioned among the classes
of directors so as to make all classes as nearly equal in number as possible. A
decrease in the number of directors may not shorten the term of the incumbent
director.
REMOVAL OF DIRECTORS
DTG. Pursuant to the DTG Certificate of Incorporation, directors may be
removed at any time by the holders of a majority of shares entitled to vote on
the election of directors, but only for cause. "Cause" is present when (i) the
director has been convicted of a felony and such conviction is no longer subject
to direct appeal; (ii) the director has been adjudicated to be liable for
negligence or misconduct in the performance of such director's duty to the
corporation in a matter of substantial importance to the corporation and such
adjudication is no longer subject to appeal; (iii) the director has become
mentally incompetent, whether or not so adjudicated, which mental incompetence
directly affects the director's ability as a director of the corporation, or
(iv) the director's actions or failure to act have been in derogation of the
director's duties. Any proposal for removal pursuant to clauses (iii) and (iv)
initiated by the DTG Board requires the affirmative vote of at least two-thirds
of
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the total number of directors then in office, excluding the director whose
removal is proposed and who shall not be entitled to vote thereon.
McLeodUSA. Neither the McLeodUSA Certificate of Incorporation nor the
McLeodUSA Bylaws includes a provision setting forth the procedure for the
removal of directors. Under the DGCL, any director or the entire board of
directors of a corporation with a classified board, such as McLeodUSA, may be
removed by the holders of a majority of shares then entitled to vote at an
election of directors, but only for cause.
OFFICERS
DTG. Pursuant to the DTG Bylaws, the DTG Board appoints all the officers
of DTG at its first meeting after the annual meeting of stockholders. The
officers appointed must include a Chairman of the Board, a President, a
Secretary and a Treasurer and the DTG Board may appoint other officers and
assistant officers. The Chairman of the Board and the President shall be chosen
from among the directors and either one of them shall be appointed the Chief
Executive Officer. The DTG Board may remove any officer with or without cause.
The DTG Board or the Chief Executive Officer may, as they deem necessary,
designate certain individuals as divisional officers.
McLeodUSA. Pursuant to the McLeodUSA Bylaws, McLeodUSA's officers consist
of a President, a Secretary and a Treasurer, and other officers and assistant
officers as may be elected or appointed by the McLeodUSA Board. The McLeodUSA
Board may remove any officer, with or without cause, by the affirmative vote of
a majority of the McLeodUSA Board.
SPECIAL MEETINGS OF STOCKHOLDERS
DTG. Pursuant to the DTG Bylaws, a special meeting of DTG's stockholders
may be called at any time by an executive officer at the direction of the DTG
Board.
McLeodUSA. Pursuant to the McLeodUSA Bylaws, a special meeting of
McLeodUSA's stockholders may be called by the Board of Directors, the
Chairperson, the Chief Executive Officer or the President.
QUORUM AT STOCKHOLDER MEETINGS
DTG. Pursuant to the DTG Bylaws, the holders of a majority of stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, constitute a quorum at all stockholder meetings. In the absence of a
quorum, the chairman of the meeting may adjourn any meeting until a quorum is
present.
McLeodUSA. Pursuant to the McLeodUSA Bylaws, the holders of a majority of
the voting rights represented by the shares issued and outstanding and entitled
to vote at the meeting, and who are present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders for the
transaction of business. Where a separate vote by a class or classes is
required, a majority of the outstanding shares of such class or classes, present
in person or represented by proxy, shall constitute a quorum entitled to take
action with respect to that vote on that matter. The holders of a majority of
the voting rights represented by the shares represented at a meeting, whether or
not a quorum is present, may adjourn such meeting from time to time.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Under the DGCL, unless the corporation's certificate of incorporation
provides otherwise, any action required or permitted to be taken at any annual
or special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if written consents are signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which all shares entitled to vote
were present and
123
voted. The DTG Certificate of Incorporation provides that any action required or
permitted to be taken at any annual or special meeting of stockholders may be
taken without a meeting by written consent of the holders of all shares of stock
entitled to vote thereon. The McLeodUSA Certificate of Incorporation does not
address this matter.
ADVANCE NOTICE OF STOCKHOLDER-PROPOSED BUSINESS AT ANNUAL MEETINGS
Neither the McLeodUSA Certificate of Incorporation nor the McLeodUSA Bylaws
include a provision which requires that advance notice be given to McLeodUSA or
DTG of stockholder-proposed business to be conducted at annual meetings. The
DTG Bylaws contain procedural requirements stockholders must follow in order to
present items for consideration at stockholder meetings.
AMENDMENT OF GOVERNING DOCUMENTS
DTG. DTG may amend, alter, change or repeal any provision of the DTG
Certificate of Incorporation as permitted by the DGCL. Under the DGCL, an
amendment to a corporation's certificate of incorporation requires the
recommendation of a corporation's board of directors, the approval of a majority
of all shares entitled to vote thereon, voting together as a single class, and
the approval of a majority of the outstanding stock of each class entitled to
vote separately thereon unless a higher vote is required in the corporation's
certificate of incorporation. The DTG Certificate of Incorporation requires the
affirmative vote of not less than 80% of the outstanding shares of voting stock
held by stockholders who are not Interested Stockholders (as such term is
defined in the DTG Certificate of Incorporation) to alter, amend, modify or
repeal Article XII (requirements to approve a Business Combination, as such term
is defined in the DTG Certificate of Incorporation, when there is board approval
and certain other requirements) and Article XV(A) (amendment of certificate of
incorporation). The DTG Certificate of Incorporation also requires the
affirmative vote of not less than 80% of the outstanding shares of voting stock
to alter, amend, modify or repeal Article VII (powers of the directors), Article
VIII (election, replacement and removal of directors), Article IX (action by
written consent), Article X (requirements to approve a Business Combination, as
such term is defined in the DTG Certificate of Incorporation, when a majority of
the Continuing Directors (as such term is defined in the DTG Certificate of
Incorporation) have approved the combination), Article XI (initiation, approval,
adoption or recommendation of DTG Board for tender offer or Business
Combination), Article XIII (liability of directors), Article XV(B) (amendment of
certificate of incorporation and Bylaws) and the DTG Bylaws; provided, however,
that this higher vote requirement shall not apply to any amendment, alteration,
modification or repeal previously approved by the affirmative votes of 80% of
the DTG Board (including the affirmative vote of at least one director from each
class of directors) and the affirmative vote of two-thirds of the Continuing
Directors. The DTG Bylaws provide that they may be amended, altered, changed or
repealed by the DTG Board at any regular or special meeting and by the
stockholders at any regular or special meeting of stockholders provided that
notice of the proposed amendment, and the proposed amendment, has been provided.
McLeodUSA. McLeodUSA may amend or repeal any provision of the McLeodUSA
Certificate of Incorporation as permitted by the DGCL and the McLeodUSA
Certificate of Incorporation, except as noted below. Under the DGCL, an
amendment to a corporation's certificate of incorporation requires the
recommendation of a corporation's board of directors, the approval of a majority
of all shares entitled to vote thereon, voting together as a single class, and
the approval of a majority of the outstanding stock of each class entitled to
vote separately thereon unless a higher vote is required in the corporation's
certificate of incorporation. Pursuant to the McLeodUSA Certificate of
Incorporation, the affirmative vote of at least two-thirds of the voting rights
represented by the shares entitled to vote thereon and the affirmative vote of a
majority of the entire McLeodUSA Board is required to amend, alter or repeal
Sections 5.1 (election of directors) and 5.3 (limitation of liability), Article
6 (indemnification), and Article 8 (amendment of certificate of incorporation)
of the McLeodUSA Certificate of Incorporation.
124
Pursuant to the McLeodUSA Certificate of Incorporation, the McLeodUSA Board
has the power to adopt, alter, amend and repeal the McLeodUSA Bylaws in
accordance with the DGCL. Under the DGCL, the stockholders also have the power
to amend or repeal the McLeodUSA Bylaws or to adopt new bylaws.
BUSINESS COMBINATION WITH AN INTERESTED STOCKHOLDER
DTG. The DTG Certificate of Incorporation provides that certain Business
Combinations require the affirmative vote of the holders of not less than 80% of
the outstanding shares of voting stock. Such requirement is not applicable to
any transaction that has received approval by a majority of Continuing
Directors. The voting requirements are also inapplicable (i) to Business
Combinations that either (i) have been approved by a majority of Continuing
Directors or (ii) where (a) the Business Combination will result in an
involuntary sale, redemption, cancellation or other termination of ownership of
any class of DTG voting stock held by stockholders who do not approve such
Business Combination and the aggregate amount of the cash and the market value
of other consideration to be received by such stockholders is at least equal to
the Minimum Price Per Share (as defined in the DTG Certificate of
Incorporation), (b) the consideration to be received by the holders of a
particular class of voting stock shall be paid in cash or in such other form as
the Interested Stockholder (as defined in the DTG Certificate of Incorporation)
has previously paid for shares of such class of voting stock, (c) from the time
an Interested Stockholder became an Interested Stockholder, among other things,
(1) such Interested Stockholder shall have insured that the DTG Board included
representation by Continuing Directors proportionate to the stock holdings of
DTG's voting stockholders not affiliated with the Interested Stockholder,
(2) there shall have been no reduction in the rate of dividends payable on DTG's
stock except as approved by a unanimous vote of the directors, (3) the
Interested Stockholder shall not have acquired any newly issued shares of stock
from DTG, (4) the Interested Stockholder shall not have acquired additional
shares of DTG's outstanding stock, except as part of the transaction by which
such person became an Interested Stockholder, and (5) the Interested Stockholder
shall not have received the benefit of any loans, advances, guarantees or other
financial assistance or tax credits provided by DTG nor made any major change in
DTG's business or capital structure without the unanimous approval of the DTG
Board, in either case prior to the consummation of the Business Combination;
(d) a proxy statement under the Exchange Act shall have been mailed to all the
stockholders of DTG soliciting approval of the Business Combination; and
(e) there has been five years between the date such person became an Interested
Stockholder and the date the Business Combination is consummated.
DTG is also subject to the provisions of Section 203 of the DGCL as
generally described above under "--Certain Charter and Statutory Provisions."
McLeodUSA. McLeodUSA is subject to the provisions of Section 203 of the
DGCL as described above under "--Description of McLeodUSA Capital Stock--Certain
Charter and Statutory Provisions."
125
CERTAIN OTHER MATTERS
LEGAL MATTERS
The validity of the McLeodUSA Common Stock offered hereby and certain
federal income tax consequences in connection with the Merger will be passed
upon by Hogan & Hartson L.L.P., Washington, D.C.
The federal income tax consequences described in this Prospectus and Proxy
Statement are the subject of an opinion issued by Warner Norcross & Judd LLP,
Grand Rapids, Michigan.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
ended December 31, 1997 incorporated by reference in this Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said reports.
The consolidated financial statements of Consolidated Communications Inc.
as of December 31, 1996 and 1995, and for each of the three years ended December
31, 1996 incorporated by reference in this Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of DTG as of December 31, 1997 and
1996 and for each of the two years in the period ended December 31, 1997
included in this Prospectus and Proxy Statement and in the Registration
Statement of which this Prospectus and Proxy Statement is a part, have been
audited by Olsen Thielen & Co., Ltd., independent auditors, as set forth in
their report, appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of said firm
as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On March 27, 1997, McLeodUSA engaged the accounting firm of Arthur Andersen
LLP as McLeodUSA's principal independent accountants, to replace McGladrey &
Pullen, LLP, McLeodUSA's former independent accountants, effective with such
engagement. The decision to change independent accountants was made following a
review of competitive proposals submitted by Arthur Andersen LLP and two other
major public accounting firms, and was recommended by the Audit Committee of the
McLeodUSA Board and approved by the McLeodUSA Board. McGladrey & Pullen, LLP
did not resign and did not decline to stand for re-election.
During the fiscal years ended December 31, 1996 and 1995, and the interim
period between December 31, 1996 and March 27, 1997, there were no disagreements
with McGladrey & Pullen, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
would have caused McGladrey & Pullen, LLP to make reference in their report to
such disagreements if not resolved to their satisfaction.
126
McGladrey & Pullen, LLP's reports on the financial statements of the
McLeodUSA for the fiscal years ended December 31, 1996 and 1995 contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.
McLeodUSA provided McGladrey & Pullen, LLP with a copy of this disclosure
and requested that McGladrey & Pullen, LLP furnish it with a letter addressed to
the SEC stating whether it agreed with the above statements. (A copy of the
McGladrey & Pullen, LLP letter addressed to the SEC is filed as Exhibit 16.1 to
McLeodUSA's Annual Report on Form 10-K for its fiscal year ended December 31,
1997, filed on March 9, 1998).
STOCKHOLDER PROPOSALS
DTG will hold its 1999 Annual Meeting of Stockholders only if the Merger is
not consummated before the time of such meeting. In the event that such a
meeting is held, for stockholder proposals to be considered for inclusion in the
proxy statement for the 1999 Annual Meeting of Stockholders of DTG, such
proposals must have been received by the Secretary of DTG on or before November
26, 1998.
As described in McLeodUSA's proxy statement relating to its 1998 Annual
Meeting of Stockholders, for stockholder proposals to be considered for
inclusion in the proxy statement for the 1999 Annual Meeting of Stockholders of
McLeodUSA, such proposals must be received by the Secretary of McLeodUSA on or
before December 21, 1998.
OTHER MATTERS
As of the date of this Prospectus and Proxy Statement, the DTG Board knows
of no matter that will be presented for consideration at the Special Meeting
other than as described in this Prospectus and Proxy Statement. If any other
matters come before the Special Meeting or any adjournments or postponements
thereof and are voted upon, the enclosed proxies will confer discretionary
authority on the individuals named as proxies therein to vote the shares
represented by such proxies as to any such matters. The individuals named as
proxies intend to vote or not to vote in accordance with the recommendation of
the management of DTG.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Olsen Thielen & Co. LLC will be present at the Special
Meeting. Such representatives will have the opportunity to make a statement if
they desire to do so and are expected to be available to respond to appropriate
questions.
WHERE YOU CAN FIND MORE INFORMATION
McLeodUSA has filed with the SEC a Registration Statement under the
Securities Act that registers the distribution to DTG stockholders and holders
of Conversion-Merger Rights of the shares of McLeodUSA Common Stock to be issued
in connection with the Merger (the "Registration Statement"). The Registration
Statement, including the attached exhibits and schedules, contain additional
relevant information about McLeodUSA Common Stock. The rules and regulations of
the SEC allow us to omit certain information included in the Registration
Statement from this Prospectus and Proxy Statement.
In addition, McLeodUSA and DTG file reports, proxy statements and other
information with the SEC under the Exchange Act. You may read and copy this
information at the following locations of the SEC:
127
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA and DTG, that
file electronically with the SEC. The address of that site is
http://www.sec.gov.
The SEC allows McLeodUSA to "incorporate by reference" information into
this Prospectus and Proxy Statement. This means that McLeodUSA can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is
considered to be a part of this Prospectus and Proxy Statement, except for any
information that is superseded by information that is included directly in this
document.
This Prospectus and Proxy Statement incorporates by reference the documents
listed below that McLeodUSA has previously filed with the SEC. They contain
important information about McLeodUSA and its financial condition.
. McLeodUSA's Annual Report on Form 10-K for its fiscal year ended December
31, 1997, filed on March 9, 1998
. McLeodUSA's Current Reports on Form 8-K, filed on March 20, 1998,
October 29, 1998 and November 19, 1998
. McLeodUSA's Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1998, June 30, 1998 and September 30, 1998, filed on May 13,
1998, August 14, 1998 and November 16, 1998, respectively
. The consolidated financial statements of Consolidated Communications Inc.
and subsidiaries appearing on pages F-45 through F-60 of McLeodUSA's
definitive prospectus dated December 1, 1997 and filed with the SEC on
December 2, 1997 pursuant to Rule 424(b) under the Securities Act as part
of McLeodUSA's Registration Statement on Form S-4 (Registration No. 333-
34227)
. All documents filed with the SEC by McLeodUSA pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus
and Proxy Statement and prior to the date of the Special Meeting are
incorporated by reference into this Prospectus and Proxy Statement,
effective the date such documents are filed
. The description of McLeodUSA Common Stock set forth in the McLeodUSA
Registration Statement filed under Section 12 of the Exchange Act on Form
8-A on May 24, 1996, including any amendment or report filed with the SEC
for the purpose of updating such description
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents incorporated by reference in this
document through McLeodUSA or from the SEC through the SEC's web site at the
address described above. Documents incorporated by reference are available from
McLeodUSA without charge, excluding any exhibits to those documents unless the
exhibit is specifically incorporated by reference as an exhibit in this
Prospectus and Proxy Statement. You can obtain documents incorporated by
reference in this
128
Prospectus and Proxy Statement by requesting them in writing or by telephone
from McLeodUSA at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street, SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 364-0000
If you would like to request documents, please do so by ____________, 1999
to receive them before the Special Meeting. If you request any incorporated
documents from McLeodUSA, McLeodUSA will mail them to you by first class mail,
or another equally prompt means, within two business day after McLeodUSA
receives your request.
This document constitutes the Prospectus of McLeodUSA and the Proxy
Statement of DTG. McLeodUSA has supplied all information contained or
incorporated by reference in this Prospectus and Proxy Statement relating to
McLeodUSA and DTG has supplied all such information relating to DTG.
Neither McLeodUSA nor DTG has authorized anyone to give any information or
make any representation about the Merger or McLeodUSA or DTG that is different
from, or in addition to, that contained in this Prospectus and Proxy Statement
or in any of the materials that McLeodUSA has incorporated into this document.
Therefore, if anyone does give you information of this sort, you should not rely
on it. The information contained in this document speaks only as of the date of
this document unless the information specifically indicates that another date
applies.
129
INDEX TO FINANCIAL STATEMENTS
DAKOTA TELECOMMUNICATIONS GROUP, INC. CONSOLIDATED FINANCIAL INFORMATION
DTG ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheet.......................................... F-3
Consolidated Statement of Operations................................ F-4
Consolidated Statement of Stockholders' Equity...................... F-5
Consolidated Statement of Cash Flows................................ F-6
Notes to Consolidated Financial Statements.......................... F-7
DTG INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheet.......................................... F-22
Consolidated Statements of Operations............................... F-24
Consolidated Statement of Cash Flows................................ F-26
Notes to Consolidated Financial Statements.......................... F-27
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dakota Telecommunications Group, Inc.
and Subsidiaries
Irene, South Dakota
We have audited the accompanying consolidated balance sheet of Dakota
Telecommunications Group, Inc. (incorporated in Delaware and formerly Dakota
Cooperative Telecommunications, Inc.) and subsidiaries as of December 31, 1997,
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dakota
Telecommunications Group, Inc. and subsidiaries as of December 31, 1997, and
1996, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
St. Paul, Minnesota
January 30, 1998 Olsen Thielen & Co., Ltd.
F-2
CONSOLIDATED FINANCIAL STATEMENTS
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
================================================================================
ASSETS
1997 1996
-------------- -------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,297,938 $ 2,121,444
Temporary Cash Investments 300,000 749,000
Accounts Receivable, Less Allowance for
Uncollectibles of $298,700 and $152,300 4,216,025 1,784,895
Deposits -- 274,889
Income Taxes Receivable 62,987 248,500
Materials and Supplies 1,109,226 694,097
Prepaid Expenses 275,567 168,078
-------------- -------------
Total Current Assets 10,261,743 6,040,903
-------------- -------------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired 4,869,096 1,830,959
Other Intangible Assets 809,843 509,559
Other Investments 2,037,571 625,722
Deferred Charges 653,373 56,628
-------------- -------------
Total Investments and Other Assets 8,369,883 3,022,868
-------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 25,408,266 14,441,104
-------------- -------------
TOTAL ASSETS $ 44,039,892 $ 23,504,875
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 1,390,000 $ 697,700
Note Payable 1,500,000 --
Accounts Payable 2,290,727 399,694
Payable Under Floor Plan Arrangements 569,287 --
Other Current Liabilities 1,171,772 497,388
-------------- -------------
Total Current Liabilities 6,921,786 1,594,782
-------------- -------------
LONG-TERM DEBT 29,200,469 15,338,395
-------------- -------------
DEFERRED CREDITS 113,565 159,482
-------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock -- 1,172,000
Common Stock 8,523,870 26,185
Treasury Stock at Cost (12,325)
Capital Credits -- 4,732,723
Other Capital 2,298,006 --
Retained Earnings (Deficit) (2,005,479) 481,308
Unearned Employee Stock Ownership Plan Shares (1,000,000) --
-------------- -------------
Total Stockholders' Equity 7,804,072 6,412,216
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,039,892 $ 23,504,875
============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
================================================================================
1997 1996
----------------- ----------------
REVENUES:
Local Network $ 1,221,788 $ 1,058,667
Network Access 4,176,695 3,266,969
Long Distance Network 3,478,721 1,996,301
Cable Television Service 1,517,028 1,300,512
Computer Network Sales 1,788,104 --
Internet Service 1,021,344 72,447
Other 525,312 406,446
--------------- ---------------
Total Operating Revenues 13,728,992 8,101,342
--------------- ---------------
COSTS AND EXPENSES:
Plant Operations 4,082,624 2,406,766
Cost of Goods Sold 1,465,885 --
Depreciation and Amortization 3,448,109 2,434,416
Customer 1,465,735 500,802
General and Administrative 4,215,257 1,817,869
Other Operating Expenses 810,041 863,639
--------------- ---------------
Total Operating Expenses 15,487,651 8,023,492
--------------- ---------------
OPERATING INCOME (LOSS) (1,758,659) 77,850
--------------- ---------------
OTHER INCOME AND (EXPENSES):
Interest and Dividend Income 276,204 309,982
Interest Expense (1,122,807) (723,778)
--------------- ---------------
Net Other Income and (Expenses) (846,603) (413,796)
--------------- ---------------
LOSS BEFORE INCOME TAXES (2,605,262) (335,946)
INCOME TAX BENEFIT (118,475) (175,712)
--------------- ---------------
NET LOSS $ (2,486,787) $ (160,234)
=============== ===============
BASIC AND DILUTED LOSS PER SHARE
(since reorganization) $ (1.35)
===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
------------------------------------------------------
Retained
Preferred Common Treasury Capital Other Earnings
Stock Stock Stock Credits Capital (Deficit)
------------- ------------- ------------ ------------- ------------ -------------
BALANCE on December 31, 1995 $ $ 26,125 $ $ 4,643,909 $ $ 745,271
Net Income (Loss) 103,729 (263,963)
Common Stock Issued, Net 60
Preferred Stock Issued
(1,172 Shares) 1,172,000
Retirement of Capital
Credits to Estates (14,915)
------------- ------------- ------------ ------------- ------------ -------------
BALANCE on December 31, 1996 1,172,000 26,185 - 4,732,723 - 481,308
Net Loss (2,486,787)
Issuance of Common Stock in
Exchange for Preferred
Stock, Capital Credits and
Capital Stock (1,172,000) 3,471,770 (4,597,776) 2,298,006
Retirement of Capital Credits (134,947)
Common Stock Issued, Net 4,025,915 (12,325)
Employee Stock Ownership
Plan Shares Purchased 1,000,000
------------- ------------- ------------ ------------- ------------ -------------
BALANCE on December 31, 1997 $ - $ 8,523,870 $ (12,325) $ - $ 2,298,006 $ (2,005,479)
============= ============= ============ ============= ============ =============
Unearned
Employee
Stock
Ownership
Plan Shares Total
------------- -------------
BALANCE on December 31, 1995 $ $ 5,415,305
Net Income (Loss) (160,234)
Common Stock Issued, Net 60
Preferred Stock Issued
(1,172 Shares) 1,172,000
Retirement of Capital
Credits to Estates (14,915)
------------- -------------
BALANCE on December 31, 1996 - 6,412,216
Net Loss (2,486,787)
Issuance of Common Stock in
Exchange for Preferred
Stock, Capital Credits and
Capital Stock -
Retirement of Capital Credits (134,947)
Common Stock Issued, Net 4,013,590
Employee Stock Ownership
Plan Shares Purchased (1,000,000) -
------------- -------------
BALANCE on December 31, 1997 $ (1,000,000) $ 7,804,072
============= =============
F-5
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
================================================================================
1997 1996
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,486,787) $ (160,234)
Adjustments to Reconcile Net Loss to Net
Cash Provided By Operating Activities:
Depreciation and Amortization 3,448,109 2,469,873
Deferred Charges 67,060 208,248
Deposits 274,889 274,889
Receivables (1,296,894) (155,521)
Income Taxes Receivable 185,513 (248,500)
Prepaid Expenses (101,777) (52,618)
Accounts Payable 1,464,361 (379,143)
Accrued Income Taxes - (260,655)
Other Current Liabilities 370,819 206,778
Deferred Credits (73,589) 58,719
----------------- -------------------
Net Cash Provided By Operating Activities 1,851,704 1,961,836
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment (13,564,024) (5,751,604)
Deposits - 107,822
Sale of Temporary Cash Investments 649,000 -
Purchase of Temporary Cash Investments (200,000) (749,000)
Purchase of Other Investments (1,473,754) (532,977)
Purchase of Other Intangible Assets (279,832) (541,300)
Deferred Charges (663,805) (8,885)
Acquisition Costs, Net of Cash Acquired (75,812) (40,295)
----------------- -------------------
Net Cash Used In Investing Activities (15,608,227) (7,516,239)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-Term Debt 33,912,727 4,399,270
Principal Payments of Long-Term Debt (20,241,444) (2,844,967)
Proceeds from Issuance of Note Payable 1,500,000 -
Construction Contracts Payable (116,909) (182,912)
Retirement of Capital Credits (134,947) (14,915)
Other - (3,513)
Issuance of Common Stock 1,025,915 -
Purchase of Treasury Stock (12,325) -
----------------- -------------------
Net Cash Provided by Financing Activities 15,933,017 1,352,963
----------------- -------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,176,494 (4,201,440)
CASH AND CASH EQUIVALENTS at Beginning of Year 2,121,444 6,322,884
----------------- -------------------
CASH AND CASH EQUIVALENTS at End of Year $ 4,297,938 $ 2,121,444
================= ===================
F-6
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations - The Company is a diversified telecommunications
--------------------
services company, which, directly or through wholly-owned subsidiaries, provides
wireline local and network access sales, long-distance telephone services,
operator assisted calling services, telecommunications and computer equipment
sale and leasing services, cable television services, Internet access, computer
network services and related services. The principal market for these
telecommunications and cable services are local residential and business
customers residing in southeastern South Dakota, with a portion of its cable
television customers in northwestern Iowa and southwestern Minnesota. No single
customer accounted for a significant amount of revenues and accounts receivable.
Local service rates charged to telephone customers are established by the
Company and are not subject to regulation. Toll and access rates are subject to
state and Federal Communications Commission regulation. Rates charged cable
television customers are established by the Company.
B. Principles of Consolidation - The consolidated financial statements include
---------------------------
the accounts of Dakota Telecommunications Group, Inc. (formerly Dakota
Cooperative Telecommunications, Inc.) and its wholly-owned subsidiaries, Dakota
Telecom, Inc., DTG Internet Services, Inc. (formerly IWAY, Inc.), DTG
Communications, Inc. (formerly TCIC Communications, Inc.), Dakota
Telecommunications Systems, Inc. (and its wholly-owned subsidiary, Dakota
Wireless Systems, Inc.), DTG DataNet, Inc. (formerly Futuristic, Inc. d/b/a
DataNet) and DTG Community Telephone, Inc. All significant intercompany
transactions and accounts have been eliminated.
C. Basis of Accounting - The accounting policies of the Company are in
-------------------
conformity with generally accepted accounting principles and the Company does
not have any regulatory assets or liabilities as defined by Financial Accounting
Standards Board Statement No. 71, "Accounting for the Effects of Certain Types
of Regulation".
D. Deferred Charges - Deferred Charges include the cost of computer software
----------------
that is being developed for internal use. These costs will be amortized over
three years when the software is completed and placed into service.
E. Accounting Estimates - The presentation of financial statements in
--------------------
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F. Cash Investments - Cash and cash equivalents include general funds and
----------------
short-term investments with original maturities of three months or less.
Investments with original maturities of three months to twelve months are
classified as temporary cash investments. Cash investments are valued at market
value.
F-7
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. Materials and Supplies - Materials and supplies are recorded at average unit
----------------------
cost and inventory held for resale is valued at the lower of first-in, first-out
cost or market. Balances as of December 31, 1997, and 1996 are :
1997 1996
------------ ------------
Materials and Supplies $ 797,521 $ 528,546
Inventory 311,705 165,551
------------ ------------
Total $ 1,109,226 $ 694,097
============ ============
H. Property, Plant and Depreciation - Property, plant and equipment are
--------------------------------
recorded at original cost. Additions, improvements or major renewals are
capitalized. If the telecommunication and cable television utility plant is
sold, retired or otherwise disposed of in the ordinary course of business, the
cost plus removal costs less salvage, is charged to accumulated depreciation.
Depreciation is computed using principally the straight-line method based upon
the estimated service lives of the depreciable assets.
I. Excess of Cost Over Net Assets Acquired - The excess of cost over net assets
---------------------------------------
of acquired companies is being expensed equally over fifteen years and is shown
net of accumulated amortization of $150,030 and $10,032 at December 31, 1997,
and 1996.
J. Other Intangible Assets - Other intangible assets consist of customer lists
-----------------------
($628,026 and $541,300 as of December 31, 1997, and 1996) and is being expensed
equally over fifteen years and shown net of accumulated amortization of $73,193
and $31,741 at December 31, 1997, and 1996. Other intangible assets also
include the cost ($255,010) of a Broadband Personal Communications Service
System license at December 31, 1997.
K. Other Investments - Other investments are recorded at cost.
-----------------
L. Capital Credits - The Company operated as a cooperative until July 21, 1997.
---------------
Amounts received from the furnishing of telephone service, interest income and
other nonoperating operations in excess of costs and expenses were assigned to
telephone patrons on a patronage basis to the extent they were not needed to
offset prior losses.
M. Revenue Recognition - Revenues are recognized when earned, regardless of the
-------------------
period in which they are billed. Network access and long distance revenues are
furnished in conjunction with interexchange carriers and are determined by cost
separation studies. Revenues include estimates pending finalization of cost
studies. Network access revenues are based upon interstate tariffs filed with
the Federal Communications Commission by the National Exchange Carriers
Association and state tariffs filed with state regulatory agencies. Management
believes recorded revenues are reasonable based on estimates of final cost
separation studies which are typically settled within two years.
F-8
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
N. Income Taxes - Until July 21, 1997, the Parent Company operated as a
------------
cooperative and had been granted tax exempt status under Section 501(c)12 of the
Internal Revenue Code; therefore the Parent Company income was not taxable. The
State of South Dakota does not have an income tax.
After July 21, 1997, the Parent Company became subject to federal income taxes
and files a consolidated return with its wholly-owned subsidiaries, which are
subject to federal income taxes and Minnesota and Iowa income taxes for
operations in those states. Income taxes for these companies are provided for
the tax effects of transactions reported in the financial statements and include
taxes currently payable and deferred income taxes which reflect the estimated
income tax consequences of the differences between the income tax bases of
assets and liabilities and their financial reporting bases. Temporary
differences are primarily depreciation and net operating losses carryforwards.
O. Credit Risk - Financial instruments which potentially subject the Company to
-----------
concentrations of credit risk consist principally of temporary cash investments.
The Company places its temporary cash investments with high credit quality
financial institutions and, by policy, generally limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to the Company's large number of
customers. The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk.
P. Allowance for Funds Used During Construction - The Company includes in its
--------------------------------------------
telecommunication and cablevision plant accounts an average cost of debt used
for the construction of the plant, and excludes the amounts from interest
expense on the statement of operations. The amount capitalized for 1997 was
$171,800.
Q. Reclassifications - Certain reclassifications have been made to the 1996
-----------------
financial statements to conform to the 1997 presentation. These
reclassifications had no effect on net income.
NOTE 2 - REORGANIZATION
At a special meeting of the stockholders on July 21, 1997, an amendment to the
Company's articles of incorporation was approved which resulted in the
conversion of the Company from a cooperative to a South Dakota business
corporation. Also at a meeting convened on July 21, 1997, and subsequently
adjourned and completed on July 25, 1997, the shareholders of the South Dakota
business corporation approved an Agreement and Plan of Merger that provided for
the subsequent merger of the South Dakota business corporation with and into the
Company. The conversion of equity in the Cooperative to equity in the South
Dakota business corporation and then into equity in the Company was at the rate
of one share of common stock for each share of the Cooperative's common stock,
80.8216445 shares of common stock for each share of preferred stock and 0.2 of a
share of common stock for each dollar of capital credits.
F-9
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 2 - REORGANIZATION (CONTINUED)
General and administrative expenses for the year ended December 31, 1997,
includes $611,342 of costs relating to the reorganization of the Company.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment are as
follows:
Estimated
Useful
Life 1997 1996
------------- ------------ -------------
Land $ 101,573 $ 101,573
Buildings 20-33 years 2,669,620 1,486,491
Leasehold Improvements 5 242,886 15,677
Machinery and Equipment 5-10 2,250,495 1,499,518
Furniture and Fixtures 3-20 2,076,192 1,010,234
Telecommunications Plant 4-20 23,947,827 16,922,589
Cable Television Plant 8-12 5,352,431 4,869,851
Construction In Progress -- 288,504 354,025
------------ -------------
36,929,528 26,259,958
Less Accumulated
Depreciation 11,521,262 11,818,854
------------ -------------
Total $ 25,408,266 $ 14,441,104
============ =============
Depreciation included in costs and expenses was $3,265,650 in 1997 and
$2,392,643 in 1996.
The Company intends to add new construction in 1998 of approximately $37,000,000
which is expected to be financed through additional long-term financing.
NOTE 4 - NOTE PAYABLE
The Company has a line of credit arrangement for $1.5 million with RTFC which
expires in 2002. Interest is payable quarterly at variable monthly rates
determined by RTFC with a cap at prime plus 1.5%. Any advances must be paid in
full within 360 days of the advance and remain at a zero balance for at least
five consecutive business days. Advances from the line of credit were used to
finance construction approved in the RTFC long-term agreements. The $1.5 million
outstanding note balance was paid in full January 1998.
F-10
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4 - NOTE PAYABLE (CONTINUED)
The Company has a line of credit arrangement for $800,000, at the prime rate,
with Norwest Bank, South Dakota, N. A. which expires January 31, 1998. This
arrangement was obtained through acquisition of a new subsidiary in 1997. No
amounts were outstanding as of December 31, 1997.
NOTE 5 - PAYABLE UNDER FLOOR PLAN ARRANGEMENT
The Company has floor plan agreements with Deutsche Financial Services and IBM
Credit Corporation under which it may borrow up to 100% of the cost of qualified
purchases. The agreement with Deutsche Financial Services has a $1,400,000
credit limit with no interest for up to 30 days and 15% interest after 30 days.
The agreement with IBM Credit Corporation has a $350,000 credit limit with no
interest for up to 30 days, 8.85% for 30-45 days and 9.2% after 45 days. The
amount borrowed under these agreements must be repaid when the financed items
are sold or disposed of in any manner. The agreements are secured by all the
assets of the Company's subsidiary, DTG DataNet, Inc. and include various
covenants which have been approved by RTFC.
NOTE 6 - LONG-TERM DEBT
Long-term debt is as follows:
1997 1996
-------------- --------------
Rural Telephone Finance Cooperative (RTFC) Mortgage Note, matures
2012, variable interest rate (6.65% at December 31, 1997) $ 28,184,830 $ --
Rural Telephone Finance Cooperative (RTFC) Mortgage Note, matures
2006, variable interest rate (6.65% at December 31, 1997) 1,405,639 1,537,537
Home Federal Savings Bank, matures 2007,
variable interest rate (9.5% at December 31, 1997)
(ESOP loan guaranteed by the Company) 1,000,000 --
Rural Utilities Service (RUS) mortgage notes:
2% payable in quarterly installments -- 2,595,175
5% payable in monthly installments -- 10,756,343
Norwest Bank South Dakota, N.A., variable
interest rate (prime plus one percent) -- 980,469
Other -- 166,571
------------- --------------
30,590,469 16,036,095
Amount Due Within One Year (1,390,000) (697,700)
------------- --------------
Total Long-Term Debt $ 29,200,469 $ 15,338,395
============= ==============
F-11
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 6 - LONG-TERM DEBT (Continued)
The Company received loans of $14,737,000 and $13,684,000 from RTFC for the
purposes of refinancing its RUS debt and RTFC lines of credit and to finance
plant construction. The loans are payable quarterly, with full payment due in
fifteen years. On July 15, 1997, the Company retired its entire RUS debt with
loan proceeds from RTFC. In order to obtain financing from RTFC, the loans
include borrowings of $1,449,185 to purchase Subordinated Capital Certificates
(SCC) of RTFC. The SCCs bear no interest and will be repaid to the Company.
SCCs are included in other investments on the balance sheet. The Company is
required to maintain a debt service coverage of not less than 1.25 and a times
interest earned ratio of not less than 1.50. Each ratio is determined by
averaging the two highest annual calculations during the three most recent
fiscal years. The Company is restricted from incurring any additional unsecured
debt in excess of five percent of total assets from any other lender and from
declaring or paying any dividend or purchasing or redeeming any capital stock in
excess of 25 percent of the prior fiscal year-end cash margins without written
approval of the lender.
Unadvanced loan funds of $94,181 are available to the Company on loan
commitments from RTFC. Loan proceeds will be used to finance future
construction. The RTFC loans, maturing in 2012, are collateralized by all
assets, revenues and stock of the Company's subsidiaries. The RTFC loan,
maturing in 2006, is collateralized by the cable plant located in ten cities in
southeastern South Dakota and is payable in quarterly installments.
The loan from Home Federal Savings Bank is guaranteed by the Company and is
payable by the Company's ESOP in ten equal installments beginning in 1998.
Approximate annual principal payments on the existing debt for the next five
years are: 1998 - $1,390,000; 1999 - $1,491,000; 2000 - $1,595,000; 2001 -
$1,706,000 and 2002 - $1,825,000.
F-12
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - CAPITAL STOCK
Preferred Common Treasury Unearned
----------------------- ----------------------- -----------------------
Issued Issued Issued ESOP Plan
-----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ----------- ---------- ---------- ---------- ---------- ---------- -----------
BALANCE -
December 31, 1995 $ 5,225 $ 26,125 $ $
Issued 1,172 1,172,000 456 2,280
Redeemed (444) (2,220)
---------- ----------- ---------- ----------
BALANCE -
December 31, 1996 1,172 1,172,000 5,237 26,185
Issuance of Common Stock
in Exchange for Capital
Credits
and Capital Stock 459,954 2,299,770
Issuance of Common Stock
in Exchange
for Preferred Stock (1,172) (1,172,000) 94,727 1,172,000
Issuance of Common Stock
to Purchase Futuristic, Inc.
(d/b/a DataNet) 160,000 4,000,000
Issuance of Common
Stock to ESOP 49,213 1,000,000 (49,213) (1,000,000)
Issuance of Common
Stock to Employees 2,043 25,915
Repurchase of Common
Stock 493 (12,325)
Two-for-One Stock
Split 771,174 493 (49,213)
---------- ----------- ---------- ---------- ---------- ---------- ---------- -----------
BALANCE -
December 31, 1997 - $ - 1,542,348 $8,523,870 986 $ (12,325) (98,426) $(1,000,000)
========== =========== ========== ========== ========== ========== ========== ===========
On December 16, 1997, the Board of Directors declared a two-for-one common stock
split pursuant to a share dividend paid to common stockholders of record on
January 1, 1998. All common stock share amounts shown below have been adjusted
for the stock split.
As of December 31, 1996, the Company's common stock had a par value of $5 per
share. There were 15,000 shares authorized. No person could own more than one
share of common stock and each holder of common stock had one vote in the
affairs of the Company.
Nonvoting preferred stock had a par value of $100 per share and there were
63,000 shares authorized. The preferred stock is shown on the balance sheet at
its redemption value of $1,000 per share. Preferred shareholders were entitled
to a Non-Liquidity Fee of $80 per share payable semi-annually in cash or
preferred stock at the discretion of the Company. Preferred shareholders also
were granted warrants which entitle them to purchase additional preferred stock
at $1,000 per share.
F-13
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - CAPITAL STOCK (Continued)
At December 31, 1996, and 1997, there were warrants outstanding which may be
exercised through January 21, 1998, to purchase 482 shares of preferred stock
which were converted to 77,912 shares of common stock. These warrants were
exercised on January 21, 1998. Effective January 1, 1997, the Company granted
management options to purchase up to 1,534 shares of preferred stock at $1,000 a
share which were replaced with common stock under the Executive Stock Option
Plan.
As of December 31, 1997, the Company has 5,000,000 shares of no par common stock
authorized and 1,542,348 shares are issued and outstanding. The Company also
has 250,000 shares of no par preferred stock of which 15,000 shares are
designated as Series A Junior Participating Preferred Stock. No preferred stock
is outstanding as of December 31, 1997.
Former holders of Cooperative common stock and capital credit accounts are
entitled to receive shares of common stock of the Company, without any further
consideration, upon receipt by the Company of properly executed transmittal
documents in acceptable form. If all such persons had satisfied the conditions
to receive shares at December 31, 1997, a total of 911,320 additional shares of
the Company's common stock would have been issued and outstanding at that date.
Other capital includes that amount of stockholders equity which would have been
included in common stock if those shares had been issued and outstanding at
December 31, 1997.
On July 22, 1997, the Board of Directors adopted a leveraged employee stock
ownership plan ("ESOP"). The ESOP purchased 98,426 shares of common stock for
$1,000,000 in December 1997. The purchase price per share is approximately the
same as fair value per share at December 31, 1997, based upon an appraisal.
Under the terms of the Plan, employees who are not part of a collective
bargaining unit, a leased employee or a nonresident alien and have completed at
least 1,000 hours of service become eligible to participate in the plan. The
Company determines the amount of contributions that will be made each year. The
contribution is allocated among eligible participants based on compensation in
proportion to total compensation paid to all eligible participants. Any
dividends earned will be allocated to the participant's account based on
allocated shares. A participant becomes fully vested after five years of
service or upon normal retirement date. No contributions were made to the ESOP
in 1997.
On July 22, 1997, the Board of Directors declared a dividend of one right for
each outstanding share of common stock to common stockholders of record on
August 5, 1997. Each right allows the holder to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock. The exercise price of
the rights are $100 per right and the redemption price is $.01. The rights
expire August 4, 2007.
In July 1997, the Company adopted the 1997 Stock Incentive Plan that provides
for stock options, stock appreciation rights, restricted stock, stock awards and
tax benefit rights for key employees and provides for automatic awards of stock
options to nonemployee directors of the Company which expire ten years after
being granted. The Company has reserved 350,000 shares of common stock for this
plan.
In November 1997, the Company adopted the Director Stock Plan of 1997 that
provides that stock may be awarded to outside directors upon their fifth
anniversary of service as an outside director. The Company has reserved 40,000
shares of common stock for this plan.
F-14
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - CAPITAL STOCK (Continued)
In November 1997, the Company adopted the Executive Stock Option Plan of 1997
that provides that options for 247,960 shares of common stock may be awarded to
officers and other key employees of the Company which expire ten years after
being granted. Options for 247,960 shares of common stock were granted under
this plan to replace preferred stock options for 1,534 shares at $1,000 per
share.
At December 31, 1997, there were options for 285,640 shares outstanding which
were granted during 1997. Exercise prices of outstanding stock options are
267,640 shares at $6.19 and 18,000 shares at $12.50 per share. The average
exercise price is $6.59 per share. The average remaining life of outstanding
stock options at December 31, 1997, was 6.12 years. Options exercisable at
December 31, 1997, are 53,528 shares at $6.19 and 6,480 shares at $12.50 per
share.
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", but applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees" for measurement and recognition of stock-based
transactions with its employees. If the Company had elected to recognize
compensation cost for its stock based transactions using the method prescribed
by SFAS No. 123, net loss and loss per share since reorganization would have
been $(1,782,202) and $(1.47).
The fair value of the Company's stock options used to compute pro forma net loss
and net loss per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 30%, a risk free interest rate of 5.70% to 6.33%, an
expected holding period of seven years and no dividend yield. Pro forma stock-
based compensation cost was $150,000 in 1997.
The Company approved an offering of 400,000 shares of common stock at a purchase
price of $12.50 per share to shareholders and employees as of January 27, 1998.
The offering expires on March 11, 1998.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and temporary cash investments approximates their
fair value due to the short maturity of the instruments. The fair value of the
Company's long-term debt at December 31, 1997, is estimated to be approximately
equal to the carrying value of $29,200,469. The fair value of the Company's
long-term debt at December 31, 1996, after deducting current maturities, is
estimated to be $12,905,145, compared to carrying values of $15,338,395. The
fair value estimates are based on the overall weighted rates and maturity
compared to rates and terms currently available in the long-term financing
markets.
F-15
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9 - DEPOSITS
On December 7, 1994, the Company and its wholly-owned subsidiary, Dakota
Telecommunications Systems, Inc., entered into an agreement with U S West
Communications, Inc. to purchase the assets and acquire the right to provide and
operate wireline telecommunication services in eight exchanges in the state of
South Dakota for $10,144,884. In 1996, the Company canceled the agreement. The
Company had a $549,778 earnest money deposit on the purchase. The deposit was
written down by $274,889 to the estimated recoverable amount of $274,889, which
was received in 1997. In addition, the Company expensed $275,252 of related
acquisition costs in 1996.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
1997 1996
------------- ------------
CASH PAYMENTS (REFUNDS), NET FOR:
Interest $ 1,287,837 $ 730,633
Income Taxes $ (215,056) $ 283,415
NONCASH INVESTING AND FINANCING ACTIVITY:
Acquisitions
Fair Value of Assets $ 4,796,848 $ 2,607,631
Liabilities 721,036 1,389,208
------------- ------------
Net Assets Acquired 4,075,812 1,218,423
Less: Common Stock Issued for Acquisitions 4,000,000 1,172,000
Cash Acquired - 6,128
------------- ------------
Acquisition Costs, Net of Cash Acquired $ 75,812 $ 40,295
============= ============
NOTE 11 - INCOME TAXES
Income tax expense (benefit) consists of the following:
1997 1996
------------- ------------
Current $ (29,543) $ (225,740)
Deferred (88,932) 50,028
------------- ------------
Total $ (118,475) $ (175,712)
============= ============
Federal and state income tax operating loss carryovers as of December 31, 1997,
were $2,749,000 and will expire in 2012.
F-16
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 11 - INCOME TAXES (CONTINUED)
Deferred tax assets and (liabilities) as of December 31, 1997, and 1996 relate
to the following:
1997 1996
------------ -----------
Accelerated Depreciation $ (251,684) $ (88,932)
Loss Carryforward 875,057
Other 165,610
Valuation Allowance (788,983)
------------ -----------
Total $ - $ (88,932)
============ ===========
At December 31, 1997, the Company had net deferred tax assets primarily as a
result of the net operating losses. The full amount of the net deferred tax
asset was offset by a valuation allowance due to uncertainties relating to the
full future utilization of these net operating losses.
The differences between the statutory federal rate and the effective tax rate
were as follows:
1997 1996
------------ -----------
Consolidated (Loss) Before Income Taxes $ (2,605,262) $ (335,946)
Less Tax Exempt (Income) Loss 570,910 (100,729)
------------ -----------
Taxable Loss $ (2,034,352) $ (436,675)
============ ===========
Statutory Tax Rate 35.0% 35.0%
Valuation Allowance (34.4) -
Effect of Graduated Rates and Other 5.2 5.2
------------ -----------
Effective Tax Rate 5.8% 40.2%
============ ===========
NOTE 12 - PENSION PLANS
Pension benefits for substantially all employees are provided through the
National Telephone Cooperative Association Retirement and Security Program (a
defined benefit plan) and Savings Plan (a defined contribution plan). The
Company makes annual contributions to the plans equal to the amounts accrued for
pension expense. The Retirement and Security Program is a multi-employer plan
and the accumulated benefits and plan assets are not determined or allocated
separately by individual employer. The total pension costs for 1997 and 1996
were $218,673 and $150,220.
F-17
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13 - ACQUISITIONS
In December 1997, the Company acquired Futuristic, Inc., a South Dakota
Corporation doing business as DataNet, Inc. ("DataNet"), in exchange for 320,000
(after the two-for-one split) shares of common stock valued at $4,000,000. The
acquisition was accounted for as a purchase. The excess of the aggregate
purchase price and liabilities assumed exceed the fair value of the assets by
$3,178,136 and is being expensed equally over fifteen years. Operations of the
Company acquired are included in the consolidated statement of operations
subsequent to its purchase.
In the first half of 1996, Dakota Telecom, Inc. purchased the assets of nineteen
cable service areas from three companies that provided cable services to various
communities in addition to the assets purchased by Dakota Telecom, Inc. in three
separate purchase transactions and one asset exchange transaction. The total
purchase price was $3,858,704. Customer lists acquired for $541,300 are being
expensed equally over 15 years. Operations of the service areas purchased are
included in the consolidated statements of operations subsequent to their
purchase.
In December 1996, the Company acquired I-Way Partners, Inc. and TCIC
Communications, Inc. in exchange for 1,172 shares of preferred stock valued at
$1,172,000. The acquisitions were accounted for as purchases. The excess of
the aggregate purchase price and liabilities assumed exceed the fair value of
the assets by $1,840,991 and is being expensed equally over fifteen years.
Operations of the companies acquired are included in the consolidated statement
of operations subsequent to their purchase.
The following unaudited consolidated pro forma information assumes the
acquisitions had occurred at the beginning of each of the following years:
1997 1996
--------------- ---------------
Total Revenues $ 27,251,152 $ 24,729,339
Net Loss For the Year (2,383,332) (493,496)
Net Loss Per Share (Since Reorganization) (1.30)
The Company has entered into a merger agreement to purchase the outstanding
stock of Vantek Communications, Inc. and Van/Alert, Inc. in exchange for stock,
cash and notes valued at $1,100,000. The purchase is pending FCC approval.
NOTE 14 - CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1996, the Company revised its estimate of the useful lives
of telecommunication computers and fiber optic cable which were being
depreciated over 12 and 25 years. The revised useful lives are 4 and 10 years.
F-18
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 14 - CHANGE IN ACCOUNTING ESTIMATE (Continued)
Effective February 1, 1996, the Company revised its estimate of the useful lives
of cable television plant. Previously the plant was depreciated over 20 years.
The revised useful life of the plant ranges from eight to twenty years. These
changes were made to better reflect the estimated periods during which such
assets will remain in service. The 1996 changes increased depreciation expense
by approximately $189,000 in 1996.
NOTE 15 - LOSS PER SHARE
Basic loss per share was computed by dividing the net loss of $(1,632,202) for
only the period since the reorganization (July 21, 1997, to December 31, 1997)
by the weighted average number of common shares outstanding (1,213,442 shares)
during the period since the reorganization adjusted for the two-for-one stock
split. Shares issued as a result of the reorganization were considered
outstanding for the entire period. Net loss of $(854,585) for the period prior
to the reorganization was not considered in the loss per share calculation.
Options, rights and warrants have not been considered in the computation of
diluted loss per share since their effect would be anti-dilutive because of the
net loss. If the 911,320 shares issuable at December 31, 1997, to former
holders of Cooperative common stock and capital credit accounts upon
satisfaction by such holders of conditions to issuance, which have not been
issued as a result of the reorganization, were considered issued for the entire
period, the loss per share would have been $(.77).
NOTE 16 - SEGMENT INFORMATION
The Company operates in three businesses: telecommunications, cable television
and computer network sales. Industry segment information is as follows:
1997 1996
------------------ ------------------
Revenues:
Telecommunications $ 10,048,303 $ 6,752,185
Cable Television 1,892,585 1,349,157
Computer Network Sales 1,788,104 -
------------------ ------------------
$ 13,728,992 $ 8,101,342
================== ==================
Operating Income (Loss):
Telecommunications $ (1,383,297) $ 454,097
Cable Television (430,730) (376,247)
Computer Network Sales 55,368
------------------
$ (1,758,659) $ 77,850
================== ==================
Identifiable Assets:
Telecommunications $ 29,075,590 $ 18,246,345
Cable Television 9,217,881 5,258,530
Computer Network Sales 5,746,421
------------------
$ 44,039,892 $ 23,504,875
================== ==================
F-19
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 16 - SEGMENT INFORMATION (Continued)
1997 1996
--------------- ----------------
Depreciation and Amortization Expense:
Telecommunications $ 2,727,991 $ 2,011,046
Cable Television 702,778 423,370
Computer Network Sales 17,340
----------------
$ 3,448,109 $ 2,434,416
================ ================
Capital Expenditures:
Telecommunications $ 10,204,443 $ 1,930,389
Cable Television 2,887,753 3,821,215
Computer Network Sales 471,828
----------------
$ 13,564,024 $ 5,751,604
================ ================
F-20
INTERIM FINANCIAL STATEMENTS
THE FOLLOWING FINANCIAL STATEMENTS OF DTG AND IT SUBSIDIARIES AS OF AND FOR
THE PERIODS ENDED SEPTEMBER 30, 1998 HAVE NOT BEEN AUDITED. THEY SHOULD BE
CONSIDERED IN CONJUNCTION WITH THE PRECEDING AUDITED FINANCIAL STATEMENTS.
F-21
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 (Unaudited) AND DECEMBER 31, 1997
================================================================================
ASSETS
SEPTEMBER 30, December 31,
1998 1997
------------- ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,705,383 $ 4,297,938
Temporary Cash Investments 100,000 300,000
Accounts Receivable, Less Allowance for
Uncollectibles of $415,400 and $298,700 3,749,093 4,216,025
Income Taxes Receivable 27,321 62,987
Materials and Supplies 1,883,839 1,109,226
Prepaid Expenses 427,297 275,567
----------- -----------
Total Current Assets 7,892,933 10,261,743
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost over Net Assets Acquired 5,661,715 4,869,096
Other Intangible Assets 781,836 809,843
Other Investments 1,524,024 2,037,571
Deferred Charges 1,506,636 653,373
----------- -----------
Total Investments and Other Assets 9,474,211 8,369,883
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 26,304,230 25,408,266
----------- -----------
TOTAL ASSETS $43,671,374 $44,039,892
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 (Unaudited) AND DECEMBER 31, 1997
(CONTINUED)
================================================================================
SEPTEMBER 30, December 31,
1998 1997
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 1,430,000 $ 1,390,000
Notes Payable 2,162,573 1,500,000
Accounts Payable 1,925,389 2,290,727
Payable Under Floor Plan Arrangements 547,756 569,287
Other Current Liabilities 1,341,233 1,171,772
----------- -----------
Total Current Liabilities 7,406,951 6,921,786
----------- -----------
LONG-TERM DEBT 30,793,121 29,200,469
----------- -----------
DEFERRED CREDITS 161,051 113,565
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 10,979,987 8,523,870
Treasury Stock at Cost (12,325) (12,325)
Other Capital 1,176,299 2,298,006
Retained Earnings (5,833,710) (2,005,479)
Unearned Employee Stock Ownership Plan Shares (1,000,000) (1,000,000)
----------- -----------
Total Stockholders' Equity 5,310,251 7,804,072
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,671,374 $44,039,892
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
DAKOTA TELECOMMUNICATIONS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
===============================================================================
1998 1997
------------ ----------
REVENUES:
Local Network $ 424,577 $ 309,401
Network Access 1,417,276 888,876
Long Distance Network 936,349 869,378
Cable Television Service 442,353 376,113
Computer Network Service 5,489,635 -
Internet Service 463,126 296,064
Wireless Telecommunications 259,691 -
Other 26,386 86,154
----------- ----------
Total Operating Revenues 9,459,393 2,825,986
----------- ----------
COSTS AND EXPENSES:
Plant Operations 1,634,272 1,018,806
Cost of Goods Sold 4,425,144 -
Depreciation and Amortization 1,156,948 820,124
Customer 884,806 378,798
General and Administrative 1,979,398 1,045,974
Other Operating Expenses 247,623 180,687
----------- ----------
Total Operating Expenses 10,328,191 3,444,389
----------- ----------
OPERATING LOSS (868,798) (618,403
----------- ----------
OTHER INCOME AND (EXPENSES):
Interest and Dividend Income 62,724 88,524
Interest Expense (593,458) (383,231)
----------- ----------
Net Other Income and Expenses (530,734) (294,707)
----------- ----------
LOSS BEFORE INCOME TAXES (1,399,532) (913,110)
INCOME TAX BENEFIT 8,000 232,784
----------- ----------
NET LOSS $(1,391,532) $ (680,326)
=========== ==========
BASIC AND DILUTED LOSS PER SHARE $ (0.52) $ -
=========== ==========
(Since 1997 Reorganization)
The accompanying notes are an integral part of the consolidated
financial statements.
F-24
DAKOTA TELECOMMUNICATIONS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
=============================================================================
1998 1997
----------- ----------
REVENUES:
Local Network $ 1,248,714 $ 924,903
Network Access 4,097,470 2,796,044
Long Distance Network 2,662,143 2,438,754
Cable Television Service 1,278,309 1,156,633
Computer Network Service 13,008,166 -
Internet Service 1,284,079 776,016
Wireless Telecommunications 259,691 -
Other 383,904 348,317
----------- -----------
Total Operating Revenues 24,222,476 8,440,667
----------- -----------
COSTS AND EXPENSES:
Plant Operations 4,449,232 2,672,679
Cost of Goods Sold 10,376,666 -
Depreciation and Amortization 3,313,164 2,379,769
Customer 2,370,318 828,096
General and Administrative 5,334,793 3,006,705
Other Operating Expenses 712,360 829,798
----------- -----------
Total Operating Expenses 26,556,533 9,717,047
----------- -----------
OPERATING LOSS (2,334,057) (1,276,380)
----------- -----------
OTHER INCOME AND (EXPENSES):
Interest and Dividend Income 150,873 240,509
Interest Expense (1,653,047) (791,920)
----------- -----------
Net Other Income and Expenses (1,502,174) (551,411)
----------- -----------
LOSS BEFORE INCOME TAXES (3,836,231) (1,827,791)
INCOME TAX BENEFIT 8,000 292,880
----------- -----------
NET LOSS $(3,828,231) $(1,534,911)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (1.42) $ -
=========== ===========
(Since 1997 Reorganization)
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
================================================================================
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,828,231) $ (1,534,911)
Adjustments to Reconcile Net Loss to Net
Cash Provided By (Used In) Operating Activities:
Depreciation and Amortization 3,313,164 2,379,769
Deposits - 274,889
Receivables 547,988 313,141
Income Taxes Receivable 35,666 138,698
Prepaids (149,066) (77,100)
Accounts Payable (394,934) 522,324
Other Current Liabilities 105,388 98,033
Deferred Credits 47,486 (39,050)
Other 38,201 -
----------- ------------
Net Cash (Used In) Provided By Operating Activities (284,338) 2,075,793
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment, Net (3,860,718) (11,131,102)
Materials and Supplies (703,170) (689,547)
Sale of Temporary Cash Investments 200,000 349,000
Purchase of Other Investments (18,121) (1,250,637)
Sale of Other Investment 502,174 -
Acquisition, Net of Cash Acquired (288,088) -
Purchase of Other Intangible Assets (19,326) (81,759)
Deferred Charges (861,970) (883)
----------- ------------
Net Cash Used In Investing Activities (5,049,219) (12,804,928)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments of Long-Term Debt (1,017,348) (386,059)
Proceeds from Issuance of Note Payable 5,723,248 11,686,551
Principal Payments of Note Payable (2,660,675) -
Construction Contracts Payable (38,633) 459,761
Retirement of Patronage Capital - (28,235)
Other 593 (85,151)
Issuance of Common Stock 251,815 -
Increase in Deferred Income Taxes - (238,000)
Conversion of Warrants to Common Stock 482,002 -
----------- ------------
Net Cash Provided by Financing Activities 2,741,002 11,408,867
----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,592,555) 679,732
CASH AND CASH EQUIVALENTS at Beginning of Year 4,297,938 2,121,444
----------- ------------
CASH AND CASH EQUIVALENTS at End of Period $ 1,705,383 $ 2,801,176
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheets as of September 30, 1998 and December 31, 1997, statements of
operations for the three and nine months ended September 30, 1998 and 1997 and
cash flows for the nine months ended September 30, 1998 and 1997 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and changes in cash flows
have been made.
The Consolidated Financial Statements have been prepared in accordance with the
requirements of Item 301(b) of Regulation S-B and with the instructions to Form
10-QSB. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed financial
statements should be read in conjunction with the financial statements and
accompanying notes for the years ended December 31, 1997 and 1996. The results
of operations for the three- and nine-month periods ended September 30, 1998 are
not necessarily indicative of the operating results to be expected for the year
ending December 31, 1998.
NOTE 2 - NOTES PAYABLE
The Company has a line of credit arrangement for $1.5 million with Rural
Telephone Finance Cooperative ("RTFC") which expires in 2002. Interest is
payable quarterly at variable monthly rates determined by RTFC with a cap at
prime plus 1.5%. Any advances must be paid in full within 360 days of the
advance and remain at a zero balance for at least five consecutive business
days. A balance of $1,500,000 was outstanding as of September 30, 1998.
In October 1998, the Company's secured line of credit arrangement for $4 million
with RTFC was increased to $6 million and expires January 1, 2000. Interest is
payable quarterly at variable monthly rates based on the prevailing bank prime
rate plus 1.5%. A balance of $2,400,000 was outstanding as of September 30,
1998.
The $800,000 line of credit with Norwest Bank which would have expired on April
1, 1999 was replaced by a new line of credit agreement with Norwest dated
September 10, 1998 for a maximum of $2,000,000 at the prime rate plus one and
one half percent expiring September 3, 2001, at which point it may be renewed on
an annual basis thereafter. This line of credit is secured by essentially all of
the assets of DTG DataNet, Inc., a wholly owned subsidiary of the Company. The
amount outstanding at September 30, 1998 was $662,573.
NOTE 3 - PAYABLE UNDER FLOOR PLAN ARRANGEMENT
The Company's additional $500,000 credit limit for the floor plan arrangement
with the IBM Credit Corporation expired August 31, 1998. The amount outstanding
at September 30, 1998 on the original $350,000 agreement was $113,902. The
Company also had $433,854 outstanding on another floor plan arrangement as of
September 30, 1998.
F-27
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - INCOME TAXES
As of July 22, 1997, the income of the Company became taxable at the federal
level. Prior to that date, the Company operated as a cooperative and had been
granted tax exempt status under Section 501(c)12 of the Internal Revenue Code of
1986, as amended.
At September 30, 1998 and December 31, 1997, the Company had net deferred tax
assets primarily as a result of the net operating losses. The full amount of the
net deferred tax asset was offset by a valuation allowance due to uncertainties
relating to the future utilization of these net operating losses. The tax
benefit of $8,000 at September 30, 1998 is due to additional refunds receivable
for net operating losses that can be applied against income in a prior year.
NOTE 5 - ACQUISITIONS
On July 1, 1998, the Company purchased the outstanding stock of Vantek
Communications, Inc. and Van/Alert, Inc. in exchange for 48,000 shares of the
Company's stock valued at $12.50 per share, long-term debt of $250,000 and
$250,000 in cash. The debt is convertible into Company stock. The acquisition
resulted in an excess of cost over net assets acquired of $1,046,919. This
amount is being amortized over 15 years.
The long-term debt of $250,000 at 9% interest is payable in monthly installments
of $5,190 until July 1, 2003.
NOTE 6 - CAPITAL STOCK
At September 30, 1998 and December 31, 1997 the number of shares of common stock
outstanding were 2,692,321 and 1,542,348, respectively.
Former holders of common stock and capital credit accounts of Dakota Cooperative
Telecommunications, Inc. (the "Cooperative") are entitled to receive shares of
common stock of the Company, without any further consideration, upon receipt by
the Company of properly executed transmittal documents in acceptable form. If
all such persons had satisfied the conditions to receive shares at September 30,
1998 and December 31, 1997, a total of 395,376 and 911,320 additional shares of
the Company's common stock, respectively, would have been issued and outstanding
as of those dates. Other capital includes that amount of stockholders' equity
that would have been included in common stock if those shares had been issued
and outstanding at September 30, 1998 and December 31, 1997.
The Company approved an offering of 400,000 shares of common stock at a purchase
price of $12.50 per share to existing shareholders and employees as of January
27, 1998. The offering expired on March 11, 1998 and 19,485 shares of common
stock were issued.
At the annual meeting, the shareholders approved an amendment to the Company's
Certificate of Incorporation to increase the authorized number of shares of
common stock from 5,000,000 to 10,000,000.
F-28
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
1998 1997
---------- --------
CASH PAID (RECEIVED) FOR:
Interest $1,569,349 $791,920
Income Taxes (43,666) 18,883
NONCASH INVESTING AND FINANCING ACTIVITY:
Acquisitions:
Fair Value of Assets $1,252,941
Liabilities 110,771
----------
Net Assets Acquired 1,142,170
Less Common Stock Issued for Acquisition 600,000
Cash Acquired 4,082
Long-Term Debt Issued for Acquisition 250,000
----------
Acquisition, Net of Cash Acquired $ 288,088
==========
NOTE 8 - LOSS PER SHARE
Basic and diluted loss per share as of September 30, 1998 was based on the
average number of shares of common stock outstanding during the periods. Shares
issued as a result of the reorganization were considered outstanding for the
entire period. The number of shares used in the calculation was 2,692,321 and
2,321,272 for the three months and nine months ended September 30, 1998. No
shares were outstanding as of September 30, 1997.
Options, rights and warrants have not been considered in the computation of
diluted loss per share since their effect would be anti-dilutive because of the
net loss. If the 395,376 shares issuable at September 30, 1998 to former holders
of Cooperative common stock and capital credit accounts upon satisfaction by
such holders of conditions to issuance, which have not been issued as a result
of the reorganization, were considered issued for the entire period, the loss
per share would have been $1.41 for the nine months ended, and $.45 for the
three months ended, September 30, 1998.
If the 1, 970,432 shares issuable at September 30, 1997 to former holders of
Cooperative common stock and capital credit accounts upon satisfaction by such
holders of conditions to issuance, which have not been issued as a result of the
reorganization, were considered issued for the entire period, the basic and
diluted loss per share would have been $(.35) for the three months and nine
months ended September 30, 1997.
Basic and diluted loss per share as of September 30, 1997 was computed by
dividing the net loss of $(680,326) for only the period since the reorganization
(July 21, 1997 to September 30, 1997) by the weighted average number of common
shares issuable (1,970,432 shares) during the period since the reorganization
adjusted for the two-for-one stock split. Shares issuable as a result of the
reorganization were considered outstanding for the entire period. Net loss of
$(854,585) for the period prior to the reorganization was not considered in the
loss per share calculation.
Options, rights and warrants have not been considered in the computation of
diluted loss per share since their effect would be anti-dilutive because of the
net loss.
NOTE 9 - COMMITMENTS
The Company has made commitments to provide cable access television service to
the cities of Luverne and Marshall, Minnesota and Canton, South Dakota. These
cities have required that bonds and financial securities be provided to ensure
performance by the Company. The Company has obtained $832,500 in irrevocable
letters of credit to fully cover these requirements.
F-29
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - SUBSEQUENT EVENTS
On October 27, 1998, the Board of Directors approved an Agreement and Plan of
Merger with McLeodUSA Incorporated, pursuant to which the Company will be merged
with and into a wholly owned subsidiary of McLeodUSA Incorporated (the
"Merger"). All of the stock of the Company and each right to receive one share
of Company common stock will be exchanged for the right to receive .4328 shares
of McLeodUSA Incorporated common stock. The maximum number of shares of
McLeodUSA Incorporated common stock to be issued is 1,295,000. The Merger is
subject to stockholder and regulatory approval. The Merger agreement requires
the Company to pay McLeodUSA Incorporated a $2,500,000 penalty if alternative
offers are pursued.
On April 24, 1998, the Company entered into a Merger Agreement to purchase the
outstanding stock of Hurley Communications in exchange for stock, cash and notes
valued at $180,000. The purchase has been approved by the FCC and was
consummated on November 1, 1998.
On October 27, 1998, the Company entered into a lease agreement of fiber optic
cable facilities with McLeodUSA Incorporated. The lease is for twenty years. The
entire lease fee of $5,000,000 for the twenty years has been paid in advance.
F-30
APPENDIX A
----------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MCLEODUSA INCORPORATED,
WEST GROUP ACQUISITION CO.
and
DAKOTA TELECOMMUNICATIONS GROUP, INC.
Dated as of October 27, 1998
TABLE OF CONTENTS
Page
----
ARTICLE I THE MERGER......................................................................................... 2
SECTION 1.01. The Merger............................................................................... 2
SECTION 1.02. Effective Time........................................................................... 2
SECTION 1.03. Effect of the Merger..................................................................... 2
SECTION 1.04. Certificate of Incorporation; Bylaws..................................................... 2
SECTION 1.05. Directors and Officers................................................................... 3
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES AND OTHER INSTRUMENTS.......................... 3
SECTION 2.01. Conversion of Securities................................................................. 3
SECTION 2.02. Exchange of Certificates or Instruments.................................................. 5
SECTION 2.03. Stock Transfer Books..................................................................... 9
SECTION 2.04. Stock Options............................................................................ 9
SECTION 2.05. Closing.................................................................................. 10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................... 10
SECTION 3.01. Organization and Standing................................................................ 11
SECTION 3.02. Subsidiaries............................................................................. 11
SECTION 3.03. Certificate of Incorporation and Bylaws.................................................. 12
SECTION 3.04. Capitalization........................................................................... 12
SECTION 3.05. Authority; Binding Obligation............................................................ 13
SECTION 3.06. No Conflict; Required Filings and Consents............................................... 14
SECTION 3.07. Licenses; Compliance..................................................................... 15
SECTION 3.08. SEC Documents............................................................................ 17
SECTION 3.09. Absence of Undisclosed Liabilities....................................................... 18
SECTION 3.10. Absence of Certain Changes or Events..................................................... 18
SECTION 3.11. Litigation; Disputes..................................................................... 19
SECTION 3.12. Debt Instruments......................................................................... 20
SECTION 3.13. Leases................................................................................... 20
SECTION 3.14. Other Agreements; No Default............................................................. 21
SECTION 3.15. Labor Relations.......................................................................... 23
SECTION 3.16. Pension and Benefit Plans................................................................ 24
SECTION 3.17. Taxes and Tax Matters.................................................................... 29
SECTION 3.18. Customers................................................................................ 31
SECTION 3.19. Certain Business Practices............................................................... 31
SECTION 3.20. Insurance................................................................................ 31
SECTION 3.21. Potential Conflicts of Interest.......................................................... 32
SECTION 3.22. Receivables.............................................................................. 33
SECTION 3.23. Real Property............................................................................ 33
SECTION 3.24. Books and Records........................................................................ 34
-i-
SECTION 3.25. Assets................................................................................... 34
SECTION 3.26. No Infringement or Contest............................................................... 35
SECTION 3.27. Opinion of Financial Advisor............................................................. 36
SECTION 3.28. Board Recommendation..................................................................... 36
SECTION 3.29. Vote Required............................................................................ 36
SECTION 3.30. Banks; Attorneys-in-fact................................................................. 36
SECTION 3.31. Voting Agreements........................................................................ 36
SECTION 3.32. Brokers.................................................................................. 37
SECTION 3.33. Environmental Matters.................................................................... 37
SECTION 3.34. Disclosure............................................................................... 38
SECTION 3.35. Directors, Officers and Affiliates....................................................... 39
SECTION 3.36. Copies of Documents...................................................................... 39
SECTION 3.37. Condition and Operation of the System.................................................... 39
SECTION 3.38. Affiliate Agreements..................................................................... 39
SECTION 3.39. Rights Agreement......................................................................... 40
SECTION 3.40. Reorganization........................................................................... 40
SECTION 3.41. State Takeover Statutes; Certain Charter Provisions...................................... 40
SECTION 3.42. Dissenters Rights........................................................................ 40
SECTION 3.43. Year 2000 Compliance..................................................................... 41
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUIROR SUB....................................... 44
SECTION 4.01. Organization and Qualification; Subsidiaries............................................. 44
SECTION 4.02. Certificate of Incorporation and Bylaws.................................................. 45
SECTION 4.03. Authority; Binding Obligation............................................................ 45
SECTION 4.04. No Conflict; Required Filings and Consents............................................... 45
SECTION 4.05. No Prior Activities of Acquiror Sub...................................................... 46
SECTION 4.06. Brokers.................................................................................. 46
SECTION 4.07. SEC Documents............................................................................ 47
SECTION 4.08. Acquiror Common Stock.................................................................... 47
SECTION 4.09. Capitalization........................................................................... 48
SECTION 4.10. Reorganization........................................................................... 49
SECTION 4.11. Compliance............................................................................... 49
SECTION 4.12. Disclosure............................................................................... 49
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS.......................................................... 50
SECTION 5.01. Conduct of Business of the Company....................................................... 50
SECTION 5.02. Other Actions............................................................................ 53
SECTION 5.03. Certain Tax Matters...................................................................... 53
SECTION 5.04. Access and Information................................................................... 54
SECTION 5.05. No Solicitation.......................................................................... 54
-ii-
ARTICLE VI ADDITIONAL AGREEMENTS............................................................................. 56
SECTION 6.01. Registration Statement; Proxy Statement.................................................. 56
SECTION 6.02. Meeting of Stockholders.................................................................. 58
SECTION 6.03. Appropriate Action; Consents; Filings.................................................... 58
SECTION 6.04. Letters of Accountants................................................................... 59
SECTION 6.05. Update Disclosure; Breaches.............................................................. 60
SECTION 6.06. Public Announcements..................................................................... 60
SECTION 6.07. Employee Matters......................................................................... 60
SECTION 6.08. Unaudited Financial Information.......................................................... 61
SECTION 6.09. Environmental Matters.................................................................... 61
SECTION 6.10. Post-Signing SEC Documents............................................................... 61
SECTION 6.11. Standstill Agreement..................................................................... 61
SECTION 6.12. Affiliates; Tax Treatment................................................................ 62
SECTION 6.13. Tax Returns.............................................................................. 62
SECTION 6.14. Reorganization........................................................................... 62
SECTION 6.15. Directors' and Officers' Insurance; Indemnification...................................... 62
SECTION 6.16. Obligations of Acquiror Sub.............................................................. 64
SECTION 6.17. Advisory Committee....................................................................... 64
SECTION 6.18. Capitalization of the Surviving Corporation.............................................. 64
SECTION 6.19. Acquiror Option Shares................................................................... 65
SECTION 6.20. Dark Fiber Lease Agreement............................................................... 65
SECTION 6.21. Certain Post-Merger Operations........................................................... 65
SECTION 6.22. Forfeiture of Unclaimed Credits.......................................................... 66
ARTICLE VII CONDITIONS PRECEDENT............................................................................. 66
SECTION 7.01. Conditions to Obligations of Each Party Under This Merger Agreement...................... 66
SECTION 7.02. Additional Conditions to Obligations of Acquiror and Acquiror Sub........................ 67
SECTION 7.03. Additional Conditions to Obligations of the Company...................................... 70
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER............................................................... 71
SECTION 8.01. Termination.............................................................................. 71
SECTION 8.02. Effect of Termination.................................................................... 73
SECTION 8.03. Expenses................................................................................. 73
SECTION 8.04. Amendment................................................................................ 74
SECTION 8.05. Extension; Waiver........................................................................ 74
ARTICLE IX GENERAL PROVISIONS................................................................................ 74
SECTION 9.01. Nonsurvival of Representations and Warranties............................................ 74
SECTION 9.02. Notices.................................................................................. 75
SECTION 9.03. Headings................................................................................. 76
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SECTION 9.04. Severability............................................................................. 76
SECTION 9.05. Entire Agreement......................................................................... 76
SECTION 9.06. Assignment............................................................................... 76
SECTION 9.07. Parties in Interest...................................................................... 77
SECTION 9.08. Mutual Drafting.......................................................................... 77
SECTION 9.09. Specific Performance..................................................................... 77
SECTION 9.10. Governing Law............................................................................ 77
SECTION 9.11. Counterparts............................................................................. 78
SECTION 9.12. Confidentiality.......................................................................... 78
ARTICLE X DEFINITIONS........................................................................................ 78
EXHIBITS
- --------
EXHIBIT A-1 FORM OF VOTING AGREEMENT
EXHIBIT A-2 FORM OF VOTING AGREEMENT (CRAIG A. ANDERSON)
EXHIBIT B LIST OF PERSONS TO SIGN VOTING AGREEMENTS
EXHIBIT C FORM OF AFFILIATE AGREEMENT
EXHIBIT D FORM OF EMPLOYMENT AGREEMENT
EXHIBIT E FORM OF DARK FIBER LEASE AGREEMENT
EXHIBIT F-1 FORM OF OPINION TO BE RENDERED BY COUNSEL TO THE COMPANY
EXHIBIT F-2 FORM OF OPINION TO BE RENDERED BY SOUTH DAKOTA COUNSEL TO
THE COMPANY
EXHIBIT F-3 OPINIONS TO BE RENDERED BY REGULATORY COUNSEL TO THE COMPANY
EXHIBIT G FORM OF TAX OPINION TO BE RENDERED BY COUNSEL TO ACQUIROR
EXHIBIT H FORM OF ACQUIROR TAX CERTIFICATE
EXHIBIT I FORM OF COMPANY TAX CERTIFICATE
EXHIBIT J FORM OF OPINION TO BE RENDERED BY COUNSEL TO ACQUIROR AND
ACQUIROR SUB
EXHIBIT K FORM OF TAX OPINION TO BE RENDERED BY COUNSEL TO THE COMPANY
EXHIBIT L FORM OF ACQUIROR TAX CERTIFICATE
EXHIBIT M FORM OF COMPANY TAX CERTIFICATE
SCHEDULES
- ---------
SCHEDULE 5.01 PERMITTED ACTIONS
SCHEDULE 5.01(a)(i) PERMITTED BONUSES
-iv-
SCHEDULE 5.01(a)(ii) AGREEMENTS WITH SEVERANCE OR TERMINATION PAY
OBLIGATIONS
SCHEDULE 5.01(a)(v) AGREEMENTS REQUIRING INCENTIVE AWARD GRANTS
SCHEDULE 5.01(a)(vi) AGREEMENTS REQUIRING PAYMENT OF COMPENSATION OR
BENEFITS
SCHEDULE 6.07 LIST OF COMPANY EMPLOYEES TO SIGN EMPLOYMENT
AGREEMENTS
SCHEDULE 6.15 AGREEMENTS PROVIDING FOR INDEMNIFICATION OF
DIRECTORS AND OFFICERS
-v-
AGREEMENT AND PLAN OF MERGER, dated as of October 27, 1998 (this "Merger
------
Agreement"), among McLeodUSA Incorporated, a Delaware corporation ("Acquiror"),
- --------- --------
West Group Acquisition Co., a Delaware corporation ("Acquiror Sub") and a wholly
------------
owned subsidiary of Acquiror, and Dakota Telecommunications Group, Inc., a
Delaware corporation (the "Company");
-------
WHEREAS, Acquiror Sub, upon the terms and subject to the conditions of this
Merger Agreement and in accordance with the General Corporation Law of the State
of Delaware ("Delaware Law"), will merge with and into the Company (the
------------
"Merger");
------
WHEREAS, the Board of Directors of the Company has (i) determined that the
Merger is fair to the holders of Company Capital Stock (as defined in Section
3.04) and is in the best interests of such stockholders and (ii) approved and
adopted this Merger Agreement and the transactions contemplated hereby and
recommended approval and adoption of this Merger Agreement by the stockholders
of the Company (the "Company Stockholders");
--------------------
WHEREAS, the Board of Directors of Acquiror has determined that the Merger
is in the best interests of Acquiror and its stockholders and the Boards of
Directors of Acquiror and Acquiror Sub have approved and adopted this Merger
Agreement and the transactions contemplated hereby;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization under the provisions of Section
368(a) of the United States Internal Revenue Code of 1986, as amended (the
"Code"); and
----
WHEREAS, in order to induce Acquiror and Acquiror Sub to enter into this
Merger Agreement, concurrently herewith certain stockholders, each of the
directors and certain executive officers of the Company are entering into voting
agreements (the "Voting Agreements") pursuant to which, among other things, each
-----------------
such stockholder, director (in such director's capacity as a stockholder) and
executive officer (in such executive officer's capacity as a stockholder) agrees
to vote in favor of this Merger Agreement and the Merger and against any
Competing Transaction (as defined in Section 5.05(a));
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this Merger
Agreement, and intending to be legally bound hereby, the parties hereto agree as
follows.
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER.
Upon the terms and subject to the conditions set forth in this Merger
Agreement, and in accordance with Delaware Law, at the Effective Time (as
defined in Section 1.02) Acquiror Sub shall be merged with and into the Company.
As a result of the Merger, the separate corporate existence of Acquiror Sub
shall cease and the Company shall continue as the surviving corporation of the
Merger (the "Surviving Corporation").
---------------------
SECTION 1.02. EFFECTIVE TIME.
Subject to the provisions of Section 2.05, as promptly as practicable after
the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the parties hereto shall cause the Merger to be consummated by
filing this Merger Agreement, articles of merger or other appropriate Documents
(as defined in Article X) (in any such case, the "Articles of Merger") with the
------------------
Secretary of State of the State of Delaware, in such form as required by, and
executed in accordance with the relevant provisions of, Delaware Law (the date
and time of such filing being the "Effective Time").
--------------
SECTION 1.03. EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Acquiror Sub and the Company shall vest in
the Surviving Corporation, and all debts, liabilities and duties of Acquiror Sub
and the Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.04. CERTIFICATE OF INCORPORATION; BYLAWS.
(a) Unless otherwise mutually determined by Acquiror and the Company
prior to the Effective Time, at the Effective Time the certificate of
incorporation of the Company shall be amended in its entirety to conform to the
certificate of incorporation of Acquiror Sub in effect immediately prior to the
Effective Time, and shall become the certificate of incorporation of the
Surviving Corporation, until thereafter amended as provided by Law (as defined
in Article X) and such certificate of incorporation; provided, however, that
-------- -------
Article 1 of the
-2-
certificate of incorporation of the Surviving Corporation shall be amended to
read as follows: "The name of the corporation is Dakota Telecommunications
Group, Inc."
(b) Unless otherwise determined by Acquiror prior to the Effective
Time, at the Effective Time the bylaws of the Company shall be amended in their
entirety to conform to the bylaws of Acquiror Sub in effect immediately prior to
the Effective Time, and shall become the bylaws of the Surviving Corporation
until thereafter amended as provided by Law, the certificate of incorporation of
the Surviving Corporation and such bylaws.
SECTION 1.05. DIRECTORS AND OFFICERS.
Immediately following the Effective Time, the Board of Directors of the
Surviving Corporation will be reconstituted to include a total of five (5)
directors, and will initially consist of Thomas W. Hertz, Craig A. Anderson,
Stephen C. Gray, J. Lyle Patrick and Clark E. McLeod, each to hold office in
accordance with the certificate of incorporation and bylaws of the Surviving
Corporation, and the initial officers of the Surviving Corporation shall be the
officers of the Company immediately prior to the Effective Time, in each case
until their respective successors are duly elected or appointed and qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES AND OTHER INSTRUMENTS
SECTION 2.01. CONVERSION OF SECURITIES.
At the Effective Time, as provided in this Merger Agreement, by virtue
of the Merger and without any action on the part of Acquiror Sub, the Company or
the Company Stockholders:
(a) Company Common Stock and Conversion-Merger Rights. Each share of
-------------------------------------------------
common stock, no par value per share, of the Company ("Company Common
--------------
Stock") issued and outstanding immediately prior to the Effective Time
-----
(other than any shares of Company Common Stock to be canceled pursuant to
Section 2.01(c)), and each right to receive one share of Company Common
Stock outstanding immediately prior to the Effective Time (collectively,
the "Conversion-Merger Rights") arising from the Conversion-Merger (as
------------------------
defined in Article X), whether pursuant to unexchanged Cooperative
Interests (as defined in Article X) or otherwise, in each case together
with the associated Rights (as defined in Section 3.04) shall be converted,
subject to Section 2.02(e), into the right to receive 0.4328 of a share of
Acquiror Common Stock (as defined in Article X) (the "Exchange
--------
-3-
Ratio"); it being understood that the maximum numbers of shares of Acquiror
-----
Common Stock issuable pursuant to the Merger as contemplated under this
Merger Agreement shall be 1,295,000 (assuming the exercise of all Company
Stock Options (as defined in Section 2.04) prior to the Effective Time).
All such shares of Company Common Stock, Conversion-Merger Rights
(including unexchanged Cooperative Interests) and associated Rights shall
no longer be outstanding and shall automatically be canceled and retired,
as appropriate, and shall cease to exist, and each certificate or other
instrument previously representing any such shares, Conversion-Merger
Rights (including unexchanged Cooperative Interests) and associated Rights
shall thereafter represent the right to receive a certificate representing
the shares of Acquiror Common Stock into which such Company Common Stock,
Conversion-Merger Rights and associated Rights were converted pursuant to
the Merger and any cash, without interest, in lieu of fractional shares.
Certificates or other instruments which prior to the Effective Time
represented shares of Company Common Stock, Conversion-Merger Rights
(including certificates or other instruments which prior to the Conversion-
Merger represented Cooperative Interests) and associated Rights shall be
exchanged for certificates representing whole shares of Acquiror Common
Stock issued in consideration therefor upon the surrender of such
certificates or instruments in accordance with the provisions of Section
2.02, without interest. No fractional share of Acquiror Common Stock shall
be issued, and, in lieu thereof, a cash payment shall be made pursuant to
Section 2.02(e) hereof. In any event, if between the date of this Merger
Agreement and the Effective Time the outstanding shares of Acquiror Common
Stock shall have been changed into a different number of shares or a
different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares, the nature of the consideration to be received by the Company
Stockholders and the Exchange Ratio shall be appropriately and
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares.
(b) Cancellation and Retirement of Company Common Stock and
-------------------------------------------------------
Conversion-Merger Rights. All such shares of Company Common Stock (other
------------------------
than any shares of Company Common Stock to be canceled pursuant to Section
2.01(c)), Conversion-Merger Rights (including unexchanged Cooperative
Interests) and associated Rights referred to in Section 2.01(a) shall no
longer be outstanding and shall automatically be canceled and retired, as
appropriate, and shall cease to exist, and each certificate or other
instrument previously representing any such shares, Conversion-Merger
Rights (including unexchanged Cooperative Interests) and associated Rights
shall thereafter represent the right to receive the shares of Acquiror
Common Stock into which such Company Common Stock, Conversion-Merger Rights
(including unexchanged Cooperative Interests) and associated Rights were
-4-
converted pursuant to the Merger and any cash, without interest, in lieu of
fractional shares. The holders of certificates or other instruments which
prior to the Effective Time represented shares of Company Common Stock,
Conversion-Merger Rights (including the holders of certificates or other
instruments which prior to the Conversion-Merger represented Cooperative
Interests) and associated Rights shall cease to have any rights with
respect thereto except as otherwise provided herein or by Law.
Certificates or other instruments previously representing such shares of
Company Common Stock, such Conversion-Merger Rights (including certificates
or other instruments previously representing such Cooperative Interests)
and associated Rights shall be exchanged for the whole shares of Acquiror
Common Stock to be issued therefor upon the surrender of such certificates
or instruments in accordance with the provisions of Section 2.02, without
interest. No fractional share of Acquiror Common Stock shall be issued,
and, in lieu thereof, a cash payment shall be made pursuant to Section
2.02(e) hereof.
(c) Cancellation of Treasury Stock. Any shares of Company Common
------------------------------
Stock held in the treasury of the Company and any shares of Company Common
Stock owned by Acquiror or any direct or indirect wholly owned subsidiary
of Acquiror or of the Company immediately prior to the Effective Time shall
be canceled and extinguished without any conversion thereof and no payment
shall be made with respect thereto.
(d) Acquiror Sub Common Stock. Each share of common stock, par value
--------------------------
$0.01 per share, of Acquiror Sub issued and outstanding immediately prior
to the Effective Time shall be converted into and exchanged for one newly
and validly issued, fully paid and non-assessable share of common stock of
the Surviving Corporation.
SECTION 2.02. EXCHANGE OF CERTIFICATES OR INSTRUMENTS.
(a) Exchange Agent. As of the Effective Time, Acquiror shall deposit,
--------------
or shall cause to be deposited, with Norwest Bank Minnesota, N.A., or another
bank or trust company designated by Acquiror and reasonably acceptable to the
Company (the "Exchange Agent"), for the benefit of the holders of issued and
--------------
outstanding Company Common Stock and associated Rights for exchange through the
Exchange Agent in accordance with this Article II, certificates representing the
whole shares of Acquiror Common Stock issuable to such holders pursuant to
Section 2.01 and cash in an amount sufficient to permit payment of the cash
payable in lieu of fractional shares pursuant to Section 2.02(e) (such
certificates for shares of Acquiror Common Stock, together with any dividends or
distributions with respect thereto, and such amounts of cash, being hereafter
referred to as the "Exchange Fund"). As of the Effective Time, Acquiror shall
-------------
reserve and keep available out of its authorized and unissued Acquiror Common
Stock, the number of shares of Acquiror Common Stock that will be sufficient to
permit the exercise and
-5-
exchange in full of all Conversion-Merger Rights outstanding immediately prior
to the Effective Time. The Exchange Agent shall, pursuant to irrevocable
instructions from Acquiror, deliver the shares of Acquiror Common Stock to be
issued and the amount of cash to be paid to the holders of Company Common Stock
and associated Rights pursuant to Section 2.01 out of the Exchange Fund.
(b) Exchange Procedures. Promptly (and, in any event, within seven
-------------------
(7) business days) after the Effective Time, Acquiror shall use its reasonable
best efforts to cause the Exchange Agent to mail to each holder of record of a
certificate or certificates of Company Common Stock which immediately prior to
the Effective Time represented outstanding shares of Company Common Stock and
associated Rights and to each holder of record of a certificate or certificates
or other instrument or instruments representing Conversion-Merger Rights
(including unexchanged Cooperative Interests) which immediately prior to the
Effective Time represented the right to receive shares of Company Common Stock
and associated Rights (all such certificates and instruments, the
"Certificates") (i) a letter of transmittal (which shall specify that delivery
------------
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent (in the case
of Certificates representing Company Common Stock) or Acquiror (in the case of
Certificates representing Conversion-Merger Rights) and shall be in customary
form) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Acquiror Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent
(in the case of Certificates of Company Common Stock) or Acquiror (in the case
of Certificates representing Conversion-Merger Rights), as specified in such
letter of transmittal, together with such letter of transmittal, duly executed,
and such other Documents as may reasonably be required pursuant to such
instructions, the holder of such Certificate shall be entitled to receive
promptly in exchange therefor a certificate representing that number of whole
shares of Acquiror Common Stock which such holder has the right to receive in
respect of such Certificate (after taking into account all shares of Company
Common Stock and Conversion-Merger Rights then held by such holder under all
such Certificates so surrendered), together with any dividends or other
distributions to which such holder is entitled pursuant to Section 2.02(c) and
cash in lieu of fractional shares of Acquiror Common Stock to which such holder
is entitled pursuant to Section 2.02(e), and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of shares
of Company Common Stock or Conversion-Merger Rights which is not registered in
the transfer records of the Company, the proper number of shares of Acquiror
Common Stock may be issued and the proper amount of cash may be paid pursuant
hereto to a transferee if the Certificates representing such shares of Company
Common Stock or Conversion-Merger Rights, properly endorsed or otherwise in
proper form for transfer, are presented to the Exchange Agent (in the case of
Certificates representing Company Common Stock) or Acquiror (in the case of
Certificates representing Conversion-
-6-
Merger Rights), accompanied by all Documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.02, each Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the shares of Acquiror Common Stock issuable in
exchange therefor, together with any dividends or other distributions to which
such holder is entitled pursuant to Section 2.02(c) and cash in lieu of any
fractional shares of Acquiror Common Stock to which such holder is entitled
pursuant to Section 2.02(e). No interest will be paid or will accrue on any
cash payable pursuant to Sections 2.02(c) or 2.02(e).
(c) Distributions with Respect to Unexchanged Shares of Acquiror
------------------------------------------------------------
Common Stock. No dividends or other distributions declared or made after the
- ------------
Effective Time with respect to Acquiror Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the whole shares of Acquiror Common Stock represented thereby,
and no cash payment in lieu of fractional shares shall be paid to any such
holder pursuant to Section 2.02(e), until the holder of such Certificate shall
surrender such Certificate. Subject to the effect of escheat, tax or other
applicable Laws, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Acquiror Common Stock issued in exchange therefor, without interest, (i)
promptly, the amount of any cash payable with respect to a fractional share of
Acquiror Common Stock to which such holder is entitled pursuant to Section
2.02(e) and the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
Acquiror Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions, with a record date after the Effective Time
but prior to surrender and a payment date occurring after surrender, payable
with respect to such whole shares of Acquiror Common Stock.
(d) No Further Rights in Company Common Stock and Conversion-Merger
---------------------------------------------------------------
Rights. All shares of Acquiror Common Stock issued upon conversion of the
- ------
shares of Company Common Stock, the Conversion-Merger Rights and the associated
Rights in accordance with the terms hereof (including any cash paid pursuant to
Sections 2.02(c) or (e)) shall be deemed to have been issued and paid in full
satisfaction of all rights pertaining to such shares of Company Common Stock,
such Conversion-Merger Rights and such associated Rights.
(e) No Fractional Shares. No fractional shares of Acquiror Common
--------------------
Stock shall be issued upon surrender for exchange of the Certificates, and any
such fractional share interests will not entitle the owner thereof to vote or to
any rights of a stockholder of Acquiror, but in lieu thereof each holder of
shares of Company Common Stock or Conversion-Merger Rights who would otherwise
be entitled to receive a fraction of a share of Acquiror Common Stock, after
aggregating all Certificates delivered by such holder, and rounding down to the
nearest whole
-7-
share, shall receive an amount in cash equal to the Average Trading Price (as
defined in Article X) on the Closing Date multiplied by the fraction of a share
of Acquiror Common Stock to which such holder would otherwise be entitled. Such
payment in lieu of fractional shares shall be administered by the Exchange Agent
(in the case of Certificates representing Company Common Stock) or Acquiror (in
the case of Certificates representing Conversion-Merger Rights) pursuant to the
procedures set forth in Section 2.02(b).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
----------------------------
which remains undistributed to the holders of Company Common Stock for one (1)
year after the Effective Time shall be delivered to Acquiror, upon demand. Any
holders of Company Common Stock who have not theretofore complied with this
Article II shall thereafter look only to Acquiror for the shares of Acquiror
Common Stock to which they are entitled pursuant to Section 2.01, any dividends
or other distributions with respect to Acquiror Common Stock to which they are
entitled pursuant to Section 2.02(c) and any cash in lieu of fractional shares
of Acquiror Common Stock to which they are entitled pursuant to Section 2.02(e).
Any shares of Acquiror Common Stock, any dividends or other distributions with
respect to Acquiror Common Stock, and any cash in lieu of fractional shares of
Acquiror Common Stock to which any holder of Company Common Stock or Conversion-
Merger Rights would otherwise be entitled pursuant to Section 2.01, Section
2.02(c) and Section 2.02(e), respectively, which remain unclaimed by such holder
on the fourth anniversary of the Effective Time (or such earlier date
immediately prior to such time as such property would otherwise escheat to or
become the property of any Governmental Entity (as defined in Article X)) shall,
to the extent permitted by Law, become the property of Acquiror free and clear
of any claims or interest of any Person (as defined in Article X) previously
entitled thereto.
(g) No Liability. None of Acquiror, Acquiror Sub, the Company or the
------------
Exchange Agent shall be liable to any Person for any shares of Acquiror Common
Stock (or dividends or distributions with respect thereto) or cash delivered to
a public official pursuant to any abandoned property, escheat or similar Laws.
(h) Lost, Stolen or Destroyed Certificates or Instruments. In the
-----------------------------------------------------
event any certificate evidencing shares of Company Common Stock and any
certificate or other instrument evidencing Conversion-Merger Rights (including
unexchanged Cooperative Interests) which immediately prior to the Effective Time
represented the right to receive shares of Company Common Stock shall have been
lost, stolen or destroyed, the Exchange Agent (in the case of Certificates
representing Company Common Stock) or Acquiror (in the case of Certificates
representing Conversion-Merger Rights) shall issue in exchange for such lost,
stolen or destroyed certificate or instrument, upon the making of an affidavit
of that fact by the holder thereof, such shares of Acquiror Common Stock and
cash, if any, as may be required pursuant to this Article II; provided, however,
-------- -------
that the Exchange Agent or Acquiror may, in its reasonable discretion and as a
condition precedent to
-8-
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or instrument to deliver a bond in such sum as it may reasonably
direct as indemnity against any claim that may be made against Acquiror, the
Surviving Corporation, or the Exchange Agent with respect to the certificate or
instrument alleged to have been lost, stolen or destroyed.
SECTION 2.03. STOCK TRANSFER BOOKS.
At the Effective Time, the stock transfer books of the Company shall be
closed and there shall be no further registration of transfers of shares of
Company Common Stock thereafter on the records of the Company. From and after
the Effective Time, the holders of certificates representing shares of Company
Common Stock outstanding immediately prior to the Effective Time and the holders
of certificates or other instruments evidencing Conversion-Merger Rights
(including unexchanged Cooperative Interests) which immediately prior to the
Effective Time represented the right to receive shares of Company Common Stock
shall cease to have any rights with respect to such shares of Company Common
Stock and Conversion-Merger Rights except as otherwise provided herein or by
Law. On or after the Effective Time, any Certificates presented to the Exchange
Agent or Acquiror for any reason shall be converted into the shares of Acquiror
Common Stock issuable in exchange therefor, any dividends or other distributions
to which the holders thereof are entitled pursuant to Section 2.02(c) and any
cash in lieu of fractional shares of Acquiror Common Stock to which the holders
thereof are entitled pursuant to Section 2.02(e).
SECTION 2.04. STOCK OPTIONS.
Prior to the Effective Time, the Company and Acquiror shall take such
action as may be necessary or appropriate for Acquiror, at its option, to assume
or to issue a substitute option with respect to each outstanding unexpired and
unexercised option to purchase shares of Company Common Stock (collectively, the
"Company Stock Options") under the Company's 1997 Stock Incentive Plan (the
---------------------
"Company Stock Plan") or granted to certain officers independent of the Company
- -------------------
Stock Plan, so that at the Effective Time each Company Stock Option will become
or be replaced by an option to purchase a number of whole shares of Acquiror
Common Stock (an "Acquiror Option") equal to the number of shares of Company
---------------
Common Stock that could have been purchased (assuming full vesting) under the
Company Stock Option multiplied by the Exchange Ratio (and eliminating any
fractional share), at a price per share of Acquiror Common Stock equal to the
per-share option exercise price specified in the Company Stock Option. Each
substituted Acquiror Option shall otherwise be subject to the same terms and
conditions as apply to the related Company Stock Option. The date of grant of
each substituted Acquiror Option for purposes of such terms and conditions shall
be deemed to be the date on which the corresponding Company Stock Option was
granted. As to each assumed Company
-9-
Stock Option, at the Effective Time (i) all references to the Company in the
stock option agreements with respect to the Company Stock Options being assumed
shall be deemed to refer to Acquiror; (ii) Acquiror shall assume all of the
Company's obligations with respect to the related Company Stock Option; and
(iii) Acquiror shall issue to each holder of a Company Stock Option a document
evidencing the foregoing assumption by Acquiror. Nothing in this Section 2.04
shall affect the schedule of vesting with respect to the Company Stock Options
in accordance with the terms of such Company Stock Options, and Acquiror
acknowledges that the Company Stock Plan and the Company Stock Options granted
to Thomas W. Hertz and Craig A. Anderson independent of the Company Stock Plan
provide that such Company Stock Options will be 100% vested at the Effective
Time. The Company represents and warrants that the assumption of Company Stock
Options or substitution of Acquiror Options therefor, as contemplated by this
Section 2.04, may be effected pursuant to the terms of the Company Stock
Options, the Company Stock Plan and the terms of the Company Stock Options
granted to certain officers of the Company independent of the Company Stock Plan
without the consent of any holder of a Company Stock Option and without
liability to any such holder.
SECTION 2.05. CLOSING.
The parties agree that the Closing Event (as defined in Article X) will
take place at the offices of the Company in Irene, South Dakota on the Closing
Date (as defined in this Section 2.05). Subject to the terms and conditions of
this Merger Agreement, the closing of the Merger (the "Closing") will take place
-------
as soon as practicable (but, in any event, within five (5) business days) after
satisfaction of the latest to occur or, if permissible, waiver of the conditions
set forth in Article VII hereof (the "Closing Date"), at the offices of Hogan &
------------
Hartson L.L.P., Columbia Square, 555 13th Street, N.W., Washington, D.C. 20004,
unless another date or place is agreed to in writing by the parties hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as specifically set forth in the Disclosure Schedule delivered by
the Company to Acquiror prior to the execution and delivery of this Merger
Agreement (the "Company Disclosure Schedule") (with a disclosure with respect to
---------------------------
a Section of this Merger Agreement to require a specific reference in the
Company Disclosure Schedule to the Section of this Merger Agreement to which
each such disclosure applies, and no disclosure to be deemed to apply with
respect to any Section to which it does not expressly refer), the Company hereby
represents and warrants (which representation and warranty shall be deemed to
include the disclosures with respect thereto so specified in the Company
Disclosure Schedule) to, and covenants and agrees with, Acquiror and Acquiror
Sub as follows, in each case as of the date of
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this Merger Agreement, unless otherwise specifically set forth herein or in
the Company Disclosure Schedule:
SECTION 3.01. ORGANIZATION AND STANDING.
The Company is a corporation duly organized, validly existing and in good
standing under Delaware Law, and has the full and unrestricted corporate power
and authority to own, operate and lease its Assets (as defined in Article X), to
carry on its business as currently conducted, to execute and deliver this Merger
Agreement and to carry out the transactions contemplated hereby. The Company is
duly qualified to conduct business as a foreign corporation and is in good
standing in the states, countries and territories listed in Section 3.01 of the
Company Disclosure Schedule. The Company is not qualified to conduct business
in any other jurisdiction, and neither the nature of the business conducted by
the Company nor the character of the Assets owned, leased or otherwise held by
it makes any such qualification necessary, except where the absence of such
qualification as a foreign corporation would not have a Company Material Adverse
Effect (as defined in Article X). The Conversion-Merger and the other
transactions contemplated thereby were effected in compliance with all Laws.
SECTION 3.02. SUBSIDIARIES.
Except as set forth in Section 3.02 of the Company Disclosure Schedule, the
Company has no Subsidiaries (as defined in Article X) and neither the Company
nor any Subsidiary has any equity investment or other interest in, nor has the
Company or any Subsidiary made advances or loans (other than for customary
credit extended to customers of the Company in the Ordinary Course of Business
(as defined in Article X) and reflected in the Financial Statements (as defined
in Section 3.08) or incurred in the Ordinary Course of Business since the date
of the latest Financial Statements, and other than transfers among the Company
and its wholly owned Subsidiaries) to, any corporation, association,
partnership, joint venture or other entity. Section 3.02 of the Company
Disclosure Schedule sets forth (a) the authorized capital stock or other equity
interests of each direct and indirect Subsidiary of the Company and the
percentage of the outstanding capital stock or other equity interests of each
Subsidiary directly or indirectly owned by the Company, and (b) the nature and
amount as of October 22, 1998 of any such equity investment, other interest or
advance. All of such shares of capital stock or other equity interests of
Subsidiaries directly or indirectly held by the Company have been duly
authorized and validly issued and are outstanding, fully paid and nonassessable.
The Company directly, or indirectly through wholly owned Subsidiaries, owns all
such shares of capital stock or other equity interests of the direct or indirect
Subsidiaries free and clear of all Encumbrances (as defined in Article X),
except as disclosed in Section 3.02 of the Company Disclosure Schedule. Each
Subsidiary is a corporation duly organized, validly existing and in good
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standing under the Laws of its state or jurisdiction of incorporation (as listed
in Section 3.02 of the Company Disclosure Schedule), and has the full and
unrestricted corporate power and authority to own, operate and lease its Assets
and to carry on its business as currently conducted. Each Subsidiary is duly
qualified to conduct business as a foreign corporation and is in good standing
in the states, countries and territories listed in Section 3.02 of the Company
Disclosure Schedule. The Subsidiaries are not qualified to conduct business in
any other jurisdictions, and neither the nature of their businesses nor the
character of the Assets owned, leased or otherwise held by them makes any such
qualification necessary, except where the absence of such qualification as a
foreign corporation would not have a Company Material Adverse Effect.
SECTION 3.03. CERTIFICATE OF INCORPORATION AND BYLAWS.
The Company has furnished to Acquiror a true and complete copy of the
certificate or articles of incorporation of the Company and of each Subsidiary,
as currently in effect, certified as of a recent date by the Secretary of State
(or comparable Governmental Entity) of the respective jurisdictions of
incorporation, and a true and complete copy of the bylaws of the Company and of
each Subsidiary, as currently in effect, certified by their respective corporate
secretaries or assistant corporate secretaries. Such certified copies are
attached as exhibits to, and constitute an integral part of, the Company
Disclosure Schedule.
SECTION 3.04. CAPITALIZATION.
The authorized capital stock of the Company consists of (a) 10,000,000
shares of Company Common Stock, of which: (i) 2,161,136 shares are issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
nonassessable; (ii) 986 shares are held in the treasury of the Company; (iii)
400,120 shares are reserved for issuance pursuant to Company Stock Options; (iv)
390,524 shares are reserved for issuance in connection with the Conversion-
Merger; (v) 6,400 shares are reserved for issuance pursuant to the terms of that
certain Asset Purchase Agreement, dated as of April 24, 1998, by and among the
Company, Dakota Wireless Systems, Inc. and Russell Dangel, sole proprietor of
Hurley Communications (the "Hurley Communications Agreement"); and (vi) 20,000
-------------------------------
shares are reserved for issuance pursuant to the terms of that certain $250,000
9% Term Note, dated July 1, 1998, by Dakota Wireless Systems, Inc. and the
Company; (b) 250,000 shares of Company preferred stock, without par value per
share ("Company Preferred Stock") (of which 15,000 are designated "Series A
----------------------- --------
Junior Participating Preferred Stock"), of which: (i) no shares are issued and
- ------------------------------------
outstanding; (ii) no shares are held in the treasury of the Company; and (iii)
15,000 shares are reserved for issuance pursuant to the Rights Agreement (as
defined in this Section 3.04). The Company Common Stock and Company Preferred
Stock are referred to collectively in this Merger Agreement as the "Company
-------
Capital Stock."
- -------------
-12-
Except as described in this Section 3.04 or Section 3.04 of the Company
Disclosure Schedule, no other shares of Company Capital Stock have been reserved
for any purpose. Except (i) as set forth in clauses (a)(iii), (a)(iv) and
(a)(vi) above, and (ii) rights to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock (the "Rights") pursuant to a
------
Rights Agreement dated as of July 22, 1997 between the Company and Norwest Bank
Minnesota, N.A. (the "Rights Agreement"), there are no outstanding securities
----------------
convertible into or exchangeable for Company Common Stock, any other securities
of the Company, or any capital stock or other securities of any of the
Subsidiaries and no outstanding options, rights (preemptive or otherwise), or
warrants to purchase or to subscribe for any shares of such stock or other
securities of the Company or any of the Subsidiaries. Except as set forth in
Section 3.04 of the Company Disclosure Schedule, there are no outstanding
Agreements (as defined in Article X) affecting or relating to the voting,
issuance, purchase, redemption, registration, repurchase or transfer of Company
Common Stock, any other securities of the Company, or any capital stock or other
securities of any Subsidiary, except as contemplated hereunder. Since June 30,
1998, no shares of Company Common Stock have been issued by the Company, except
(i) for 48,000 shares of Company Common Stock issued on or about July 2, 1998
pursuant to the terms of that certain Merger Agreement, dated as of December 5,
1997, by and among the Company, Dakota Wireless Systems, Inc., Vantek
Communications, Inc. and Van/Alert, Inc. or (ii) pursuant to (A) the exercise of
outstanding Company Stock Options in accordance with their terms or (B) the
Conversion-Merger as described in clause (a)(iv) above. Each of the outstanding
shares of Company Common Stock and of capital stock of, or other equity
interests in, the Subsidiaries was issued in compliance with all applicable
federal and state Laws concerning the issuance of securities, and such shares or
other equity interests owned by the Company or any Subsidiary are owned free and
clear of all Encumbrances, except as described in Section 3.04 of the Company
Disclosure Schedules. Except as set forth in Section 3.04 of the Company
Disclosure Schedule, there are no obligations, contingent or otherwise, of the
Company or any Subsidiary to provide funds to, make any investment (in the form
of a loan, capital contribution or otherwise) in, or provide any guarantee with
respect to, any Subsidiary or any other Person. Except as set forth in Section
3.04 of the Company Disclosure Schedule, there are no Agreements pursuant to
which any Person is or may be entitled to receive any of the revenues or
earnings, or any payment based thereon or calculated in accordance therewith, of
the Company or any Subsidiary, except for the existing employment Agreements
between the Company and Mr. Thomas Hertz and Mr. Craig Anderson.
SECTION 3.05. AUTHORITY; BINDING OBLIGATION.
The execution and delivery by the Company of this Merger Agreement, the
execution and delivery by the Company and the Subsidiaries of all other
Documents contemplated hereby, and the consummation by the Company and the
Subsidiaries
-13-
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action, and no other corporate proceedings on the part
of the Company or the Subsidiaries are necessary to authorize this Merger
Agreement and the other Documents contemplated hereby, or to consummate the
transactions contemplated hereby and thereby, other than the approval and
adoption of this Merger Agreement by the holders of a majority of the
outstanding shares of Company Common Stock in accordance with Delaware Law and
the Company's certificate of incorporation and bylaws. This Merger Agreement
has been duly executed and delivered by the Company and constitutes a legal,
valid and binding obligation of the Company, enforceable in accordance with its
terms, except as such enforceability may be subject to the effects of any
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar Laws affecting creditors' rights generally and subject to
the effects of general equitable principles (whether considered in a proceeding
in equity or at law).
SECTION 3.06. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution, delivery and performance by the Company and the
Subsidiaries of this Merger Agreement and all other Documents contemplated
hereby, the fulfillment of and compliance with the respective terms and
provisions hereof and thereof, and the consummation by the Company and the
Subsidiaries of the transactions contemplated hereby and thereby, do not and
will not: (i) conflict with, or violate any provision of, the certificate of
incorporation or bylaws of the Company or the certificate or articles of
incorporation or bylaws of any Subsidiary; (ii) subject to (A) obtaining the
requisite approval and adoption of this Merger Agreement by the holders of a
majority of the outstanding shares of Company Common Stock in accordance with
Delaware Law and the Company's certificate of incorporation and bylaws and (B)
obtaining the consents, approvals, authorizations and permits of, and making
filings with or notifications to, the applicable Governmental Entity pursuant to
the applicable requirements, if any, of the Securities Act (as defined in
Article X), the Exchange Act (as defined in Article X), Blue Sky Laws (as
defined in Article X), the HSR Act (as defined in Article X), the Communications
Act (as defined in Article X), the Federal Aviation Act (as defined in Article
X), applicable state utility Laws, applicable municipal franchise Laws and the
filing and recordation of the Articles of Merger as required by Delaware Law,
conflict with or violate any Law applicable to the Company or any Subsidiary, or
any of their respective Assets; (iii) subject to obtaining the consents and
approvals set forth in Section 3.06(b) of the Company Disclosure Schedule,
conflict with, result in any breach of, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under any
Agreement to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary, or any of their respective Assets, may be bound; or
(iv) except as disclosed in Section 3.06(b) of the Company Disclosure Schedule,
result in or require the creation or imposition of, or result in the
acceleration of, any indebtedness or any Encumbrance of any
-14-
nature upon, or with respect to, the Company or any Subsidiary or any of the
Assets now owned or hereafter acquired by the Company or any Subsidiary; except
for any such conflict or violation described in clause (ii), any such conflict,
breach or default described in clause (iii), or any such creation, imposition or
acceleration described in clause (iv) that would not have a Company Material
Adverse Effect and that would not prevent the Company from consummating the
Merger on a timely basis.
(b) Except as set forth in Section 3.06(b) of the Company Disclosure
Schedule, the execution, delivery and performance by the Company and the
Subsidiaries of this Merger Agreement and all other Documents contemplated
hereby, the fulfillment of and compliance with the respective terms and
provisions hereof and thereof, and the consummation by the Company and the
Subsidiaries of the transactions contemplated hereby and thereby, do not and
will not: (i) require any consent, approval, authorization or permit of, or
filing with or notification to, any Person not party to this Merger Agreement,
except (A) the approval and adoption of this Merger Agreement by the holders of
a majority of the outstanding shares of Company Common Stock in accordance with
Delaware Law and the Company's certificate of incorporation and bylaws, (B)
pursuant to the applicable requirements, if any, of the Securities Act, the
Exchange Act, Blue Sky Laws, the HSR Act, the Communications Act, the Federal
Aviation Act, applicable state utility Laws and applicable municipal franchise
Laws, and (C) the filing and recordation of the Articles of Merger as required
by Delaware Law; or (ii) result in or give rise to any penalty, forfeiture,
Agreement termination, right of termination, amendment or cancellation, or
restriction on business operations of Acquiror, the Company, the Surviving
Corporation or any Subsidiary, except for any Agreement not required to be
disclosed by the last sentence of this Section 3.06(b). Section 3.06(b) of the
Company Disclosure Schedule lists all Agreements that reasonably could be
interpreted or expected to require the consent or acquiescence of any Person not
party to this Merger Agreement with respect to any aspect of the execution,
delivery or performance of this Merger Agreement by the Company and the
Subsidiaries where (i) such Agreements are material to the operation of the
Company and the Subsidiaries or (ii) the failure to obtain such consent or
acquiescence would result in a Company Material Adverse Effect.
SECTION 3.07. LICENSES; COMPLIANCE.
(a) Each of the Company and each Subsidiary is in possession of all
Licenses (as defined in Article X) necessary for the Company or any Subsidiary
to own, lease and operate its Assets or to carry on its business as it is now
being conducted (the "Company Licenses"), except where the failure to possess
----------------
any such Company License would not have a Company Material Adverse Effect. All
Company Licenses that are FCC (as defined in Article X), FAA (as defined in
Article X) or state utilities Licenses or municipal franchises, and all other
material Company Licenses, are listed and described in Section 3.07(a)(i) of the
Company Disclosure Schedule. Except as set forth in Schedule 3.07(a)(ii) of the
Company
-15-
Disclosure Schedule, all Company Licenses are valid and in full force and effect
through the respective dates indicated in the Company Disclosure Schedule,
except for any such invalidity or failure to be in full force and effect that
would not, alone or in the aggregate, have a Company Material Adverse Effect,
and no suspension, cancellation, complaint, proceeding, order or investigation
of or with respect to any such Company License (or operations thereunder) is
pending or, to the knowledge of the Company or any Subsidiary, threatened.
Neither the Company nor any Subsidiary is in violation of or default under any
Company License, except for any such violation or default that would not have a
Company Material Adverse Effect. Except as set forth in Section 3.07(a)(iii) of
the Company Disclosure Schedule, since December 31, 1996, neither the Company
nor any Subsidiary has received written or, to the knowledge of the Company or
any Subsidiary, oral notice from any Governmental Entity or any other Person of
any allegation of any such violation or default under a Company License.
(b) Neither the Company nor any Subsidiary is in violation of or
default under, nor has it breached, (i) any term or provision of its certificate
or articles of incorporation or bylaws or (ii) any Agreement or restriction to
which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary, or any of their respective Assets, is bound or affected, except for
any such violation, default or breach described in clause (ii) that would not
have a Company Material Adverse Effect. The Company and the Subsidiaries have
complied and are in full compliance with all Laws, except where the failure so
to comply would not have a Company Material Adverse Effect. The Conversion-
Merger and the other transactions contemplated thereby were effected in
compliance with all Laws, neither the Company nor any Subsidiary has received
any notice, claim or allegation or has knowledge that the Conversion-Merger or
the other transactions contemplated thereby were not effected in compliance with
all Laws, and the Company has undertaken significant efforts to attempt to
locate the holders of accounts of positive capital credit balances existing
immediately prior to the Conversion-Merger.
(c) Except as set forth in Schedule 3.07(c) of the Company Disclosure
Schedule, all returns, reports, statements and other Documents required to be
filed by the Company or any Subsidiary with any Governmental Entity have been
filed and complied with and are true, correct and complete in all material
respects (and any related fees required to be paid have been paid in full).
Except as set forth in Section 3.07(c) of the Company Disclosure Schedule, to
the knowledge of the Company and the Subsidiaries, all records of every type and
nature relating to the Company Licenses or the business, operations or Assets of
the Company or any Subsidiary have been maintained in all material respects in
accordance with good business practices and the rules of any Governmental Entity
and are maintained at the Company or the appropriate Subsidiary.
-16-
(d) Except as provided in Section 3.07(d) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary has any interest in any License
(including both any Company License and any License held by third parties in
which the Company or any Subsidiary has an interest) material to the operation
of the Company or any Subsidiary that is subject to restrictions on assignment
or transfer based on the circumstances under which the License was granted (such
as eligibility or auction rules), the status of construction and operation (such
as rules restricting resale for a certain period after construction), or any
other restrictions other than an ordinary course requirement for prior approval
of transactions such as the Merger contemplated herein.
(e) Neither the Company nor any Subsidiary is aware of any fact or
circumstance related to them that could reasonably be expected to cause the
filing of any objection to any application for any Governmental consent required
hereunder, lead to any delay in processing such application, or require any
waiver of any Governmental rule, policy or other applicable Law.
SECTION 3.08. SEC DOCUMENTS.
Since January 1, 1997, the Company has filed or, in the case of the
Company Post-Signing SEC Documents (as defined in Section 6.10), will file all
required reports, schedules, forms, statements and other Documents with the SEC
(as defined in Article X) (collectively, including the Company Post-Signing SEC
Documents, the "Company SEC Documents"). As of their respective dates, the
---------------------
Company SEC Documents complied or, in the case of the Company Post-Signing SEC
Documents, will comply as to form in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
none of the Company SEC Documents contained or, in the case of the Company Post-
Signing SEC Documents, will contain, any untrue statement of a material fact or
omitted or, in the case of the Company Post-Signing SEC Documents, will omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The consolidated financial statements of the Company
included in the Company SEC Documents (the "Financial Statements") comply or, in
--------------------
the case of the Company Post-Signing SEC Documents, will comply as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been or, in the case
of the Company Post-Signing SEC Documents, will have been prepared in accordance
with GAAP (except, in the case of unaudited statements, for the lack of normal
year-end adjustments, the absence of footnotes and as permitted by Form 10-QSB
and Item 310 of Regulation S-B of the SEC) applied on a consistent basis during
the periods subject thereto (except as may be indicated in the notes thereto)
and fairly present the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal
-17-
year-end adjustments and the absence of footnotes). Except as disclosed in the
Financial Statements, as required by GAAP or as required by any Governmental
Entity, the Company has not, since December 31, 1997, made any change in
accounting practices or policies applied in the preparation of the Financial
Statements.
SECTION 3.09. ABSENCE OF UNDISCLOSED LIABILITIES.
There are no liabilities or obligations (whether absolute or contingent,
matured or unmatured, known or unknown) of the Company or any Subsidiary,
including but not limited to liabilities for Taxes (as defined in Article X), of
a nature required by GAAP (giving effect to the principles of materiality
included therein) to be reflected, or reserved against, in the balance sheet
included in the Financial Statements and that are not so reflected, or reserved
against, therein. Except as described in Section 3.09 of the Company Disclosure
Schedule or reflected or reserved against in the Financial Statements, since
December 31, 1997, neither the Company nor any Subsidiary has incurred any
material liabilities or obligations (whether absolute or contingent, matured or
unmatured, known or unknown) other than in the Ordinary Course of Business (as
defined in Article X).
SECTION 3.10. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Other than as set forth in Section 3.10 to the Company Disclosure Schedule
or as disclosed in the Company SEC Documents filed with the SEC prior to the
date hereof, since December 31, 1997, there has been no material adverse change,
and no change except in the Ordinary Course of Business, in the business,
operations, condition (financial or otherwise), Assets or liabilities of the
Company or any Subsidiary. Except as set forth in Section 3.10 to the Company
Disclosure Schedule or as disclosed in the Company SEC Documents filed with the
SEC prior to the date hereof, since December 31, 1997, the Company and the
Subsidiaries have conducted their respective businesses substantially in the
manner theretofore conducted and only in the Ordinary Course of Business, and
neither the Company nor any Subsidiary has (a) incurred any damage, destruction
or loss not covered by insurance with respect to any material Assets of the
Company or of any such Subsidiary; (b) issued any capital stock or other equity
securities or granted any options, warrants or other rights calling for the
issuance thereof; (c) issued any bonds or other long-term debt instruments,
granted any options, warrants or other rights calling for the issuance thereof,
or borrowed any funds; (d) incurred, or become subject to, any material
obligation or liability (whether absolute or contingent, matured or unmatured,
known or unknown), except current liabilities incurred in the Ordinary Course of
Business; (e) discharged or satisfied any Encumbrance or paid any material
obligation or liability (whether absolute or contingent, matured or unmatured,
known or unknown) other than current liabilities shown in the Unaudited Balance
Sheets (as defined in Section 6.08) and
-18-
current liabilities incurred since December 31, 1997 in the Ordinary Course of
Business; (f) declared or made payment of, or set aside for payment, any
dividends or distributions of any Assets, or purchased, redeemed or otherwise
acquired any of its capital stock, any securities convertible into capital
stock, or any other securities; (g) mortgaged, pledged or subjected to any
Encumbrance any of its Assets; (h) sold, exchanged, transferred or otherwise
disposed of any of its Assets, or canceled any debts or claims, except in each
case in the Ordinary Course of Business; (i) written down the value of any
Assets or written off as uncollectible any debt, notes or accounts receivable,
except to the extent previously reserved against in the Financial Statements and
not material in amount, and except for write-downs and write-offs in the
Ordinary Course of Business, none of which, individually or in the aggregate,
are material; (j) entered into any transactions other than in the Ordinary
Course of Business; (k) increased the rate of compensation payable, or to become
payable, by it to any of its officers, employees, agents or independent
contractors over the rate being paid to them on December 31, 1997, except for
any increase in the rate of compensation payable, or to become payable, by it in
the Ordinary Course of Business to employees who are not directors or executive
officers; (l) made or permitted any amendment or termination of any material
Agreement to which it is a party; (m) through negotiation or otherwise made any
commitment or incurred any liability to any labor organization; (n) made any
accrual or arrangement for or payment of bonuses or special compensation of any
kind to any director, officer or employee, except for any accrual or arrangement
for or payment of bonuses or special compensation in the Ordinary Course of
Business to employees who are not directors or officers; (o) directly or
indirectly paid any severance or termination pay in excess of two months' salary
to any officer or employee with an annual salary in excess of $60,000; (p) made
capital expenditures, or entered into commitments therefor, not provided for in
the Company's July 1998 CLEC Facilities Expansion Plan (a copy of which has been
furnished by the Company to Acquiror) or, if applicable, the Company's
subsequent capital budget (which capital budget shall have been approved by
Acquiror as provided in Section 5.01(i)), except for capital expenditures
permitted by Section 5.01; (q) made any change in any method of accounting or
accounting practice except as required by GAAP; (r) entered into any transaction
of the type described in Section 3.19; (s) made any charitable contributions or
pledges exceeding $10,000 individually or $100,000 in the aggregate; or (t) made
any Agreement to do any of the foregoing. At the Closing, the Company shall
deliver to Acquiror an updated Section 3.10 to the Company Disclosure Schedule
in accordance with the provisions of Section 6.05.
SECTION 3.11. LITIGATION; DISPUTES.
(a) Except as disclosed in Section 3.11(a) of the Company Disclosure
Schedule, there are no actions, suits, claims, arbitrations, proceedings or
investigations pending or, to the knowledge of the Company or any Subsidiary,
-19-
threatened against, affecting or involving the Company or any Subsidiary or
their respective businesses or Assets, or the transactions contemplated by this
Merger Agreement, at law or in equity, or before or by any court, arbitrator or
Governmental Entity, domestic or foreign. Neither the Company nor any
Subsidiary is (i) operating under or subject to any order (except for orders
that Persons similarly situated, engaged in similar businesses and owning
similar Assets are operating under or subject to), award, writ, injunction,
decree or judgment of any court, arbitrator or Governmental Entity, or (ii) in
default with respect to any order, award, writ, injunction, decree or judgment
of any court, arbitrator or Governmental Entity.
(b) Except as set forth in Section 3.11(b) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary is currently involved in, or to
the knowledge of the Company or any Subsidiary, reasonably anticipates any
dispute with, any of its current or former employees, agents, brokers,
distributors, vendors, customers, business consultants, franchisees,
franchisors, representatives or independent contractors (or any current or
former employees of any of the foregoing Persons) affecting the business or
Assets of the Company or any Subsidiary, except for any such disputes that, if
resolved adversely to the Company or any Subsidiary, would not have a Company
Material Adverse Effect.
SECTION 3.12. DEBT INSTRUMENTS.
Section 3.12 of the Company Disclosure Schedule lists all mortgages,
indentures, notes, guarantees and other Agreements for or relating to borrowed
money (including, without limitation, conditional sales agreements and capital
leases) to which the Company or any Subsidiary is a party or which have been
assumed by the Company or any Subsidiary or to which any Assets of the Company
or any Subsidiary are subject. With respect to the Documents listed on Section
3.12 of the Company Disclosure Schedule, the Company and the Subsidiaries have
performed all the obligations required to be performed by any of them to date
and are not in default in any respect under any of the foregoing, and there has
not occurred any event which (whether with or without notice, lapse of time or
the happening or occurrence of any other event) would constitute such a default,
except for any failure so to perform or any such default that would not have a
Company Material Adverse Effect.
SECTION 3.13. LEASES.
Section 3.13 of the Company Disclosure Schedule lists all leases and
other Agreements with a term in excess of one (1) year or requiring payments in
excess of $35,000 in the aggregate over its term under which the Company or any
Subsidiary is the lessee or lessor of any Asset, or holds, manages or operates
any Asset owned by any third party, or under which any Asset owned by the
Company or by any Subsidiary is held, operated or managed by a third party. The
Company
-20-
and the Subsidiaries are the owners and holders of all the leasehold estates
purported to be granted to them by the Documents listed in Section 3.13 of the
Company Disclosure Schedule. Each such lease and other Agreement is in full
force and effect and constitutes a legal, valid and binding obligation of, and
is legally enforceable against, the respective parties thereto. The Company and
the Subsidiaries have in all respects performed all material obligations
thereunder required to be performed by any of them to date. To the knowledge of
the Company or any Subsidiary, no party is in default in any material respect
under any of the foregoing, and there has not occurred any event which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a default. All of the Assets subject to such
leases and other Agreements are in a condition adequate for the uses to which
they are currently being used.
SECTION 3.14. OTHER AGREEMENTS; NO DEFAULT.
(a) Section 3.14(a) of the Company Disclosure Schedule lists each
Agreement to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary, or any of their respective Assets, is bound, and
which is:
(i) an Agreement with a term in excess of one (1) year or
requiring payments in excess of $10,000 in any twelve (12) month period or
$50,000 in the aggregate over its term for the employment of any director,
officer, employee, consultant or independent contractor, or providing for
severance payments to any such director, officer, employee, consultant or
independent contractor;
(ii) a license Agreement or distributor, dealer, sales
representative, sales agency, advertising, property management or brokerage
Agreement involving an annual payment in excess of $50,000;
(iii) an Agreement with any labor organization or other
collective bargaining unit;
(iv) an Agreement for the future purchase of materials,
supplies, services, merchandise or equipment involving payments of more
than $50,000 over its remaining term (including, without limitation,
periods covered by any option to renew by any party);
(v) an Agreement other than in the Ordinary Course of Business
for the purchase, sale or lease of any Asset with a purchase or sale price
or aggregate rental payment in excess of $50,000;
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(vi) a profit-sharing, bonus, incentive compensation, deferred
compensation, stock option, severance pay, stock purchase, employee
benefit, insurance, hospitalization, pension, retirement or other similar
plan or Agreement;
(vii) an Agreement for the sale of any of its Assets or
services or the grant of any preferential rights to purchase any of its
Assets, services or rights, other than in the Ordinary Course of Business;
(viii) an Agreement that contains any provisions requiring the
Company or any Subsidiary to indemnify any other party;
(ix) a joint venture Agreement or other Agreement involving
the sharing of revenues or profits;
(x) an Agreement with an Affiliate (as defined in Article X)
of the Company or any Subsidiary;
(xi) an Agreement (including, without limitation, an Agreement
not to compete and an exclusivity Agreement) that reasonably could be
interpreted to impose any restriction on the business or operations of the
Company or any Subsidiary, or any of their respective affiliates, prior to
the Effective Time, or on the business or operations of Acquiror or any of
its Affiliates after the Effective Time;
(xii) an Agreement material to the Company and its Subsidiaries
not otherwise described in this Section 3.14(a) which by its terms does not
terminate or is not terminable by the Company or by a Subsidiary within
thirty (30) days or upon thirty (30) days' (or less) notice;
(xiii) an Agreement with any Governmental Entity;
(xiv) an Agreement with any of the twenty (20) largest
customers of the Company and the Subsidiaries, taken as a whole (based on
amounts billed), for each of (A) the year ended December 31, 1997 and (B)
the period from January 1, 1998 through the date of this Merger Agreement;
(xv) a material Agreement to provide any customer with free
service or service at rates departing from the standard rate schedules of
the local, long distance, wireline or wireless telephone system or cable
television system operated by the Company or any Subsidiary; or
(xvi) any other Agreement (A) that is material to the Company
and the Subsidiaries, taken as a whole, or the conduct of their businesses
or operations, or (B) the absence of which would have a Company Material
Adverse Effect,
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(the foregoing Agreements referred to herein as the "Company Contracts"). The
-----------------
Company has furnished Acquiror with true and complete copies of each written
Company Contract (including any amendments thereto) and a complete written
summary of each oral Company Contract.
(b) Each Company Contract is in full force and effect and constitutes
a legal, valid and binding obligation of, and is legally enforceable against,
the respective parties thereto. All necessary approvals of any Governmental
Entity with respect thereto have been obtained (except where the failure so to
obtain any such approval would not have a Company Material Adverse Effect), all
necessary filings or registrations therefor have been made, and there are no
outstanding disputes thereunder and, to the knowledge of the Company or any
Subsidiary, no threatened cancellation or termination thereof. The Company and
the Subsidiaries have performed all material obligations thereunder required to
be performed by any of them to date. To the knowledge of the Company and the
Subsidiaries, no party is in default in any material respect under any of the
Company Contracts, and there has not occurred any event which (whether with or
without notice, lapse of time or the happening or occurrence of any other event)
would constitute such a default. No Agreement has been canceled or otherwise
terminated within the twelve (12) months prior to the date of this Merger
Agreement which would have been a "Company Contract" had such Agreement not been
canceled or terminated and the cancellation or termination of which has had or
is reasonably likely to have a Company Material Adverse Effect. Except as
specifically described in Section 3.14(a) of the Company Disclosure Schedule,
there has been no written or oral modification or amendment to any Company
Contract and there are no reasonably expected changes to any Company Contract.
At the Closing, the Company shall deliver to Acquiror an updated Section 3.14(a)
to the Company Disclosure Schedule in accordance with the provisions of Section
6.05.
SECTION 3.15. LABOR RELATIONS.
Section 3.15(a) of the Company Disclosure Schedule lists all
collective bargaining or other labor union Agreements to which the Company or
any Subsidiary is a party. Except as set forth in Section 3.15(b) of the
Company Disclosure Schedule, there are no strikes, work stoppages, union
organization efforts or other controversies (other than grievance proceedings)
pending, threatened or reasonably anticipated between the Company or any
Subsidiary and (a) any current or former employees of the Company or of any
Subsidiary or (b) any union or other collective bargaining unit representing
such employees. The Company and the Subsidiaries have complied and are in
compliance with all Laws relating to employment or the workplace, including,
without limitation, Laws relating to wages, hours, collective bargaining, safety
and health, work authorization, equal employment opportunity, immigration,
withholding, unemployment compensation, worker's compensation, employee privacy
and right to
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know, except where the failure so to comply would not have a Company Material
Adverse Effect. Except as set forth in Section 3.15(c) of the Company
Disclosure Schedule, neither the Company nor any Subsidiary has been notified by
any Governmental Agency or counsel to any claimant of any unresolved violation
or alleged violation of any Law relating to equal employment opportunity, civil
or human rights, or employment discrimination generally. Except as set forth in
Section 3.15(d) to the Company Disclosure Schedule, there are no collective
bargaining Agreements, employment Agreements between the Company or any
Subsidiary and any of their respective employees, or professional service
Agreements not terminable at will relating to the businesses and Assets of the
Company or of any Subsidiary. Except as set forth in Section 3.15(e) to the
Company Disclosure Schedule, the consummation of the transactions contemplated
hereby will not cause Acquiror, the Surviving Corporation, the Company or any
Subsidiary to incur or suffer any liability relating to, or obligation to pay,
severance, termination or other payments to any Person.
SECTION 3.16. PENSION AND BENEFIT PLANS.
(a) Except as set forth in Section 3.16(a) to the Company Disclosure
Schedule, neither the Company nor any Subsidiary (i) maintains or during the
past six (6) years has maintained any Plan (as defined in Article X) or Other
Arrangement (as defined in Article X), (ii) is or during the past six (6) years
has been a party to any Plan or Other Arrangement, or (iii) has obligations
under any Plan or Other Arrangement.
(b) The Company has furnished to Acquiror true and complete copies of
each of the following Documents: (i) the Documents setting forth the terms of
each Plan; (ii) all related trust Agreements or annuity Agreements (and any
other funding Document) for each Plan; (iii) for the three (3) most recent plan
years, all annual reports (Form 5500 series) on each Plan that have been filed
with any Governmental Entity; (iv) the current summary plan description and
subsequent summaries of material modifications for each Title I Plan (as defined
in Article X); (v) all DOL (as defined in Article X) opinions on any Plan; (vi)
all correspondence with the PBGC (as defined in Article X) on any Plan exchanged
during the past three (3) years; (vii) all IRS (as defined in Article X)
rulings, opinions or technical advice relating to any Plan and the current IRS
determination letter issued with respect to each Qualified Plan (as defined in
Article X); and (viii) all current Agreements with service providers or
fiduciaries for providing services on behalf of any Plan. For each Other
Arrangement, the Company has furnished to Acquiror true and complete copies of
each policy, Agreement or other Document setting forth or explaining the current
terms of the Other Arrangement, all related trust Agreements or other funding
Documents (including, without limitation, insurance contracts, certificates of
deposit, money market accounts, etc.), all significant employee communications,
all correspondence with or other submissions to any
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Governmental Entity, and all current Agreements with service providers or
fiduciaries for providing services on behalf of any Other Arrangement.
(c) No Plan is a Multiemployer Plan (as defined in Article X).
(d) Section 3.16(d) of the Company Disclosure Schedule sets forth
each Individual Account Plan (as defined in Article X) that is an ESOP (as
defined in Article X) (indicating whether such ESOP is leveraged) or otherwise
invests in employer securities (as such term is defined in Section 409(l) of the
Code). The Company has furnished to Acquiror true and complete copies of all
loan Agreements and other related Documents for each leveraged ESOP.
(e) The funding method used under each Minimum-Funding Plan (as
defined in Article X) does not violate the funding requirements in Title I,
Subtitle B, Part 3, of ERISA (as defined in Article X). For each Defined
Benefit Plan (as defined in Article X), the Company has furnished to Acquiror a
true and complete copy of the actuarial valuation reports issued by the
actuaries of that Defined Benefit Plan for the three (3) most recent plan years,
setting forth: (i) the actuarial present value (based upon the same actuarial
assumptions as were used for that period for funding purposes) of all vested and
nonvested accrued benefits under that Defined Benefit Plan; (ii) the actuarial
present value (based upon the same actuarial assumptions, other than turnover
assumptions, as were used for that period for funding purposes) of vested
benefits under that Defined Benefit Plan; (iii) the net fair market value of
that Defined Benefit Plan's Assets; and (iv) a detailed description of the
funding method used under that Defined Benefit Plan.
(f) No "accumulated funding deficiency" as defined in Section
302(a)(2) of ERISA or Section 412 of the Code, whether or not waived, and no
"unfunded current liability" as determined under Section 412(l) of the Code
exists with respect to any Minimum-Funding Plan. No security is required under
Section 401(a)(29) of the Code as to any Minimum-Funding Plan. Section 3.16(f)
of the Company Disclosure Schedule sets forth all unpaid obligations and
liabilities of the Company and the Subsidiaries to provide contributions
currently due with respect to any Minimum-Funding Plan.
(g) Section 3.16(g) of the Company Disclosure Schedule sets forth the
contributions that (i) the Company or any Subsidiary has promised or is
otherwise obligated to make under each Individual Account Plan that is a
Statutory-Waiver Plan (as defined in Article X) and (ii) are unpaid as of the
date of this Merger Agreement.
(h) The Company and the Subsidiaries have made all contributions and
other payments required by and due under the terms of each Plan and Other
Arrangement and have taken no action during the past three (3) years (other than
actions required by Law) relating to any Plan or Other Arrangement that will
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increase Acquiror's, the Surviving Corporation's, the Company's or any
Subsidiary's obligation under any Plan or Other Arrangement.
(i) Section 3.16(i) of the Company Disclosure Schedule sets forth a
list of all Qualified Plans (as defined in Article X). All Qualified Plans and
any related trust Agreements or annuity Agreements (or any other funding
Document) comply and have complied with ERISA, the Code (including, without
limitation, the requirements for Tax qualification described in Section 401
thereof), and all other Laws, except where the failure so to comply would not
have a Company Material Adverse Effect. The trusts established under such Plans
are exempt from federal income taxes under Section 501(a) of the Code. The
Company and the Subsidiaries have received determination letters issued by the
IRS with respect to each Qualified Plan, and the Company has furnished to
Acquiror true and complete copies of all such determination letters and all
correspondence relating to the applications therefor, or the remedial amendment
period under Section 401(b) of the Code has not elapsed with regard to the
initial adoption of such Qualified Plan. All statements made by or on behalf of
the Company or any Subsidiary to the IRS in connection with applications for
determinations with respect to each Qualified Plan were true and complete when
made and continue to be true and complete. To the knowledge of the Company and
the Subsidiaries, nothing has occurred since the date of the most recent
applicable determination letter that would adversely affect the tax-qualified
status of any Qualified Plan.
(j) To their knowledge, the Company and the Subsidiaries have
complied in all material respects with all applicable provisions of the Code,
ERISA, the National Labor Relations Act, Title VII of the Civil Rights Act of
1964, the Age Discrimination in Employment Act, the Fair Labor Standards Act,
the Securities Act, the Exchange Act, and all other Laws pertaining to the
Plans, Other Arrangements and other employee or employment related benefits, and
all premiums and assessments relating to all Plans or Other Arrangements.
Neither the Company nor any Subsidiary has any liability for any delinquent
contributions within the meaning of Section 515 of ERISA (including, without
limitation, related attorneys' fees, costs, liquidated damages and interest) or
for any arrearages of wages. Neither the Company nor any Subsidiary has any
pending unfair labor practice charges, contract grievances under any collective
bargaining agreement, other administrative charges, claims, grievances or
lawsuits before any court, arbiter or Governmental Entity arising under any Law
governing any Plan, and to the knowledge of the Company and the Subsidiaries
there exist no facts that could give rise to such a claim.
(k) Section 3.16(k) of the Company Disclosure Schedule describes all
transactions in which, to the knowledge of the Company and the Subsidiaries, the
Company or any Subsidiary or any of the Plans has engaged in violation of
Section 406(a) or 406(b) of ERISA for which no exemption exists under Section
408 of ERISA and all "prohibited transactions" (as such term is defined in
-26-
Section 4975(c)(1) of the Code), for which no exemption exists under Section
4975(c)(2) or 4975(d) of the Code. The Company has furnished to Acquiror true
and complete copies of each request for a prohibited transaction exemption and
each exemption obtained in response to such request. All such requests were true
and complete when made and continue to be true and complete.
(l) The Company and the Subsidiaries have paid all premiums (and
interest charges and penalties for late payment, if applicable) due to the PBGC
for each Defined Benefit Plan. The Company has reflected (or shall reflect) in
the Financial Statements the current value of such premium obligation that is
accrued and unsatisfied as of the date of each such Financial Statement.
Section 3.16(l) of the Company Disclosure Schedule sets forth the amount of all
such unpaid premium obligations (including, without limitation, proportionate
partial accruals for the current year). Other than being required to make and
making premium payments when due, no liability to the PBGC has been incurred by
the Company or by any Common Control Entity (as defined in Article X) on account
of Title IV of ERISA. During the past three (3) years, no filing has been made
by, or required of, the Company or any Common Control Entity with the PBGC, the
PBGC has not started any proceeding to terminate any Defined Benefit Plan that
was or is maintained or wholly or partially funded by the Company or any Common
Control Entity, and to the knowledge of the Company and the Subsidiaries, no
facts exist that would permit the PBGC to begin such a proceeding. Neither the
Company nor any Common Control Entity has, or will have as a result of the
transactions contemplated hereby, (i) withdrawn as a substantial employer so as
to become subject to Section 4063 of ERISA; or (ii) ceased making contributions
to any Pension Plan that is subject to Section 4064(a) of ERISA to which the
Company or any Common Control Entity made contributions during the past five (5)
years.
(m) Section 3.16(m) of the Company Disclosure Schedule identifies any
terminated Plan that covered any current or former employees of the Company or
any Subsidiary, and any other Plan that has been terminated, during the past
three (3) years. The Company has furnished to Acquiror true and complete copies
of all filings with any Governmental Entity, employee communications, board
minutes and all other Documents relating to each such termination of a Qualified
Plan.
(n) Except as set forth in Section 3.16(n) of the Company Disclosure
Schedule, no Plan or Other Arrangement, individually or collectively, provides
for any payment by the Company or any Subsidiary to any employee or independent
contractor that is not deductible under Section 162(a)(1) or 404 of the Code or
that is an "excess parachute payment" pursuant to Section 280G of the Code.
(o) No Plan has within the past three (3) years experienced a
"reportable event" (as such term is defined in Section 4043(b) of ERISA) that is
not subject to an administrative or statutory waiver from the reporting
requirement.
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(p) No Plan is a "qualified foreign plan" (as such term is defined in
Section 404A(e) of the Code), and no Plan is subject to the Laws of any
jurisdiction other than the United States of America or one of its political
subdivisions.
(q) The Company and the Subsidiaries have timely filed and the
Company has furnished to Acquiror true and complete copies of each Form 5330
(Return of Excise Taxes Related to Employee Benefit Plans) that the Company or
any Subsidiary filed on any Plan during the past three (3) years. To their
knowledge, the Company and the Subsidiaries have no liability for Taxes required
to be reported on Form 5330.
(r) Section 3.16(r) of the Company Disclosure Schedule lists all
funded Welfare Plans (as defined in Article X) that provide benefits to current
or former employees of the Company or any Subsidiary, or to their beneficiaries.
The funding under each Welfare Plan does not exceed and has not exceeded the
limitations under Sections 419A(b) and 419A(c) of the Code. To their knowledge,
the Company and the Subsidiaries are not subject to taxation on the income of
any Welfare Plan's welfare benefit fund (as such term is defined in Section
419(e) of the Code) under Section 419A(g) of the Code.
(s) Section 3.16(s) of the Company Disclosure Schedule (i) identifies
all post-retirement medical, life insurance or other benefits promised, provided
or otherwise due now or in the future to current, former or retired employees of
the Company or any Subsidiary, (ii) identifies the method of funding (including,
without limitation, any individual accounting) for all such benefits, (iii)
discloses the funded status of the Plans providing or promising such benefits,
and (iv) sets forth the method of accounting for such benefits to any key
employees (as defined in Section 416(i) of the Code) of the Company or any
Subsidiary.
(t) All Welfare Plans and the related trusts that are subject to
Section 4980B(f) of the Code and Sections 601 through 607 of ERISA comply in all
material respects with and have been administered in all material respects in
compliance with the health care continuation-coverage requirements for tax-
favored status under Section 4980B(f) of the Code (formerly Section 162(k) of
the Code), Sections 601 through 607 of ERISA, and all proposed or final
regulations under Section 162 of the Code explaining those requirements.
(u) The Company and the Subsidiaries have (i) filed or caused to be
filed all returns and reports on the Plans that they are required to file, and
(ii) paid or made adequate provision for all fees, interest, penalties,
assessments or deficiencies that have become due pursuant to those returns or
reports or pursuant to any assessment or adjustment that has been made relating
to those returns or reports. All other fees, interest, penalties and assessments
that are due and payable by or for the Company or any Subsidiary with respect to
any Plan have been timely reported, fully paid and discharged. There are no
unpaid fees,
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penalties, interest or assessments due from the Company or any Subsidiary or
from any other Person that are or could become an Encumbrance on any Asset of
the Company or any Subsidiary or could otherwise have a Company Material Adverse
Effect. The Company and the Subsidiaries have collected or withheld all amounts
that are required to be collected or withheld by them to discharge their
obligations with respect to each Plan, and all of those amounts have been paid
to the appropriate Governmental Entity or set aside in appropriate accounts for
future payment when due.
SECTION 3.17. TAXES AND TAX MATTERS.
(a) The Company and the Subsidiaries have (or, in the case of Company
Tax Returns (as defined in Article X) becoming due after the date hereof and
before the Effective Time, will have prior to the Effective Time) duly filed all
Company Tax Returns required to be filed by the Company and the Subsidiaries at
or before the Effective Time with respect to all applicable material Taxes. No
material penalties or other charges are or will become due with respect to any
such Company Tax Returns as the result of the late filing thereof. All such
Company Tax Returns are (or, in the case of returns becoming due after the date
hereof and before the Effective Time, will be) true and complete in all material
respects. The Company and the Subsidiaries: (i) have paid all Taxes due or
claimed to be due by any Taxing authority in connection with any such Company
Tax Returns (without regard to whether or not such Taxes are shown as due on any
Company Tax Returns); or (ii) have established (or, in the case of amounts
becoming due after the date hereof, prior to the Effective Time will have paid
or established) in the Financial Statements adequate reserves (in conformity
with GAAP consistently applied) for the payment of such Taxes. The amounts set
up as reserves for Taxes in the Financial Statements are sufficient for the
payment of all unpaid Taxes, whether or not such Taxes are disputed or are yet
due and payable, for or with respect to the applicable period, and for which the
Company or any Subsidiary may be liable in its own right (including, without
limitation, by reason of being a member of the same affiliated group) or as a
transferee of the Assets of, or successor to, any Person.
(b) Neither the Company nor any Subsidiary, either in its own right
(including, without limitation, by reason of being a member of the same
affiliated group) or as a transferee, has or at the Effective Time will have any
liability for Taxes payable for or with respect to any periods prior to and
including the Effective Time in excess of the amounts actually paid prior to the
Effective Time or reserved for in the Financial Statements, except for any Taxes
due in connection with the Merger or incurred in the Ordinary Course of Business
subsequent to the date of the latest Financial Statement.
(c) Except as set forth in Section 3.17(c) of the Company Disclosure
Schedule, all Company Tax Returns have been examined by the relevant Taxing
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authorities, or closed without audit by applicable Law, and all deficiencies
proposed as a result of such examinations have been paid, settled or reserved
for in the Financial Statements, for all taxable years prior to and including
the taxable year ended December 31, 1997. Except as set forth in Section
3.17(c) of the Company Disclosure Schedule, there is no action, suit,
proceeding, audit, investigation or claim pending or, to the knowledge of the
Company or any Subsidiary, threatened in respect of any Taxes for which the
Company or any Subsidiary is or may become liable, nor has any deficiency or
claim for any such Taxes been proposed, asserted or, to the knowledge of the
Company or any Subsidiary, threatened. Except as set forth in Section 3.17(c)
of the Company Disclosure Schedule, neither the Company nor any Subsidiary has
consented to any waivers or extensions of any statute of limitations with
respect to any taxable year of the Company or any Subsidiary. Except as set
forth in Section 3.17(c) of the Company Disclosure Schedule, there is no
Agreement, waiver or consent providing for an extension of time with respect to
the assessment or collection of any Taxes against the Company or any Subsidiary,
and no power of attorney granted by the Company or any Subsidiary with respect
to any Tax matters is currently in force.
(d) The Company has furnished to Acquiror true and complete copies of
all Company Tax Returns and all written communications with any Governmental
Entity relating to any such Company Tax Returns or to any deficiency or claim
proposed or asserted, irrespective of the outcome of such matter, but only to
the extent such items relate to Tax years (i) which are subject to an audit,
investigation, examination or other proceeding, or (ii) with respect to which
the statute of limitations has not expired.
(e) Section 3.17(e) of the Company Disclosure Schedule sets forth (i)
all federal Tax elections that currently are in effect with respect to the
Company or any Subsidiary, and (ii) all elections for purposes of foreign, state
or local Taxes and all consents or Agreements for purposes of federal, foreign,
state or local Taxes in each case that reasonably could be expected to affect or
be binding upon the Surviving Corporation or any Subsidiary or their respective
Assets or operations after the Effective Time. Section 3.17(e) of the Company
Disclosure Schedule sets forth all changes in accounting methods for Tax
purposes at any time made, agreed to, requested or required with respect to the
Company or any of the Subsidiaries since January 1, 1996.
(f) Except as set forth in Section 3.17(f) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary (i) is or has since January 1,
1991 been a partner in a partnership or an owner of an interest in an entity
treated as a partnership for federal income Tax purposes; (ii) has executed or
filed with the IRS any consent to have the provisions of Section 341(f) of the
Code apply to it; (iii) is subject to Section 999 of the Code; (iv) is a passive
foreign investment company as defined in Section 1296(a) of the Code; or (v) is
a party to an Agreement relating to the sharing, allocation or payment of, or
indemnity for, Taxes (other
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than an Agreement the only parties to which are the Company and the
Subsidiaries).
(g) The Company has complied in all material respects with all rules
and regulations relating to the withholding of Taxes.
SECTION 3.18. CUSTOMERS.
Except as set forth in Section 3.18 of the Company Disclosure Schedule, to
the knowledge of the Company and the Subsidiaries, the relationships of the
Company and the Subsidiaries with their customers are good commercial working
relationships. Except as set forth in Section 3.18 of the Company Disclosure
Schedule, during the twelve (12) months prior to the date of this Merger
Agreement, no customer of the Company or any Subsidiary which accounted for in
excess of $50,000 of the revenues of the Company and the Subsidiaries during
such twelve (12) months has canceled or otherwise terminated its relationship
with the Company or any Subsidiary.
SECTION 3.19. CERTAIN BUSINESS PRACTICES.
Neither the Company, the Subsidiaries nor any of their officers, directors
or, to the knowledge of the Company or any Subsidiary, any of their employees or
agents (or stockholders, distributors, representatives or other persons acting
on the express, implied or apparent authority of the Company or of any
Subsidiary) have paid, given or received or have offered or promised to pay,
give or receive, any bribe or other unlawful payment of money or other thing of
value, any unlawful discount, or any other unlawful inducement, to or from any
Person or Governmental Entity in the United States or elsewhere in connection
with or in furtherance of the business of the Company or any Subsidiary
(including, without limitation, any offer, payment or promise to pay money or
other thing of value (a) to any foreign official or political party (or official
thereof) for the purposes of influencing any act, decision or omission in order
to assist the Company or any Subsidiary in obtaining business for or with, or
directing business to, any Person, or (b) to any Person, while knowing that all
or a portion of such money or other thing of value will be offered, given or
promised to any such official or party for such purposes). The business of the
Company and the Subsidiaries is not in any manner dependent upon the making or
receipt of such payments, discounts or other inducements.
SECTION 3.20. INSURANCE.
Section 3.20 of the Company Disclosure Schedule lists and briefly describes
all policies of title, Asset, fire, hazard, casualty, liability, life, worker's
compensation and other forms of insurance of any kind owned or held by the
Company or any Subsidiary. All such policies: (a) are with insurance companies
-31-
reasonably believed by the Company to be financially sound and reputable; (b)
are in full force and effect; (c) are sufficient for compliance by the Company
and by each Subsidiary with all requirements of Law and of all Agreements to
which the Company or any Subsidiary is a party; (d) are valid and outstanding
policies enforceable against the insurer; (e) to the knowledge of the Company or
any Subsidiary, insure against risks of the kind customarily insured against and
in amounts customarily carried by companies similarly situated and by companies
engaged in similar businesses and owning similar Assets and provide adequate
insurance coverage for the businesses and Assets of the Company and the
Subsidiaries; and (f) provide that they will remain in full force and effect
through the respective dates set forth in Section 3.20 of the Company Disclosure
Schedule.
SECTION 3.21. POTENTIAL CONFLICTS OF INTEREST.
Except as set forth in Section 3.21 of the Company Disclosure Schedule,
neither any present nor, to the knowledge of the Company or any Subsidiary,
former employee with a salary in excess of $60,000, director, or officer of the
Company or any Subsidiary, nor, to the knowledge of the Company or any
Subsidiary, any stockholder who beneficially owns more than 5% of the capital
stock of the Company or any Subsidiary, nor, to the knowledge of the Company or
any Subsidiary, any Affiliate of such employee, director, officer, or
stockholder:
(a) owns, directly or indirectly, any interest in (except for holdings
in securities that are listed on a national securities exchange, quoted on
a national automated quotation system or regularly traded in the over-the-
counter market, where such holdings are not in excess of two percent (2%)
of the outstanding class of such securities and are held solely for
investment purposes), or is a stockholder, partner, other holder of equity
interests, director, officer, employee, consultant or agent of, any Person
that is a competitor, lessor, lessee or customer of, or supplier of goods
or services to, the Company or any Subsidiary, except where the value to
such individual of any such arrangement with the Company or any Subsidiary
has been less than $60,000 in the last twelve (12) months;
(b) owns, directly or indirectly, in whole or in part, any Assets with
a fair market value of $60,000 or more which the Company or any Subsidiary
currently uses in its business;
(c) has asserted any cause of action or other suit, action or claim
whatsoever against, or owes any amount to, the Company or any Subsidiary,
except for claims arising in the Ordinary Course of Business from any such
Person's service to the Company or any Subsidiary as a director, officer or
employee, or amounts owing in the Ordinary Course of Business in
connection with such Person's purchase of goods or services from the
Company or any Subsidiary;
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(d) has sold or leased to, or purchased or leased from, the Company or
any Subsidiary any Assets for consideration in excess of $60,000 in the
aggregate since January 1, 1995;
(e) is a party to any Agreement pursuant to which the Company or any
Subsidiary provides office space to any such Person, or provides services
of any nature to any such Person, other than in the Ordinary Course of
Business in connection with the employment of such Person by the Company or
any Subsidiary; or
(f) has, since January 1, 1995, engaged in any other material
transaction with the Company or any Subsidiary involving in excess of
$60,000, other than (i) in the Ordinary Course of Business in connection
with the employment of such Person by the Company or any Subsidiary, and
(ii) dividends, distributions and stock issuances to all common and
preferred stockholders (as applicable) on a pro rata basis.
SECTION 3.22. RECEIVABLES.
The accounts receivable of the Company and the Subsidiaries shown in the
latest Financial Statements and the Unaudited Balance Sheets, or thereafter
acquired by any of them, have been collected or are, to the knowledge of the
Company and the Subsidiaries, collectible in amounts not less than the amounts
thereof carried on the books of the Company and the Subsidiaries, without right
of recourse, defense, deduction, counterclaim, offset or setoff on the part of
the obligor, and can reasonably be expected to be collected within ninety (90)
days of the date incurred, except to the extent of the allowance for doubtful
accounts shown on such Audited Balance Sheets and Unaudited Balance Sheets.
SECTION 3.23. REAL PROPERTY.
(a) Section 3.23(a) of the Company Disclosure Schedule lists all the
Real Property (as defined in Article X), specifying the owner of each parcel
thereof, and all such Real Property is suitable and adequate for the uses for
which it is currently being used.
(b) Except as set forth in Section 3.23(b) of the Company Disclosure
Schedule, the Company and the Subsidiaries are the sole owners of good, valid,
fee simple, marketable and insurable (at standard rates) title to the Real
Property respectively owned by them, including, without limitation, all
buildings, structures, fixtures and improvements thereon, in each case free and
clear of all Encumbrances.
(c) All buildings, structures, fixtures and other improvements on the
Real Property are fit for the uses to which they are currently devoted. All
such
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buildings, structures, fixtures and improvements on the Real Property conform to
all Laws, except for any such non-conformance that would not have a Company
Material Adverse Effect. Except as set forth in Schedule 3.23(c) of the Company
Disclosure Schedule, to the knowledge of the Company or any Subsidiary, the
buildings, structures, fixtures and improvements on each parcel of the Real
Property lie entirely within the boundaries of such parcel of the Real Property
as specified in the description set forth in Section 3.23(a) of the Company
Disclosure Schedule, and no structures of any kind encroach on the Real
Property.
(d) Except as set forth in Schedule 3.23(d) of the Company Disclosure
Schedule, to the knowledge of the Company or any Subsidiary, none of the owned
Real Property is subject to any Agreement preventing or limiting the Company's
or any Subsidiary's right to convey or to use it.
(e) No portion of the Real Property or any building, structure,
fixture or improvement thereon is the subject of any condemnation, eminent
domain or inverse condemnation proceeding currently instituted or pending, and
neither the Company nor any Subsidiary has any knowledge that any of the
foregoing are, or will be, the subject of any such proceeding.
(f) The Real Property has access to adequate electric, gas, water,
sewer and telephone lines, to the extent necessary for the uses to which the
Real Property is currently devoted.
SECTION 3.24. BOOKS AND RECORDS.
The books of account, stock records, minute books and other corporate and
financial records of the Company are complete and correct in all material
respects and have been maintained in accordance with good business practices,
and the matters contained therein are appropriately and accurately reflected in
all material respects in the Financial Statements in accordance with GAAP.
SECTION 3.25. ASSETS.
Except as set forth in Section 3.25 of the Company Disclosure Schedule, the
Company and the Subsidiaries have good, valid and marketable title to all
material Assets respectively owned by them, including, without limitation, all
material Assets reflected in the Audited Balance Sheets and in the Unaudited
Balance Sheets and all material Assets purchased by the Company or by any
Subsidiary since December 31, 1997 (except for Assets reflected in such Audited
Balance Sheets and Unaudited Balance Sheets or acquired since December 31, 1997
which have been sold or otherwise disposed of in the Ordinary Course of
Business), free and clear of all Encumbrances. All personal property of the
Company and the Subsidiaries is in a condition adequate for the uses for which
it is currently being used.
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SECTION 3.26. NO INFRINGEMENT OR CONTEST.
(a) Section 3.26(a) of the Company Disclosure Schedule identifies and
describes each item of Intellectual Property (as defined in Article X) (i) owned
by the Company or a Subsidiary, (ii) owned by any third party and used by the
Company or any Subsidiary pursuant to license, sublicense or other Agreement, or
(iii) otherwise used by the Company or any Subsidiary (including, in each case,
specification of whether each such item is owned, licensed or used by the
Company or any Subsidiary).
(b) With respect to each item of Intellectual Property listed in
Section 3.26(a) of the Company Disclosure Schedule that is owned by the Company
or any Subsidiary, the Company and the Subsidiaries have the right to bring
action for infringement of such Intellectual Property. With respect to the
Intellectual Property listed in Section 3.26(a) of the Company Disclosure
Schedule that is used by the Company or a Subsidiary pursuant to an Agreement,
such Intellectual Property can be used by the Company and the Subsidiaries in
their respective businesses as currently conducted by them in accordance with
the terms and conditions of such Agreements. Except as set forth in Section
3.26(b) of the Company Disclosure Schedule, to the knowledge of the Company and
the Subsidiaries, each item of Intellectual Property owned or used by the
Company or any Subsidiary immediately prior to the Closing will be owned or
available for use by the Company or such Subsidiary on identical terms and
conditions immediately after the Closing.
(c) As used in the businesses of the Company and the Subsidiaries as
currently conducted, none of the Intellectual Property listed in Section 3.26(a)
of the Company Disclosure Schedule infringes or misappropriates or otherwise
violates any Intellectual Property of any other Person, nor is the Company or
any Subsidiary otherwise in the conduct of their respective businesses
infringing upon, or alleged to be infringing upon, any Intellectual Property of
any other Person. To the knowledge of the Company or any Subsidiary, there are
no pending or threatened claims against the Company or any Subsidiary alleging
that the conduct of the Company's or any Subsidiary's business infringes or
conflicts with any Intellectual Property rights of others or that the
Intellectual Property of another Person infringes, misappropriates or violates
any of the Intellectual Property listed in Section 3.26(a) of the Company
Disclosure Schedule.
(d) The Company and the Subsidiaries own or possess adequate rights to
use all Intellectual Property necessary to the conduct of the respective
businesses of the Company and the Subsidiaries as currently conducted.
(e) The Company and the Subsidiaries have not originated for
transmission through the Company's or the Subsidiaries' facilities any obscene,
libelous or indecent material and have instituted a policy pursuant to which the
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Company and the Subsidiaries will terminate any web site hosted by the Company
or any Subsidiary which contains obscene material when the Company or any
Subsidiary is made aware of such web site.
SECTION 3.27. OPINION OF FINANCIAL ADVISOR.
The Company has received the written opinion of Duff & Phelps, LLC on or
prior to the date of this Merger Agreement, to the effect that, as of the date
of such opinion, the consideration to be received pursuant to the transactions
contemplated under this Merger Agreement is fair to the Company Stockholders
from a financial point of view, and the Company will promptly, after the date of
this Merger Agreement, deliver a copy of such opinion to Acquiror.
SECTION 3.28. BOARD RECOMMENDATION.
At a meeting duly called and held in compliance with Delaware Law, the
Board of Directors of the Company has adopted by unanimous vote a resolution
approving and adopting this Merger Agreement and the transactions contemplated
hereby and recommending approval and adoption of this Merger Agreement and the
transactions contemplated hereby by the Company Stockholders.
SECTION 3.29. VOTE REQUIRED.
The affirmative vote of the holders of a majority of the outstanding shares
of Company Common Stock is the only vote of the holders of any class or series
of capital stock of the Company necessary to approve the transactions
contemplated by this Merger Agreement.
SECTION 3.30. BANKS; ATTORNEYS-IN-FACT.
Section 3.30 of the Company Disclosure Schedule sets forth a complete list
showing the name of each bank or other financial institution in which the
Company or any Subsidiary has accounts (including a description of the names of
all Persons authorized to draw thereon or to have access thereto). Such list
also shows the name of each Person holding a power of attorney from the Company
or any Subsidiary and a brief description thereof.
SECTION 3.31. VOTING AGREEMENTS.
Voting Agreements in the form attached hereto as Exhibit A-1 (or, in the
-----------
case of Craig A. Anderson, Exhibit A-2) have been executed and delivered to
-----------
Acquiror prior to the execution of this Merger Agreement by the Persons listed
in Exhibit B and, to the knowledge of the Company or any Subsidiary, each such
---------
Voting Agreement constitutes a legal, valid and binding obligation of the
respective Person
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who is a party thereto, enforceable against such Person in accordance with its
terms.
SECTION 3.32. BROKERS.
No broker, finder or investment banker (other than Duff & Phelps, LLC) is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Merger Agreement based upon
arrangements made by or on behalf of the Company or any Subsidiary or any of
their respective Affiliates. Prior to the date of this Merger Agreement, the
Company has furnished to Acquiror a complete and correct copy of all Agreements
between the Company and Duff & Phelps, LLC pursuant to which such firm will be
entitled to any payment relating to the transactions contemplated by this Merger
Agreement.
SECTION 3.33. ENVIRONMENTAL MATTERS.
Except for matters disclosed on the written environmental reports received
by Acquiror and prepared at Acquiror's expense prior to the date hereof, copies
of which have been previously furnished to the Company by Acquiror:
(a) The Company and each of the Subsidiaries have complied and are in
compliance with, and the Real Property and all improvements thereon are in
compliance with, all Environmental Laws (as defined in Article X), except where
the failure so to comply would not have a Company Material Adverse Effect.
(b) To the knowledge of the Company and the Subsidiaries, neither the
Company nor any Subsidiary has any liability under any Environmental Law, nor is
the Company or any Subsidiary responsible for any liability of any other Person
under any Environmental Law. Except as set forth in Section 3.33(b) of the
Company Disclosure Schedule, there are no pending or, to the knowledge of the
Company or any Subsidiary, threatened actions, suits, claims, legal proceedings
or other proceedings based on, and neither the Company nor any Subsidiary, has
received any formal or informal notice of any complaint, order, directive,
citation, notice of responsibility, notice of potential responsibility, or
information request from any Governmental Entity or any other Person since
January 1, 1993 (or prior thereto with respect to any such complaint, order,
directive, citation, notice of responsibility, notice of potential
responsibility, or information request which has not been finally resolved) or
knows any fact(s) which might reasonably be expected to form the basis for any
such actions or notices arising out of or attributable to: (i) the current or
past presence at any part of the Real Property of Hazardous Materials (as
defined in Article X) or any substances that pose a hazard to human health; (ii)
the current or past release or threatened release into the environment from the
Real Property (including, without limitation, into any storm drain, sewer,
septic system or publicly owned treatment works) of any Hazardous Materials or
any substances that pose a hazard to human health; (iii) the off-site disposal
of
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Hazardous Materials originating on or from the Real Property or the businesses
or Assets of the Company or any Subsidiary; (iv) any facility operations,
procedures or designs of the Company or any Subsidiary which do not conform to
requirements of the Environmental Laws; or (v) any violation of Environmental
Laws at any part of the Real Property or otherwise arising from the Company's or
any Subsidiary's activities (or the activities of the Company's or any
Subsidiary's predecessors in title) involving Hazardous Materials.
(c) The Company and the Subsidiaries have been duly issued, and
currently have and will maintain through the Effective Time, all Licenses
required under any Environmental Law. A true and complete list of such
Licenses, all of which are valid and in full force and effect, is set out in
Section 3.33(c) of the Company Disclosure Schedule. Except in accordance with
such Licenses, as described in Section 3.33(c) of the Company Disclosure
Schedule or as otherwise permitted by Law, there has been no Hazardous Discharge
(as defined in Article X) or discharge of any other material regulated by such
Licenses. Except as disclosed in Section 3.33(c) of the Company Disclosure
Schedule, to the knowledge of the Company and the Subsidiaries no such Licenses
are non-transferable or which require consent, notification or other action to
remain in full force and effect following consummation of the Merger and the
other transactions contemplated hereby.
(d) Except as set forth in Section 3.33(d) of the Company Disclosure
Schedule, the Real Property contains no underground improvements, including but
not limited to treatment or storage tanks, or underground piping associated with
such tanks, used currently or in the past for the storage, throughput or other
management of Hazardous Materials, and no portion of the Real Property is or has
been used as a dump or landfill or consists of or contains filled in land or
wetlands.
SECTION 3.34. DISCLOSURE.
(a) None of the information supplied by the Company expressly for
inclusion (and so included or relied on for information included) in (i) the
Registration Statement (as defined in Section 6.01(a)) and (ii) the Proxy
Statement (as defined in Section 6.01(a)), at the respective times that (w) the
Registration Statement is filed with the SEC, (x) the Registration Statement
becomes effective, (y) the Proxy Statement is mailed, and (z) any meeting of
stockholders (and any adjournment thereof) is held to consider, or written
consents are effective with respect to approval of, the transactions
contemplated by this Merger Agreement, shall contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
(b) No representation or warranty by the Company, and no Document
furnished or to be furnished to Acquiror by the Company pursuant to this
-38-
Merger Agreement or otherwise in connection herewith or with the transactions
contemplated hereby, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary in order to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading. As of the date of this Merger Agreement, the Company
believes that, based upon the assumptions contained therein (and subject to the
risks disclosed therein), the Company has a reasonable likelihood of attaining
the results of its July 1998 CLEC Facilities Expansion Plan, as furnished to
Acquiror.
SECTION 3.35. DIRECTORS, OFFICERS AND AFFILIATES.
Section 3.35 of the Company Disclosure Schedule lists all current directors
and executive officers of the Company and the Subsidiaries, showing each such
person's name, positions, and annual remuneration, bonuses and fringe benefits
paid by the Company or any Subsidiary for the current fiscal year and the most
recently completed fiscal year.
SECTION 3.36. COPIES OF DOCUMENTS.
True and complete copies of all Documents listed in the Company Disclosure
Schedule have been furnished to Acquiror prior to the execution of this Merger
Agreement.
SECTION 3.37. CONDITION AND OPERATION OF THE SYSTEM.
(a) Section 3.37(a) of the Company Disclosure Schedule sets forth all
complaints regarding "slamming" or "cramming" (as such terms are understood in
the telephone industry) by the Company, any Subsidiary or any of their
respective employees, resellers, agents or representatives; and
(b) Section 3.37(b) of the Company Disclosure Schedule sets forth all
filings by the Company or any Subsidiary with the FCC, the NDPSC (as defined in
Article X), the SDPUC (as defined in Article X), the IUB (as defined in Article
X), the MPUC (as defined in Article X) or the FAA since July 1, 1997.
SECTION 3.38. AFFILIATE AGREEMENTS.
In accordance with Section 6.12, the executive officers, directors and
certain Company Stockholders specified in Section 3.38 of the Company Disclosure
Schedule ("Company Affiliates") have indicated to the Company that they intend
------------------
to execute and deliver to Acquiror affiliate agreements in substantially the
form attached hereto as Exhibit C (the "Affiliate Agreements") and each such
--------- --------------------
Affiliate Agreement, when so executed and delivered, will, to the knowledge of
the Company, constitute a legal, valid and binding obligation of the respective
Company Affiliate
-39-
who is a party thereto, enforceable against such Company Affiliate in accordance
with its terms. Except as set forth in Section 3.38 of the Company Disclosure
Schedule, there are no affiliates of the Company as of the date hereof as that
term is used in SEC Rule 145.
SECTION 3.39. RIGHTS AGREEMENT.
Concurrently with the execution and delivery of this Merger Agreement, the
Company has executed and delivered for signature by Norwest Bank Minnesota, N.A.
as rights agent an amendment to the Rights Agreement which (i) renders the
Rights Agreement inapplicable to the Merger and the transactions contemplated
hereby and thereby; (ii) provides that (A) Acquiror shall not be deemed an
Acquiring Person (as defined in the Rights Agreement), (B) the Distribution Date
(as defined in the Rights Agreement) shall not be deemed to occur, and (C) the
Rights will not separate from the shares of Company Common Stock, as a result of
entering into this Merger Agreement or consummating the transactions
contemplated hereby or thereby; and (iii) provides that the Rights shall cease
to be exercisable immediately prior to the Effective Time.
SECTION 3.40. REORGANIZATION.
To the knowledge of the Company, neither it nor any of the Subsidiaries has
taken any action or failed to take any action which action or failure would
jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
SECTION 3.41. STATE TAKEOVER STATUTES; CERTAIN CHARTER PROVISIONS.
The Board of Directors of the Company has, to the extent such statutes are
applicable, taken all action (including appropriate approvals of the Board of
Directors of the Company) necessary to exempt the Company, the Subsidiaries and
affiliates, the Merger, this Merger Agreement and the transactions contemplated
hereby and thereby from Section 203 of Delaware Law. To the knowledge of the
Company, no other state takeover statutes or charter or bylaw provisions are
applicable to the Merger or this Merger Agreement and the transactions
contemplated hereby or thereby.
SECTION 3.42. DISSENTERS RIGHTS.
The shares of Company Common Stock are held of record by more than 2,000
stockholders and no Company Stockholder has any appraisal or dissenters' rights
pursuant to the Certificate of Incorporation of the Company arising from, or in
connection with, the consummation of the Merger and the other transactions
contemplated hereby.
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SECTION 3.43. YEAR 2000 COMPLIANCE.
(a) For purposes of this Section 3.43 only, the following terms have
the following meanings: (i) "Education" means quantifying the awareness that
---------
employees have regarding the Year 2000 issue, including understanding of the
Year 2000 problem, what it means to be Year 2000 compliant, understanding known
problems on the Company's and the Subsidiaries' respective platforms,
recommended solutions, and how to create Year 2000 compliant products.
Education also includes the full participation and cooperation with Year 2000
activities as needed to achieve Year 2000 compliance within the Company and the
Subsidiaries; (ii) "Survey" means identifying the components, including their
------
vendors and/or manufacturer's, with point of contact, address and phone,
software version, hardware model number, quantity and number of licenses, for
all hardware (mainframe, mid-range servers, connectivity equipment, personal
computers, printers, facilities, environmental systems such as heating, cooling,
power, and security, etc.), software applications, software products (files,
databases, spreadsheets, etc.), and electronic data interfaces (including third
party software and hardware) of the Company and each Subsidiary; (iii) "Business
--------
Critical/Y2K Critical" means the percentage of all of the components identified
- ---------------------
in the Survey which have been rated as "high," "medium," or "low" for the
following two questions: "How critical is this component to the continued
operation of the business?" and "What level of Year 2000 impact is there on the
component?;" (iv) "Cost Assessment" means the percentage of the components
---------------
identified in the Survey for which the cost of making the component Year 2000
compliant has been estimated; (v) "Date Assessment" means the percentage of all
---------------
components identified in the Survey for which a date has been estimated for
fixing, testing and implementation if they are not Year 2000 compliant or if
compliance is unknown; (vi) "Corrections" means that percentage of the total
-----------
number of components identified in the Survey that are not Year 2000 compliant
and require correction/remediation to become compliant which have been
corrected; (vii) "Replacement" means that percentage of the total number of
-----------
components identified in the Survey that are not Year 2000 compliant and require
replacement to become Year 2000 compliant which have been replaced to date;
(viii) "Testing & Verification" means that percentage of the total number of
----------------------
components identified in the Survey that require testing and verification by the
vendor and the user(s) which have been tested and verified to date; (ix)
"Implementation" means that percentage of the total number of components
- ---------------
identified in the Survey that must be corrected or replaced to achieve Year 2000
compliance which have been implemented into production status to date.
(b) Set forth below are the current completion percentages and the
Company's target completion dates for the operating units of the Company and
the Subsidiaries with respect to each of the Year 2000 compliance steps defined
in Section 3.43(a): (i) ILEC operating unit: (A) Education--50% complete; target
completion 4th quarter 1998; (B) Survey--25% complete; target completion 1st
quarter 1999; (C) Business Critical/Y2K Critical--0% complete; target completion
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1st quarter 1999; (D) Cost Assessment--0% complete; target completion 1st
quarter 1999; (E) Date Assessment--0% complete; target completion 1st quarter
1999; (F) Corrections--0% complete; target completion 2nd quarter 1999; (G)
Replacement--0% complete; target completion 2nd quarter 1999; (H) Testing &
Verification--0% complete; target completion 2nd quarter 1999; and (I)
Implementation--0% complete; target completion 3rd quarter 1999; (ii) CLEC
operating unit: (A) Education--75% complete; target completion 4th quarter 1998;
(B) Survey--25% complete; target completion 1st quarter 1999; (C) Business
Critical/Y2K Critical--0% complete; target completion 1st quarter 1999; (D) Cost
Assessment--0% complete; target completion 1st quarter 1999; (E) Date
Assessment--0% complete; target completion 1st quarter 1999; (F) Corrections--0%
complete; target completion 2nd quarter 1999; (G) Replacement--0% complete;
target completion 2nd quarter 1999; (H) Testing & Verification--0% complete;
target completion 2nd quarter 1999; and (I) Implementation--0% complete; target
completion 3rd quarter 1999; (iii) VANTEK operating unit: (A) Education--0%
complete; target completion 4th quarter 1998; (B) Survey--25% complete; target
completion 1st quarter 1999; (C) Business Critical/Y2K Critical--0% complete;
target completion 1st quarter 1999; (D) Cost Assessment--0% complete; target
completion 1st quarter 1999; (E) Date Assessment--0% complete; target completion
1st quarter 1999; (F) Corrections--0% complete; target completion 2nd quarter
1999; (G) Replacement--0% complete; target completion 2nd quarter 1999; (H)
Testing & Verification--0% complete; target completion 2nd quarter 1999; and (I)
Implementation--0% complete; target completion 3rd quarter 1999; (iv) Datanet
operating unit: (A) Education--50% complete; target completion 4th quarter 1998;
(B) Survey--50% complete; target completion 1st quarter 1999; (C) Business
Critical/Y2K Critical--50% complete; target completion 1st quarter 1999; (D)
Cost Assessment--0% complete; target completion 1st quarter 1999; (E) Date
Assessment--0% complete; target completion 1st quarter 1999; (F) Corrections--0%
complete; target completion 2nd quarter 1999; (G) Replacement--0% complete;
target completion 2nd quarter 1999; (H) Testing & Verification--50% complete;
target completion 2nd quarter 1999; and (I) Implementation--0% complete; target
completion 3rd quarter 1999; (v) MIS operating unit: (A) Education--50%
complete; target completion 4th quarter 1998; (B) Survey--50% complete; target
completion 1st quarter 1999; (C) Business Critical/Y2K Critical--50% complete;
target completion 1st quarter 1999; (D) Cost Assessment--0% complete; target
completion 1st quarter 1999; (E) Date Assessment--0% complete; target completion
1st quarter 1999; (F) Corrections--0% complete; target completion 2nd quarter
1999; (G) Replacement--0% complete; target completion 2nd quarter 1999; (H)
Testing & Verification--50% complete; target completion 2nd quarter 1999; and
(I) Implementation--0% complete; target completion 3rd quarter 1999; (vi) Cable
TV operating unit: (A) Education---50% complete; target completion 4th quarter
1998; (B) Survey--25% complete; target completion 1st quarter 1999; (C) Business
Critical/Y2K Critical--0% complete; target completion 1st quarter 1999; (D) Cost
Assessment--0% complete; target completion 1st quarter 1999; (E) Date
Assessment--0% complete; target completion 1st quarter 1999; (F) Corrections--
0% complete; target completion 2nd quarter 1999;
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(G) Replacement--0% complete; target completion 2nd quarter 1999; (H) Testing &
Verification--0% complete; target completion 2nd quarter 1999; and (I)
Implementation--0% complete; target completion 3rd quarter 1999; (vii) Wireless
operating unit : (A) Education--50% complete; target completion 4th quarter
1998; (B) Survey--25% complete; target completion 1st quarter 1999; (C) Business
Critical/Y2K Critical--50% complete; target completion 1st quarter 1999; (D)
Cost Assessment--0% complete; target completion 1st quarter 1999; (E) Date
Assessment--0% complete; target completion 1st quarter 1999; (F) Corrections--0%
complete; target completion 2nd quarter 1999; (G) Replacement--0% complete;
target completion 2nd quarter 1999; (H) Testing & Verification--0% complete;
target completion 2nd quarter 1999; and (I) Implementation--0% complete; target
completion 3rd quarter 1999; (viii) Corporate Facilities operating unit: (A)
Education--25% complete; target completion 4th quarter 1998; (B) Survey--10%
complete; target completion 1st quarter 1999; (C) Business Critical/Y2K
Critical--0% complete; target completion 1st quarter 1999; (D) Cost Assessment--
0% complete; target completion 1st quarter 1999; (E) Date Assessment--0%
complete; target completion 1st quarter 1999; (F) Corrections--0% complete;
target completion 2nd quarter 1999; (G) Replacement--0% complete; target
completion 2nd quarter 1999; (H) Testing & Verification--0% complete; target
completion 2nd quarter 1999; and (I) Implementation--0% complete; target
completion 3rd quarter 1999; and (ix) Internet operating unit: (A) Education--
50% complete; target completion 4th quarter 1998; (B) Survey--50% complete;
target completion 1st quarter 1999; (C) Business Critical/Y2K Critical--50%
complete; target completion 1st quarter 1999; (D) Cost Assessment--0% complete;
target completion 1st quarter 1999; (E) Date Assessment--0% complete; target
completion 1st quarter 1999; (F) Corrections--0% complete; target completion 2nd
quarter 1999; (G) Replacement--0% complete; target completion 2nd quarter 1999;
(H) Testing & Verification--0% complete; target completion 2nd quarter 1999; and
(I) Implementation--0% complete; target completion 3rd quarter 1999.
(c) The Company and the Subsidiaries have achieved the following
average total completion percentages (calculated by adding the current
completion percentage for each operating unit of the Company and the
Subsidiaries and dividing the sum by the number of operating units of the
Company and the Subsidiaries) with respect to each of the Year 2000 compliance
steps defined in Section 3.43(a): (i) Education--40%; (ii) Survey--29%; (iii)
Business Critical/Y2K Critical--20%; (iv) Cost Assessment--0%; (v) Date
Assessment--0%; (vi) Corrections--0%; (vii) Replacement--0%;
(viii) Testing & Verification--10%; and (ix) Implementation--0%.
(d) To the knowledge of the Company and the Subsidiaries, the
Company's ILEC operating unit's telephone switches and key systems, microwave
systems, network equipment, fiber systems, satellite systems, and
telecommunications management systems to provide local and long distance
switched telephone service are Year 2000 compliant and Year 2000 ready. Based on
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the Survey, vendor letters, and tests conducted by the Company, the Company
reasonably believes that the following software systems used in the Company's or
the Subsidiaries' operations are Year 2000 compliant: (i) CommSoft billing
software; (ii) Multiview accounting software; (iii) Lucent switching, access and
SONET systems; (iv) ILS software; (v) Bay, Cisco and Livingston routers used by
the Company in its operations; and (vi) all cable headend equipment, except for
its Scientific Atlantic systems controllers, which are scheduled for a Year 2000
compliant software upgrade on October 27, 1998. The Company reasonably estimates
that the total cost to bring the rest of the Company's and the Subsidiaries'
systems into Year 2000 compliance is approximately $250,000.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF ACQUIROR AND ACQUIROR SUB
Except as specifically set forth in the Disclosure Schedule delivered by
Acquiror and Acquiror Sub to the Company prior to the execution and delivery of
this Merger Agreement (the "Acquiror Disclosure Schedule") (with a disclosure
----------------------------
with respect to a Section of this Merger Agreement to require a specific
reference in the Acquiror Disclosure Schedule to the Section of this Merger
Agreement to which each such disclosure applies, and no disclosure to be deemed
to apply with respect to any Section to which it does not expressly refer),
Acquiror and Acquiror Sub hereby jointly and severally represent and warrant
(which representation and warranty shall be deemed to include the disclosures
with respect thereto so specified in the Acquiror Disclosure Schedule) to the
Company as follows, in each case as of the date of this Merger Agreement, unless
otherwise specifically set forth herein or in the Acquiror Disclosure Schedule:
SECTION 4.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
Each of Acquiror, Acquiror Sub and Acquiror's Significant Subsidiaries (as
defined in Article X) is a corporation duly organized, validly existing and in
good standing under the Laws of the jurisdiction of its incorporation or
organization, and has the full and unrestricted corporate power and authority to
own, operate and lease its Assets, and to carry on its business as currently
conducted. Each of Acquiror, Acquiror Sub and Acquiror's Significant
Subsidiaries is duly qualified to conduct business as a foreign corporation and
is in good standing in the states, countries and territories in which the nature
of the business conducted by it or the character of the Assets owned, leased or
otherwise held by it makes such qualification necessary, except where the
absence of such qualification as a foreign corporation would not have an
Acquiror Material Adverse Effect (as defined in Article X).
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SECTION 4.02. CERTIFICATE OF INCORPORATION AND BYLAWS.
Acquiror has furnished to the Company a true and complete copy of the
Amended and Restated Certificate of Incorporation of Acquiror and the
certificate of incorporation of Acquiror Sub, as currently in effect, certified
as of a recent date by the Secretary of State (or comparable Governmental
Entity) of their respective jurisdictions of incorporation, and a true and
complete copy of the Amended and Restated Bylaws of Acquiror and the bylaws of
Acquiror Sub, as currently in effect, certified by their respective corporate
secretaries. Such certified copies are attached as exhibits to, and constitute
an integral part of, the Acquiror Disclosure Schedule.
SECTION 4.03. AUTHORITY; BINDING OBLIGATION.
Each of Acquiror and Acquiror Sub has the full and unrestricted corporate
power and authority to execute and deliver this Merger Agreement and to carry
out the transactions contemplated hereby. The execution and delivery by Acquiror
and Acquiror Sub of this Merger Agreement and all other Documents contemplated
hereby, and the consummation by Acquiror and Acquiror Sub of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of Acquiror or
Acquiror Sub are necessary to authorize this Merger Agreement and the other
Documents contemplated hereby, or to consummate the transactions contemplated
hereby and thereby. This Merger Agreement has been duly executed and delivered
by Acquiror and Acquiror Sub and constitutes a legal, valid and binding
obligation of Acquiror and Acquiror Sub in accordance with its terms, except as
such enforceability may be subject to the effect of any applicable bankruptcy,
insolvency fraudulent conveyance, reorganization, moratorium or similar Laws
affecting creditors' rights generally and subject to the effect of general
equitable principles (whether considered in a proceeding in equity or at law).
SECTION 4.04. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution, delivery and performance by Acquiror and Acquiror
Sub of this Merger Agreement and all other Documents contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof
and thereof, and the consummation by Acquiror and Acquiror Sub of the
transactions contemplated hereby and thereby, do not and will not: (i) conflict
with, or violate any provision of, the Amended and Restated Certificate of
Incorporation or the Amended and Restated Bylaws of Acquiror, or the certificate
or articles of incorporation or bylaws of Acquiror Sub or any of Acquiror's
Significant Subsidiaries; or (ii) subject to obtaining the consents, approvals,
authorizations and permits of, and making filings with or notifications to, the
applicable Governmental Entity pursuant to the applicable requirements, if any,
of the Securities Act, the Exchange Act, Blue Sky Laws, the HSR Act, the
Communications Act, the Federal Aviation Act, applicable state utility Laws and
applicable municipal franchise
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Laws, and the filing and recordation of the Articles of Merger as required by
Delaware Law, conflict with or violate any Law applicable to Acquiror, Acquiror
Sub or any of Acquiror's Significant Subsidiaries, or any of their respective
Assets; (iii) conflict with, result in any breach of, constitute a default (or
an event that with notice or lapse of time or both would become a default) under
any Agreement to which Acquiror, Acquiror Sub or any of Acquiror's Significant
Subsidiaries is a party or by which Acquiror, Acquiror Sub or any of Acquiror's
Significant Subsidiaries, or any of their respective Assets, may be bound; or
(iv) result in or require the creation or imposition of, or result in the
acceleration of, any indebtedness or any Encumbrance of any nature upon, or with
respect to, Acquiror, Acquiror Sub or any of Acquiror's Significant Subsidiaries
or any of the Assets of Acquiror, Acquiror Sub or any of Acquiror's Significant
Subsidiaries; except for any such conflict or violation described in clause
(ii), any such conflict, breach or default described in clause (iii), or any
such creation, imposition or acceleration described in clause (iv) that would
not have an Acquiror Material Adverse Effect and that would not prevent Acquiror
or Acquiror Sub from consummating the Merger on a timely basis.
(b) The execution, delivery and performance by Acquiror and Acquiror
Sub of this Merger Agreement and all other Documents contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof
and thereof, and the consummation by Acquiror and Acquiror Sub of the
transactions contemplated hereby and thereby, do not and will not: (i) require
any consent, approval, authorization or permit of, or filing with or
notification to, any Person not party to this Merger Agreement, except (A)
pursuant to the applicable requirements, if any, of the Securities Act, the
Exchange Act, Blue Sky Laws, the HSR Act, the Communications Act, the Federal
Aviation Act, and applicable state utility Laws and applicable municipal
franchise Laws and (B) the filing and recordation of the Articles of Merger as
required by Delaware Law; or (ii) result in or give rise to any penalty,
forfeiture, Agreement termination, right of termination, amendment or
cancellation, or restriction on business operations of Acquiror, the Surviving
Corporation or any of Acquiror's Significant Subsidiaries, except with respect
to any Agreement not material to the operation of Acquiror, Acquiror Sub and
Acquiror's Significant Subsidiaries.
SECTION 4.05. NO PRIOR ACTIVITIES OF ACQUIROR SUB.
Acquiror Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Merger Agreement and has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
SECTION 4.06. BROKERS.
No broker or finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated
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by this Merger Agreement based upon arrangements made by or on behalf of
Acquiror or any of its Affiliates.
SECTION 4.07. SEC DOCUMENTS.
Since January 1, 1997, Acquiror has filed or, in the case of the Acquiror
Post-Signing SEC Documents (as defined in Section 6.10), will file all required
reports, schedules, forms, statements and other Documents with the SEC
(collectively, including the Acquiror Post-Signing SEC Documents, the "Acquiror
--------
SEC Documents"). As of their respective dates, the Acquiror SEC Documents
- -------------
complied or, in the case of the Acquiror Post-Signing SEC Documents, will comply
as to form in all material respects with the applicable requirements of the
Securities Act or the Exchange Act, as the case may be, and none of the Acquiror
SEC Documents contained or, in the case of the Acquiror Post-Signing SEC
Documents, will contain, any untrue statement of a material fact or omitted or,
in the case of the Acquiror Post-Signing SEC Documents, will omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The consolidated financial statements of Acquiror included in
the Acquiror SEC Documents comply or, in the case of the Acquiror Post-Signing
SEC Documents, will comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been or, in the case of the Acquiror Post-Signing SEC
Documents, will have been prepared in accordance with GAAP (except, in the case
of unaudited statements, for the lack of normal year-end adjustments, the
absence of footnotes and as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods subject thereto (except as may be indicated
in the notes thereto) and fairly present the consolidated financial position of
Acquiror and its consolidated subsidiaries as of the dates thereof and the
consolidated results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end adjustments
and the absence of footnotes). Except as disclosed in the Acquiror SEC
Documents, as required by GAAP or as required by any Governmental Entity,
Acquiror has not, since December 31, 1997, made any change in accounting
practices or policies applied in the preparation of financial statements.
SECTION 4.08. ACQUIROR COMMON STOCK.
The Acquiror Common Stock to be issued and delivered to the Company
Stockholders pursuant to the Merger has been duly authorized and, when issued in
the Merger in accordance with this Merger Agreement, will be validly issued,
fully paid and nonassessable and will have been approved for listing (subject to
official notice of issuance) by The Nasdaq Stock Market's National Market
System.
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SECTION 4.09. CAPITALIZATION.
The authorized capital stock of Acquiror consists of (a) 250,000,000 shares
of Acquiror Common Stock, of which, as of October 23, 1998: (i) 63,244,064
shares were issued and outstanding, all of which were duly authorized, validly
issued, fully paid and nonassessable; (ii) no shares were held in the treasury
of Acquiror; (iii) 11,090,936 shares were reserved for issuance pursuant to
outstanding options to purchase Acquiror Common Stock granted to employees and
certain other Persons; and (iv) 245,536 shares were reserved for issuance
pursuant to a Stock Option Agreement dated August 21, 1998 between Acquiror and
QST Enterprises, Inc.; (b) 22,000,000 shares of Class B common stock, par value
$.01 per share ("Acquiror Class B Common Stock"), of which, as of October 23,
-----------------------------
1998: (i) no shares were issued and outstanding; (ii) no shares were held in the
treasury of Acquiror; and (iii) 1,300,683 shares were reserved for issuance
pursuant to outstanding options to purchase Acquiror Class B Common Stock
granted to a significant stockholder of Acquiror; and (c) 2,000,000 shares of
serial preferred stock, par value $.01 per share, of which: (i) no shares are
issued and outstanding; and (ii) no shares are held in the treasury of Acquiror.
Except for the options set forth in clauses (a)(iii), (a)(iv) and (b)(iii)
above, as of October 23, 1998, there were no outstanding securities convertible
into or exchangeable for capital stock or any other securities of Acquiror, or
any capital stock or other securities of any of Acquiror's Significant
Subsidiaries and no outstanding options, rights (preemptive or otherwise), or
warrants to purchase or to subscribe for any shares of such capital stock or
other securities of Acquiror or any of Acquiror's Significant Subsidiaries.
Except as set forth in Section 4.09(a) of the Acquiror Disclosure Schedule and
except for Agreements relating to the options specified in clauses (a)(iii),
(a)(iv) and (b)(iii) above, there are no outstanding Agreements to which
Acquiror or any of its Significant Subsidiaries is a party affecting or relating
to the voting, issuance, purchase, redemption, registration, repurchase or
transfer of capital stock or any other securities of Acquiror, or any capital
stock or other securities of any of Acquiror's Significant Subsidiaries, except
as contemplated hereunder. Each of the outstanding shares of Acquiror Common
Stock, and of capital stock of, or other equity interests in, Acquiror's
Significant Subsidiaries was issued in compliance with all applicable federal
and state Laws concerning the issuance of securities, and, except as set forth
in Section 4.09(b) of the Acquiror Disclosure Schedule, such shares or other
equity interests owned by Acquiror or any of its Significant Subsidiaries are
owned free and clear of all Encumbrances. Except as contemplated by this Merger
Agreement or as set forth in Section 4.09(c) of the Acquiror Disclosure
Schedule, there are no obligations, contingent or otherwise, of Acquiror or any
of its Significant Subsidiaries to provide funds to, make any investment (in the
form of a loan, capital contribution or otherwise) in, or provide any guarantee
with respect to, any of Acquiror's Significant Subsidiaries or any other Person.
Except as set forth in Section 4.09(d) of the Acquiror Disclosure Schedule,
there are no Agreements pursuant to which any Person is or may be entitled to
receive any of the revenues or earnings, or any payment based thereon or
calculated in accordance
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therewith, of Acquiror or any of its Significant Subsidiaries. No vote of the
stockholders of Acquiror is required in connection with the consummation of the
Merger and the other transactions contemplated hereby.
SECTION 4.10. REORGANIZATION.
To the knowledge of Acquiror, neither Acquiror, Acquiror Sub nor any of
Acquiror's Significant Subsidiaries has taken any action or failed to take any
action which action or failure would jeopardize the qualification of the Merger
as a reorganization within the meaning of Section 368(a) of the Code.
SECTION 4.11. COMPLIANCE.
Neither Acquiror nor Acquiror Sub is aware of any fact or circumstance
related to them that could reasonably be expected to cause the filing of any
objection to any application for any Governmental consent required hereunder,
lead to any delay in processing such application, or require any waiver of any
Governmental rule, policy or other applicable Law.
SECTION 4.12. DISCLOSURE.
(a) None of the information supplied by Acquiror or Acquiror Sub
expressly for inclusion (and so included or relied on for information included)
in (i) the Registration Statement and (ii) the Proxy Statement, at the
respective times that (w) the Registration Statement is filed with the SEC, (x)
the Registration Statement becomes effective, (y) the Proxy Statement is mailed,
and (z) any meeting of stockholders (and any adjournment thereof) is held to
consider, or written consents are effective with respect to approval of, the
transactions contemplated by this Merger Agreement, shall contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
(b) No representation or warranty by Acquiror or Acquiror Sub, and no
Document furnished or to be furnished to the Company by Acquiror or Acquiror Sub
pursuant to this Merger Agreement or otherwise in connection herewith or with
the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
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ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 5.01. CONDUCT OF BUSINESS OF THE COMPANY.
The Company hereby covenants and agrees that, from the date of this Merger
Agreement until the Effective Time, the Company, unless otherwise expressly
contemplated by this Merger Agreement or consented to in writing by Acquiror,
will, and will cause the Subsidiaries to, carry on their respective businesses
only in the Ordinary Course of Business, use their respective reasonable best
efforts to preserve intact their business organizations and Assets, maintain
their rights and franchises, retain the services of their officers and key
employees and maintain their relationships with customers, suppliers, licensors,
licensees and others having business dealings with them, and use their
respective reasonable best efforts to keep in full force and effect liability
insurance and bonds comparable in amount and scope of coverage to that currently
maintained. Without limiting the generality of the foregoing, except as
otherwise expressly contemplated by this Merger Agreement, as consented to in
writing by Acquiror, or as provided in Schedule 5.01, from the date of this
Merger Agreement until the Effective Time the Company shall not, and shall not
permit any of the Subsidiaries to:
(a) (i) increase in any manner the compensation or fringe benefits
of, or pay any bonus to, any director, officer or employee, except for
increases in the Ordinary Course of Business to employees who are not
directors or officers and except for bonuses to the employees and in the
amounts set forth in Schedule 5.01(a)(i); (ii) grant any severance or
termination pay (other than pursuant to the normal severance practices or
existing Agreements of the Company or any Subsidiary in effect on the date
of this Merger Agreement as described in Schedule 5.01(a)(ii)) to, or enter
into any severance Agreement with, any director, officer or employee, or
enter into any employment Agreement with any director, officer or employee;
(iii) establish, adopt, enter into or amend any Plan or Other Arrangement,
except as may be required to comply with applicable Law; (iv) pay any
benefits exceeding $10,000 in the aggregate not provided for under any Plan
or Other Arrangement; (v) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or Plan or Other
Arrangement (including the grant of stock options, stock appreciation
rights, stock-based or stock-related awards, performance units or
restricted stock, or the removal of existing restrictions in any Plan or
Other Arrangement or Agreement or awards made thereunder), except for
grants in the Ordinary Course of Business (and subject to the limits set
forth in Section 5.01(d)(iv) in the case of grants of stock options) or as
required under the Agreements set forth in Schedule 5.01(a)(v), or (vi)
take any action to fund or in any other way secure
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the payment of compensation or benefits under any Agreement, except as
required under the Agreements set forth in Schedule 5.01(a)(vi);
(b) declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock;
(c) (i) redeem, purchase or otherwise acquire any shares of capital
stock of the Company or any Subsidiary or any securities or obligations
convertible into or exchangeable for any shares of capital stock of the
Company or any Subsidiary, or any options, warrants or conversion or other
rights to acquire any shares of capital stock of the Company or any
Subsidiary or any such securities or obligations, or any other securities
thereof; (ii) effect any reorganization or recapitalization; or (iii)
split, combine or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of
or in substitution for, shares of its capital stock;
(d) except (i) in connection with Conversion-Merger Rights, (ii) upon
the exercise of Company Stock Options in accordance with their terms, (iii)
as required by the terms of the Hurley Communications Agreement, or (iv)
for grants of Company Stock Options to directors and new employees in the
Ordinary Course of Business, to the extent that the aggregate number of
shares of Company Common Stock issuable under all Company Stock Options
(whether or not vested) outstanding at any given time does not exceed
400,120, issue, deliver, award, grant or sell, or authorize the issuance,
delivery, award, grant or sale (including the grant of any limitations in
voting rights or other Encumbrances) of, any shares of any class of its
capital stock (including shares held in treasury), any securities
convertible into or exercisable or exchangeable for any such shares, or any
rights, warrants or options to acquire, any such shares, or amend or
otherwise modify the terms of any such rights, warrants or options the
effect of which shall be to make such terms more favorable to the holders
thereof;
(e) except as contemplated by Agreements which have been identified
in Section 3.14(a) of the Company Disclosure Schedule, acquire or agree to
acquire, by merging or consolidating with, by purchasing an equity interest
in or a portion of the Assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any Assets of
any other Person (other than the purchase of assets from suppliers or
vendors in the Ordinary Course of Business);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
subject to any Encumbrance or dispose of, or agree to sell, lease,
exchange, mortgage, pledge, transfer or otherwise subject to any
Encumbrance or
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dispose of, any of its Assets, except for sales, dispositions or transfers
in the Ordinary Course of Business;
(g) adopt any amendments to its articles or certificate of
incorporation, bylaws or other comparable charter or organizational
documents;
(h) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ended December 31, 1997, except in
either case as may be required by Law, the IRS or GAAP;
(i) make or agree to make any new capital expenditure or expenditures
which are not included in the Company's July 1998 CLEC Facilities Expansion
Plan, a copy of which was furnished to Acquiror (and, if the Effective Time
has not occurred prior to the expiration of the Company's July 1998 CLEC
Facilities Expansion Plan, the Company's subsequent capital budget, which
budget shall have been approved by Acquiror (such approval not to be
unreasonably withheld)), or which are in excess of $20,000,000 in equity in
the aggregate;
(j) (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another Person (other than the Company or any wholly
owned Subsidiary), issue or sell any debt securities or warrants or other
rights to acquire any debt securities of the Company or any Subsidiary,
guarantee any debt securities of another Person (other than the Company or
any wholly owned Subsidiary), enter into any "keep well" or other Agreement
to maintain any financial statement condition of another Person (other than
the Company or any wholly owned Subsidiary) or enter into any Agreement
having the economic effect of any of the foregoing, except for short-term
borrowings incurred in the Ordinary Course of Business, or (ii) make any
loans, advances or capital contributions to, or investments in, any other
Person other than intra-group loans, advances, capital contributions or
investments between or among the Company and any of its wholly owned
Subsidiaries and other than the extension of credit to customers of the
Company or any Subsidiary in the Ordinary Course of Business;
(k) pay, discharge, settle or satisfy any claims, liabilities or
obligations (whether absolute or contingent, matured or unmatured, known or
unknown), other than the payment, discharge or satisfaction, in the
Ordinary Course of Business or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the most
recent
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Financial Statement or incurred in the Ordinary Course of Business, or
waive any material benefits of, or agree to modify in any material respect,
any confidentiality, standstill or similar Agreements to which the Company
or any Subsidiary is a party;
(l) except in the Ordinary Course of Business, waive, release or
assign any rights or claims, or modify, amend or terminate any Agreement to
which the Company or any Subsidiary is a party;
(m) make any change in any method of accounting or accounting
practice or policy other than those required by GAAP or a Governmental
Entity;
(n) take any action or fail to take any action which could reasonably
be expected to have a Company Material Adverse Effect prior to or after the
Effective Time or an Acquiror Material Adverse Effect after the Effective
Time, or that could reasonably be expected to adversely affect the ability
of the Company or any Subsidiary prior to the Effective Time, or Acquiror
or any of its subsidiaries after the Effective Time, to obtain consents of
third parties or approvals of Governmental Entities required to consummate
the transactions contemplated in this Merger Agreement; or
(o) authorize, or commit or agree to do any of the foregoing.
SECTION 5.02. OTHER ACTIONS.
The Company and Acquiror shall not, and shall not permit any of their
respective Affiliates to, knowingly take any action that would, or that could
reasonably be expected to, result in (a) any of the representations and
warranties of such party set forth in this Merger Agreement becoming untrue, or
(b) any of the conditions to the Merger set forth in Article VII not being
satisfied.
SECTION 5.03. CERTAIN TAX MATTERS.
From the date hereof until the Effective Time, the Company and the
Subsidiaries (a) will prepare and timely file with the relevant Taxing authority
all Company Tax Returns ("Post-Signing Returns") required to be filed, which
--------------------
Post-Signing Returns shall be accurate in all material respects, (b) will timely
pay all Taxes due and payable with respect to such Post-Signing Returns, (c)
will pay or otherwise make adequate provision for all Taxes payable by the
Company and the Subsidiaries for which no Post-Signing Return is due prior to
the Effective Time, and (d) will promptly notify Acquiror of any action, suit,
proceeding, claim or audit pending against or with respect to the Company or any
Subsidiary in respect of any Taxes.
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SECTION 5.04. ACCESS AND INFORMATION.
For so long as this Merger Agreement is in effect, the Company shall, and
shall cause each Subsidiary to, (a) afford to Acquiror and its officers,
employees, accountants, consultants, legal counsel and other representatives
reasonable access during normal business hours, subject to reasonable advance
notice, to all of their respective properties, Agreements, books, records and
personnel and (b) furnish promptly to Acquiror (i) a copy of each Document filed
with, or received from any Governmental Entity and (ii) all other information
concerning their respective businesses, operations, prospects, conditions
(financial or otherwise), Assets, liabilities and personnel as Acquiror may
reasonably request.
SECTION 5.05. NO SOLICITATION.
(a) The Company shall use its reasonable best efforts to cause its
directors, and shall cause its officers, employees, representatives, agents and
Subsidiaries and their respective directors, officers, employees,
representatives and agents to, immediately cease any discussions or negotiations
with any Person that may be ongoing with respect to a Competing Transaction (as
defined in this Section 5.05(a)). The Company shall not, and shall cause the
Subsidiaries not to, initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Competing Transaction, or enter into discussions or
furnish any information or negotiate with any Person or otherwise cooperate in
any way in furtherance of such inquiries or to obtain a Competing Transaction,
or agree to or endorse any Competing Transaction, or authorize any of the
directors, officers, employees, agents or representatives of the Company or any
Subsidiary to take any such action, and the Company shall, and shall cause the
Subsidiaries to, direct and instruct and use its or their reasonable best
efforts to cause the directors, officers, employees, agents and representatives
of the Company and the Subsidiaries (including, without limitation, any
investment banker, financial advisor, attorney or accountant retained by the
Company or any Subsidiary) not to take any such action, and the Company shall
promptly notify Acquiror if any such inquiries or proposals are received by the
Company or any Subsidiary, or any of its or their respective directors,
officers, employees, agents, investment bankers, financial advisors, attorneys,
accountants or other representatives, and the Company shall promptly inform
Acquiror as to the material terms of such inquiry or proposal and, if in
writing, promptly deliver or cause to be delivered to Acquiror a copy of such
inquiry or proposal (unless the Board of Directors of the Company, after
consultation with and based upon the written advice of independent legal
counsel, determines in good faith that such delivery would cause the Board of
Directors of the Company to breach its fiduciary duties to the Company
Stockholders), and the Company shall keep Acquiror informed, on a current basis,
of the nature of any such inquiries and the status and terms of any such
proposals. For purposes of this Merger Agreement, "Competing
---------
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Transaction" shall mean any of the following involving the Company or the
- -----------
Subsidiaries (other than the transactions contemplated by this Merger
Agreement): (i) any merger, consolidation, share exchange, business combination,
or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of fifteen percent (15%) or more of the Assets of
the Company and the Subsidiaries, taken as a whole, or issuance of fifteen
percent (15%) or more of the outstanding voting securities of the Company or any
Subsidiary in a single transaction or series of transactions; (iii) any tender
offer or exchange offer for fifteen percent (15%) or more of the outstanding
shares of capital stock of the Company or any Subsidiary or the filing of a
registration statement under the Securities Act in connection therewith; (iv)
any solicitation of proxies in opposition to approval by the Company
Stockholders of the Merger Agreement or the Merger; (v) any Person shall have
acquired beneficial ownership or the right to acquire beneficial ownership of,
or any "group" (as such term is defined under Section 13(d) of the Exchange Act)
-----
shall have been formed after the date of this Merger Agreement which
beneficially owns or has the right to acquire beneficial ownership of, fifteen
percent (15%) or more of the then outstanding shares of capital stock of the
Company or any Subsidiary; or (vi) any Agreement to, or public announcement by
the Company or any other Person of a proposal, plan or intention to, do any of
the foregoing.
(b) Notwithstanding anything to the contrary set forth in subsection
(a) above or elsewhere in this Merger Agreement, nothing contained in this
Merger Agreement shall prohibit the Board of Directors of the Company from (i)
furnishing information to, or entering into discussions or negotiations with,
any Person in connection with an unsolicited bona fide written proposal for a
Competing Transaction from such Person if (A) the Board of Directors of the
Company, after consultation with and based upon the written advice of
independent legal counsel, determines in good faith that such action is
necessary for such Board of Directors to comply with its fiduciary duties to the
Company Stockholders under applicable Law, (B) the Company enters into with such
Person a confidentiality agreement in reasonably customary form on terms not
more favorable to such Person than the terms contained in the Confidentiality
Agreement, and (C) the Board of Directors of the Company reasonably believes in
its good faith judgment after consultation with independent financial advisors
that such Person has the financial ability to consummate a Competing
Transaction; and (ii) failing to make or withdrawing or modifying its
recommendation for the Merger or making or disclosing any position or taking any
other action if the Board of Directors of the Company, after consultation with
and based on the written advice of independent legal counsel, determines in good
faith that such action is necessary for such Board of Directors to comply with
its fiduciary duties to the Company Stockholders under applicable Law.
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ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. REGISTRATION STATEMENT; PROXY STATEMENT
(a) As promptly as practicable after the execution of this Merger
Agreement, Acquiror shall prepare and file with the SEC a registration statement
on Form S-4 (such registration statement, together with the amendments thereto
being the "Registration Statement"), containing a proxy statement/prospectus, in
----------------------
connection with the registration under the Securities Act of the shares of
Acquiror Common Stock issuable pursuant to Section 2.01, the vote of the Company
Stockholders with respect to the Merger (such proxy statement/prospectus,
together with any amendments thereof or supplements thereto, in each case in the
form or forms mailed to the Company Stockholders, being the "Proxy Statement")
---------------
and the other transactions contemplated by this Merger Agreement. Acquiror
agrees to provide the Company with an opportunity to review and comment on the
Registration Statement and the Proxy Statement before filing. Acquiror agrees
promptly to provide the Company with copies of all correspondence from and all
responsive correspondence to the SEC regarding the Registration Statement and
Proxy Statement. Acquiror agrees promptly to notify the Company of all stop
orders or threatened stop orders of which it becomes aware with respect to the
Registration Statement. Each of Acquiror and the Company will use all
reasonable efforts to have or cause the Registration Statement to become
effective as promptly as practicable, and shall take any action required to be
taken under any applicable federal or state securities Laws in connection with
the issuance of shares of Acquiror Common Stock in the Merger. Each of Acquiror
and the Company shall furnish all information concerning it and the holders of
its capital stock as the other may reasonably request in connection with such
actions. As promptly as practicable after the Registration Statement shall have
become effective, the Company shall mail the Proxy Statement to its stockholders
and to the holders of Conversion-Merger Rights, and the Company shall comply
with the proxy solicitation rules and regulations under the Exchange Act in
connection with the solicitation of such stockholders and holders of Conversion-
Merger Rights. The Proxy Statement shall include the recommendation of the
Company's Board of Directors to the Company Stockholders to vote to approve this
Merger Agreement and the transactions contemplated hereby, subject to Section
5.05(b) above.
(b) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by the
Company for inclusion in the Proxy Statement to be sent to the Company
Stockholders in connection with the meeting of the Company Stockholders to
consider the Merger
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(the "Stockholders' Meeting") shall not, at the date the Proxy Statement (or any
---------------------
amendment thereof or supplement hereto) is first mailed to stockholders, at the
time of the Stockholders' Meeting or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event or circumstance relating to the
Company or any of its affiliates, or its or their respective officers or
directors, should be discovered by the Company which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
the Company shall promptly inform Acquiror. All documents that the Company is
responsible for filing with the SEC in connection with the transactions
contemplated herein will comply as to form and substance in all material
respects with the applicable requirements of the Securities Act and the rules
and regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
(c) The information supplied by Acquiror for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by
Acquiror for inclusion in the Proxy Statement to be sent to the Company
Stockholders in connection with the Stockholders' Meeting shall not, at the date
the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to stockholders, at the time of the Stockholders' Meeting or at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event or
circumstance relating to Acquiror or any of its respective affiliates, or its or
their respective officers or directors, should be discovered by Acquiror which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Acquiror shall promptly inform the Company.
All documents that Acquiror is responsible for filing with the SEC in connection
with the transactions contemplated herein will comply as to form and substance
in all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(d) The Company and Acquiror each hereby (i) consents to the use of
its name and, on behalf of its subsidiaries and affiliates, the names of such
subsidiaries and affiliates and to the inclusion of financial statements and
business information relating to such party and its subsidiaries and affiliates
(in each case, to the extent required by applicable securities Laws) in any
registration statement or proxy statement prepared by the Company or Acquiror
pursuant to this Merger Agreement; (ii) agrees to use its reasonable best
efforts to obtain the written
-57-
consent of any Person retained by it which may be required to be named (as an
expert or otherwise) in such registration statement or proxy statement; and
(iii) agrees to cooperate, and to use its reasonable best efforts to cause its
subsidiaries and affiliates to cooperate, with any legal counsel, investment
banker, accountant or other agent or representative retained by any of the
parties specified in clause (i) in connection with the preparation of any and
all information required, as determined after consultation with each party's
counsel, to be disclosed by applicable securities Laws in any such registration
statement or proxy statement.
SECTION 6.02. MEETING OF STOCKHOLDERS.
The Company shall promptly after the date of this Merger Agreement take all
action necessary in accordance with Delaware Law and its certificate of
incorporation and bylaws to duly call, give notice of, convene and hold the
Stockholders' Meeting, and the Company shall consult with Acquiror in connection
therewith. Subject to Section 5.05(b) above, the Company shall use its
reasonable best efforts to solicit from the Company Stockholders proxies or
consents to approve this Merger Agreement and the transactions contemplated
hereby and shall take all other reasonable actions necessary or advisable to
secure the vote or consent of the Company Stockholders required by Delaware Law
to approve this Merger Agreement and the transactions contemplated hereby.
SECTION 6.03. APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) Upon the terms and subject to the conditions set forth in this
Merger Agreement, the Company and Acquiror shall use all reasonable efforts to
take, or cause to be taken, all appropriate action, and do, or cause to be done,
and to assist and cooperate with the other parties in doing all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the transactions contemplated by this Merger Agreement as
promptly as practicable, including (i) executing and delivering any additional
instruments necessary, proper or advisable to consummate the transactions
contemplated by, and to carry out fully the purposes of, this Merger Agreement,
(ii) obtaining from any Governmental Entities any Licenses required to be
obtained or made by Acquiror or the Company or any of their subsidiaries in
connection with the authorization, execution and delivery of this Merger
Agreement and the consummation of the transactions contemplated herein,
including, without limitation, the Merger, and (iii) making all necessary
filings, and thereafter making any other required submissions, with respect to
this Merger Agreement and the Merger required under (A) the Securities
Act and any other applicable federal or state securities Laws, (B) the HSR Act
and (C) any other applicable Law; provided that Acquiror and the Company shall
--------
cooperate with each other in connection with the making of all such filings,
including providing copies of all such Documents to the non-filing party and its
advisors prior to filing and discussing all reasonable additions, deletions or
changes
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suggested in connection therewith. The Company and Acquiror shall furnish to
each other all information required for any application or other filing to be
made pursuant to the rules and regulations of any applicable Law in connection
with the transactions contemplated by this Merger Agreement.
(b) (i) The Company and Acquiror shall give (or shall cause their
respective subsidiaries to give) any notices to third parties, and use, and
cause their respective subsidiaries to use, all reasonable efforts to obtain any
third party consents, approvals or waivers (A) necessary, proper or advisable to
consummate the transactions contemplated in this Merger Agreement, (B) disclosed
or required to be disclosed in the Company Disclosure Schedule or the Acquiror
Disclosure Schedule, as the case may be, or (C) required to prevent a Company
Material Adverse Effect from occurring prior to or after the Effective Time or
an Acquiror Material Adverse Effect from occurring prior to or after the
Effective Time.
(ii) In the event that any party shall fail to obtain any third
party consent, approval or waiver described in subsection (b)(i) above, such
party shall use all reasonable efforts, and shall take any such actions
reasonably requested by the other parties hereto, to minimize any adverse effect
upon the Company and Acquiror, their respective subsidiaries, and their
respective businesses resulting, or which could reasonably be expected to result
after the Effective Time, from the failure to obtain such consent, approval or
waiver.
(c) From the date of this Merger Agreement until the Effective Time,
the Company and Acquiror shall promptly notify each other in writing of any
pending or, to the knowledge of the Company or Acquiror (or their respective
subsidiaries), threatened action, proceeding or investigation by any
Governmental Entity or any other Person (i) challenging or seeking damages in
connection with the Merger or the conversion of the Company Common Stock into
Acquiror Common Stock pursuant to the Merger or (ii) seeking to restrain or
prohibit the consummation of the Merger or otherwise limit the right of Acquiror
or its subsidiaries to own or operate all or any portion of the businesses or
Assets of the Company or any Subsidiary. The Company and Acquiror shall
cooperate with each other in defending any such action, proceeding or
investigation, including seeking to have any stay or temporary restraining order
entered by any court or other Governmental Entity vacated or reversed.
SECTION 6.04. LETTERS OF ACCOUNTANTS.
The Company shall use its reasonable best efforts to cause to be delivered
to Acquiror "cold comfort" letters of Olsen Thielen & Co., LLC dated the date
on which the Registration Statement shall become effective and the Effective
Time, respectively, and addressed to Acquiror, reasonably customary in scope and
substance for letters delivered by independent public accountants in connection
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with registration statements similar to the Registration Statement and
transactions such as those contemplated by this Merger Agreement.
SECTION 6.05. UPDATE DISCLOSURE; BREACHES.
From and after the date of this Merger Agreement until the Effective Time,
each party hereto shall promptly notify the other parties hereto by written
update to its Disclosure Schedule of (i) any representation or warranty made by
it in connection with this Merger Agreement becoming untrue or inaccurate, (ii)
the occurrence, or non-occurrence, of any event the occurrence, or non-
occurrence, of which would be likely to cause any condition to the obligations
of any party to effect the Merger and the other transactions contemplated by
this Merger Agreement not to be satisfied, or (iii) the failure of the Company,
Acquiror or Acquiror Sub, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it pursuant
to this Merger Agreement which would be likely to result in any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Merger Agreement not to be satisfied; provided, however,
-------- -------
that the delivery of any notice pursuant to this Section 6.05 shall not cure any
breach of any representation or warranty requiring disclosure of such matter
prior to the date of this Merger Agreement or otherwise limit or affect the
rights and remedies available hereunder to the party receiving such notice. The
Company shall deliver to Acquiror updated versions of Sections 3.10 and 3.14(a)
of the Company Disclosure Schedule as of the Closing Date, solely to reflect
events occurring between the date of this Merger Agreement and the Closing Date,
or shall have notified Acquiror that no changes to such Sections of the Company
Disclosure Schedule are required.
SECTION 6.06. PUBLIC ANNOUNCEMENTS.
Acquiror, Acquiror Sub and the Company shall consult with each other before
issuing or making, and shall give each other the opportunity to review and
comment upon, any press release or other public statement with respect to the
Merger and the other transactions contemplated in this Merger Agreement, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by Law or any listing agreement
with the NASD (as defined in Article X).
SECTION 6.07. EMPLOYEE MATTERS.
The Company and Acquiror shall use their respective reasonable best efforts
to cause the officers and employees of the Company and the Subsidiaries listed
in Schedule 6.07 (the "Company Key Employees") to enter into employment,
------------- ---------------------
confidentiality and non-competition agreements, in the form of Acquiror's
standard Employment, Confidentiality and Non-Competition Agreement, a copy of
which is
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attached hereto as Exhibit D (the "Employment Agreements"), at or prior to the
--------- ---------------------
Effective Time.
SECTION 6.08. UNAUDITED FINANCIAL INFORMATION.
The Company will cause to be prepared and will furnish to Acquiror as
promptly as possible an unaudited consolidated balance sheet of the Company and
the Subsidiaries as of the last day of each month ending after September 30,
1998 (the "Unaudited Balance Sheets") and the related unaudited consolidated
------------------------
statements of income of the Company and the Subsidiaries for the one-month
periods then ended (together with the Unaudited Balance Sheets, the "Unaudited
---------
Financial Statements"). The Company will ensure that such Unaudited Financial
- --------------------
Statements are complete and correct in all material respects, have been prepared
in accordance with the books and records of the Company and the Subsidiaries,
and present fairly the consolidated financial position of the Company and the
Subsidiaries and their consolidated results of operations as of and for the
respective dates and time periods in accordance with accounting principles
applied on a basis consistent with prior accounting periods, except as noted
thereon and subject to normal and recurring year-end adjustments which are not
expected to be material in amount.
SECTION 6.09. ENVIRONMENTAL MATTERS.
The Company will promptly furnish to Acquiror written notice of any
Hazardous Discharge or of any actions or notices described in Section 3.33(b).
SECTION 6.10. POST-SIGNING SEC DOCUMENTS.
Each of the Company and Acquiror will file with the SEC all reports,
schedules, forms, statements and other Documents required to be filed by it
after the date of this Merger Agreement but before the Effective Time (in the
case of the Company, the "Company Post-Signing SEC Documents" and, in the case
----------------------------------
of Acquiror, the "Acquiror Post-Signing SEC Documents").
-----------------------------------
SECTION 6.11. STANDSTILL AGREEMENT.
If this Merger Agreement is terminated for any reason other than as a
result of the Company's willful failure to perform any covenant or agreement or
willful breach of any representation or warranty contained in this Merger
Agreement, and subject to compliance by the Company with the terms of Section
8.03, then, for a period of three (3) years from the date of this Merger
Agreement, Acquiror shall not, directly or indirectly, except pursuant to this
Merger Agreement: (a) acquire or agree, offer, seek or propose to acquire, or
cause to be acquired, ownership of fifteen percent (15%) or more of the
Company's assets or businesses or fifteen percent
-61-
(15%) or more of the voting securities issued by the Company, or any other
rights or options to acquire such ownership (including from a third party); (b)
seek or propose to influence or control the Company's management or policies,
except that nothing contained herein shall restrict Acquiror's right to vote any
voting securities of the Company owned by Acquiror; or (c) enter into any
discussions, negotiations, arrangements or understandings with any third party
with respect to any of the foregoing.
SECTION 6.12. AFFILIATES; TAX TREATMENT.
Prior to the Effective Time, the Company shall use its reasonable best
efforts to obtain Affiliate Agreements from each Person listed in Section 3.38
of the Company Disclosure Schedule and any Person who may be deemed to have
become an affiliate of the Company (under SEC Rule 145 of the Securities Act)
after the date of this Merger Agreement and on or prior to the Effective Time,
provided that the Company shall use its reasonable best efforts to obtain
- --------
Affiliate Agreements from each such Person as soon as practicable after the date
of this Merger Agreement or the date on which such Person attains such status,
as the case may be. Each party hereto shall use its reasonable best efforts to
cause the Merger to qualify, and shall not take any actions which could prevent
the Merger from qualifying, as a reorganization under the provisions of Section
368(a) of the Code.
SECTION 6.13. TAX RETURNS.
To the extent permitted under applicable Tax Laws, the Merger shall be
reported as a "reorganization" within the meaning of Section 368(a) of the Code
in all federal, state and local Tax Returns filed after the Effective Time.
Notwithstanding any other provision of this Merger Agreement, the obligations
set forth in this Section 6.13 shall survive the Effective Time without
limitation as to time or in any other respect.
SECTION 6.14. REORGANIZATION.
During the period from the date of this Merger Agreement through the
Effective Time, unless Acquiror and the Company shall otherwise agree in
writing, Acquiror and the Company shall not, and shall cause their respective
subsidiaries not to, knowingly take or fail to take any action which action or
failure would jeopardize the qualification of the Merger as a reorganization
within the meaning of Section 368(a) of the Code.
SECTION 6.15. DIRECTORS' AND OFFICERS' INSURANCE; INDEMNIFICATION.
Acquiror agrees that for the entire period from the Effective Time until at
least six (6) years after the Effective Time, (a) Acquiror will cause the
Surviving
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Corporation to maintain and to honor (including, without limitation, by
providing the Surviving Corporation with sufficient funding) the Company's
current directors' and officers' insurance and indemnification policy and
related arrangements, or an equivalent policy and related arrangements, subject
in either case to terms and conditions no less advantageous to the present and
former directors and officers of the Company than those contained in the policy
and arrangements in effect on the date hereof, for all present and former
directors and officers of the Company, covering claims made and insurable events
occurring prior to or within six (6) years after the Effective Time (provided
that the Surviving Corporation will not be required to maintain such policy
except to the extent that the aggregate annual cost of maintaining such policy
is not in excess of two hundred percent (200%) of the current annual cost, in
which case the Surviving Corporation shall maintain such policies up to an
annual cost of two hundred percent (200%) of the current annual cost); and (b)
Acquiror will cause the Surviving Corporation to maintain and to honor
(including, without limitation, by providing the Surviving Corporation with
sufficient funding) indemnification provisions, including, without limitation,
provisions for expense advances, for present and former officers and directors
in the Surviving Corporation's certificate of incorporation and bylaws and the
Agreements set forth in Schedule 6.15 to the fullest extent permitted by
Delaware Law. In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit proceeding or
investigation in which any of the present or former officers or directors (the
"Managers") of the Company is, or is threatened to be, made a party by reason of
- ---------
the fact that such Manager is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other entity, whether before or after the Effective Time, the parties
hereto agree to cooperate and use their reasonable best efforts to defend
against and respond thereto. It is understood and agreed that the Company shall
indemnify and hold harmless, and after the Effective Time each of the Surviving
Corporation and Acquiror shall indemnify and hold harmless, as and to the full
extent that the Surviving Corporation would be permitted by applicable Law (and
as to matters arising from or relating to this Merger Agreement and the possible
change in control of the Company, to the full extent that Acquiror would be
permitted under applicable Law), each such Manager against any losses, claims,
damages, liabilities, costs, expenses (including reasonable attorneys' fees),
judgments, fines and amounts paid in settlement in connection with any such
claim, action, suit, proceeding or investigation; and in the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), (i) the Managers may retain counsel satisfactory to
them, and the Company, or the Surviving Corporation and Acquiror after the
Effective Time, shall pay all reasonable fees and expenses of such counsel for
the Managers promptly as statements therefor are received whether before or
after final determination of the matter, and (ii) the Company, or the Surviving
Corporation and Acquiror after the Effective Time, will use their respective
reasonable best efforts to assist in the
-63-
vigorous defense of any such matter; provided that neither the Company nor the
--------
Surviving Corporation or Acquiror shall be liable for any settlement effected
without its prior written consent (which consent shall not be unreasonably
withheld); and provided further that the Company's, the Surviving Corporation's
-------- -------
and Acquiror's obligations hereunder shall only be reduced or relieved when and
if a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and non-appealable, that indemnification
of such Manager in the manner contemplated is prohibited by applicable Law.
SECTION 6.16. OBLIGATIONS OF ACQUIROR SUB.
Acquiror shall take all action necessary to cause Acquiror Sub and, after
the Effective Time, the Surviving Corporation, to perform its obligations under
this Merger Agreement and to cause Acquiror Sub to consummate the Merger on the
terms and conditions set forth in this Merger Agreement.
SECTION 6.17. ADVISORY COMMITTEE.
Acquiror and the Company agree that following the Effective Time (a) (i)
those persons serving as members of the Board of Directors of the Company as of
the date hereof who are also serving as members of the Board of Directors of the
Company immediately prior to the Effective Time and (ii) Edward D. Christensen,
Jr., in each case provided such individuals do not become employees of Acquiror,
the Surviving Corporation or any of Acquiror's subsidiaries following the
Effective Time, shall be offered positions on an advisory committee (the
"Advisory Committee") that will be established by and provide certain consulting
- -------------------
services to the Board of Directors of the Surviving Corporation at the request
and direction of the Board of Directors of the Surviving Corporation; (b) each
person accepting such a position on the Advisory Committee (the "Advisory
--------
Committee Members") shall receive as compensation (i) a one-time grant of an
- -----------------
option to purchase 2,000 shares of Acquiror Common Stock pursuant to Acquiror's
1996 Employee Stock Option Plan and (ii) a quarterly fee of $2,000, plus
reimbursement for reasonable out-of-pocket travel expenses incurred in
connection with service as an Advisory Committee Member; (c) each Advisory
Committee Member shall be entitled to participate, at such Advisory Committee
Member's expense, in the medical and health insurance plans of the Surviving
Corporation as in effect from time to time, to the extent permitted by the terms
of such plans; and (d) the Advisory Committee shall continue until the fifth
anniversary of the Effective Time unless terminated earlier by decision of
Acquiror and the unanimous vote of the Advisory Committee.
SECTION 6.18. CAPITALIZATION OF THE SURVIVING CORPORATION.
Promptly following the Closing, Acquiror will make a capital contribution
to the Surviving Corporation in the amount of $20,000,000.
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SECTION 6.19. ACQUIROR OPTION SHARES.
Acquiror will use its reasonable best efforts to insure that any shares of
Acquiror Common Stock issued upon exercise of the Acquiror Options referred to
in Section 2.04 will be registered under the Securities Act pursuant to a
registration statement on Form S-8 and will be approved for listing (subject to
official notice of issuance) by The Nasdaq Stock Market's National Market System
or an exchange, if shares of Acquiror Common Stock are traded on such exchange.
SECTION 6.20. DARK FIBER LEASE AGREEMENT.
Immediately following the execution of this Merger Agreement, the Company
and Acquiror shall enter into a Dark Fiber Lease Agreement in the form attached
hereto as Exhibit E.
---------
SECTION 6.21. CERTAIN POST-MERGER OPERATIONS.
It is the present intention of Acquiror that, following the Effective Time:
(a) the Surviving Corporation will continue its corporate existence as
a wholly owned subsidiary of Acquiror, operating under the name "Dakota
Telecommunications Group, Inc.," and will continue to own and operate all of its
wholly owned subsidiaries;
(b) the principal place of business and main corporate office of the
Surviving Corporation will continue to be located at the Company's main
corporate office in Irene, South Dakota;
(c) no employee of the Company or any Subsidiary will be terminated or
suffer a reduction in salary or a change of employment title or be required to
relocate their residence solely as a result of the Merger; provided,
--------
however, that nothing herein will be deemed to prohibit or limit in any way the
- -------
ability of the Company or any of its subsidiaries to terminate, reduce the
salary or change the title of any employee between the date hereof and the
Effective Time;
(d) Acquiror will, or will cause the Surviving Corporation to,
continue to provide charitable contributions and community support within the
service areas of the Company and each of the Subsidiaries at levels
substantially comparable to the levels of charitable contributions and community
support provided by the Company and the Subsidiaries within their service areas
during the two-year period immediately prior to the date of this Merger
Agreement;
(e) Acquiror will honor, or will cause the Surviving Corporation to
honor, the obligations of the Company and the Subsidiaries under all existing
cable franchises granted by any community to the Company or any Subsidiary; and
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(f) the compensation and benefits of the employees of the Company and
the Subsidiaries, taken as a whole, will be at least equivalent to current
levels, except as adjusted for individual performance and except that the mix of
compensation and benefits is anticipated to change over time; a committee of
employees of the Company and Acquiror will review the current benefits of
employees in order to make recommendations regarding the future mix of
compensation and benefits.
SECTION 6.22. FORFEITURE OF UNCLAIMED CREDITS.
The Company shall use its reasonable best efforts to take the actions
required pursuant to Section 47-16-54 et seq. of the South Dakota Codified Laws
regarding the forfeiture of unclaimed credits.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.01. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS MERGER
AGREEMENT.
The respective obligations of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which may
be waived by agreement of Acquiror and the Company, in whole or in part, to the
extent permitted by applicable Law:
(a) Effectiveness of the Registration Statement. The Registration
-------------------------------------------
Statement shall have been declared effective by the SEC under the
Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall have been initiated or, to the knowledge of Acquiror
or the Company, threatened by the SEC. Acquiror shall have received all
other federal or state securities permits and other authorizations
necessary to issue Acquiror Common Stock in exchange for Company Common
Stock and to consummate the Merger.
(b) Stockholder Approval. This Merger Agreement and the Merger shall
--------------------
have been approved and adopted by the requisite vote of the Company
Stockholders.
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(c) No Order. No Governmental Entity or federal or state court of
--------
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in
any case which is in effect and which prevents or prohibits consummation of
the Merger; provided, however, that each of the parties shall use its
-------- -------
reasonable best efforts to cause any such decree, judgment, injunction or
other order to be vacated or lifted.
(d) HSR Act. The applicable waiting period, together with any
-------
extensions thereof, under the HSR Act shall have expired or been
terminated.
(e) Other Approvals. All consents, waivers, approvals and
---------------
authorizations required to be obtained, and all filings or notices required
to be made, by Acquiror or the Company prior to consummation of the
transactions contemplated in this Merger Agreement (other than the filing
of the Articles of Merger in accordance with Delaware Law) shall have been
obtained from and made with all required Governmental Entities, except for
such consents, waivers, approvals or authorizations which the failure to
obtain, or such filings or notices which the failure to make, would not
have a Company Material Adverse Effect or an Acquiror Material Adverse
Effect or be reasonably likely to subject the Company, any Subsidiary,
Acquiror, Acquiror Sub or any of their respective directors or officers to
criminal liability or substantial penalties.
SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR AND
ACQUIROR SUB.
The obligations of Acquiror and Acquiror Sub to effect the Merger and the
other transactions contemplated herein are also subject to the satisfaction at
or prior to the Effective Time of the following conditions, any or all of which
may be waived by Acquiror, in whole or in part, to the extent permitted by
applicable Law:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties of the Company contained in this Merger Agreement shall be true
and correct as of the date of this Merger Agreement and shall be true and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects giving effect to
such standard) as of the Effective Time as though made as of the Effective
Time, except that those representations and warranties which address
matters only as of a particular date shall remain true and correct in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall
be true and correct in all respects giving effect to such standard) as of
such date, and except
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(A) for changes permitted or contemplated by this Merger Agreement, or (B)
in a representation and warranty that does not expressly include a standard
of a Company Material Adverse Effect, any untrue or incorrect statements
therein that, considered in the aggregate, do not indicate a Company
Material Adverse Effect. Acquiror shall have received a certificate of the
chief executive officer or chief financial officer of the Company to that
effect.
(b) Updated Company Disclosure Schedule. The revised versions of
-----------------------------------
Sections 3.10 and 3.14(a) of the Company Disclosure Schedule delivered to
Acquiror pursuant to Section 6.05 shall not disclose any Company Material
Adverse Effect as compared to such Sections of the Company Disclosure
Schedule as of the date of this Merger Agreement.
(c) Agreements and Covenants. The Company shall have performed or
------------------------
complied in all material respects with all agreements and covenants
required by this Merger Agreement to be performed or complied with by it on
or prior to the Effective Time. Acquiror shall have received a certificate
of the chief executive officer or chief financial officer of the Company to
that effect.
(d) Consents Under Agreements. The Company or the appropriate
-------------------------
Subsidiary shall have obtained the consent or approval of each Person whose
consent or approval shall be required in connection with the Merger under
all Agreements to which the Company or any Subsidiary is a party, except
where the failure to obtain any such consents or approvals, considered in
the aggregate, would not have a Company Material Adverse Effect or an
Acquiror Material Adverse Effect.
(e) Opinions of Counsel. Acquiror shall have received from Warner
-------------------
Norcross & Judd LLP, counsel to the Company, and David Buechler, Esq.,
South Dakota counsel to the Company, opinions dated the Closing Date,
substantially in the forms attached hereto as Exhibit F-1 and Exhibit F-2,
----------- -----------
respectively, and Acquiror shall have received from Latham & Watkins,
regulatory counsel to the Company, an opinion dated the Closing Date, in
usual and customary form reasonably acceptable to the Company, to the
effect of the opinion attached hereto as Exhibit F-3.
-----------
(f) No Challenge. There shall not be pending any action, proceeding
------------
or investigation by any Governmental Entity (i) challenging or seeking
material damages in connection with the Merger or the conversion of Company
Common Stock into Acquiror Common Stock pursuant to the Merger, or seeking
to place limitations on the ownership of shares of Company Common Stock (or
shares of common stock of the Surviving Corporation) by Acquiror or
Acquiror Sub, (ii) seeking to restrain or prohibit
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the consummation of the Merger or otherwise limit the right of the Company,
any Subsidiary, Acquiror or any of its subsidiaries to own or operate all
or any portion of the business or Assets of the Company and the
Subsidiaries, or (iii) which otherwise is likely to have a Company Material
Adverse Effect or an Acquiror Material Adverse Effect.
(g) Accountant Letters. Acquiror shall have received from the Company
------------------
"cold comfort" letters of Olsen Thielen & Co. LLC dated the date on which
the Registration Statement shall become effective and the Effective Time,
respectively, and addressed to Acquiror, reasonably customary in scope and
substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration
Statement and transactions such as those contemplated by this Merger
Agreement.
(h) Fractional Shares. The aggregate of the fractional share
-----------------
interests in Acquiror Common Stock to be paid in cash pursuant to
Section 2.02(e) of this Merger Agreement shall not be more than 5% of the
maximum aggregate number of shares of Acquiror Common Stock which could be
issued as a result of the Merger.
(i) Employment Agreements. Acquiror shall have received executed
---------------------
copies of Employment Agreements from the Company Key Employees unless the
failure to receive an executed Employment Agreement from any such Company
Key Employee is the result of the death or disability of such Company Key
Employee.
(j) Company Material Adverse Effect. Since December 31, 1997, there
-------------------------------
shall not have occurred a Company Material Adverse Effect (or any
development that, insofar as reasonably can be foreseen, is reasonably
likely to result in any Company Material Adverse Effect) not disclosed in
the Company Disclosure Schedule.
(k) Affiliate Agreements. Acquiror shall have received, after the
--------------------
date of this Merger Agreement and on or prior to the Closing Date, a signed
Affiliate Agreement from each Person listed in Section 3.38 of the Company
Disclosure Schedule and any other Person who may be deemed to have become
an affiliate of the Company (under Rule 145 of the Securities Act).
(l) Tax Opinion. Acquiror shall have received the opinion of Hogan &
-----------
Hartson L.L.P., counsel to Acquiror, in the form of Exhibit G, dated the
---------
Closing Date, to the effect that the Merger will not result in taxation to
Acquiror or Acquiror Sub under the Code. In rendering such opinion, Hogan
& Hartson L.L.P. shall require delivery of and rely upon the representation
letters delivered by Acquiror, Acquiror Sub and the Company substantially
in the forms of Exhibit H and Exhibit I hereto.
--------- ---------
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SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY.
The obligations of the Company to effect the Merger and the other
transactions contemplated herein are also subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which may
be waived by the Company, in whole or in part, to the extent permitted by
applicable Law:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties of Acquiror and Acquiror Sub contained in this Merger Agreement
shall be true and correct as of the date of this Merger Agreement and shall
be true and correct in all material respects (except that where any
statement in a representation or warranty expressly includes a standard of
materiality, such statement shall be true and correct in all respects
giving effect to such standard) as of the Effective Time as though made as
of the Effective Time, except that those representations and warranties
which address matters only as of a particular date shall remain true and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects giving effect to
such standard) as of such date, and except (A) for changes permitted or
contemplated by this Merger Agreement or (B) in a representation and
warranty that does not expressly include a standard of an Acquiror Material
Adverse Effect, any untrue or incorrect statements therein that, considered
in the aggregate, do not indicate an Acquiror Material Adverse Effect. The
Company shall have received a certificate of the chief executive officer or
chief financial officer of Acquiror to that effect.
(b) Agreements and Covenants. Acquiror and Acquiror Sub shall have
------------------------
performed or complied in all material respects with all agreements and
covenants required by this Merger Agreement to be performed or complied
with by them on or prior to the Effective Time. The Company shall have
received a certificate of the chief executive officer or chief financial
officer of Acquiror and Acquiror Sub to that effect.
(c) Opinion of Counsel. The Company shall have received from Hogan &
------------------
Hartson L.L.P., counsel to Acquiror and Acquiror Sub, an opinion dated the
Closing Date, substantially in the form attached hereto as Exhibit J.
---------
(d) No Challenge. There shall not be pending any action, proceeding
------------
or investigation by any Governmental Entity (i) challenging or seeking
material damages in connection with the Merger or the conversion of Company
Common Stock into Acquiror Common Stock pursuant to the
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Merger, or (ii) seeking to restrain or prohibit the consummation of the
Merger.
(e) Quotation of Acquiror Common Stock. The Company shall have
----------------------------------
received from Acquiror or The Nasdaq Stock Market's National Market System
evidence reasonably satisfactory to the Company that the shares of Acquiror
Common Stock to be issued in the Merger shall be quoted on The Nasdaq Stock
Market's National Market System immediately after the Effective Time.
(f) Tax Opinion. The Company shall have received the opinion of
-----------
Warner Norcross & Judd LLP, counsel to the Company, in the form of Exhibit
-------
K, dated the Closing Date, to the effect that the Merger will not result in
-
taxation to the Company or the Company Stockholders under the Code. In
rendering such opinion, Warner Norcross & Judd LLP shall require delivery
of and rely upon the representation letters delivered by Acquiror,
Acquiror Sub and the Company substantially in the forms of Exhibit L and
---------
Exhibit M hereto.
---------
(g) Average Trading Price. The Average Trading Price on the Closing
---------------------
Date shall be greater than $10 per share of Acquiror Common Stock;
provided, however, that if between the date of this Merger Agreement and
-------- -------
the Closing Date the outstanding shares of Acquiror Common Stock shall have
been changed into a different number of shares or a different class by
reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, then such
dollar figure shall be appropriately and correspondingly adjusted to
reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION.
This Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of this Merger Agreement and the Merger
by the Company Stockholders:
(a) by mutual written consent of Acquiror and the Company;
(b) (i) by Acquiror, if there has been a breach by the Company of
any of its representations, warranties, covenants or agreements contained
in this Merger Agreement, or any such representation and warranty shall
have
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become untrue, in any such case such that Section 7.02(a), Section 7.02(b)
or Section 7.02(c) will not be satisfied and such breach or condition has
not been cured within ten (10) business days following receipt by the
Company of written notice of such breach;
(ii) by the Company, if there has been a breach by Acquiror or
Acquiror Sub of any of its representations, warranties, covenants or
agreements contained in this Merger Agreement, or any such representation
and warranty shall have become untrue, in any such case such that Section
7.03(a) or Section 7.03(b) will not be satisfied and such breach or
condition has not been cured within ten (10) business days following
receipt by Acquiror of written notice of such breach;
(c) by either Acquiror or the Company if any decree, permanent
injunction, judgment, order or other action by any court of competent
jurisdiction or any Governmental Entity preventing or prohibiting
consummation of the Merger shall have become final and non-appealable;
(d) by either Acquiror or the Company if the Agreement shall fail to
receive the requisite vote for approval and adoption by the Company
Stockholders at the Stockholders' Meeting;
(e) by either Acquiror or the Company if the Merger shall not have
been consummated by August 15, 1999; provided, however, that this Merger
-------- -------
Agreement may be extended not more than sixty (60) days by Acquiror or the
Company by written notice to the other if the Merger shall not have been
consummated as a direct result of the Company having failed by such date to
receive all regulatory approvals or consents required to be obtained by the
Company with respect to the Merger; provided further, that the right to
-------- -------
terminate this Merger Agreement under this Section 8.01(e) shall not be
available to (i) Acquiror, where Acquiror's willful failure to fulfill any
obligation under this Merger Agreement has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before such date, or
(ii) the Company, where the Company's willful failure to fulfill any
obligation under this Merger Agreement has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before such date; and
(f) by the Company, if in connection with a proposal for a Competing
Transaction the Board of Directors of the Company determines in good faith,
after consultation with and based upon the written advice of independent
legal counsel, that such action is necessary for such Board of Directors to
comply with their fiduciary duties under applicable Law.
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SECTION 8.02. EFFECT OF TERMINATION.
In the event of termination of this Merger Agreement by either Acquiror or
the Company as provided in Section 8.01, this Merger Agreement shall forthwith
become void and there shall be no liability or obligation on the part of
Acquiror, Acquiror Sub or the Company or any of their respective directors or
officers, and each party hereby releases and waives any claim that may otherwise
exist in connection with this Merger Agreement upon such termination, except (a)
nothing herein shall (i) relieve any party from liability for fraud or any
willful or bad faith breach hereof or (ii) prevent any party from challenging
the effectiveness of such termination, and (b) Sections 6.11, 8.02, 8.03, 9.09
(with respect to rights and obligations that survive termination) and 9.12 shall
remain in full force and effect and survive any termination of this Merger
Agreement.
SECTION 8.03. EXPENSES.
(a) Subject to subsection (b) of this Section 8.03, whether or not
the Merger is consummated, all costs and expenses incurred in connection with
this Merger Agreement and the transactions contemplated hereby, including the
preparation of the Registration Statement, the Proxy Statement and all other
Documents contemplated hereby, shall be paid by the party incurring such
expense, except that expenses incurred in connection with printing the documents
distributed to Company Stockholders (including the Proxy Statement) shall be
paid by the Company and the registration and filing fees incurred in connection
with the Registration Statement and the listing of the shares of Acquiror Common
Stock to be issued pursuant hereto on The Nasdaq Stock Market's National Market
System, and fees, costs and expenses associated with compliance with applicable
state securities laws in connection with the Merger shall be paid by Acquiror.
(b) If this Merger Agreement is terminated pursuant to Section
8.01(f), then the Company shall (i) promptly, but in no event later than three
(3) business days after such termination, pay to Acquiror $500,000, by wire
transfer of immediately available funds to the account designated by Acquiror
and (ii) (A) if a Competing Transaction is consummated prior to the first
anniversary of such termination, then simultaneously with the consummation of
such Competing Transaction the Company shall pay to Acquiror $2,000,000, by wire
transfer of immediately available funds to the account designated by Acquiror,
or (B) if a Competing Transaction is not consummated prior to the first
anniversary of such termination, then on the first anniversary of such
termination the Company shall, at its option, (1) pay to Acquiror $2,000,000, by
wire transfer of immediately available funds to the account designated by
Acquiror, or (2) issue to Acquiror 200,000 validly issued, fully paid and non-
assessable shares of Company Common Stock free of any preemptive rights or any
encumbrances, liens or charges of any kind, except that such shares of Company
Common Stock will not be registered under state or federal securities Laws;
provided, however, that if between the date
- -------- -------
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of this Merger Agreement and the first anniversary of such termination the
outstanding shares of Company Common Stock shall have been changed into a
different number of shares or a different class by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares, then such number of shares shall be appropriately and correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
SECTION 8.04. AMENDMENT.
This Merger Agreement may be amended by the parties hereto at any time
prior to the Effective Time; provided, however, that, after approval of the
-------- -------
Merger by the Company Stockholders, no amendment may be made which would reduce
the amount or change the type of consideration into which each share of Company
Common Stock shall be converted pursuant to this Merger Agreement upon
consummation of the Merger. This Merger Agreement may not be amended except by
an instrument in writing signed by the parties hereto.
SECTION 8.05. EXTENSION; WAIVER.
At any time prior to the Effective Time, the parties hereto may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any Document delivered pursuant hereto and (c)
subject to the proviso of Section 8.04, waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party or parties to
be bound thereby. The failure of any party to assert any of its rights under
this Merger Agreement or otherwise shall not constitute a waiver of such rights.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES.
None of the representations, warranties, covenants and agreements in
Article III or Article IV shall survive the Effective Time. This Section 9.01
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
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SECTION 9.02. NOTICES.
All notices and other communications given or made pursuant hereto shall be
in writing and shall be deemed to have been duly given or made as of the date
delivered, mailed or transmitted if delivered personally, mailed by registered
or certified mail (postage prepaid, return receipt requested) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses or sent by electronic transmission to the following telecopier numbers
(or at such other address or telecopy number for a party as shall be specified
by like notice):
(a) If to Acquiror or Acquiror Sub:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW
P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
Telecopier No.: (319) 298-7901
Attention: Randall Rings
Vice President, General Counsel and Secretary
With a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004
Telecopier No.: (202) 637-5910
Attention: Joseph G. Connolly, Jr.
(b) If to the Company:
Dakota Telecommunications Group, Inc.
P.O. Box 66
29705 453rd Avenue
Irene, SD 57037-0066
Telecopier No.: (605) 263-3844
Attention: Thomas W. Hertz, Chairman and CEO
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With a copy (which shall not constitute notice) to:
Warner Norcross & Judd LLP
900 Old Kent Building
111 Lyon Street, N.W.
Grand Rapids, MI 49503
Telecopier No.: (616) 752-2510
Attention: Tracy T. Larsen
SECTION 9.03. HEADINGS.
The headings contained in this Merger Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Merger Agreement.
SECTION 9.04. SEVERABILITY.
If any term or other provision of this Merger Agreement is invalid, illegal
or incapable of being enforced by any rule of Law or public policy, all other
conditions and provisions of this Merger Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Merger Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
SECTION 9.05. ENTIRE AGREEMENT.
This Merger Agreement (together with the Exhibits, Schedules, the Company
Disclosure Schedule and the Acquiror Disclosure Schedule and the other Documents
delivered pursuant hereto) and the Confidentiality Agreement (as defined in
Article X) constitute the entire agreement of the parties and supersede all
prior agreements and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof and, except as expressly
provided in Section 9.07, are not intended to confer upon any other Person any
rights or remedies hereunder.
SECTION 9.06. ASSIGNMENT.
This Merger Agreement shall not be assigned by operation of Law or
otherwise.
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SECTION 9.07. PARTIES IN INTEREST.
This Merger Agreement shall be binding upon and inure solely to the benefit
of each party hereto, and nothing in this Merger Agreement, express or implied,
other than the right to receive the consideration payable in the Merger pursuant
to Article II, is intended to or shall confer upon any other Person any right,
benefit or remedy of any nature whatsoever under or by reason of this Merger
Agreement, except for the provisions of Section 6.15 and Section 6.17, which
shall be for the benefit of, and shall be enforceable by, the beneficiaries
described therein and their heirs, legal representatives, successors and
assigns. Without limiting the generality of the foregoing, the parties
acknowledge and agree that Section 6.21 shall under no circumstances be deemed
to confer any right or benefit upon any Person or be enforceable against any
party or its affiliates.
SECTION 9.08. MUTUAL DRAFTING.
Each party hereto has participated in the drafting of this Merger
Agreement, which each party acknowledges is the result of extensive negotiations
between the parties.
SECTION 9.09. SPECIFIC PERFORMANCE.
In addition to any other remedies which any party may have at law or in
equity, (a) the Company hereby acknowledges that the Company Common Stock and
the Company and the Subsidiaries are unique, and that the harm to Acquiror
resulting from breaches by the Company of its obligations cannot be adequately
compensated by damages and (b) Acquiror and Acquiror Sub hereby acknowledge that
the Acquiror Common Stock and Acquiror and Acquiror Sub are unique, and that the
harm to the Company resulting from breaches by the Acquiror or Acquiror Sub of
their respective obligations cannot be adequately compensated by damages.
Accordingly, each party agrees that the other parties shall have the right to
have all obligations, undertakings, agreements, covenants and other provisions
of this Merger Agreement specifically performed by such party and that the other
parties shall have the right to obtain an order or decree of such specific
performance in any of the courts of the United States of America or of any state
or other political subdivision thereof.
SECTION 9.10. GOVERNING LAW.
This Merger Agreement shall be governed by, and construed in accordance
with, the Laws of the State of Delaware, regardless of the Laws that might
otherwise govern under applicable principles of conflicts of law.
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SECTION 9.11. COUNTERPARTS.
This Merger Agreement may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed and delivered shall be deemed to be an original but all
of which taken together shall constitute one and the same agreement.
SECTION 9.12. CONFIDENTIALITY.
All information delivered to or obtained by or on behalf of any party to
this Merger Agreement shall be held pursuant to the Confidentiality Agreement.
ARTICLE X
DEFINITIONS
For purposes of this Merger Agreement, the following terms, and the
singular and plural thereof, shall have the meanings set forth below:
"Acquiror" is defined in the Preamble to this Merger Agreement.
--------
"Acquiror Class B Common Stock" is defined in Section 4.09.
-----------------------------
"Acquiror Common Stock" means the Class A common stock, par value $.01 per
---------------------
share, of Acquiror.
"Acquiror Disclosure Schedule" is defined in Article IV.
----------------------------
"Acquiror Material Adverse Effect" means any event, change or effect that,
--------------------------------
individually or when taken together with all other such events, changes or
effects, is or is reasonably likely to be materially adverse to the business,
operations, condition (financial or otherwise), Assets or liabilities of
Acquiror and its subsidiaries, taken as a whole.
"Acquiror Options" is defined in Section 2.04.
----------------
"Acquiror Post-Signing SEC Documents" is defined in Section 6.10.
-----------------------------------
"Acquiror SEC Documents" is defined in Section 4.07.
----------------------
"Acquiror Sub" is defined in the Preamble to this Merger Agreement.
------------
"Affiliate" means: (a) with respect to an individual, any member of such
---------
individual's family who resides in the same home; (b) with respect to an entity,
any officer, director, stockholder, partner or investor of or in such entity;
and (c) with respect to a Person, any Person which directly or indirectly,
through one or more
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intermediaries, Controls, is Controlled by, or is under common Control with such
Person.
"affiliate" means, with respect to any Person, a Person that directly or
---------
indirectly, through one or more intermediaries, Controls, is Controlled by, or
is under common Control with, such Person.
"Agreement" means any concurrence of understanding and intention between
---------
two or more Persons with respect to their relative rights and/or obligations or
with respect to a thing done or to be done (whether or not conditional,
executory, express, implied, in writing or meeting the requirements of
contract), including, without limitation, contracts, leases, promissory notes,
covenants, easements, rights of way, covenants, commitments, arrangements and
understandings.
"Articles of Merger" is defined in Section 1.02.
------------------
"Assets" means assets of every kind and everything that is or may be
------
available for the payment of liabilities (whether inchoate, tangible or
intangible), including, without limitation, real and personal property.
"Average Trading Price" means, on any given date, the average, during the
---------------------
ten (10) trading days immediately prior to such date, of the daily closing
prices for Acquiror Common Stock on The Nasdaq Stock Market's National Market
System as reported by Nasdaq.
"beneficial owner" means, with respect to any shares of Company Common
----------------
Stock, a Person who shall be deemed to be the beneficial owner of such shares
(i) which such Person or any of its affiliates or associates beneficially owns,
directly or indirectly, (ii) which such Person or any of its affiliates or
associates (as such term is defined in Rule 12b-2 under the Exchange Act) has,
directly or indirectly, (A) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to any
Agreement or upon the exercise of conversion rights, exchange rights, warrants
or options, or otherwise, or (B) the right to vote pursuant to any Agreement,
(iii) which are beneficially owned, directly or indirectly, by any other Persons
with whom such Person or any of its affiliates or associates has any Agreement
for the purpose of acquiring, holding, voting or disposing of any such shares,
or (iv) pursuant to Section 13(d) of the Exchange Act and any rules or
regulations promulgated thereunder.
"Blue Sky Laws" means state securities or blue sky laws and the rules and
-------------
regulations thereunder.
"Business Critical/Y2K Critical" is defined in Section 3.43.
------------------------------
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"business day" means a day other than a Saturday, a Sunday or any other day
------------
on which commercial banks in the State of South Dakota and in the State of Iowa
are authorized or obligated to be closed.
"Certificates" is defined in Section 2.02(b).
------------
"Closing" is defined in Section 2.06.
-------
"Closing Date" is defined in Section 2.06.
------------
"Closing Event" means a meeting to be held by certain officers of Acquiror
-------------
and certain officers and directors of the Company to acknowledge and formally
announce the Closing and to execute such Documents as may be reasonably
necessary to carry out such event.
"Code" is defined in the Preamble to this Merger Agreement.
----
"Common Control Entity" means any trade or business under common control
---------------------
(as such term is defined in Section 414(b) or 414(c) of the Code) with the
Company or any Subsidiary.
"Communications Act" means the Communications Act of 1934, as amended, and
------------------
all Laws promulgated pursuant thereto or in connection therewith.
"Company" is defined in the Preamble to this Merger Agreement.
-------
"Company Affiliates" is defined in Section 3.38.
------------------
"Company Capital Stock" is defined in Section 3.04.
---------------------
"Company Common Stock" is defined in Section 2.01(a).
--------------------
"Company Contracts" is defined in Section 3.14(a).
-----------------
"Company Disclosure Schedule" is defined in Article III.
---------------------------
"Company Key Employees" is defined in Section 6.07.
---------------------
"Company Licenses" is defined in Section 3.07(a).
----------------
"Company Material Adverse Effect" means any event, change or effect that,
-------------------------------
individually or when taken together with all other such events, changes or
effects, is or is reasonably likely to be materially adverse to the business,
operations, condition (financial or otherwise), Assets or liabilities of the
Company and the Subsidiaries, taken as a whole.
"Company Post-Signing SEC Documents" is defined in Section 6.10.
----------------------------------
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"Company Preferred Stock" is defined in Section 3.04.
-----------------------
"Company SEC Documents" is defined in Section 3.08.
---------------------
"Company Stock Options" is defined in Section 2.04.
---------------------
"Company Stockholders" is defined in the Preamble to this Merger Agreement.
--------------------
"Company Tax Returns" means all Tax Returns required to be filed by the
-------------------
Company or any of the Subsidiaries (without regard to extensions of time
permitted by law or otherwise).
"Competing Transaction" is defined in Section 5.05(a).
---------------------
"Confidentiality Agreement" means the confidentiality agreement dated June
-------------------------
25, 1998 between Acquiror and the Company.
"Control" (including the terms "Controlled by" and "under common Control
------- ------------- --------------------
with") means, as used with respect to any Person, possession, directly or
- ----
indirectly or as a trustee or executor, of power to direct or cause the
direction of management or policies of such Person (whether through ownership of
voting securities, as trustee or executor, by Agreement or otherwise).
"Conversion-Merger" means the transactions described in (i) Appendix A to
-----------------
the Company's Registration Statement on Form S-4, Registration No. 333-22025,
filed with the SEC on June 12, 1997 and (ii) that certain Agreement and Plan of
Merger, dated as of February 14, 1997, between Dakota Cooperative
Telecommunications, Inc., Dakota Telecommunications Group, Inc. and Dakota
Telecommunications Group (Delaware), Inc.
"Conversion-Merger Rights" is defined in Section 2.01(a).
------------------------
"Cooperative" means Dakota Cooperative Telecommunications, Inc., the
-----------
predecessor of the Company prior to the Conversion-Merger.
"Cooperative Interests" mean shares of common stock, par value $5.00 per
---------------------
share, of the Cooperative, shares of preferred stock, par value $100.00 per
share, of the Cooperative, and amounts credited on the books of the Cooperative
to the account of former members, which immediately prior to the Effective Time
had not been exchanged for shares of Company Common Stock in connection with the
Conversion-Merger and which represent the right to receive shares of Company
Common Stock.
"Corrections" is defined in Section 3.43.
-----------
"Cost Assessment" is defined in Section 3.43.
---------------
-81-
"Date Assessment" is defined in Section 3.43.
---------------
"Defined Benefit Plan" means a Plan that is or was a "defined benefit plan"
--------------------
as such term is defined in Section 3(35) of ERISA.
"Delaware Law" is defined in the Preamble to this Merger Agreement.
------------
"Documents" means any paper or other material (including, without
---------
limitation, computer storage media) on which is recorded (by letters, numbers or
other marks) information that may be evidentially used, including, without
limitation, legal opinions, mortgages, indentures, notes, instruments, leases,
Agreements, insurance policies, reports, studies, financial statements
(including, without limitation, the notes thereto), other written financial
information, schedules, certificates, charts, maps, plans, photographs, letters,
memoranda and all similar materials.
"DOL" means the United States Department of Labor and its successors.
---
"Education" is defined in Section 3.43.
---------
"Effective Time" is defined in Section 1.02.
--------------
"Employment Agreements" is defined in Section 6.07.
---------------------
"Encumbrance" means any mortgage, lien, pledge, encumbrance, security
-----------
interest, deed of trust, option, encroachment, reservation, order, decree,
judgment, condition, restriction, charge, Agreement, claim or equity of any
kind, other than: (i) Taxes not yet due or the validity of which is being
contested in good faith by appropriate proceedings, and as to which the Company
shall, if appropriate under GAAP, have set aside in the Financial Statements and
on its books and records adequate reserves; (ii) deposits under workmen's
compensation, unemployment insurance, social security and other similar Laws, or
to secure the performance of bids, tenders or contracts (other than for the
repayment of borrowed money) or to secure indemnity, performance or other
similar bonds for the performance of bids, tenders or contracts (other than for
the repayment of borrowed money) or to secure statutory obligations or surety or
appeal bonds, or to secure indemnity, performance or other similar bonds in the
ordinary course of business; and (iii) zoning restrictions, easements, licenses,
covenants and other restrictions affecting the use of the Real Property and of
which no executive officer of the Company or any Subsidiary has knowledge.
"Environmental Laws" means any Laws (including, without limitation, the
------------------
Comprehensive Environmental Response, Compensation, and Liability Act),
including any plans or other legally binding criteria promulgated pursuant to
such Laws, now or hereafter in effect relating to Hazardous Materials
generation,
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production, use, storage, treatment, transportation or disposal, or noise
control, or the protection of human health or the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and all Laws promulgated pursuant thereto or in connection therewith.
"ESOP" means an "employee stock ownership plan" as such term is defined in
----
Section 407(d)(6) of ERISA or Section 4975(e)(7) of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
------------
all Laws promulgated pursuant thereto or in connection therewith.
"Exchange Agent" is defined in Section 2.02(a).
--------------
"Exchange Fund" is defined in Section 2.02(a).
-------------
"Exchange Ratio" is defined in Section 2.01(a).
--------------
"FAA" means the United States Federal Aviation Administration and its
---
successors.
"FCC" means the United States Federal Communications Commission and its
---
successors.
"Federal Aviation Act" means the Federal Aviation Act of 1958, as amended,
--------------------
and all Laws promulgated pursuant thereto or in connection therewith.
"Financial Statements" is defined in Section 3.08.
--------------------
"GAAP" means United States generally accepted accounting principles.
----
"Governmental Entities" (including the term "Governmental") means any
--------------------- ------------
governmental, quasi-governmental or regulatory authority, whether domestic or
foreign.
"group" is defined in Section 5.05(a).
-----
"Hazardous Discharge" means any emission, spill, release or discharge
-------------------
(whether on Real Property, on property adjacent to the Real Property, or at any
other location or disposal site) into or upon the air, soil or improvements,
surface water or groundwater, or the sewer, septic system, or waste treatment,
storage or disposal systems servicing the Real Property, in each case of
Hazardous Materials used, stored, generated, treated or disposed of at the Real
Property.
"Hazardous Materials" means any wastes, substances, radiation or materials
-------------------
(whether solids, liquids or gases) that are regulated by a Governmental Entity
or defined or listed by a Governmental Entity as hazardous, toxic, pollutants or
-83-
contaminants, including, without limitation, substances defined as "hazardous
wastes," "hazardous substances," "toxic substances," "radioactive materials," or
other similar designations in, or otherwise subject to regulation under, any
Environmental Laws. "Hazardous Materials" includes polychlorinated biphenyls
-------------------
(PCBs), asbestos, lead-based paints, and petroleum and petroleum products
(including, without limitation, crude oil or any fraction thereof).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
-------
as amended, and all Laws promulgated pursuant thereto or in connection
therewith.
"Hurley Communications Agreement" is defined in Section 3.04.
-------------------------------
"Implementation" is defined in Section 3.43.
--------------
"Individual Account Plan" means a Plan that is or was an "individual
-----------------------
account plan" as such term is defined in Section 3(34) of ERISA.
"Intellectual Property" means (a) all inventions (whether patentable or
---------------------
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, all rights to database
information, and all applications, registrations, and renewals in connection
therewith, (d) all mask works and all applications, registrations, and renewals
in connection therewith, (e) all trade secrets and confidential business
information (including ideas, research and development, know-how, formulas,
compositions, manufacturing and production processes and techniques, technical
data, designs, drawings, specifications, customer and supplier lists, pricing
and cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation), (g) all rights,
including rights of privacy and publicity, to use the names, likenesses and
other personal characteristics of any individual, (h) all other proprietary
rights, and (i) all copies and tangible embodiments thereof (in whatever form or
medium) existing in any part of the world.
"IRS" means the United States Internal Revenue Service and its successors.
---
"IUB" means the Iowa Utilities Board.
---
"knowledge" (including the terms "knowing" and "knowingly") will be deemed
--------- ------- ---------
to be present with respect to the Company and the Subsidiaries, on the one hand,
or
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Acquiror, on the other hand, when the matter in question was brought to the
attention of or, if due diligence had been exercised, would have been brought to
the attention of, any officer or responsible employee of the Company or any
Subsidiary, on the one hand, or Acquiror, on the other hand.
"Laws" means all foreign, federal, state and local statutes, laws,
----
ordinances, regulations, rules, resolutions, orders, tariffs, determinations,
writs, injunctions, awards (including, without limitation, awards of any
arbitrator), judgments and decrees applicable to the specified Person and to the
businesses and Assets thereof (including, without limitation, Laws relating to
securities registration and regulation; the sale, leasing, ownership or
management of real property; employment practices, terms and conditions, and
wages and hours; building standards, land use and zoning; safety, health and
fire prevention; and environmental protection, including Environmental Laws).
"License" means any franchise, grant, authorization, license, tariff,
-------
permit, easement, variance, exemption, consent, certificate, approval or order
of any Governmental Entity.
"Managers" is defined in Section 6.15.
--------
"Merger" is defined in the Preamble to this Merger Agreement.
------
"Merger Agreement" is defined in the Preamble to this Merger Agreement.
----------------
"Minimum-Funding Plan" means a Pension Plan that is subject to Title I,
--------------------
Subtitle B, Part 3, of ERISA (concerning "funding").
"MPUC" means the Minnesota Public Utilities Commission.
----
"Multiemployer Plan" means a "multiemployer plan" as such term is defined
------------------
in Section 3(37) of ERISA.
"NASD" means the National Association of Securities Dealers, Inc.
----
"NDPSC" means the North Dakota Public Service Commission.
-----
"Ordinary Course of Business" means ordinary course of business consistent
---------------------------
with past practices and, in the reasonable judgment of a diligent businessman,
prudent business operations.
"Other Arrangement" means a benefit program or practice providing for
-----------------
bonuses, incentive compensation, vacation pay, severance pay, insurance,
restricted stock, stock options, employee discounts, company cars, tuition
reimbursement or any other perquisite or benefit (including, without limitation,
any fringe benefit under Section 132 of the Code) to employees, officers or
independent contractors that is not a Plan.
-85-
"PBGC" means the Pension Benefit Guaranty Corporation or its successors.
----
"Pension Plan" means an "employee pension benefit plan" as such term is
------------
defined in Section 3(2) of ERISA.
"Person" means an individual, corporation, partnership, joint venture,
------
trust, unincorporated organization or other entity, or a Governmental Entity.
"Plan" means any plan, program or arrangement, whether or not written, that
----
is or was an "employee benefit plan" as such term is defined in Section 3(3) of
ERISA and (a) which was or is established or maintained by the Company or any
Subsidiary; (b) to which the Company or any Subsidiary contributed or was
obligated to contribute or to fund or provide benefits; or (c) which provides or
promises benefits to any person who performs or who has performed services for
the Company or any Subsidiary and because of those services is or has been (i) a
participant therein or (ii) entitled to benefits thereunder.
"Post-Signing Returns" is defined in Section 5.03.
--------------------
"Proxy Statement" is defined in Section 6.01(a).
---------------
"Qualified Plan" means a Pension Plan that satisfies, or is intended by the
--------------
Company to satisfy, the requirements for Tax qualification described in Section
401 of the Code.
"Real Property" means the real property owned, operated, or used by the
-------------
Company or any of the Subsidiaries as of December 31, 1996, and any additional
real property owned, operated, or used since that date, and, for purposes of
Section 3.33, any real property formerly owned or operated by the Company or any
of the Subsidiaries.
"Registration Statement" is defined in Section 6.01(a).
----------------------
"Replacement" is defined in Section 3.43.
-----------
"Representative" is defined in Section 2.02(h).
--------------
"Rights" is defined in Section 3.04.
------
"Rights Agreement" is defined in Section 3.04.
----------------
"SDPUC" means the South Dakota Public Utilities Commission.
-----
"SEC" means the United States Securities and Exchange Commission and its
---
successors.
-86-
"Securities Act" means the Securities Act of 1933, as amended, and all Laws
--------------
promulgated pursuant thereto or in connection therewith.
"Significant Subsidiary" means any subsidiary of Acquiror disclosed in its
----------------------
most recent Annual Report on Form 10-K, and any other subsidiary that would
constitute a "Significant Subsidiary" of Acquiror within the meaning of Rule 1-
02 of Regulation S-X of the SEC.
"Statutory-Waiver Plan" means a Pension Plan that is not subject to Title
---------------------
I, Subtitle B, Part 3, of ERISA (concerning "funding").
"Stockholders' Meeting" is defined in Section 6.01(b).
---------------------
"Subsidiary" means a corporation, partnership, joint venture or other
----------
entity of which the Company owns, directly or indirectly, at least 50% of the
outstanding securities or other interests the holders of which are generally
entitled to vote for the election of the board of directors or other governing
body or otherwise exercise Control of such entity.
"Survey" is defined in Section 3.43.
------
"Taxes" (including the terms "Tax" and "Taxing") means all federal, state,
----- --- ------
local and foreign taxes (including, without limitation, income, profit,
franchise, sales, use, real property, personal property, ad valorem, excise,
employment, social security and wage withholding taxes) and installments of
estimated taxes, assessments, deficiencies, levies, imports, duties, license
fees, registration fees, withholdings, or other similar charges of every kind,
character or description imposed by any Governmental Entity, and any interest,
penalties or additions to tax imposed thereon or in connection therewith.
"Tax Returns" means all federal, state, local, foreign and other applicable
-----------
returns, declarations, reports and information statements with respect to Taxes
required to be filed with the IRS or any other Governmental Entity or Tax
authority or agency, including, without limitation, consolidated, combined and
unitary tax returns.
"Testing & Verification" is defined in Section 3.43.
----------------------
"Title I Plan" means a Plan that is subject to Title I of ERISA.
------------
"Unaudited Balance Sheets" is defined in Section 6.08.
------------------------
"Unaudited Financial Statements" is defined in Section 6.08.
------------------------------
"Voting Agreements" is defined in the Preamble to this Merger Agreement.
-----------------
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"Welfare Plan" means an "employee welfare benefit plan" as such term is
------------
defined in Section 3(1) of ERISA.
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IN WITNESS WHEREOF, Acquiror, Acquiror Sub and the Company have caused this
Merger Agreement to be executed and delivered as of the date first written
above.
MCLEODUSA INCORPORATED
By: /s/ Stephen C. Gray
--------------------------------------------
Name: Stephen C. Gray
Title: President and Chief Operating Officer
WEST GROUP ACQUISITION CO.
By: /s/ Stephen C. Gray
--------------------------------------------
Name: Stephen C. Gray
Title: President
DAKOTA TELECOMMUNICATIONS
GROUP, INC.
By: /s/ Thomas W. Hertz
--------------------------------------------
Name: Thomas W. Hertz
Title: Chairman/CEO
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APPENDIX B
THE DUFF & PHELPS, LLC
FAIRNESS OPINION
Appendix B
October 27, 1998
Board of Directors of
Dakota Telecommunications Group, Inc.
29705 453rd Avenue
Irene, South Dakota 57037-0066
Gentlemen:
Duff & Phelps, LLC ("Duff & Phelps") has been engaged by the board of directors
("Board") of Dakota Telecommunications Group, Inc. ("DTG" or the "Company") as
financial advisor. Specifically, Duff & Phelps has been engaged to determine if
a Proposed Transaction (as defined below) is fair to the shareholders of DTG
from a financial point of view.
The Company is a facilities-oriented telecommunications firm that offers local
and long-distance telephone services, cable services, internet services and
network consulting services. It is our understanding that DTG is considering a
transaction (the "Proposed Transaction") wherein the Company would be acquired
by McLeodUSA Incorporated ("McLeod"), and each share of common stock of DTG
would be exchanged for 0.4328 shares of McLeod common stock. McLeod is a
provider of integrated telecommunications services in Midwest and Rocky Mountain
states with common stock that is publicly traded on the NASDAQ National Market
System. We understand that the Proposed Transaction will be submitted to the
shareholders of DTG for approval at a Special Meeting of the Shareholders.
For purposes of our opinion and in connection with our review of the Proposed
Transaction, we have, among other things:
1. Reviewed a draft dated as of October 22, 1998 of an Agreement and Plan of
Merger by and among McLeodUSA Incorporated, West Group Acquisition Co. and
Dakota Telecommunications Group, Inc., including drafts of exhibits and
schedules thereto;
2. discussed the history, current operations and future outlook of DTG as well
as the history and terms of the Proposed Transaction with Company
management;
3. reviewed the Company's Form 10-KSB for the year ended December 31, 1997;
4. reviewed the Company's Form 10-QSB for the period ended June 30, 1998;
5. reviewed the DTG CLEC Facilities Expansion Plan dated as of July 1998;
6. reviewed a Private Placement Memorandum dated as of May 1998 prepared in
conjunction with the firm of Houlihan Lokey Howard & Zukin ("HLHZ");
7. reviewed a 1998--2002 Development Forecast dated as of May 1998;
8. reviewed the market prices and trading activity of the common stock of
McLeod;
9. reviewed the McLeod Form 10-K for the year ended December 31, 1997;
10. reviewed the McLeod Form 10-Q for the period ended June 30, 1998; and
11. performed such other review and analyses as we deemed necessary.
Our opinion is based upon an analysis of the foregoing in light of our
assessment of general economic and financial market conditions as they can be
evaluated by us as of the date hereof. As of the time of the completion of our
analysis, the common stock of McLeod was trading in a range of approximately $32
to $35 per share.
In connection with our opinion, with your permission and without any independent
verification, we have relied on the accuracy and completeness of all the
financial and other information reviewed by us, furnished, or otherwise
communicated to us by the Company or obtained by us from publicly available
sources. We have not made an independent valuation or appraisal of the assets or
liabilities of the Company and have not been furnished with such valuation or
appraisal. Any inaccuracies in the information on which we relied could
materially affect our opinion. Duff & Phelps has previously served as financial
advisor to the employee stock ownership plan of the Company.
In rendering this opinion, we have assumed that the Proposed
Transaction occurs on terms that are described in the Merger Agreement.
Nonetheless, it should be recognized that we are not making any recommendation
as to whether the shareholders of the Company should vote in favor of the
Proposed Transaction.
Based upon the foregoing, it is our opinion that the Proposed Transaction is
fair to the shareholders of Dakota Telecommunications Group, Inc. from a
financial point of view.
Respectfully submitted,
/s/ Duff & Phelps, LLC
Duff & Phelps, LLC
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of McLeodUSA (the
"McLeodUSA Certificate") contains provisions that provide that no director of
McLeodUSA shall be liable for breach of fiduciary duty as a director except for
(1) any breach of the directors' duty of loyalty to McLeodUSA or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director derived
an improper personal benefit. The McLeodUSA Certificate contains provisions that
further provide for the indemnification of directors and officers to the fullest
extent permitted by the DGCL. Under the Bylaws of McLeodUSA, McLeodUSA is
required to advance expenses incurred by an officer or director in defending any
such action if the director or officer undertakes to repay such amount if it is
determined that the director or officer is not entitled to indemnification. In
addition, McLeodUSA has entered into indemnity agreements with each of its
directors pursuant to which McLeodUSA has agreed to indemnify the directors as
permitted by the DGCL. McLeodUSA has obtained directors and officers liability
insurance against certain liabilities, including liabilities under the
Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
- -------
Number EXHIBIT DESCRIPTION
- ------ -------------------
1.1 Purchase Agreement, dated as of February 26, 1997 among Salomon
Brothers Inc, Morgan Stanley & Co. Incorporated and McLeod, Inc. (Filed
as Exhibit 1.1 to Registration Statement on Form S-4, File No. 333-
27647 (the "July 1997 Form S-4"), and incorporated herein by
reference).
1.2 Purchase Agreement, dated as of July 15, 1997 among Salomon Brothers
Inc, Bear, Stearns & Co. Inc., Morgan Stanley Dean Witter and McLeodUSA
Incorporated. (Filed as Exhibit 1.2 to Registration Statement on Form S
-4, File No. 333-34227 (the "November 1997 Form S-4"), and
incorporated herein by reference).
1.3 Purchase Agreement, dated as of March 10, 1998 among Salomon Brothers
Inc, Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, Chase
Securities Inc. and McLeodUSA Incorporated (Filed as Exhibit 1.3 to
Registration Statement on Form S-4, File No. 333-52793 (the "May 1998
Form S-4"), and incorporated herein by reference).
2.1 Agreement and Plan of Reorganization dated April 28, 1995 among Midwest
Capital Group Inc., MWR Telecom, Inc. and McLeod, Inc. (Filed as
Exhibit 2.1 to Registration Statement on Form S-1, File No. 333-3112
("Initial Form S-1"), and incorporated herein by reference).
2.2 Agreement and Plan of Reorganization dated as of July 12, 1996 among
Ruffalo, Cody & Associates, Inc., certain shareholders of Ruffalo, Cody
& Associates, Inc. and McLeod, Inc. (Filed as Exhibit 2 to Current
Report on Form 8-K, File No. 0-20763, filed with the Commission on July
29, 1996 and incorporated herein by reference).
2.3 Agreement and Plan of Reorganization dated as of August 15, 1996 among
TelecomwUSA Publishing Group, Inc. and McLeod, Inc. (Filed as Exhibit 2
to Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on August 26, 1996 and incorporated herein by reference).
2.4 Agreement and Plan of Reorganization dated as of January 27, 1997 among
McLeod, Inc., Digital Communications of Iowa, Inc., Clark E. McLeod and
Mary E. McLeod. (Filed as Exhibit 2 to Current Report on Form 8-K, File
No. 0-20763, filed with the Commission on February 24, 1997 and
incorporated herein by reference).
2.5 Asset Purchase Agreement dated as of May 30, 1997 by and among
McLeodUSA Incorporated, ESI/McLeodUSA, Inc., and ESI Communications,
Inc., ESI Communications/ SW, Inc., ESI Communications/West, Inc., ESI
Communications Downtown, Inc., ESI Communications North, Inc., and
Michael Reichert, Peter Jones, John Pupkes and Jeff Meehan. (Filed as
Exhibit 2.1 to Current Report on Form 8-K, File No. 0-20763 (the "June
1997 Form 8-K"), filed with the Commission on June 26, 1997 and
incorporated herein by reference).
2.6 Agreement and Plan of Reorganization dated as of June 14, 1997 among
McLeodUSA Incorporated, Eastside Acquisition Co. and Consolidated
Communications Inc. (Filed as Exhibit 2.2 to the June 1997 Form 8-K and
incorporated herein by reference).
2.7* Agreement and Plan of Merger dated as of October 27, 1998 among
McLeodUSA Incorporated, West Group Acquisition Co. and Dakota
Telecommunications Group, Inc. (Attached as Appendix A to the Proxy
Statement/Prospectus).
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Initial Form S-1 and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the "November
1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to the July 1997
Form S-4 and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on Form
10-K, File No. 0-20763, filed with the Commission on March 6, 1998 (the
"1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United States
Trust Company of New York, as Trustee, relating to the 10-1/2% Senior
Discount Notes Due 2007 of McLeod, Inc. (Filed as Exhibit 4.2 to Annual
Report on Form 10-K, File No. 0-20763, filed with the Commission on
March 31, 1997 (the "1996 Form 10-K") and incorporated herein by
reference).
4.3 Initial Global 10-1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10-1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K and
incorporated herein by reference).
4.5 Registration Agreement dated March 4, 1997 among McLeod, Inc., Salomon
Brothers Inc and Morgan Stanley & Co. Incorporated. (Filed as Exhibit
4.5 to the 1996 Form 10-K and incorporated herein by reference).
4.6 Investor Agreement dated as of April 1, 1996 among McLeod, Inc., IES
Investments Inc., Midwest Capital Group Inc., MWR Investments Inc.,
Clark and Mary McLeod, and certain other stockholders. (Filed as
Exhibit 4.8 to Initial Form S-1 and incorporated herein by reference).
4.7 Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by
and among McLeod, Inc., IES Investments Inc., Midwest Capital Group
Inc., MWR Investments Inc., Clark E. McLeod and Mary E. McLeod. (Filed
as Exhibit 4.3 to the November 1996 Form S-1 and incorporated herein by
reference).
4.8 Form of 10-1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.9 Indenture dated as of July 21, 1997 between McLeodUSA Incorporated and
United States Trust Company of New York, as Trustee, relating to the 9-
1/4% Senior Notes Due 2007 of McLeodUSA Incorporated. (Filed as Exhibit
4.9 to the July 1997 Form S-4 and incorporated herein by reference).
4.10 Form of Initial Global 9-1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4 and
incorporated herein by reference).
4.11 Registration Agreement dated July 21, 1997 among McLeodUSA
Incorporated, Salomon Brothers Inc, Morgan Stanley Dean Witter and
Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11 to the July 1997 Form
S-4 and incorporated herein by reference).
4.12 Stockholders' Agreement dated June 14, 1997 among McLeodUSA
Incorporated, IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard A.
Lumpkin on behalf of each of the shareholders of Consolidated
Communications Inc. listed on Schedule 1 of the Stockholders'
Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.13 Amendment No. 1 to Stockholders' Agreement dated as of September 19,
1997 by and among McLeodUSA Incorporated, IES Investments Inc., Midwest
Capital Group, Inc., MWR Investments Inc., Clark E. McLeod, Mary E.
McLeod and Richard A. Lumpkin on behalf of each of the shareholders of
Consolidated Communications Inc. listed in Schedule I thereto. (Filed
as Exhibit 4.1 to the Quarterly Report on Form 10-Q, File No. 0-20763,
filed with the Commission on November 14, 1997 and incorporated herein
by reference).
4.14 Form of 9-1/4% Senior Exchange Note Due 2007 of McLeodUSA Incorporated.
(Filed as Exhibit 4.14 to the 1997 Form 10-K and incorporated herein by
reference).
4.15 Indenture dated as of March 16, 1998 between McLeodUSA Incorporated and
United States Trust Company of New York, as Trustee, relating to the
8-3/8% Senior Notes Due 2008 of McLeodUSA Incorporated. (Filed as
Exhibit 4.15 to the May 1998 Form S-4 and incorporated herein by
reference).
4.16 Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.15).
4.17 Registration Agreement dated March 16, 1998 among McLeodUSA
Incorporated, Solomon Brothers Inc, Bear, Stearns & Co. Inc., Morgan
Stanley & Co. Incorporated and Chase Securities Inc. (Filed as
Exhibit 4.17 to the May 1998 Form S-4 and incorporated herein by
reference).
4.18 Stockholders' Agreement dated November 18, 1998 by and among McLeodUSA
Incorporated; IES Investments Inc., Clark E. McLeod; Mary E. McLeod;
and Richard A. Lumpkin and each of the former shareholders of
Consolidated Communications Inc. ("CCI") and certain permitted
transferees of the former CCI shareholders. (Filed as Exhibit 99.1 to
the Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on November 19, 1998 and incorporated herein by reference).
5.1* Opinion of Hogan & Hartson L.L.P.
8.1* Opinion of Warner Norcross & Judd LLP regarding certain tax matters.
10.1 Credit Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod
Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc. and The First National Bank of Chicago. (Filed
as Exhibit 10.1 to Initial Form S-1 and incorporated herein by
reference).
10.2 First Amendment to Credit Agreement dated as of June 17, 1994 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement,
Inc., McLeod Telecommunications, Inc. and The First National Bank of
Chicago. (Filed as Exhibit 10.2 to Initial Form S-1 and incorporated
herein by reference).
10.3 Second Amendment to Credit Agreement dated as of December 1, 1994 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement,
Inc., McLeod Telecommunications, Inc. and The First National Bank of
Chicago. (Filed as Exhibit 10.3 to Initial Form S-1 and incorporated
herein by reference).
10.4 Third Amendment to Credit Agreement dated as of May 31, 1995 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement,
Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First
National Bank of Chicago. (Filed as Exhibit 10.4 to Initial Form S-1
and incorporated herein by reference).
10.5 Fourth Amendment to Credit Agreement dated as of July 28, 1995 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement,
Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First
National Bank of Chicago. (Filed as Exhibit 10.5 to Initial Form S-1
and incorporated herein by reference).
10.6 Fifth Amendment to Credit Agreement dated as of October 18, 1995 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement,
Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First
National Bank of Chicago. (Filed as Exhibit 10.6 to Initial Form S-1
and incorporated herein by reference).
10.7 Sixth Amendment to Credit Agreement dated as of March 29, 1996 among
McLeod, Inc., McLeod Network Services, Inc., McLeod Telecommunications,
Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed
as Exhibit 10.7 to Initial Form S-1 and incorporated herein by
reference).
10.8 Security Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod
Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc. and The First National Bank of Chicago. (Filed
as Exhibit 10.8 to Initial Form S-1 and incorporated herein by
reference).
10.9 First Amendment to Security Agreement dated as of December 1, 1994
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc. and The First
National Bank of Chicago. (Filed as Exhibit 10.9 to Initial Form S-1
and incorporated herein by reference).
10.10 Support Agreement dated as of December 1, 1994 among IES Diversified
Inc., McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc. and The First
National Bank of Chicago. (Filed as Exhibit 10.10 to Form S-1 and
incorporated herein by reference).
10.11 Agreement Regarding Support Agreement dated December 1994 between
McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit 10.11 to
Initial Form S-1 and incorporated herein by reference).
10.12 Agreement Regarding Guarantee dated May 16, 1994 between McLeod, Inc.
and IES Diversified Inc. (Filed as Exhibit 10.12 to Initial Form S-1
and incorporated herein by reference).
10.13 Joinder to and Assumption of Credit Agreement dated as of April 28,
1995 between McLeod Merging Co. and The First National Bank of Chicago.
(Filed as Exhibit 10.13 to Initial Form S-1 and incorporated herein by
reference).
10.14 Joinder to and Assumption of Security Agreement dated as of April 28,
1995 between McLeod Merging Co. and The First National Bank of Chicago.
(Filed as Exhibit 10.14 to Initial Form S-1 and incorporated herein by
reference).
10.15 Letter from The First National Bank of Chicago to James L. Cram dated
April 28, 1995 regarding extension of the termination date under the
Credit Agreement. (Filed as Exhibit 10.15 to Initial Form S-1 and
incorporated herein by reference).
10.16 Credit Agreement dated as of March 29, 1996 among McLeod, Inc., McLeod
Network Services, Inc., McLeod Telemanagement, Inc., McLeod
Telecommunications, Inc. MWR Telecom, Inc. and The First National Bank
of Chicago. (Filed as Exhibit 10.16 to Initial Form S-1 and
incorporated herein by reference).
10.17 Agreement for Construction Related Services dated as of October 17,
1995 between City Signal Fiber Services, Inc. and McLeod Network
Services, Inc. (Filed as Exhibit 10.17 to Initial Form S-1 and
incorporated herein by reference).
10.18 Construction Services Agreement dated March 27, 1996 between City
Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as
Exhibit 10.18 to Initial Form S-1 and incorporated herein by
reference).
10.19 Fiber Optic Use Agreement dated as of February 14, 1996 between McLeod
Network Services, Inc. and Galaxy Telecom, L.P. (Filed as Exhibit 10.19
to Initial Form S-1 and incorporated herein by reference).
10.20 Agreement dated as of July 11, 1994 between McLeod Network Services,
Inc. and KLK Construction. (Filed as Exhibit 10.20 to Initial Form S-1
and incorporated herein by reference).
10.21 Lease Agreement dated September 5, 1995 between State of Iowa and MWR
Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1 and
incorporated herein by reference).
10.22 Lease Agreement dated September 5, 1995 between State of Iowa and
McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial Form
S-1 and incorporated herein by reference).
10.23 Contract dated September 5, 1995 between Iowa Telecommunications and
Technology Commission and MWR Telecom, Inc. (Filed as Exhibit 10.23 to
Initial Form S-1 and incorporated herein by reference).
10.24 Contract dated June 27, 1995 between Iowa National Guard and McLeod
Network Services, Inc. (Filed as Exhibit 10.24 to Initial Form S-1 and
incorporated herein by reference).
10.25 Addendum Number One to Contract dated September 5, 1995 between Iowa
National Guard and McLeod Network Services, Inc. (Filed as Exhibit
10.25 to Initial Form S-1 and incorporated herein by reference).
10.26 U S WEST Centrex Plus Service Rate Stability Plan dated October 15,
1993 between McLeod Telemanagement, Inc. and U S WEST Communications,
Inc. (Filed as Exhibit 10.26 to Initial Form S- 1 and incorporated
herein by reference).
10.27 U S WEST Centrex Plus Service Rate Stability Plan dated July 17, 1993
between McLeod Telemanagement, Inc. and U S WEST Communications, Inc.
(Filed as Exhibit 10.27 to Initial Form S- 1 and incorporated herein by
reference).
10.28 Ameritech Centrex Service Confirmation of Service Orders dated various
dates in 1994, 1995 and 1996 between McLeod Telemanagement, Inc. and
Ameritech Information Industry Services. (Filed as Exhibit 10.28 to
Initial Form S-1 and incorporated herein by reference).
10.29 Lease Agreement dated as of December 28, 1993 between 2060 Partnership
and McLeod Telemanagement, Inc., as amended by Amendments First to
Ninth dated as of July 3, 1994, March 25,1994, June 22, 1994, August
12, 1994, September 12, 1994, September 20, 1994, November 16, 1994,
September 20, 1995 and January 6, 1996, respectively. (Filed as Exhibit
10.29 to Initial Form S- 1 and incorporated herein by reference).
10.30 Lease Agreement dated as of May 24, 1995 between 2060 Partnership and
McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial Form S-1
and incorporated herein by reference).
10.31 Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture
and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial Form
S-1 and incorporated herein by reference).
10.32 First Amendment to Lease Agreement dated as of November 20, 1995
between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. (Filed
as Exhibit 10.32 to Initial Form S-1 and incorporated herein by
reference).
10.33 Uniform Purchase Agreement dated July 22, 1993 between McLeod, Inc. and
Hill's Maple Crest Farms Partnership. (Filed as Exhibit 10.33 to
Initial Form S-1 and incorporated herein by reference).
10.34 Master Right-of-Way Agreement dated July 27, 1994 between McLeod
Network Services, Inc. and IES Industries Inc. (Filed as Exhibit 10.34
to Initial Form S-1 and incorporated herein by reference).
10.35 Master Right-of-Way and Tower Use Agreement dated February 13, 1996
between IES Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35 to
Initial Form S-1 and incorporated herein by reference).
10.36 Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Iowa and South
Dakota). (Filed as Exhibit 10.36 to Initial Form S-1 and incorporated
herein by reference).
10.37 Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Illinois). (Filed
as Exhibit 10.37 to Initial Form S-1 and incorporated herein by
reference).
10.38 Settlement Agreement dated March 18, 1996 between U S WEST
Communications, Inc. and McLeod Telemanagement, Inc. (Filed as Exhibit
10.38 to Initial Form S-1 and incorporated herein by reference).
10.39 Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.39 to Initial Form S-1 and
incorporated herein by reference).
10.40 McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan.
(Filed as Exhibit 10.40 to Initial Form S-1 and incorporated herein by
reference).
10.41 McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit 10.41
to Initial Form S-1 and incorporated herein by reference).
10.42 McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit 10.42
to Initial Form S-1 and incorporated herein by reference).
10.43 McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as
Exhibit 10.43 to Initial Form S-1 and incorporated herein by
reference).
10.44 Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and
McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1 and
incorporated herein by reference).
10.45 Promissory Note dated March 29, 1996 between Stephen K. Brandenburg and
McLeod, Inc. (Filed as Exhibit 10.45 to Initial Form S-1 and
incorporated herein by reference).
10.46 Agreement dated April 28, 1995 among McLeod, Inc., McLeod
Telecommunications, Inc., McLeod Telemanagement, Inc., McLeod Network
Services, Inc. and Clark E. McLeod. (Filed as Exhibit 10.46 to Initial
Form S-1 and incorporated herein by reference).
**10.47 Telecommunications Services Agreement dated March 14, 1994 between
WilTel, Inc. and McLeod Telemanagement, Inc., as amended. (Filed as
Exhibit 10.47 to Initial Form S-1 and incorporated herein by
reference).
10.48 Amendment to Contract Addendum A to Contract No. 2102 dated March 31,
1993 between the Iowa Department of General Services and McLeod
Telecommunications, Inc. (Filed as Exhibit 10.48 to Initial Form S-1
and incorporated herein by reference).
10.49 Construction Services Agreement dated June 30, 1995 between MFS Network
Technologies, Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.49 to
Initial Form S-1 and incorporated herein by reference).
10.50 First Amendment to Agreement Regarding Support Agreement dated May 14,
1996 among McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
(Filed as Exhibit 10.50 to Initial Form S-1 and incorporated herein by
reference).
10.51 First Amendment to Agreement Regarding Guarantee dated May 14, 1996
among McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
(Filed as Exhibit 10.51 to Initial Form S-1 and incorporated herein by
reference).
10.52 Amended and Restated Directors Stock Option Plan of McLeod, Inc. (Filed
as Exhibit 10.52 to Initial Form S-1 and incorporated herein by
reference).
10.53 Forms of Employment, Confidentiality and Non-Competition Agreement
between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as
Exhibit 10.53 to Initial Form S-1 and incorporated herein by
reference).
10.54 Form of Change-of-Control Agreement between McLeod, Inc. and certain
employees of McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form S-1
and incorporated herein by reference).
10.55 McLeod, Inc. 1996 Employee Stock Option Plan, as amended. (Filed as
Exhibit 10.55 to the November 1996 Form S-1 and incorporated herein by
reference).
10.56 McLeod, Inc. Employee Stock Purchase Plan, as amended. (Filed as
Exhibit 10.56 to the 1996 Form 10-K and incorporated herein by
reference).
10.57 Form of Indemnity Agreement between McLeod, Inc. and certain officers
and directors of McLeod, Inc. (Filed as Exhibit 10.57 to Initial Form
S-1 and incorporated herein by reference).
10.58 License Agreement dated April 24, 1996 between PageMart, Inc. and MWR
Telecom, Inc. (Filed as Exhibit 10.58 to Initial Form S-1 and
incorporated herein by reference).
10.59 Assignment of Purchase Agreement dated August 15, 1996 between Ryan
Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.59 to the
November 1996 Form S-1 and incorporated herein by reference).
10.60 Assignment of Purchase Agreement dated August 14, 1996 between Ryan
Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.60 to the
November 1996 Form S-1 and incorporated herein by reference).
10.61 Asset Purchase Agreement dated September 4, 1996 between Total
Communication Services, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.61 to the November 1996 Form S-1 and
incorporated herein by reference).
10.62 First Amendment to Asset Purchase Agreement dated September 30, 1996
between Total Communication Services, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.62 to the November 1996 Form S-1 and
incorporated herein by reference).
10.63 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to the November
1996 Form S-1 and incorporated herein by reference).
10.64 Amended and Restated Credit Agreement dated as of May 5, 1996 among
TelecomwUSA Publishing Group, Inc., TelecomwUSA Publishing Company and
TelecomwUSA Neighborhood Directories, Inc. and Norwest Bank Iowa,
National Association. (Filed as Exhibit 10.64 to the November 1996 Form
S- 1 and incorporated herein by reference).
10.65 First Amendment to Amended and Restated Credit Agreement dated as of
January 31, 1996 by and between TelecomwUSA Publishing Group, Inc.,
TelecomwUSA Publishing Company and TelecomwUSA Neighborhood
Directories, Inc. and Norwest Bank Iowa, National Association. (Filed
as Exhibit 10.65 to the November 1996 Form S-1 and incorporated herein
by reference).
10.66 Lease Agreement dated as of September 26, 1994 between Ryan Properties,
Inc. and Ruffalo, Cody & Associates, Inc. (Filed as Exhibit 10.66 to
the November 1996 Form S-1 and incorporated herein by reference).
10.67 First Lease Amendment dated as of April 12, 1995 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as Exhibit
10.67 to the November 1996 Form S-1 and incorporated herein by
reference).
10.68 Lease Agreement dated as of July 18, 1995 between 2060 Partnership,
L.P. and TelecomwUSA Publishing Company. (Filed as Exhibit 10.68 to the
November 1996 Form S-1 and incorporated herein by reference).
10.69 Lease Agreement dated April 26, 1995 by and between A.M. Henderson and
TelecomwUSA Publishing Company. (Filed as Exhibit 10.69 to the November
1996 Form S-1 and incorporated herein by reference).
10.70 License Agreement dated as of April 19, 1994, between Ameritech
Information Industry Services and TelecomwUSA Publishing Company.
(Filed as Exhibit 10.70 to the November 1996 Form S-1 and incorporated
herein by reference).
10.71 License Agreement dated September 13, 1993 between U S WEST
Communications, Inc. and TelecomwUSA Publishing Company. (Filed as
Exhibit 10.71 to the November 1996 Form S-1 and incorporated herein by
reference).
10.72 Form of McLeod, Inc. Directors Stock Option Plan Option Agreement.
(Filed as Exhibit 10.72 to the November 1996 Form S-1 and incorporated
herein by reference).
10.73 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive Stock
Option Agreement. (Filed as Exhibit 10.73 to the November 1996 Form S-1
and incorporated herein by reference).
10.74 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-Incentive
Stock Option Agreement. (Filed as Exhibit 10.74 to the November 1996
Form S-1 and incorporated herein by reference).
10.75 Option Agreement dated April 27, 1995 between Fronteer Directory
Company, Inc. and TelecomwUSA Publishing Company. (Filed as Exhibit
10.75 to the November 1996 Form S-1 and incorporated herein by
reference).
10.76 Promissory Note dated May 5, 1995 between TelecomwUSA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.76 to
the November 1996 Form S-1 and incorporated herein by reference).
10.77 Security Agreement dated May 5, 1995 between TelecomwUSA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.77 to
the November 1996 Form S-1 and incorporated herein by reference).
10.78 Design/Build Construction Contract dated September 17, 1996 between
Ryan Construction Company of Minnesota, Inc. and McLeod, Inc. (Filed as
Exhibit 10.78 to the November 1996 Form S-1 and incorporated herein by
reference).
10.79 Guaranty Agreement dated as of October 17, 1996 by McLeod, Inc. in
favor of Kirkwood Community College. (Filed as Exhibit 10.79 to the
November 1996 Form S-1 and incorporated herein by reference).
10.80 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.80 to the November 1996 Form S-1 and incorporated
herein by reference).
10.81 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telecommunications, Inc.
(Filed as Exhibit 10.81 to the November 1996 Form S- 1 and incorporated
herein by reference).
10.82 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Network Services, Inc.
(Filed as Exhibit 10.82 to the November 1996 Form S-1 and incorporated
herein by reference).
10.83 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod, Inc. (Filed as Exhibit
10.83 to the November 1996 Form S-1 and incorporated herein by
reference).
10.84 Change Order No. 1 to the Construction Services Agreement dated
November 22, 1995 by and between MWR TeIecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.84 to the November 1996 Form S-
1 and incorporated herein by reference).
10.85 Change Order No. 2 to the Construction Services Agreement dated August
14, 1996 between MWR Telecom, Inc. and MFS Network Technologies, Inc.
(Filed as Exhibit 10.85 to the November 1996 Form S-1 and incorporated
herein by reference).
10.86 Change Order No. 3 to the Construction Services Agreement dated October
31, 1996 between MWR Telecom, Inc. and MFS Network Technologies, Inc.
(Filed as Exhibit 10.86 to the November 1996 Form S-1 and incorporated
herein by reference).
10.87 Independent Contractor Sales Agreement dated May, 1995 between Sprint
Communications Company L.P. and Ruffalo, Cody & Associates, Inc. (Filed
as Exhibit 10.87 to the November 1996 Form S-1 and incorporated herein
by reference).
10.88 Second Amendment to Asset Purchase Agreement dated October 31, 1996
between Total Communication Services, Inc. and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.88 to the November 1996 Form S-1 and
incorporated herein by reference)
10.89 Escrow Agreement dated July 15, 1996 among McLeod, Inc., certain
shareholders of Ruffalo, Cody & Associates, Inc., Albert P. Ruffalo and
Norwest Bank N.A. (Filed as Exhibit 10.89 to the November 1996 Form S-1
and incorporated herein by reference).
10.90 Sale and Purchase Agreement dated January 27, 1997 among McLeodUSA
Publishing Company, Fronteer Financial Holdings, Ltd., Classified
Directories, Inc., Larry A. Scott, James Greff, Randall L. Gowin and
Edwin Dressler and certain directors, officers and shareholders of
Fronteer Financial Holdings, Ltd. (Filed as Exhibit 10.90 to the 1996
Form 10-K and incorporated herein by reference).
10.91 Sale and Purchase Agreement dated February 27, 1997 among McLeodUSA
Publishing Company, Indiana Directories, Inc., John Morgan, Hank
Meijer, Jack Hendricks, Brad Nelson and Talking Directories, Inc.
(Filed as Exhibit 10.91 to the 1996 Form 10-K and incorporated herein
by reference).
10.92 Amendment to Sale and Purchase Agreement dated February 28, 1997
between McLeodUSA Publishing Company and Indiana Directories, Inc.
(Filed as Exhibit 10.92 to the 1996 Form 10-K and incorporated herein
by reference).
10.93 Ameritech Centrex Service Confirmation of Service Orders dated August
21, 1996 between McLeod Telemanagement, Inc. and Ameritech Information
Industry Services. (Filed as Exhibit 10.93 to the 1996 Form 10-K and
incorporated herein by reference).
**10.94 Amended and Restated Program Enrollment Terms dated November 1, 1996
between WorldCom Network Services, Inc. d/b/a WilTel and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.94 to Annual Report on Form
10-K/A, File No. 0-20763, filed with the Commission on April 8, 1997
and incorporated herein by reference).
10.95 Letter Agreement dated April 15, 1997 between U S WEST Communications
and McLeodUSA Network Services, Inc. (Filed as Exhibit 10.1 to
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
Commission on May 14, 1997 and incorporated herein by reference).
10.96 Network Agreement dated April 7, 1997, between Wisconsin Power and
Light Company and McLeodUSA Telecommunications Services, Inc. (Filed as
Exhibit 10.96 to the July 1997 Form S-4 and incorporated herein by
reference).
10.97 Agreement dated July 7, 1997 between McLeodUSA Telecommunications
Services, Inc. and U S WEST Communications, Inc. (Filed as Exhibit
10.97 to the July 1997 Form S-4 and incorporated herein by reference).
10.98 Agreement dated August 14, 1997 between McLeodUSA Incorporated and
Taylor Ball, Inc. (Filed as Exhibit 10.98 to the November 1997 Form S-4
and incorporated herein by reference).
10.99 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of October 28, 1996 between
Ameritech Information Industry Services and Consolidated Communications
Telecom Services Inc. (Filed as Exhibit 10.99 to the November 1997 Form
S-4 and incorporated herein by reference).
10.100 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of July 17, 1997 between
Ameritech Information Industry Services and Consolidated Communications
Telecom Services Inc. (Filed as Exhibit 10.100 to the November 1997
Form S-4 and incorporated herein by reference).
11.1 Statement regarding Computation of Per Share Earnings (Filed as Exhibit
11.1 to the Quarterly Report on Form 10-Q, File No. 0-20763, filed with
the Commission on November 16, 1998 and incorporated herein by
reference).
16.1 Letter regarding Change in Certifying Accountant (Filed as Exhibit 16.1
to the 1997 Form 10-K and incorporated herein by reference).
21.1 Subsidiaries of McLeodUSA Incorporated (Filed as Exhibit 21.1 to the
1997 Form 10-K and incorporated herein by reference).
23.1* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.2* Consent of Arthur Andersen LLP.
23.3* Consent of Duff & Phelps, LLC.
23.4* Consent of Warner Norcross & Judd LLP (included in Exhibit 8.1).
23.5* Consent of Olsen Thielen & Co., Ltd.
24.1 Power of attorney (included on signature page).
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Quarterly Report
on Form 10-Q, File No. 0-20763, filed with the Commission on November
16, 1998 and incorporated herein by reference).
99.1 Purchase Agreement dated as of August 15, 1996 between Iowa Land and
Building Company and Ryan Properties, Inc. (Filed as Exhibit 99.1 to
the November Form S-1 and incorporated herein by reference).
99.2 Purchase Agreement dated as of June 28, 1996 between Donald E. Zvacek,
Dennis E. Zvacek and Robert J. Zvacek and Ryan Properties, Inc. (Filed
as Exhibit 99.2 to the November Form S-1 and incorporated herein by
reference).
99.3* Form of Proxy Card
99.4* Form of Letter to Stockholders of Dakota Telecommunications Group, Inc.
99.5* Form of Employee Stock Ownership Plan Vote Direction Form
* Filed herewith.
** Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule was filed with McLeodUSA's Annual
Report on Form 10-K for the year ended December 31, 1997 (File No. 0-20763),
filed with the Commission on March 9, 1998, and is incorporated herein by
reference:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable or
the information required to be set forth therein is contained, or incorporated
by reference, in the Consolidated Financial Statements of McLeodUSA or notes
thereto.
ITEM 22.UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
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 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 registrant
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.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 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 this Registration Statement through
the date of responding to the request.
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
this Registration Statement when it became effective.
The undersigned registrant hereby undertakes 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 of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
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 from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
this Registration Statement when it becomes effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that, for the purpose 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.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act that is
incorporated by reference in the registration statement 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.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the 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 Form S-4 with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
Form S-4.
The undersigned registrant hereby undertakes that every prospectus (i) that is
filed pursuant to the immediately preceding paragraph, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a 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 of 1933, 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.
SIGNATURES
Pursuant to the requirements of Securities Act, McLeodUSA has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cedar Rapids, Iowa, on this 11th day of
December, 1998.
McLEODUSA INCORPORATED
By: /s/ Clark E. McLeod
-------------------
Clark E. McLeod
Chairman and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Clark E. McLeod, Stephen C. Gray and Blake O. Fisher,
Jr., jointly and severally, each in his own capacity, his true and lawful
attorneys-in-fact, with full power of substitution, for him and his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents with full power and authority to do so and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons, in the capacities
indicated below, on this 11th day of December, 1998.
SIGNATURE TITLE
- --------- ------
/s/ Clark E. McLeod Chairman, Chief Executive Officer and
- ----------------------
Clark E. McLeod Director (Principal Executive Officer)
/s/ Richard A. Lumpkin
- ---------------------- Vice Chairman and Director
Richard A. Lumpkin
/s/ Stephen C. Gray President, Chief Operating
- ------------------------ Officer and Director
Stephen C. Gray
/s/ Blake O. Fisher, Jr. Group Vice President and Director
- ------------------------
Blake O. Fisher, Jr.
/s/ J. Lyle Patrick Group Vice President, Chief Financial
- ------------------------ Officer and Treasurer
J. Lyle Patrick (Principal Financial Officer)
/s/ Joseph H. Ceryanec Vice President, Finance, Corporate
- ------------------------ Controller and Principal Accounting Officer
Joseph H. Ceryanec (Principal Accounting Officer)
/s/ Thomas M. Collins Director
- ------------------------
Thomas M. Collins
/s/ Robert J. Currey Director
- ------------------------
Robert J. Currey
/s/ Lee Liu Director
- ------------------------
Lee Liu
/s/ Paul D. Rhines Director
- ------------------------
Paul D. Rhines
/s/ Ronald W. Stepien Director
- ---------------------
Ronald W. Stepien
INDEX TO EXHIBITS
EXHIBIT
-------
NUMBER EXHIBIT DESCRIPTION
------ -------------------
1.1 Purchase Agreement, dated as of February 26, 1997 among Salomon
Brothers Inc, Morgan Stanley & Co. Incorporated and McLeod, Inc.
(Filed as Exhibit 1.1 to Registration Statement on Form S-4, File
No. 333-27647 (the "July 1997 Form S-4"), and incorporated
herein by reference).
1.2 Purchase Agreement, dated as of July 15, 1997 among Salomon
Brothers Inc, Bear, Stearns & Co. Inc., Morgan Stanley Dean
Witter and McLeodUSA Incorporated. (Filed as Exhibit 1.2 to
Registration Statement on Form S-4, File No. 333-34227 (the
"November 1997 Form S-4"), and incorporated herein by
reference).
1.3 Purchase Agreement, dated as of March 10, 1998 among Salomon
Brothers Inc, Bear, Stearns & Co. Inc., Morgan Stanley & Co.
Incorporated, Chase Securities Inc. and McLeodUSA Incorporated.
(Filed as Exhibit 1.3 to Registration Statement on Form S-4, File
No. 333-52793 (the "May 1998 Form S-4"), and incorporated herein
by reference).
2.1 Agreement and Plan of Reorganization dated April 28, 1995 among
Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod, Inc.
(Filed as Exhibit 2.1 to Registration Statement on Form S-1, File
No. 333-3112 ("Initial Form S-1"), and incorporated herein by
reference).
2.2 Agreement and Plan of Reorganization dated as of July 12, 1996
among Ruffalo, Cody & Associates, Inc., certain shareholders of
Ruffalo, Cody & Associates, Inc. and McLeod, Inc. (Filed as
Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, filed
with the Commission on July 29, 1996 and incorporated herein by
reference).
2.3 Agreement and Plan of Reorganization dated as of August 15, 1996
among TelecomwUSA Publishing Group, Inc. and McLeod, Inc. (Filed
as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763,
filed with the Commission on August 26, 1996 and incorporated
herein by reference).
2.4 Agreement and Plan of Reorganization dated as of January 27, 1997
among McLeod, Inc., Digital Communications of Iowa, Inc., Clark
E. McLeod and Mary E. McLeod. (Filed as Exhibit 2 to Current
Report on Form 8-K, File No. 0-20763, filed with the Commission
on February 24, 1997 and incorporated herein by reference).
2.5 Asset Purchase Agreement dated as of May 30, 1997 by and among
McLeodUSA Incorporated, ESI/McLeodUSA, Inc., and ESI
Communications, Inc., ESI Communications/ SW, Inc., ESI
Communications/West, Inc., ESI Communications Downtown, Inc., ESI
Communications North, Inc., and Michael Reichert, Peter Jones,
John Pupkes and Jeff Meehan. (Filed as Exhibit 2.1 to Current
Report on Form 8-K, File No. 0-20763 (the "June 1997 Form 8-K"),
filed with the Commission on June 26, 1997 and incorporated
herein by reference).
2.6 Agreement and Plan of Reorganization dated as of June 14, 1997
among McLeodUSA Incorporated, Eastside Acquisition Co. and
Consolidated Communications Inc. (Filed as Exhibit 2.2 to the
June 1997 Form 8-K and incorporated herein by reference).
2.7* Agreement and Plan of Merger dated as of October 27, 1998 among
McLeodUSA Incorporated, West Group Acquisition Co. and Dakota
Telecommunications Group, Inc. (Attached as Appendix A to the
Proxy Statement/Prospectus).
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Initial Form S-1 and incorporated herein
by reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2
to Registration Statement on Form S-1, File No. 333-13885 (the
"November 1996 Form S-1"), and incorporated herein by
reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to the July
1997 Form S-4 and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office
of McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report
on Form 10-K, File No. 0-20763, filed with the Commission on
March 6, 1998 (the "1997 Form 10-K") and incorporated herein by
reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed
as Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United
States Trust Company of New York, as Trustee, relating to the 10-
1/2% Senior Discount Notes Due 2007 of McLeod, Inc. (Filed as
Exhibit 4.2 to Annual Report on Form 10-K, File No. 0-20763,
filed with the Commission on March 31, 1997 (the "1996 Form 10-
K") and incorporated herein by reference).
4.3 Initial Global 10-1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the
1996 Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10-1/2% Senior Discount Note Due March 1,
2007 of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K
and incorporated herein by reference).
4.5 Registration Agreement dated March 4, 1997 among McLeod, Inc.,
Salomon Brothers Inc and Morgan Stanley & Co. Incorporated.
(Filed as Exhibit 4.5 to the 1996 Form 10-K and incorporated
herein by reference).
4.6 Investor Agreement dated as of April 1, 1996 among McLeod, Inc.,
IES Investments Inc., Midwest Capital Group Inc., MWR Investments
Inc., Clark and Mary McLeod, and certain other stockholders.
(Filed as Exhibit 4.8 to Initial Form S-1 and incorporated herein
by reference).
4.7 Amendment No. 1 to Investor Agreement dated as of October 23,
1996 by and among McLeod, Inc., IES Investments Inc., Midwest
Capital Group Inc., MWR Investments Inc., Clark E. McLeod and
Mary E. McLeod. (Filed as Exhibit 4.3 to the November 1996 Form
S-1 and incorporated herein by reference).
4.8 Form of 10-1/2% Senior Discount Exchange Note Due 2007 of
McLeodUSA Incorporated. (Filed as Exhibit 4.8 to the July 1997
Form S-4 and incorporated herein by reference).
4.9 Indenture dated as of July 21, 1997 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 9-1/4% Senior Notes Due 2007 of
McLeodUSA Incorporated. (Filed as Exhibit 4.9 to the July 1997
Form S-4 and incorporated herein by reference).
4.10 Form of Initial Global 9-1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4
and incorporated herein by reference).
4.11 Registration Agreement dated July 21, 1997 among McLeodUSA
Incorporated, Salomon Brothers Inc, Morgan Stanley Dean Witter
and Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11 to the July
1997 Form S-4 and incorporated herein by reference).
4.12 Stockholders' Agreement dated June 14, 1997 among McLeodUSA
Incorporated, IES Investments Inc., Midwest Capital Group, Inc.,
MWR Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard
A. Lumpkin on behalf of each of the shareholders of Consolidated
Communications Inc. listed on Schedule 1 of the Stockholders'
Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.13 Amendment No. 1 to Stockholders' Agreement dated as of September
19, 1997 by and among McLeodUSA Incorporated, IES Investments
Inc., Midwest Capital Group, Inc., MWR Investments Inc., Clark
E. McLeod, Mary E. McLeod and Richard A. Lumpkin on behalf of
each of the shareholders of Consolidated Communications Inc.
listed in Schedule I thereto. (Filed as Exhibit 4.1 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
Commission on November 14, 1997 and incorporated herein by
reference).
4.14 Form of 9-1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K and
incorporated herein by reference).
4.15 Indenture dated as of March 16, 1998 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 8-3/8% Senior Notes Due 2008 of
McLeodUSA Incorporated. (Filed as Exhibit 4.15 to May 1998
Form S-4 and incorporated herein by reference).
4.16 Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA
Incorporated (contained in the Indenture filed as Exhibit 4.15).
4.17 Registration Agreement dated March 16, 1998 among McLeodUSA
Incorporated, Solomon Brothers Inc, Bear, Stearns & Co. Inc.,
Morgan Stanley & Co. Incorporated and Chase Securities Inc.
(Filed as Exhibit 4.17 to May 1998 Form S-4 and Incorporated
herein by reference).
4.18 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA Incorporated; IES Investments Inc., Clark E. McLeod;
Mary E. McLeod; and Richard A. Lumpkin and each of the former
shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders.
(Filed as Exhibit 99.1 to the Current Report on Form 8-K, File
No. 0-20763, filed with the Commission on November 19, 1998 and
incorporated herein by reference).
5.1* Opinion of Hogan & Hartson L.L.P.
8.1* Opinion of Warner Norcross & Judd LLP regarding certain tax
matters.
10.1 Credit Agreement dated as of May 16, 1994 among McLeod, Inc.,
McLeod Network Services, Inc., McLeod Telemanagement, Inc.,
McLeod Telecommunications, Inc. and The First National Bank of
Chicago. (Filed as Exhibit 10.1 to Initial Form S-1 and
incorporated herein by reference).
10.2 First Amendment to Credit Agreement dated as of June 17, 1994
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc. and The
First National Bank of Chicago. (Filed as Exhibit 10.2 to Initial
Form S-1 and incorporated herein by reference).
10.3 Second Amendment to Credit Agreement dated as of December 1, 1994
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc. and The
First National Bank of Chicago. (Filed as Exhibit 10.3 to Initial
Form S-1 and incorporated herein by reference).
10.4 Third Amendment to Credit Agreement dated as of May 31, 1995
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc., MWR
Telecom, Inc. and The First National Bank of Chicago. (Filed as
Exhibit 10.4 to Initial Form S-1 and incorporated herein by
reference).
10.5 Fourth Amendment to Credit Agreement dated as of July 28, 1995
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc., MWR
Telecom, Inc. and The First National Bank of Chicago. (Filed as
Exhibit 10.5 to Initial Form S-1 and incorporated herein by
reference).
10.6 Fifth Amendment to Credit Agreement dated as of October 18, 1995
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc., MWR
Telecom, Inc. and The First National Bank of Chicago. (Filed as
Exhibit 10.6 to Initial Form S-1 and incorporated herein by
reference).
10.7 Sixth Amendment to Credit Agreement dated as of March 29, 1996
among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telecommunications, Inc., MWR Telecom, Inc. and The First
National Bank of Chicago. (Filed as Exhibit 10.7 to Initial Form
S-1 and incorporated herein by reference).
10.8 Security Agreement dated as of May 16, 1994 among McLeod, Inc.,
McLeod Network Services, Inc., McLeod Telemanagement, Inc.,
McLeod Telecommunications, Inc. and The First National Bank of
Chicago. (Filed as Exhibit 10.8 to Initial Form S-1 and
incorporated herein by reference).
10.9 First Amendment to Security Agreement dated as of December 1,
1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod
Telemanagement, Inc., McLeod Telecommunications, Inc. and The
First National Bank of Chicago. (Filed as Exhibit 10.9 to Initial
Form S-1 and incorporated herein by reference).
10.10 Support Agreement dated as of December 1, 1994 among IES
Diversified Inc., McLeod, Inc., McLeod Network Services, Inc.,
McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and
The First National Bank of Chicago. (Filed as Exhibit 10.10 to
Form S-1 and incorporated herein by reference).
10.11 Agreement Regarding Support Agreement dated December 1994 between
McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit 10.11 to
Initial Form S-1 and incorporated herein by reference).
10.12 Agreement Regarding Guarantee dated May 16, 1994 between McLeod,
Inc. and IES Diversified Inc. (Filed as Exhibit 10.12 to Initial
Form S-1 and incorporated herein by reference).
10.13 Joinder to and Assumption of Credit Agreement dated as of April
28, 1995 between McLeod Merging Co. and The First National Bank
of Chicago. (Filed as Exhibit 10.13 to Initial Form S-1 and
incorporated herein by reference).
10.14 Joinder to and Assumption of Security Agreement dated as of April
28, 1995 between McLeod Merging Co. and The First National Bank
of Chicago. (Filed as Exhibit 10.14 to Initial Form S-1 and
incorporated herein by reference).
10.15 Letter from The First National Bank of Chicago to James L. Cram
dated April 28, 1995 regarding extension of the termination date
under the Credit Agreement. (Filed as Exhibit 10.15 to Initial
Form S-1 and incorporated herein by reference).
10.16 Credit Agreement dated as of March 29, 1996 among McLeod, Inc.,
McLeod Network Services, Inc., McLeod Telemanagement, Inc.,
McLeod Telecommunications, Inc. MWR Telecom, Inc. and The First
National Bank of Chicago. (Filed as Exhibit 10.16 to Initial Form
S-1 and incorporated herein by reference).
10.17 Agreement for Construction Related Services dated as of October
17, 1995 between City Signal Fiber Services, Inc. and McLeod
Network Services, Inc. (Filed as Exhibit 10.17 to Initial Form S-
1 and incorporated herein by reference).
10.18 Construction Services Agreement dated March 27, 1996 between City
Signal Fiber Services, Inc. and McLeod Network Services, Inc.
(Filed as Exhibit 10.18 to Initial Form S-1 and incorporated
herein by reference).
10.19 Fiber Optic Use Agreement dated as of February 14, 1996 between
McLeod Network Services, Inc. and Galaxy Telecom, L.P. (Filed as
Exhibit 10.19 to Initial Form S-1 and incorporated herein by
reference).
10.20 Agreement dated as of July 11, 1994 between McLeod Network
Services, Inc. and KLK Construction. (Filed as Exhibit 10.20 to
Initial Form S-1 and incorporated herein by reference).
10.21 Lease Agreement dated September 5, 1995 between State of Iowa and
MWR Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1 and
incorporated herein by reference).
10.22 Lease Agreement dated September 5, 1995 between State of Iowa and
McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial
Form S-1 and incorporated herein by reference).
10.23 Contract dated September 5, 1995 between Iowa Telecommunications
and Technology Commission and MWR Telecom, Inc. (Filed as Exhibit
10.23 to Initial Form S-1 and incorporated herein by reference).
10.24 Contract dated June 27, 1995 between Iowa National Guard and
McLeod Network Services, Inc. (Filed as Exhibit 10.24 to Initial
Form S-1 and incorporated herein by reference).
10.25 Addendum Number One to Contract dated September 5, 1995 between
Iowa National Guard and McLeod Network Services, Inc. (Filed as
Exhibit 10.25 to Initial Form S-1 and incorporated herein by
reference).
10.26 U S WEST Centrex Plus Service Rate Stability Plan dated October
15, 1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. (Filed as Exhibit 10.26 to Initial Form S- 1
and incorporated herein by reference).
10.27 U S WEST Centrex Plus Service Rate Stability Plan dated July 17,
1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. (Filed as Exhibit 10.27 to Initial Form S- 1
and incorporated herein by reference).
10.28 Ameritech Centrex Service Confirmation of Service Orders dated
various dates in 1994, 1995 and 1996 between McLeod
Telemanagement, Inc. and Ameritech Information Industry Services.
(Filed as Exhibit 10.28 to Initial Form S-1 and incorporated
herein by reference).
10.29 Lease Agreement dated as of December 28, 1993 between 2060
Partnership and McLeod Telemanagement, Inc., as amended by
Amendments First to Ninth dated as of July 3, 1994, March
25,1994, June 22, 1994, August 12, 1994, September 12, 1994,
September 20, 1994, November 16, 1994, September 20, 1995 and
January 6, 1996, respectively. (Filed as Exhibit 10.29 to Initial
Form S- 1 and incorporated herein by reference).
10.30 Lease Agreement dated as of May 24, 1995 between 2060 Partnership
and McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to
Initial Form S-1 and incorporated herein by reference).
10.31 Lease Agreement dated October 31, 1995 between I.R.F.B. Joint
Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31
to Initial Form S-1 and incorporated herein by reference).
10.32 First Amendment to Lease Agreement dated as of November 20, 1995
between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.32 to Initial Form S-1 and incorporated
herein by reference).
10.33 Uniform Purchase Agreement dated July 22, 1993 between McLeod,
Inc. and Hill's Maple Crest Farms Partnership. (Filed as
Exhibit 10.33 to Initial Form S-1 and incorporated herein by
reference).
10.34 Master Right-of-Way Agreement dated July 27, 1994 between McLeod
Network Services, Inc. and IES Industries Inc. (Filed as Exhibit
10.34 to Initial Form S-1 and incorporated herein by reference).
10.35 Master Right-of-Way and Tower Use Agreement dated February 13,
1996 between IES Industries Inc. and McLeod, Inc. (Filed as
Exhibit 10.35 to Initial Form S-1 and incorporated herein by
reference).
10.36 Master Pole, Duct and Tower Use Agreement dated February 20,
1996 between MidAmerican Energy Company and McLeod, Inc. (Iowa
and South Dakota). (Filed as Exhibit 10.36 to Initial Form S-1
and incorporated herein by reference).
10.37 Master Pole, Duct and Tower Use Agreement dated February 20,
1996 between MidAmerican Energy Company and McLeod, Inc.
(Illinois). (Filed as Exhibit 10.37 to Initial Form S-1 and
incorporated herein by reference).
10.38 Settlement Agreement dated March 18, 1996 between U S WEST
Communications, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.38 to Initial Form S-1 and incorporated herein by
reference).
10.39 Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.39 to Initial Form S-1
and incorporated herein by reference).
10.40 McLeod Telecommunications, Inc. 1992 Incentive Stock Option
Plan. (Filed as Exhibit 10.40 to Initial Form S-1 and
incorporated herein by reference).
10.41 McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit
10.41 to Initial Form S-1 and incorporated herein by reference).
10.42 McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit
10.42 to Initial Form S-1 and incorporated herein by reference).
10.43 McLeod Telecommunications, Inc. Director Stock Option Plan.
(Filed as Exhibit 10.43 to Initial Form S-1 and incorporated
herein by reference).
10.44 Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and
McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1 and
incorporated herein by reference).
10.45 Promissory Note dated March 29, 1996 between Stephen K.
Brandenburg and McLeod, Inc. (Filed as Exhibit 10.45 to Initial
Form S-1 and incorporated herein by reference).
10.46 Agreement dated April 28, 1995 among McLeod, Inc., McLeod
Telecommunications, Inc., McLeod Telemanagement, Inc., McLeod
Network Services, Inc. and Clark E. McLeod. (Filed as Exhibit
10.46 to Initial Form S-1 and incorporated herein by reference).
10.47** Telecommunications Services Agreement dated March 14, 1994
between WiITeI, Inc. and McLeod Telemanagement, Inc., as amended.
(Filed as Exhibit 10.47 to Initial Form S-1 and incorporated
herein by reference).
10.48 Amendment to Contract Addendum A to Contract No. 2102 dated March
31, 1993 between the Iowa Department of General Services and
McLeod Telecommunications, Inc. (Filed as Exhibit 10.48 to
Initial Form S-1 and incorporated herein by reference).
10.49 Construction Services Agreement dated June 30, 1995 between MFS
Network Technologies, Inc. and MWR Telecom, Inc. (Filed as
Exhibit 10.49 to Initial Form S-1 and incorporated herein by
reference).
10.50 First Amendment to Agreement Regarding Support Agreement dated
May 14, 1996 among McLeod, Inc., IES Diversified Inc. and IES
Investments Inc. (Filed as Exhibit 10.50 to Initial Form S-1 and
incorporated herein by reference).
10.51 First Amendment to Agreement Regarding Guarantee dated May 14,
1996 among McLeod, Inc., IES Diversified Inc. and IES Investments
Inc. (Filed as Exhibit 10.51 to Initial Form S-1 and incorporated
herein by reference).
10.52 Amended and Restated Directors Stock Option Plan of McLeod, Inc.
(Filed as Exhibit 10.52 to Initial Form S-1 and incorporated
herein by reference).
10.53 Forms of Employment, Confidentiality and Non-Competition
Agreement between McLeod, Inc. and certain employees of McLeod,
Inc. (Filed as Exhibit 10.53 to Initial Form S-1 and incorporated
herein by reference).
10.54 Form of Change-of-Control Agreement between McLeod, Inc. and
certain employees of McLeod, Inc. (Filed as Exhibit 10.54 to
Initial Form S-1 and incorporated herein by reference).
10.55 McLeod, Inc. 1996 Employee Stock Option Plan, as amended. (Filed
as Exhibit 10.55 to the November 1996 Form S-1 and incorporated
herein by reference).
10.56 McLeod, Inc. Employee Stock Purchase Plan, as amended. (Filed as
Exhibit 10.56 to the 1996 Form 10-K and incorporated herein by
reference).
10.57 Form of Indemnity Agreement between McLeod, Inc. and certain
officers and directors of McLeod, Inc. (Filed as Exhibit 10.57 to
Initial Form S-1 and incorporated herein by reference).
10.58 License Agreement dated April 24, 1996 between PageMart, Inc. and
MWR Telecom, Inc. (Filed as Exhibit 10.58 to Initial Form S-1 and
incorporated herein by reference).
10.59 Assignment of Purchase Agreement dated August 15, 1996 between
Ryan Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.59 to
the November 1996 Form S-1 and incorporated herein by reference).
10.60 Assignment of Purchase Agreement dated August 14, 1996 between
Ryan Properties, Inc. and McLeod, Inc. (Filed as Exhibit 10.60 to
the November 1996 Form S-1 and incorporated herein by reference).
10.61 Asset Purchase Agreement dated September 4, 1996 between Total
Communication Services, Inc. and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.61 to the November 1996 Form S-1 and
incorporated herein by reference).
10.62 First Amendment to Asset Purchase Agreement dated September 30,
1996 between Total Communication Services, Inc. and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.62 to the November 1996
Form S-1 and incorporated herein by reference).
10.63 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to the
November 1996 Form S-1 and incorporated herein by reference).
10.64 Amended and Restated Credit Agreement dated as of May 5, 1996
among TelecomwUSA Publishing Group, Inc., TelecomwUSA Publishing
Company and TelecomwUSA Neighborhood Directories, Inc. and
Norwest Bank Iowa, National Association. (Filed as Exhibit 10.64
to the November 1996 Form S- 1 and incorporated herein by
reference).
10.65 First Amendment to Amended and Restated Credit Agreement dated as
of January 31, 1996 by and between TelecomwUSA Publishing Group,
Inc., TelecomwUSA Publishing Company and TelecomwUSA Neighborhood
Directories, Inc. and Norwest Bank Iowa, National Association.
(Filed as Exhibit 10.65 to the November 1996 Form S-1 and
incorporated herein by reference).
10.66 Lease Agreement dated as of September 26, 1994 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.66 to the November 1996 Form S-1 and incorporated
herein by reference).
10.67 First Lease Amendment dated as of April 12, 1995 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.67 to the November 1996 Form S-1 and incorporated
herein by reference).
10.68 Lease Agreement dated as of July 18, 1995 between 2060
Partnership, L.P. and TelecomwUSA Publishing Company. (Filed as
Exhibit 10.68 to the November 1996 Form S-1 and incorporated
herein by reference).
10.69 Lease Agreement dated April 26, 1995 by and between A.M.
Henderson and TelecomwUSA Publishing Company. (Filed as Exhibit
10.69 to the November 1996 Form S-1 and incorporated herein by
reference).
10.70 License Agreement dated as of April 19, 1994, between Ameritech
Information Industry Services and TelecomwUSA Publishing Company.
(Filed as Exhibit 10.70 to the November 1996 Form S-1 and
incorporated herein by reference).
10.71 License Agreement dated September 13, 1993 between U S WEST
Communications, Inc. and TelecomwUSA Publishing Company. (Filed
as Exhibit 10.71 to the November 1996 Form S-1 and incorporated
herein by reference).
10.72 Form of McLeod, Inc. Directors Stock Option Plan Option
Agreement. (Filed as Exhibit 10.72 to the November 1996 Form S-1
and incorporated herein by reference).
10.73 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive
Stock Option Agreement. (Filed as Exhibit 10.73 to the November
1996 Form S-1 and incorporated herein by reference).
10.74 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-
Incentive Stock Option Agreement. (Filed as Exhibit 10.74 to the
November 1996 Form S-1 and incorporated herein by reference).
10.75 Option Agreement dated April 27, 1995 between Fronteer Directory
Company, Inc. and TelecomwUSA Publishing Company. (Filed as
Exhibit 10.75 to the November 1996 Form S-1 and incorporated
herein by reference).
10.76 Promissory Note dated May 5, 1995 between TelecomwUSA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit
10.76 to the November 1996 Form S-1 and incorporated herein by
reference).
10.77 Security Agreement dated May 5, 1995 between TelecomwUSA
Publishing Company and Fronteer Directory Company, Inc. (Filed as
Exhibit 10.77 to the November 1996 Form S-1 and incorporated
herein by reference).
10.78 Design/Build Construction Contract dated September 17, 1996
between Ryan Construction Company of Minnesota, Inc. and McLeod,
Inc. (Filed as Exhibit 10.78 to the November 1996 Form S-1 and
incorporated herein by reference).
10.79 Guaranty Agreement dated as of October 17, 1996 by McLeod, Inc.
in favor of Kirkwood Community College. (Filed as Exhibit 10.79
to the November 1996 Form S-1 and incorporated herein by
reference).
10.80 Industrial New Jobs Training Agreement dated as of October 31,
1996 between Kirkwood Community College and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.80 to the November 1996
Form S-1 and incorporated herein by reference).
10.81 Industrial New Jobs Training Agreement dated as of October 31,
1996 between Kirkwood Community College and McLeod
Telecommunications, Inc. (Filed as Exhibit 10.81 to the November
1996 Form S- 1 and incorporated herein by reference).
10.82 Industrial New Jobs Training Agreement dated as of October 31,
1996 between Kirkwood Community College and McLeod Network
Services, Inc. (Filed as Exhibit 10.82 to the November 1996 Form
S-1 and incorporated herein by reference).
10.83 Industrial New Jobs Training Agreement dated as of October 31,
1996 between Kirkwood Community College and McLeod, Inc. (Filed
as Exhibit 10.83 to the November 1996 Form S-1 and incorporated
herein by reference).
10.84 Change Order No. 1 to the Construction Services Agreement dated
November 22, 1995 by and between MWR TeIecom, Inc. and MFS
Network Technologies, Inc. (Filed as Exhibit 10.84 to the
November 1996 Form S-1 and incorporated herein by reference).
10.85 Change Order No. 2 to the Construction Services Agreement dated
August 14, 1996 between MWR Telecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.85 to the November 1996
Form S-1 and incorporated herein by reference).
10.86 Change Order No. 3 to the Construction Services Agreement dated
October 31, 1996 between MWR Telecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.86 to the November 1996
Form S-1 and incorporated herein by reference).
10.87 Independent Contractor Sales Agreement dated May, 1995 between
Sprint Communications Company L.P. and Ruffalo, Cody &
Associates, Inc. (Filed as Exhibit 10.87 to the November 1996
Form S-1 and incorporated herein by reference).
10.88 Second Amendment to Asset Purchase Agreement dated October 31,
1996 between Total Communication Services, Inc. and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.88 to the November 1996
Form S-1 and incorporated herein by reference)
10.89 Escrow Agreement dated July 15, 1996 among McLeod, Inc., certain
shareholders of Ruffalo, Cody & Associates, Inc., Albert P.
Ruffalo and Norwest Bank N.A. (Filed as Exhibit 10.89 to the
November 1996 Form S-1 and incorporated herein by reference).
10.90 Sale and Purchase Agreement dated January 27, 1997 among
McLeodUSA Publishing Company, Fronteer Financial Holdings, Ltd.,
Classified Directories, Inc., Larry A. Scott, James Greff,
Randall L. Gowin and Edwin Dressler and certain directors,
officers and shareholders of Fronteer Financial Holdings, Ltd.
(Filed as Exhibit 10.90 to the 1996 Form 10-K and incorporated
herein by reference).
10.91 Sale and Purchase Agreement dated February 27, 1997 among
McLeodUSA Publishing Company, Indiana Directories, Inc., John
Morgan, Hank Meijer, Jack Hendricks, Brad Nelson and Talking
Directories, Inc. (Filed as Exhibit 10.91 to the 1996 Form 10-K
and incorporated herein by reference).
10.92 Amendment to Sale and Purchase Agreement dated February 28, 1997
between McLeodUSA Publishing Company and Indiana Directories,
Inc. (Filed as Exhibit 10.92 to the 1996 Form 10-K and
incorporated herein by reference).
10.93 Ameritech Centrex Service Confirmation of Service Orders dated
August 21, 1996 between McLeod Telemanagement, Inc. and
Ameritech Information Industry Services. (Filed as Exhibit 10.93
to the 1996 Form 10-K and incorporated herein by reference).
10.94** Amended and Restated Program Enrollment Terms dated November 1,
1996 between WorldCom Network Services, Inc. d/b/a WilTel and
McLeod Telemanagement, Inc. (Filed as Exhibit 10.94 to Annual
Report on Form 10-K/A, File No. 0-20763, filed with the
Commission on April 8, 1997 and incorporated herein by
reference).
10.95 Letter Agreement dated April 15, 1997 between U S WEST
Communications and McLeodUSA Network Services, Inc. (Filed as
Exhibit 10.1 to Quarterly Report on Form 10-Q, File No. 0-20763,
filed with the Commission on May 14, 1997 and incorporated
herein by reference).
10.96 Network Agreement dated April 7, 1997, between Wisconsin Power
and Light Company and McLeodUSA Telecommunications Services,
Inc. (Filed as Exhibit 10.96 to the July 1997 Form S-4 and
incorporated herein by reference).
10.97 Agreement dated July 7, 1997 between McLeodUSA
Telecommunications Services, Inc. and U S WEST Communications,
Inc. (Filed as Exhibit 10.97 to the July 1997 Form S-4 and
incorporated herein by reference).
10.98 Agreement dated August 14, 1997 between McLeodUSA Incorporated
and Taylor Ball, Inc. (Filed as Exhibit 10.98 to the November
1997 Form S-4 and incorporated herein by reference).
10.99 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of October 28, 1996
between Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.99 to
the November 1997 Form S-4 and incorporated herein by
reference).
10.100 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of July 17, 1997 between
Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.100 to
the November 1997 Form S-4 and incorporated herein by
reference).
11.1 Statement regarding Computation of Per Share Earnings (Filed as
Exhibit 11.1 to the Quarterly Report on Form 10-Q, File No. 0-
20763, filed with the Commission on November 16, 1998 and
incorporated herein by reference).
16.1 Letter regarding Change in Certifying Accountant (Filed as
Exhibit 16.1 to the 1997 Form 10-K and incorporated herein by
reference).
21.1 Subsidiaries of McLeodUSA Incorporated (Filed as Exhibit 21.1 to
the 1997 Form 10-K and incorporated herein by reference).
23.1* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.2* Consent of Arthur Andersen LLP.
23.3* Consent of Duff & Phelps, LLC.
23.4* Consent of Warner Norcross & Judd LLP (included in Exhibit 8.1).
23.5* Consent of Olsen Thielen & Co., Ltd.
24.1 Power of attorney (included on signature page).
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Quarterly
Report on Form 10-Q, File No. 0-20763, filed with the Commission
on November 16, 1998 and incorporated herein by reference).
99.1 Purchase Agreement dated as of August 15, 1996 between Iowa Land
and Building Company and Ryan Properties, Inc. (Filed as Exhibit
99.1 to the November Form S-1 and incorporated herein by
reference).
99.2 Purchase Agreement dated as of June 28, 1996 between Donald E.
Zvacek, Dennis E. Zvacek and Robert J. Zvacek and Ryan
Properties, Inc. (Filed as Exhibit 99.2 to the November Form S-1
and incorporated herein by reference).
99.3* Form of Proxy Card
99.4* Form of Letter to Stockholders of Dakota Telecommunications
Group, Inc.
99.5* Form of Employee Stock Ownership Plan Vote Direction Form
* Filed herewith.
** Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.