-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ix9kwsdPqR977BIQijSMQYJUtb0MQBW86N4UtauMkAs+wYGk3wQHocZfsPHAHP7v j+9J7+NJ4XIssDEKgdtXdg== 0000905729-99-000006.txt : 19990121 0000905729-99-000006.hdr.sgml : 19990121 ACCESSION NUMBER: 0000905729-99-000006 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAKOTA TELECOMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001034119 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 911845100 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: SEC FILE NUMBER: 000-24121 FILM NUMBER: 99508807 BUSINESS ADDRESS: STREET 1: 29705 453RD AVENUE CITY: IRENE STATE: SD ZIP: 57037-0066 BUSINESS PHONE: 6052633301 MAIL ADDRESS: STREET 1: 29705 453RD AVENUE CITY: IRENE STATE: SD ZIP: 57037-0066 FORMER COMPANY: FORMER CONFORMED NAME: DAKOTA TELECOMMUNICATIONS GROUP DELAWARE INC DATE OF NAME CHANGE: 19970219 10QSB/A 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A (Amendment No. 1) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission File Number: 0-24121 DAKOTA TELECOMMUNICATIONS GROUP, INC. (Exact Name of Small Business Issuer as Specified in its Charter) DELAWARE 91-1845100 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 29705 453RD AVENUE (605) 263-3301 IRENE, SOUTH DAKOTA 57037-0066 (Issuer's Telephone Number, (Address of Principal Executive Offices) Including Area Code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ There were 2,160,150 shares of Dakota Telecommunications Group, Inc. Common Stock, without par value, outstanding as of October 27, 1998. Transitional Small Business Disclosure Format (check one): Yes ____ No __X__ =============================================================================== DAKOTA TELECOMMUNICATIONS GROUP, INC. INDEX =============================================================================== PART I. FINANCIAL INFORMATION PAGE NO. Item 1. FINANCIAL STATEMENTS DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheet - September 30, 1998 (Unaudited) and December 31, 1997. . . . 3 Consolidated Statement of Operations - Three Months Ended September 30, 1998 and 1997 (Unaudited). 4 Consolidated Statement of Operations - Nine Months Ended September 30, 1998 and 1997 (Unaudited) . 5 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1998 and 1997 (Unaudited) . 6 Notes to Consolidated Financial Statements (Unaudited) . . . 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 12 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 28 Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . 28 Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 29 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . 30 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 -2- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS 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 ================ ================ 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 -3- 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 (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. -4- 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 --------------- --------------- -5- NET LOSS $ (1,391,532) $ (680,326) =============== =============== BASIC AND DILUTED LOSS PER SHARE $ (0.65) $ -- =============== =============== (Since 1997 Reorganization)
The accompanying notes are an integral part of the consolidated financial statements. -6- 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 --------------- --------------- -7- NET LOSS $ (3,828,231) $ (1,534,911) =============== =============== BASIC AND DILUTED LOSS PER SHARE $ (2.04) $ -- (Since 1997 Reorganization) =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. -8- 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) -9- 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. -10- 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 -11- DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) =============================================================================== 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. 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 2,140,331 and 1,542,348, respectively. -12- DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) =============================================================================== 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. 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 ==============
-13- DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) =============================================================================== 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 2,129,323 and 1,874,509 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 $1.53 for the nine months ended, and $.55 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. -14- DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) =============================================================================== 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. 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 was 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. -15- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Management provides the following discussion as its analysis of the Company's financial condition and results of operations. This analysis should be read in conjunction with the separate consolidated financial statements of the Company and the notes thereto included in this report. References to the Company below include the Company and its wholly owned subsidiaries. FORWARD-LOOKING STATEMENTS Except for any historical information contained herein, the matters discussed in this Quarterly Report on Form 10-QSB contain certain "forward- looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and should be read in conjunction with the Company's 1997 Annual Report on Form 10-KSB. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, economic, key employee, competitive, governmental, regulatory and technological factors affecting the Company's growth, operations, markets, products, services, licenses, the ability of the Company and its third party vendors to make their computer software Year 2000 compliant by the projected deadlines and on budgeted costs and other factors discussed in the Company's other filings with the Securities and Exchange Commission. These factors may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Furthermore, the Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW The Company is a competitive local exchange carrier ("CLEC") specializing in the design, construction and operation of broadband hybrid fiber optic communications systems for small communities in South Dakota and the surrounding states. The Company 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 data networking products and services, using both wireline and wireless technologies. -16- In 1996 the Company began a major reorganization and expansion program. This program included the conversion of the Company from a stock cooperative into a publicly held Delaware business corporation, the redesign and rebuilding of the Company's switching center and fiber backbone network, which was completed in 1997, and the expansion of the Company's operations through selected acquisitions. During 1996, the Company purchased the assets of 19 cable television systems. In December 1996, the Company, through a wholly owned subsidiary, merged with TCIC Communications, Inc. ("TCIC"), a South Dakota-based provider of long distance and operator services. Also in December 1996, in a similar transaction, the Company merged with I-Way Partners, Inc. ("Iway"), one of South Dakota's largest Internet service providers. In December 1997, the Company merged with Futuristic, Inc. dba DataNet ("DataNet"), a leading regional local area network/wide area network ("LAN/WAN") integrator located in Sioux Falls, South Dakota. These companies continue to operate as wholly owned subsidiaries of the Company under the names DTG Communications, Inc., DTG Internet, Inc., and DTG DataNet, Inc., respectively. In July 1998, the Company, through a wholly owned subsidiary, merged with Vantek, Inc. and Van Alert, Inc. ("Vantek"), a regional specialized mobile radio and paging company in southeastern South Dakota. Vantek continues to operate as a wholly owned subsidiary of the Company under the name Dakota Wireless Systems, Inc. ("DWS"). On November 1, 1998 the Company, 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. On October 27, 1998, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") whereby the Company will be merged (the "Merger") with and into a wholly owned subsidiary of McLeodUSA Incorporated ("McLeodUSA"). The Merger is expected to be completed within three to six months, pending a number of issues including, but not limited to, approval by the Company's stockholders, FCC license transfers and other various regulatory approvals. In conjunction with the Merger Agreement the Company and McLeodUSA entered into a 20-year dark fiber lease agreement with an aggregate value of $5,000,000 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. The Company's reorganization and expansion plans have had, and will continue to have, significant impacts on the Company's financial condition and results of operations. As part of its network-rebuilding project, in 1995 the Company reassessed the remaining useful life of its old facilities. In 1996 and 1997, the Company incurred approximately $5.8 million and $13.6 million in new capital expenditures, respectively. -17- During the first nine months of 1998, the Company incurred an additional $3.9 million in capital expenditures as well as purchased $703,000 of additional materials for its 1998 developments. The Company anticipates spending substantial additional funds for its continuing development programs. These expenditures have been, and future expenditures are anticipated to be, financed through substantial increases in the Company's long-term debt. These changes are expected to combine to result in substantially higher depreciation and interest expenses with corresponding reductions in the Company's net income. In addition, to implement its growth plans, the Company completed the acquisitions described above and increased its employee base from 34 employees at December 31, 1995 to 185 employees at September 30, 1998, resulting in additional increases in amortization expense and employee-related operating expenses. While the Company anticipates that its revenue base will continue to grow as it completes its new facilities and markets new services, the resultant higher expense levels from a combination of higher depreciation, amortization and interest expense, as well as additional employee expenses, will likely cause the Company to recognize and report net after-tax losses. FINANCIAL CONDITION The implementation of the Company's reorganization plans has had a significant impact on the Company's balance sheet and financial condition. The following discussion reviews the material changes in the Company's balance sheet accounts. 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 the Company from the National Exchange Carriers Association for final adjustments to the Company'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 the Company'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. -18- 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 the Company 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 the Company'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 Company contributions to its 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 Rural Telephone Finance Cooperative ( the "RTFC"), offset by payments on existing Long-Term Debt. The advances were used to fund the Company's 1998 construction projects. See Notes 2 and 3 to the Consolidated Financial Statements. 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 the Company's operating losses of $3,828,000 during the first nine months of 1998 offset by additional equity raised by the Company from the exercise of outstanding warrants and the sale of stock to the Company's existing shareholders. See Note 6 to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company 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 Company's Consolidated Financial Statements. As discussed above, the Company 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, the Company 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, the Company 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 -19- DataNet operation. See Note 2 and 3 to the Consolidated Financial Statements. The Company'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 the Company 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, the Company currently anticipates investing between $50 and $55 million in new capital expenditures in 1999 in connection with its new development projects. The Company currently plans to fund these requirements through a combination of additional equity and long-term project debt. The Company's primary long-term lender is the RTFC, which provided the funds for the Company'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 the Company raising an additional $20 million in equity. There can be no assurance that the Company will be able to raise such necessary equity. If the equity is not raised, the Company 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 the Company's operations would return to positive operating cash flow within three months. As part of the Company's expansion program, the Company routinely enters into cable television franchise agreements with new communities. Some of these agreements require the Company to post performance and development bonds. As of September 30, 1998 the Company has secured performance and payment bonds and irrevocable letters of credit totaling $832,500 to various cities that have granted franchise agreements to the Company. Of this amount, $650,000 is secured by promissory notes between the Company and one of its lenders. In addition, the Company has had issued an additional $25,000 in performance bonds since the end of the third quarter. See Note 9 to the Consolidated Financial Statements. Prior to the start of construction in the various markets that have granted franchise agreements, the Company 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 the Company. While the Company 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 the Company, there is no assurance that it will be able to continue to provide the financial resources to post additional bonds in the future. -20- RESULTS OF OPERATIONS The Company's reorganization plans have also significantly changed its results of operations, primarily due to the additional entities acquired by the Company in the mergers described above. As a result, the comparison of the financial results of the Company's present operations to its past operations should be carefully analyzed. The following discussion summarizes the Company's results of operations. THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 Total Operating Revenues increased from $2,826,000 during the third quarter of 1997 to $9,459,000 in the same period of 1998, an increase of $6,633,000, or approximately 235%. Of this increase, $5,490,000 reflects the addition of revenues from the Company's DataNet operations acquired in December 1997. An additional $259,000 of this increase represents revenues from the acquisition of DWS. Finally, $528,000 of this increase was the result of an increase in access revenues, discussed in more detail below. The balance reflects other internal growth in the Company's operations. Plant Operations expense increased from $1,019,000 during the third quarter of 1997 to $1,634,000 in the same period of 1998, an increase of $615,000, or approximately 60%. Approximately $20,000 of this increase was due to the additional costs and expenses from the operations of DataNet and DWS. Approximately $492,000 of this increase is related to increased access costs from the Company's long distance and Internet operations. The remaining increase is related primarily to the start-up and operational costs associated with the Company's competitive local exchange carrier operations in its new markets. Cost of Goods Sold, a new category of operating expense, was $4,425,000 in the third quarter of 1998, reflecting expenses associated with the Company's DataNet and DWS operations. Depreciation and Amortization expense increased from $820,000 in the third quarter of 1997 to $1,157,000 in the same period of 1998, an increase of $337,000 or approximately 41%. Approximately $89,000 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 is due primarily to the depreciation of additional assets placed in service by the Company during 1997 and 1998 as part of its network expansion program. Customer operating expenses increased from $379,000 in the third quarter of 1997 to $885,000 in the same period of 1998, an increase of $506,000 or approximately 134%. Of this increase, $395,000 related to the customer service expenses associated with the DataNet operation. The remaining increase is primarily due to increased costs in the Company's competitive local exchange carrier operations in its new markets. -21- Other costs and expenses, including General and Administrative and Other Operating Expenses, increased from $1,227,000 during the third quarter of 1997 to $2,227,000 in the same period of 1998, an increase of $1,000,000 or approximately 81%. Of this increase, $313,000 was related to expenses associated with the DataNet and DWS operations. The balance of this increase is primarily related to additional operating expenses associated with the development and implementation of the Company's competitive local exchange carrier expansion plans. Interest Expense increased from $383,000 for the third quarter of 1997 to $593,000 during the same period of 1998, an increase of $210,000, or approximately 55%. This increase is primarily due to the increase in long- term debt incurred by the Company to fund its 1997 and 1998 operations and capital expenditures. NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 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 the Company'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 the Company'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 the Company's long distance and Internet operations. The remaining increase is related primarily to the start-up and operational costs associated with the Company's competitive local exchange carrier 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 the Company'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 -22- was due primarily to the depreciation of additional assets placed in service by the Company 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 the Company's competitive local exchange carrier 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 and merger of the Company 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 the Company's stockholders during the first quarter. See Note 6 to the Consolidated 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 the Company's competitive local exchange carrier 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 primarily due to the increase in long-term debt incurred by the Company to fund its 1997 and 1998 capital expenditures. 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 interexchange carriers or "IXCs") to access their end user customers in the local exchange network. For small incumbent local exchange carriers ("ILECs") like the Company who are members of the National Exchange Carriers Association ("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 -23- 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 Regional Bell Operating Company ("RBOC") or non-RBOC company; and (iii) whether a company is a rural or non-rural company. For NECA members like the Company, 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 the Company. These increases, notwithstanding the increase in the Company's ILEC operating expenses, resulted in the increase in the Company's access revenues. The Company 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, the Company. For CLECs, which include the Company'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. The Company is aware that American Telephone and Telegraph ("AT&T") has requested the Federal Communications Commission ("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 are due December 7, 1998, and reply comments are due December 22, 1998. The Company believes that it has, for its CLEC operations, based its filed access tariffs on appropriate, historical allocated cost data from its ILEC operations. The Company had only nominal CLEC access revenues in the comparable 1997 period. For 1998, the CLEC access revenue has increased in direct proportion to its increase in the Company'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 the Company from its CLEC operations. -24- INCOME TAXES The Company historically operated as a stock cooperative and was granted tax-exempt status under Section 501(c)(12) of the Internal Revenue Code of 1986, as amended. Accordingly, income tax expense was related only to certain ancillary operations, such as the Company's cable television operations. Beginning with the Company's conversion from a cooperative to a Delaware business corporation in July 1997, all of the Company's operations became taxable. However, because of the Company's consolidated net losses, the Company has accumulated income tax loss carryovers. See Note 4 to the Consolidated Financial Statements for a full discussion of the Company's income tax issues. EFFECTS OF INFLATION The Company is subject to the effects of inflation upon its operating costs. The Company's local exchange telephone 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 the Company's ability to implement rate increases. In addition, the regulatory process inherently restricts the ILEC division of the Company's operations the ability 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 the Company are subject to competitive pressures, which may limit the Company's ability to pass through inflation related costs to its non-captive customer base. All of the Company's long-term debt from the RTFC bears interest on a floating rate set by the RTFC on a monthly basis. This variable rate was 6.65% at September 30, 1998. Effective November 1, 1998, the RTFC decreased the interest rate on all obligations with them by 0.55% The Company has the option to fix the interest rate on all or a portion of these loans on a quarterly basis. Should inflation rates significantly exceed the Company's expectations, interest rates could increase and the Company's debt service expenses could increase beyond acceptable limits or make the RTFC or any other lender unwilling to extend additional credit to the Company. COMPETITION In February 1996, President Clinton signed into law the 1996 Telecommunications Act (the "1996 Act"). The new law represents the biggest change in the rules governing local telephone service since Congress imposed federal regulation and established the FCC in 1934. Under the 1996 Act, the monopoly on local service enjoyed by LECs is eliminated and LECs -25- must allow competitors access to their local network facilities. The Company does not know to what extent it will be subject to local competition in the markets it serves under the new rules. The final results of the changes made by the new law will not be known for some time until new rulemaking by the FCC and state regulatory agencies has been completed. The Company is monitoring developments regarding the new regulatory climate closely and expects its operations may be materially affected by the new rules, but the Company cannot predict what effect the new rules will have on its business. The Company is presently the only provider of local telephone service in its historical nine local 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 the Company's landline services. The Company and many other members of the local exchange carrier industry are seeking to maintain a strong, universally affordable public telecommunications network through policies and programs that are sensitive to the needs of small communities and rural areas served by the Company. However, there is no assurance that the Company will be able to continue to do so in the future. All of the Company's cable television franchises are non-exclusive. In addition to competition from off-air television, other technologies also supply services provided by cable television. These include low power television stations, multi-point distribution systems, over-the-air subscription television and direct broadcast satellites. The Company believes that cable television presently offers a wider variety of programming at a lower cost than any competing technology. However, the Company is unable to predict the effect current or developing sources of competition may have on its cable business. The Company's unregulated Internet, long distance, operator services and computer network services businesses are subject to intense competition from many different companies, many of which have substantially greater resources than the Company. YEAR 2000 READINESS DISCLOSURE AN INTRODUCTION TO THE YEAR 2000 PROBLEM The Company is highly dependent upon advanced computer systems and specialized software for the conduct of its business. These systems include switching and network operations, billing and customer care, accounting and reporting and Internet operating systems, as well as a wide assortment of personal computer productivity software. In 1997, as part of its reorganization plan, the Company installed new accounting and reporting -26- 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, the Company addressed an issue that is facing all users of automated information systems. The issue is that many computer systems that process date sensitive information based on two digits representing the year of the event may recognize a date using "00" as the year 1900 rather than the year 2000. The inability to correctly recognize "00" as the year 2000 could affect a wide variety of automated information systems, such as mainframe applications, invoicing and receivables tracking systems, event scheduling systems, personal computers and telecommunication systems, in the form of software failure, errors or miscalculations. The discussion below describes the Company's efforts to address this problem. Readers are cautioned not to place undue reliance on the following forward-looking statements. Furthermore, the Company undertakes no obligation to update, amend or clarify these forward-looking statements, whether as a result of new information, future events or otherwise. YEAR 2000 COMPLIANCE PROGRAM It is difficult to predict with certainty what will happen to the Company's operations when the year 2000 date is triggered. While the Company 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 the Company and the relative newness of the year 2000 problem, there can be no assurance that unanticipated operating problems will not occur in the Company's systems. Further, like all telecommunications companies, the Company relies on the continuing operations of other telecommunications companies to provide worldwide communications services. The Company 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, the Company 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, the Company 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 the Company's major internal business functions. The Committee is responsible for researching, planning, executing, implementing and completing the year 2000 compliance -27- goals of the Company. The systems being evaluated by the Committee include the Company's telecommunications network (the "Network"), which processes voice and data information relating to its communications operations, Information Technology ("IT") internal business systems, which include certain operational, financial and administrative functions, and non- information technology ("Non-IT") systems, which include certain systems that use embedded micro controllers in their operation. As of the date of this report and as discussed in more detail below, the Committee's assessment of the Company's year 2000 issues is not yet complete and is not expected to be completed until next year. In developing its year 2000 readiness plan, the Company has developed and uses the following definitions: "Education" means quantifying the awareness that Company 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 respective platforms, recommended solutions, and how to create year 2000 compliant products. Education also includes the full participation in and cooperation with year 2000 activities as needed to achieve year 2000 compliance within the Company. "Survey" means identifying the components, their vendors and/or manufacturers 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.), electronic data interfaces (including third party software and hardware). "Business Critical/Y2K Critical" means the percentage of all of the components in inventory which have been rated as "high," "medium," or "low" for the following two questions: "How critical is this component to the continued operation the business?" and "What level of year 2000 impact is there on the component?". "Cost Assessment" means the percentage of the components for which the cost of making the component year 2000 compliant has been estimated. "Date Assessment" means the percentage of all components in the Company's inventory for which a date has been estimated for fixing, testing and implementation if such components are not year 2000 compliant or if compliance is unknown. "Corrections" means that percentage of the total number of inventory components that are not year 2000 compliant and require correction/remediation to become compliant and which have been corrected. -28- "Replacement" means that percentage of the total number of inventory components that are not year 2000 compliant and require replacement to become year 2000 compliant, which have been replaced to date. "Testing and Verification" means that percentage of the total number of inventory components that require testing and verification by the vendor and the user(s), which have been tested and verified to date. "Implementation" means that percentage of the total number of components that must be corrected or replaced to achieve year 2000 compliance and which have been implemented into production status to date. Based on these definitions, the following are the Company's current estimates of its state of year 2000 readiness and target completion dates by service types: INCUMBENT LOCAL EXCHANGE CARRIER OPERATIONS (INCLUDING NON-IT COMPONENTS) Education--50% complete; target completion 4th quarter 1998. Survey--25% complete; target completion 1st quarter 1999. Business Critical/Y2K Critical--0% complete; target completion 1st quarter 1999. Cost Assessment--0% complete; target completion 1st quarter 1999 Date Assessment--0% complete; target completion 1st quarter 1999. Corrections--0% complete; target completion 2nd quarter 1999. Replacement--0% complete; target completion 2nd quarter 1999. Testing and Verification--0% complete; target completion 2nd quarter 1999. Implementation--0% complete; target completion 3rd quarter 1999. COMPETITIVE LOCAL EXCHANGE CARRIER OPERATIONS (INCLUDING NON-IT COMPONENTS) Education--75% complete; target completion 4th quarter 1998. Survey--25% complete; target completion 1st quarter 1999. Business Critical/Y2K Critical--0% complete; target completion 1st quarter 1999. Cost Assessment--0% complete; target completion 1st quarter 1999. Date Assessment--0% complete; target completion 1st quarter 1999. Corrections--0% complete; target completion 2nd quarter 1999. Replacement--0% complete; target completion 2nd quarter 1999. Testing and Verification--0% complete; target completion 2nd quarter 1999. Implementation--0% complete; target completion 3rd quarter 1999. -29- WIRELESS OPERATIONS (INCLUDING NON-IT COMPONENTS) Education--0% complete; target completion 4th quarter 1998. Survey--25% complete; target completion 1st quarter 1999. Business Critical/Y2K Critical--0% complete; target completion 1st quarter 1999. Cost Assessment--0% complete; target completion 1st quarter 1999. Date Assessment--0% complete; target completion 1st quarter 1999. Corrections--0% complete; target completion 2nd quarter 1999. Replacement--0% complete; target completion 2nd quarter 1999. Testing and Verification--0% complete; target completion 2nd quarter 1999. Implementation--0% complete; target completion 3rd quarter 1999 DATANET OPERATIONS (INCLUDING NON-IT COMPONENTS) Education--50% complete; target completion 4th quarter 1998. Survey--50% complete; target completion 1st quarter 1999. Business Critical/Y2K Critical--50% complete; target completion 1st quarter 1999. Cost Assessment--0% complete; target completion 1st quarter 1999. Date Assessment--0% complete; target completion 1st quarter 1999. Corrections--0% complete; target completion 2nd quarter 1999. Replacement--0% complete; target completion 2nd quarter 1999. Testing and Verification--50% complete; target completion 2nd quarter 1999. Implementation--0% complete; target completion 3rd quarter 1999. COMPANY INFORMATION TECHNOLOGY SYSTEMS Education--50% complete; target completion 4th quarter 1998. Survey--50% complete; target completion 1st quarter 1999. Business Critical/Y2K Critical--50% complete; target completion 1st quarter 1999. Cost Assessment--0% complete; target completion 1st quarter 1999. Date Assessment--0% complete; target completion 1st quarter 1999. Corrections--0% complete; target completion 2nd quarter 1999. Replacement--0% complete; target completion 2nd quarter 1999. Testing and Verification--50% complete; target completion 2nd quarter 1999. Implementation--0% complete; target completion 3rd quarter 1999. CABLE TELEVISION OPERATIONS (INCLUDING NON-IT COMPONENTS) Education--50% complete; target completion 4th quarter 1998. Survey--25% complete; target completion 1st quarter 1999. Business Critical/Y2K Critical--0% complete; target completion 1st quarter 1999. Cost Assessment--0% complete; target completion 1st quarter 1999. Date Assessment--0% complete; target completion 1st quarter 1999. Corrections--0% complete; target completion 2nd quarter 1999. Replacement--0% complete; target completion 2nd quarter 1999. Testing and Verification--0% complete; target completion 2nd quarter 1999. Implementation--0% complete; target completion 3rd quarter 1999. -30- INTERNET OPERATIONS (INCLUDING NON-IT COMPONENTS) Education--50% complete; target completion 4th quarter 1998. Survey--50% complete; target completion 1st quarter 1999. Business Critical/Y2K Critical--50% complete; target completion 1st quarter 1999. Cost Assessment--0% complete; target completion 1st quarter 1999. Date Assessment--0% complete; target completion 1st quarter 1999. Corrections--0% complete; target completion 2nd quarter 1999. Replacement--0% complete; target completion 2nd quarter 1999. Testing and Verification--0% complete; target completion 2nd quarter 1999. Implementation--0% complete; target completion 3rd quarter 1999. A component of assessing the Company'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 the Company provides services. The Company 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 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, the Company's primary costs for its year 2000 compliance program are employee costs associated with the Company's internal management information systems employees and other personnel, which the Company expenses as part of its General and Administrative Expense. Such costs to date have not been material. The Company currently estimates that the total cost to make the Company's internal systems year 2000 compliant is approximately $250,000, most of which will be expensed by the Company as the costs are incurred. CONTINGENCY PLANS The Company believes that the design of its network and support systems could provide the Company with certain operating contingencies in the event material external systems fail. The Company's major network operating facilities and systems are backed up with auxiliary power generators 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 the Company's contingency plans to eliminate the negative impact that disruptions in other carriers' services would create, there can be no assurance that the Company will not experience disruptions in its services. -31- The Company believes that with modifications to existing software and conversions to new software, the year 2000 issue will not pose significant 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 the Company's current estimates. At worst case, failure by the Company or by certain of its interconnected service providers or software vendors to remediate year 2000 compliance issues could result in the disruption of the Company's operations, possibly impacting operation of the network and the Company's ability to bill or collect revenues. A prolonged network outage could have a material adverse effect on the Company'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. The Company expects that the adoption of SFAS 131 will require the Company 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. 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 -32- 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 the company's election, before January 1, 1998). The Company does not expect the impact of the adoption of SFAS 133 to be material on the Company's results of operations as the Company 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. -33- PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS There are no pending environmental or legal issues that the Company believes will have a significant effect on either the operational of financial condition of the Company. 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 the Company. The parties to the appeal are Bresnan, the City of Marshall, and the Company. 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 the Company. Bresnan alleges that this conduct has so tainted the granting of the franchise that the court should find the franchise to be void. The Company is not a party to this lawsuit, but will continue to monitor its progress. The Company believes there is no factual basis for the allegations in the complaint. The Company believes that neither legal action is meritorious. Because the Company 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, the Company has suspended further work in the Marshall area. Construction efforts and funds intended for Marshall equipment have been shifted to other areas where the Company has been awarded franchises. If Bresnan is successful in either action, the financial impact on the Company for work already completed would not be material and would not have a negative 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 the Company alleging, among other things, defamation and disparagement of Bresnan's business. The action is based on the publication of a letter by the Company in the MARSHALL INDEPENDENT newspaper. Bresnan seeks damages in an amount in excess of $50,000, together with interest and attorney's fees. The Company believes it has meritorious defenses and plans to vigorously defend this action. Item 2. CHANGES IN SECURITIES On July 1, 1998, the Company issued 48,000 shares of the Company's common stock to Lemar Van Heuveln, Norma Van Heuveln and Karen Boersma Leisinger in connection with the acquisition of Vantek Communications, Inc. and Van Alert, Inc. The Company relied upon, among others, the exemption under Section 4(2) of the Securities Act of 1933. -34- Item 5. OTHER INFORMATION All information with respect to year 2000 issues provided by the Company in this Quarterly Report and in other reports and materials previously filed with the Securities and Exchange Commission (the "Commission"), as set forth on Exhibit 99.5 to this Quarterly Report, are "Year 2000 Readiness Disclosures" under the Year 2000 Information and Readiness Disclosure Act. The Bylaws of the Company provide that no matter submitted by a stockholder may be presented for stockholder action at an annual or special meeting of stockholders unless written notice of the matter is delivered to the Company before a designated deadline prior to the applicable meeting of stockholders. The deadline for submitting stockholder proposals for consideration at the next annual meeting of stockholders is November 26, 1998. On October 27, 1998, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with McLeodUSA Incorporated ("McLeodUSA") and West Group Acquisition Co., a wholly owned subsidiary of McLeodUSA ("MergerSub"). The Merger Agreement was previously filed as Exhibit 2.1 to the Form 8-K filed with the Commission on November 10, 1998 and is incorporated herein by reference. Pursuant to the terms of the Merger Agreement, MergerSub will be merged (the "Merger") with and into the Company and the Company will become a wholly owned subsidiary of McLeodUSA. As a result of the Merger, each share of the Company's common stock will be converted into the right to receive 0.4328 of a share of McLeodUSA's Class A common stock (the "Exchange Ratio"). The maximum number of shares of McLeodUSA's Class A common stock issuable pursuant to the Merger (assuming the exercise of all outstanding options to purchase the Company's common stock) is expected to be approximately 1,295,000 shares. In addition, under the terms of the Merger Agreement, each option to purchase the Company's common stock will become or be replaced by an option to purchase a number of shares of McLeodUSA's Class A common stock equal to the number of shares of the Company's common stock that could have been purchased (assuming full vesting) under the stock option multiplied by the Exchange Ratio. McLeodUSA has agreed to register under the Securities Act of 1933 the shares of its Class A common stock to be issued in the Merger. Consummation of the Merger is subject to the satisfaction of certain conditions, including (i) approval of the Merger Agreement and the Merger by the stockholders of the Company, (ii) effectiveness of the registration statement registering the shares of McLeodUSA's Class A common stock to be issued in the Merger, (iii) compliance with all applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the expiration of all applicable waiting periods thereunder, (iv) receipt -35- of required regulatory approvals and (v) certain other customary conditions. Each director and certain executive officers of the Company have entered into Voting Agreements pursuant to which, among other things, they have agreed to vote their shares of common stock of the Company in favor of the Merger Agreement and the Merger at a meeting of the stockholders of the Company. The forms of Voting Agreement were previously filed as Exhibits 99.1 and 99.2 to the Form 8-K filed with the Commission on November 10, 1998 and are incorporated herein by reference. The form of Voting Agreement of Craig A. Anderson, the President, Chief Financial Officer and Treasurer of the Company, was filed as Exhibit 99.3 to the Form 8-K filed with the Commission on November 10, 1998 and is incorporated herein by reference. A copy of the press release, dated October 28, 1998, issued by McLeodUSA and the Company regarding the transaction described above was previously filed as Exhibit 99.4 to the Form 8-K filed with the Commission on November 10, 1998 and is incorporated herein by reference. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. The following exhibits are filed as part of this report: EXHIBIT NUMBER DOCUMENT 2.1 Agreement and Plan of Merger dated as of October 27, 1998 by and among Dakota Telecommunications Group, Inc., McLeodUSA Incorporated and West Group Acquisition Co. Filed as Exhibit 2.1 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 3.1 Certificate of Incorporation of Dakota Telecommunications Group, Inc., a Delaware corporation, as amended. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998 and here incorporated by reference. 3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware corporation, as amended. 4.1 Certificate of Incorporation of Dakota Telecommunications Group, Inc., a Delaware corporation. See Exhibit 3.1 above. 4.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware corporation, as amended. See Exhibit 3.2 above. -36- 4.3 Rights Agreement, dated as of July 22, 1997, between the Company, and Norwest Bank Minnesota, N.A., which includes the form of Rights Certificate as Exhibit A and the Summary of Rights to Purchase Preferred Stock as Exhibit B. Filed as Exhibit 4.3 to the Registrant's Report on Form 10-QSB for the quarter ended September 30, 1997 and here incorporated by reference. 4.4 Standstill Agreement dated November 27, 1996, among Dakota Cooperative Telecommunications, Inc., and the Selling Shareholders of TCIC Communications, Inc. Filed as Exhibit 4.7 to the Registrant's Form S-4 Registration Statement that became effective on June 13, 1997 (the "S-4 Registration Statement") and here incorporated by reference. 4.5 Standstill Agreement dated November 27, 1996, among Dakota Cooperative Telecommunications, Inc. and the Selling Shareholders of I-Way Partners, Inc. Filed as Exhibit 4.8 to the S-4 Registration Statement and here incorporated by reference. 4.6 Dakota Cooperative Telecommunications, Inc. Form of Option Agreement. Filed as Exhibit 4.12 to the S-4 Registration Statement and here incorporated by reference. 4.7 Agreement Regarding Stock (I-Way Partners, Inc.) dated November 27, 1996. Filed as Exhibit 4.13 to the S-4 Registration Statement and here incorporated by reference. 4.8 Agreement Regarding Stock (TCIC Communications, Inc.) dated November 27, 1996. Filed as Exhibit 4.14 to the S-4 Registration Statement and here incorporated by reference. 4.9 Dakota Telecommunications Group, Inc. Common Stock Certificate. Filed as Exhibit 4.16 to the S-4 Registration Statement and here incorporated by reference. 4.10 Dakota Telecom, Inc. Loan Agreement with Rural Telephone Finance Cooperative dated January 29, 1996. Filed as Exhibit 4.34 to the S-4 Registration Statement and here incorporated by reference. 4.11 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom, Inc. Loan Agreement with Rural Telephone Finance Cooperative dated June 24, 1997. Filed as an exhibit to the Registrant's Report on Form 10-QSB for the quarter ended June 30, 1997 and here incorporated by reference. -37- 4.12 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom, Inc. Mortgage and Security Agreement with Rural Telephone Finance Cooperative dated June 24, 1997. Filed as Exhibit 4.31 to the Registrant's Report on Form 10-QSB for the quarter ended June 30, 1997 and here incorporated by reference. 4.13 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom, Inc. Pledge and Security Agreement with Rural Telephone Finance Cooperative dated June 24, 1997. Filed as Exhibit 4.33 to the Registrant's Report on Form 10-QSB for the quarter ended June 30, 1997 and incorporated by reference. 4.14 The Company has several classes of long-term debt instruments outstanding in addition to those described in Exhibits 4.11 through 4.14. The amount of these classes of debt outstanding on September 30, 1998, does not exceed 10% of the Company's total consolidated assets. The Company agrees to furnish copies of any agreement defining the rights of holders of any such long-term indebtedness to the Securities and Exchange Commission upon request. 27 Financial Data Schedule. 99.1 Form of Voting Agreement of directors of Dakota Telecommunications Group, Inc. Filed as Exhibit 99.1 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.2 Form of Voting Agreement of certain executive officers of Dakota Telecommunications Group, Inc. who are not also directors. Filed as Exhibit 99.2 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.3 Form of Voting Agreement of Craig A. Anderson. Filed as Exhibit 99.3 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.4 Press Release of McLeodUSA Incorporated and Dakota Telecommunications Group, Inc. dated October 28, 1998 announcing signing of Merger Agreement. Filed as Exhibit 99.4 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.5 Prior Year 2000 Readiness Disclosures (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter covered by this Report. -38- SIGNATURES In accordance with the requirements of the Exchange Act the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAKOTA TELECOMMUNICATIONS GROUP, INC. Date: January 20, 1999 By /S/ CRAIG A. ANDERSON Craig A. Anderson President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) -39- EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT 2.1 Agreement and Plan of Merger dated as of October 27, 1998 by and among Dakota Telecommunications Group, Inc., McLeodUSA Incorporated and West Group Acquisition Co. Filed as Exhibit 2.1 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 3.1 Certificate of Incorporation of Dakota Telecommunications Group, Inc., a Delaware corporation, as amended. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998 and here incorporated by reference. 3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware corporation, as amended. 4.1 Certificate of Incorporation of Dakota Telecommunications Group, Inc., a Delaware corporation, as amended. See Exhibit 3.1 above. 4.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware corporation, as amended. See Exhibit 3.2 above. 4.3 Rights Agreement, dated as of July 22, 1997, between the Company, and Norwest Bank Minnesota, N.A., which includes the form of Rights Certificate as Exhibit A and the Summary of Rights to Purchase Preferred Stock as Exhibit B. Filed as Exhibit 4.3 to the Registrant's Report on Form 10-QSB for the quarter ended September 30, 1997 and here incorporated by reference. 4.4 Standstill Agreement dated November 27, 1996, among Dakota Cooperative Telecommunications, Inc., and the Selling Shareholders of TCIC Communications, Inc. Filed as Exhibit 4.7 to the Registrant's Form S-4 Registration Statement that became effective on June 13, 1997 (the "S-4 Registration Statement") and here incorporated by reference. 4.5 Standstill Agreement dated November 27, 1996, among Dakota Cooperative Telecommunications, Inc. and the Selling Shareholders of I-Way Partners, Inc. Filed as Exhibit 4.8 to the S-4 Registration Statement and here incorporated by reference. -40- 4.6 Dakota Cooperative Telecommunications, Inc. Form of Option Agreement. Filed as Exhibit 4.12 to the S-4 Registration Statement and here incorporated by reference. 4.7 Agreement Regarding Stock (I-Way Partners, Inc.) dated November 27, 1996. Filed as Exhibit 4.13 to the S-4 Registration Statement and here incorporated by reference. 4.8 Agreement Regarding Stock (TCIC Communications, Inc.) dated November 27, 1996. Filed as Exhibit 4.14 to the S-4 Registration Statement and here incorporated by reference. 4.9 Dakota Telecommunications Group, Inc. Common Stock Certificate. Filed as Exhibit 4.16 to the S-4 Registration Statement and here incorporated by reference. 4.10 Dakota Telecom, Inc. Loan Agreement with Rural Telephone Finance Cooperative dated January 29, 1996. Filed as Exhibit 4.34 to the S-4 Registration Statement and here incorporated by reference. 4.11 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom, Inc. Loan Agreement with Rural Telephone Finance Cooperative dated June 24, 1997. Filed as an exhibit to the Registrant's Report on Form 10-QSB for the quarter ended June 30, 1997 and here incorporated by reference. 4.12 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom, Inc. Mortgage and Security Agreement with Rural Telephone Finance Cooperative dated June 24, 1997. Filed as Exhibit 4.31 to the Registrant's Report on Form 10-QSB for the quarter ended June 30, 1997 and here incorporated by reference. 4.13 Dakota Cooperative Telecommunications, Inc. and Dakota Telecom, Inc. Pledge and Security Agreement with Rural Telephone Finance Cooperative dated June 24, 1997. Filed as Exhibit 4.33 to the Registrant's Report on Form 10-QSB for the quarter ended June 30, 1997 and incorporated by reference. 4.14 The Company has several classes of long-term debt instruments outstanding in addition to those described in Exhibits 4.11 through 4.14. The amount of these classes of debt outstanding on September 30, 1998, does not exceed 10% of the Company's total consolidated assets. The Company agrees to furnish copies of any agreement defining the rights of holders of any such long-term indebtedness to the Securities and Exchange Commission upon request. -41- 27 Financial Data Schedule. 99.1 Form of Voting Agreement of directors of Dakota Telecommunications Group, Inc. Filed as Exhibit 99.1 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.2 Form of Voting Agreement of certain executive officers of Dakota Telecommunications Group, Inc. who are not also directors. Filed as Exhibit 99.2 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.3 Form of Voting Agreement of Craig A. Anderson. Filed as Exhibit 99.3 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.4 Press Release of McLeodUSA Incorporated and Dakota Telecommunications Group, Inc. dated October 28, 1998 announcing signing of Merger Agreement. Filed as Exhibit 99.4 to the Company's Form 8-K filed with the Commission on November 10, 1998 and here incorporated by reference. 99.5 Prior Year 2000 Readiness Disclosures -42- EX-3 2 As amended through October 27, 1998 EXHIBIT 3.2 BYLAWS OF DAKOTA TELECOMMUNICATIONS GROUP, INC. ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. The corporation may have offices at such places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. TIMES AND PLACES OF MEETINGS. All meetings of the stockholders shall be held, except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, at such time and place as may be fixed from time to time by the Board of Directors. Meetings of stockholders may be held within or without the State of Delaware as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. ANNUAL MEETINGS. Annual meetings of the stockholders shall be held each year at such time and on such day as may be designated by the Board of Directors. Annual meetings shall be held to elect, by a plurality vote, successors to those members of the Board of Directors whose terms expire at the meeting and to transact only such other business as may be properly brought before the meeting in accordance with these Bylaws. SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders may be called by an executive officer whenever directed by the Board of Directors. Such request shall state the purpose of the proposed meeting. SECTION 4. WRITTEN NOTICE. Written notice of all meetings of stockholders, stating the place, date and hour, and in the case of a special meeting, the purpose or purposes thereof, shall be given to each stockholder entitled to vote thereat, not less than 10 nor more than 60 days before the date fixed for the meeting. SECTION 5. WAIVER OF NOTICE. Whenever notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or by these Bylaws, a written waiver, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a stockholder at a meeting shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or by these Bylaws. SECTION 6. STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 7. QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the officer of the corporation presiding as chairman of the meeting shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meetings at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Stock of the -2- corporation issuable to a former holder of common stock or capital credits of Dakota Cooperative Telecommunications, Inc. shall not be considered to be issued and outstanding stock for purposes of calculating a quorum unless and until such former holder has properly executed and delivered to the corporation transmittal materials in a form and condition reasonably acceptable to the corporation. (As amended 3/16/98.) SECTION 8. VOTE REQUIRED. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. SECTION 9. VOTING RIGHTS. Except as otherwise provided by the Certificate of Incorporation or the resolution or resolutions of the Board of Directors creating any class of stock, each holder of issued and outstanding shares of stock shall, at every meeting of stockholders, be entitled to one vote in person or by proxy for each share of the issued and outstanding stock having voting power held by such stockholder. Stock of the corporation issuable to a former holder of common stock or capital credits of Dakota Cooperative Telecommunications, Inc. shall not be considered to be issued and outstanding, and such a former holder shall not have the right to vote stock so issuable as a stockholder, unless and until such former holder has properly executed and delivered to the corporation transmittal materials in a form and condition reasonably acceptable to the corporation. (As amended 3/16/98.) SECTION 10. ACTION WITHOUT A MEETING. Unless otherwise provided in the Certificate of Incorporation, no action required or permitted to be taken at any annual or special meeting of stockholders of the corporation may be taken by written consents without a meeting. SECTION 11. CONDUCT OF MEETINGS. Meetings of stockholders generally shall follow accepted rules of parliamentary procedure, subject to the following: (a) The chairman of the meeting shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. If, in his or her absolute discretion, the chairman deems it advisable to dispense with the rules of parliamentary procedure as to any one meeting of stockholders or part thereof, the chairman shall so state and shall clearly state the rules under which the meeting or appropriate part thereof shall be conducted. -3- (b) If disorder should arise which, in the absolute discretion of the chairman, prevents the continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting; and upon his or her so doing, the meeting is immediately adjourned without the necessity of any vote or further action of the stockholders. (c) The chairman may ask or require anyone not a bona fide stockholder of record on the record date, or a validly appointed proxy of such a stockholder, to leave the meeting. (d) The chairman may introduce nominations, resolutions or motions submitted by the Board of Directors for consideration by the stockholders without a motion or second. Except as the chairman shall direct, a resolution or motion not submitted by the Board of Directors shall be considered for vote only if proposed by a stockholder of record on the record date or a validly appointed proxy of such a stockholder and seconded by such a stockholder or proxy other than the individual who proposed the resolution or motion. SECTION 12. INSPECTORS OF ELECTION. The Board of Directors or, if they shall not have so acted, the Chief Executive Officer shall appoint, prior to any meeting of stockholders, one or more inspectors (who may be directors and/or employees of the corporation) to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of the inspector's ability. SECTION 13. STOCKHOLDER PROPOSALS. Except as otherwise provided by statute, the corporation's Certificate of Incorporation or these Bylaws: (a) No matter may be presented for stockholder action at an annual or special meeting of stockholders unless such matter is: (i) specified in the notice of the meeting (or any supplement to the notice) given by or at the direction of the Board of Directors; (ii) otherwise presented at the meeting by or at the direction of the Board of Directors; (iii) properly presented for action at the meeting by a stockholder in accordance with the notice provisions set forth in this Section and any other applicable requirements; or (iv) a procedural matter presented, or accepted for presentation, by the Chairman in his sole discretion. -4- (b) For a matter to be properly presented by a stockholder, the stockholder must have given timely notice of the matter in writing to the Secretary of the corporation. To be timely, the notice must be delivered to or mailed to and received at the principal executive offices of the corporation not less than 120 calendar days prior to the date corresponding to the date of the corporation's proxy statement or notice of meeting released to stockholders in connection with the last preceding annual meeting of stockholders in the case of an annual meeting (unless the corporation did not hold an annual meeting within the last year, or if the date of the upcoming annual meeting changed by more than thirty days from the date of the last preceding meeting, then the notice must be delivered or mailed and received not more than ten days after the earlier of the date of the notice of the meeting or public disclosure of the date of the meeting), and not more than ten days after the earlier of the date of the notice of the meeting or public disclosure of the date of the meeting in the case of a special meeting. The notice by the stockholder must set forth: (i) a brief description of the matter the stockholder desires to present for stockholder action; (ii) the name and record address of the stockholder proposing the matter for stockholder action; (iii) the class and number of shares of capital stock of the corporation that are beneficially owned by the stockholder; and (iv) any material interest of the stockholder in the matter proposed for stockholder action. For purposes of this Section, "public disclosure" means disclosure in a press release reported by the Dow Jones News Service, Associated Press or other comparable national financial news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15 of the Securities Exchange Act of 1934, as amended. (c) Except to the extent that a stockholder proposal submitted pursuant to this Section is not made available at the time of mailing, the notice of the purposes of the meeting shall include the name and address of and the number of shares of the voting security held by the proponent of each stockholder proposal. (d) Notwithstanding the above, if the stockholder desires to require the corporation to include the stockholder's proposal in the corporation's proxy materials, matters and proposals submitted for inclusion in the corporation's proxy materials shall be governed by the solicitation rules and regulations of the Securities Exchange Act of 1934, as amended, including without limitation Rule 14a-8. -5- ARTICLE III DIRECTORS SECTION 1. NUMBER AND TERM OF DIRECTORS. The number of directors which shall constitute the whole Board shall be not less than three and shall be determined from time to time by resolution of the Board of Directors as provided in the Certificate of Incorporation. The directors, other than those who may be elected by the holders of any class or series of stock having a preference over Common Stock as to dividends or upon liquidation, shall be divided into three classes, as nearly equal in number as possible, with the term of office of one class expiring each year. At each annual meeting of the stockholders, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Directors need not be stockholders. SECTION 2. POWERS. The business of the corporation shall be managed by its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. SECTION 3. VACANCIES. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled as provided in the Certificate of Incorporation. SECTION 4. RESIGNATION AND REMOVAL. Any director may resign at any time as provided in the Certificate of Incorporation. Any or all of the directors may be removed, but only for cause, as provided in the Certificate of Incorporation. SECTION 5. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 6. PLACE OF MEETINGS. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. -6- SECTION 7. FIRST MEETING OF NEWLY ELECTED BOARD. The first meeting of each newly elected Board of Directors shall be held following the annual meeting of stockholders and no notice of such meeting shall be necessary to the newly elected directors legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held immediately following the annual meeting of stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors or as shall be specified in a written waiver signed by all of the directors. SECTION 8. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. SECTION 9. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman, Chief Executive Officer or Secretary or by any two directors on two days' notice to each director, either personally, by mail, by telegram or by facsimile transmission. SECTION 10. PURPOSE NEED NOT BE STATED. Neither the business to be transacted at nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice of such meeting. SECTION 11. QUORUM. At all meetings of the Board of Directors a majority of the directors shall constitute a quorum for the transaction of business and the acts of a majority of the directors present at any meeting at which there is a quorum shall be acts of the Board of Directors except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 12. ACTION WITHOUT A MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of the proceedings of the Board or committee. SECTION 13. MEETING BY TELEPHONE OR SIMILAR EQUIPMENT. The Board of Directors or any committee designated by the Board of Directors may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means through which all persons participating in the meeting can hear each other and participation in a meeting pursuant to this section shall constitute presence in person at such meeting. -7- SECTION 14. WRITTEN NOTICE. Notices to directors shall be in writing and delivered personally or mailed to the directors at their addresses appearing on the books of the corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram or by facsimile transmission, which shall be deemed given at the time when the same shall be sent. SECTION 15. WAIVER OF NOTICE. Whenever notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or by these Bylaws, a written waiver, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except when a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors or members of a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or by these Bylaws. SECTION 16. AGE LIMITATION. No person shall be appointed or nominated for election or reelection to the Board of Directors after that person has attained the age of 70. Any person serving as a director of the corporation at the time he or she attains the age of 70 shall continue to serve out his or her then remaining term. Notwithstanding the foregoing, this Section 16 shall not apply to persons serving as directors of the corporation on the date this Section 16 becomes effective. (As amended 1/27/98.) SECTION 17. LIMITATION ON INSIDE/EMPLOYEE DIRECTORS. The maximum number of directors of the corporation who are also active employees of the corporation or any subsidiary or affiliate of the corporation shall be two (2). (As amended 1/27/98.) ARTICLE IV COMMITTEES OF DIRECTORS SECTION 1. EXECUTIVE COMMITTEE. The Board of Directors, by resolution adopted by a majority of the directors present at any meeting at which there is a quorum, may appoint an Executive Committee whose membership shall consist of two or more members of the Board of Directors as it may deem advisable from time to time to serve at the pleasure of the Board. The Board of Directors may also appoint directors to serve as alternates for members of the committee in the absence or disability of regular members. The Board of Directors may fill any vacancies as they -8- occur. The Executive Committee shall have and may exercise the powers of the Board of Directors in the management of the business affairs and property of the corporation during the intervals between meetings of the Board of Directors, subject to law and to such limitations and controls as the Board of Directors may impose from time to time. SECTION 2. AUDIT COMMITTEE. The Audit Committee, if there be one, shall cause a suitable examination of the financial records and operations of the corporation and its subsidiaries to be made by the internal auditor of the corporation. The Audit Committee shall also recommend to the Board of Directors the employment of independent certified public accountants to examine the financial statements of the corporation and its subsidiaries, review examination reports of the corporation and its subsidiaries prepared by regulatory authorities and report to the Board of Directors at least once each calendar year. SECTION 3. COMPENSATION COMMITTEE. The Compensation Committee, if there be one, shall review the personnel policies, plans and programs of the corporation, including individual salaries of executive officers, and submit recommendations to the Board of Directors. The Compensation Committee shall also review the administration and results of operation of the corporation's pension plans, confer with and receive reports from the actuaries and investment managers of the pension plans, make recommendations related to such plans and review all material pension plan changes. The Compensation Committee shall also recommend to the Board of Directors the retainer and attendance fee for nonemployee directors. SECTION 4. NOMINATING COMMITTEE. The Nominating Committee, if there be one, shall develop and recommend to the Board of Directors criteria for the selection of candidates for directors, seek out and receive suggestions concerning possible candidates, review and evaluate the qualifications of possible candidates and recommend to the Board candidates for vacancies occurring from time to time and for the slate of directors to be proposed on behalf of the Board of Directors at the annual meeting of stockholders. The Nominating Committee will consider nominees recommended by the stockholders as properly submitted to the Secretary of the corporation. SECTION 5. OTHER COMMITTEES. The Board of Directors may designate such other committees as it may deem appropriate and such committees shall exercise the authority delegated to them. SECTION 6. COMMITTEE MEETINGS. Each committee provided for above shall meet as often as its business may require and may fix a day and time each week or at other intervals for regular meetings, notice of which shall not be required. Whenever the day fixed for a meeting shall fall on a holiday, the meeting shall be held on the business day following or on such other day as the committee may determine. Special meetings of the -9- committees may be called by the chairman of the committee or any two members other than the chairman and notice thereof may be given to the members by telephone, telegram, letter or facsimile transmission. A majority of its members shall constitute a quorum for the transaction of the business of any committee. A record of the proceedings of each committee shall be kept and presented to the Board of Directors. SECTION 7. SUBSTITUTES. In the absence or disqualification of a member of a committee, the members thereof present at a meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at a meeting in place of such absent or disqualified member. ARTICLE V OFFICERS SECTION 1. (a) CENTRAL STAFF. The officers of the corporation shall be chosen by the Board of Directors at its first meeting after the annual meeting of stockholders, or as soon as practicable after the annual election of directors in each year, and shall include a Chairman of the Board, a President, a Secretary and a Treasurer. The Board of Directors may also appoint one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as the Board may deem necessary. The Chairman of the Board and President shall be chosen from among the directors, but no other officer need be a director. Either the Chairman of the Board or the President shall also be designated as the Chief Executive Officer. Any two of the above offices, except those of the President and Vice President, may be held by the same person. (b) DIVISIONAL OFFICERS. The Board of Directors or the Chief Executive Officer may, as they shall deem necessary, designate certain individuals as divisional officers. Any titles so given to divisional officers may be withdrawn at any time with or without cause by the Board of Directors or the Chief Executive Officer. SECTION 2. TERM OF OFFICE. Each officer shall hold office at the pleasure of the Board. The Board of Directors may remove any officer for cause or without cause. Any officer may resign his or her office at any time, such resignation to take effect upon receipt of written notice thereof by the corporation unless otherwise specified in the resignation. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board. -10- SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and at all meetings of the Board of Directors, and shall have such other duties and powers as may be imposed or given by the Board of Directors. In the case of absence or inability to act of the President or Chief Executive Officer, the Chairman of the Board shall exercise all of the duties and responsibilities of such officer until the Board of Directors shall otherwise direct. SECTION 4. PRESIDENT. The President shall, subject to the direction of the Board of Directors, see that all orders and resolutions of the Board of Directors are carried into effect and shall perform all other duties necessary or appropriate to the President's office, subject, however, to his right (unless otherwise limited by the Board of Directors) and the right of the directors to delegate any specific powers to any other officer or officers of the corporation. In the case of absence or inability to act of the Chairman of the Board or the Chief Executive Officer, the President shall exercise all of the duties and responsibilities of such officer until the Board of Directors shall otherwise direct. SECTION 5. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, in addition to his duties as Chairman of the Board or President, as the case may be, shall have final authority, subject to the control of the Board of Directors, over the general policy and business of the corporation and shall have the general control and management of the business and affairs of the corporation. The Chief Executive Officer shall have the power, subject to the control of the Board of Directors, to appoint, suspend or discharge and to prescribe the duties and to fix the compensation of such agents and employees of the corporation, other than the officers appointed by the Board, as he or she may deem necessary. SECTION 6. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall, subject only to the control of the Board of Directors, have general charge, control and supervision over the financial policy and administration of the corporation and shall have such other duties and powers as may be imposed or given by the Board of Directors. The Chief Financial Officer shall report only and directly to the Board of Directors. SECTION 7. CHIEF OPERATING OFFICER. There may be elected a Chief Operating Officer who shall, if elected, have general charge, control and supervision over the administration and operations of the corporation and shall have such other duties and powers as may be imposed or given by the Board of Directors. If no Chief Operating Officer is elected, the duties and powers of the Chief Operating Officer shall be performed by the Chief Executive Officer. -11- SECTION 8. VICE PRESIDENTS. The Vice President or Vice Presidents shall perform such duties and have such powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. The Board of Directors may at its discretion designate one or more of the Vice Presidents to be an Executive Vice President or Senior Vice President. Any Vice President so designated shall have such duties and responsibilities as the Board shall prescribe. SECTION 9. SECRETARY. The Secretary shall attend all meetings of the stockholders, and of the Board of Directors and the Executive Committee, and shall preserve in the books of the corporation true minutes of the proceedings of all such meetings. The Secretary shall safely keep in his or her custody the seal of the corporation, if any, and shall have authority to affix the same to all instruments where its use is required or appropriate. The Secretary shall give all notices required or appropriate pursuant to statute, the Certificate of Incorporation, Bylaws or resolution. The Secretary shall perform such other duties as may be delegated by the Board of Directors or by the Executive Committee. SECTION 10. TREASURER. The Treasurer, who shall also be the Chief Financial Officer, shall have custody of all corporate funds and securities and shall keep in books belonging to the corporation full and accurate accounts of all receipts and disbursements. The Treasurer shall deposit all moneys, securities and other valuable effects in the name of the corporation in depositories as may be designated for that purpose by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer and directors at the regular meetings of the Board, and whenever requested by them, an account of all his or her transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, the Treasurer shall deliver to the Chief Executive Officer of the corporation and keep in force a bond in form, amount and with a surety or sureties satisfactory to the Board of Directors, conditioned for faithful performance of the duties of his or her office, and for restoration to the corporation in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and property of whatever kind in his or her possession or under his or her control belonging to the corporation. SECTION 11. ASSISTANT SECRETARY AND ASSISTANT TREASURER. There may be elected an Assistant Secretary and Assistant Treasurer who shall, in the absence, disability or nonfeasance of the Secretary or Treasurer, perform the duties and exercise the powers of such persons, respectively. SECTION 12. OTHER OFFICERS. All other officers, as may from time to time be appointed by the Board of Directors, shall perform such -12- duties and exercise such authority as the Board of Directors shall prescribe. All divisional officers, as may from time to time be appointed by the Board of Directors or the Chief Executive Officer, shall perform such duties and exercise such authority as the Board of Directors or the Chief Executive Officer shall prescribe. ARTICLE VI INDEMNIFICATION SECTION 1. INDEMNIFICATION OTHER THAN IN ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, or executive officer of the corporation or, is or was a director or executive officer of the corporation and is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, whether for profit or not, shall be indemnified by the corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that such conduct was unlawful. Persons who are not directors or executive officers of the corporation may be similarly indemnified in respect of such service to the extent authorized at any time by the Board of Directors, except as otherwise provided by law. SECTION 2. INDEMNIFICATION IN ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director or executive officer of the corporation, or is or was a director or executive officer of the corporation and is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, -13- whether for profit or not, shall be indemnified by the corporation against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification shall not be made for a claim, issue or matter in which the person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application, that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. Persons who are not directors or executive officers of a corporation may be similarly identified in respect of such service to the extent authorized at any time by the Board of Directors, except as otherwise provided by law. SECTION 3. EXPENSES. To the extent that a director, officer or other person whose indemnification is authorized by the Board of Directors, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 or 2 of this Article, or in defense of any claim, issue or matter therein, he or she shall be indemnified against all expenses (including attorneys fees) actually and reasonably incurred by him or her in connection therewith. SECTION 4. DETERMINATION OF RIGHT OF INDEMNIFICATION. Any indemnification under Section 1 or 2 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the person has met the applicable standard of conduct set forth in Sections 1 and 2. Such determination shall be made (a) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (b) if there are no such directors, or if such directors so direct, by independent legal counsel (who may be the regular counsel of the corporation) in a written opinion, or (c) by the stockholders. SECTION 5. ADVANCEMENT OF EXPENSES. Expenses incurred in defending a civil or criminal action, suit or proceeding described in Sections 1 or 2 of this Article shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in Section 4 upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation as authorized in this section. -14- SECTION 6. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any Bylaw, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in the person's official capacity and as to action in another capacity while holding such office and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators. SECTION 7. INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of this Article. SECTION 8. MERGERS. For the purposes of this Article, references to the "corporation" include all constituent corporations absorbed in a consolidation or merger, as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, whether for profit or not, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation if he or she had served the resulting or surviving corporation in the same capacity. ARTICLE VII SUBSIDIARIES SECTION 1. SUBSIDIARIES. The Board of Directors, the Chief Executive Officer or any executive officer designated by the Board of Directors may vote the shares of stock owned by the corporation in any subsidiary, whether wholly or partly owned by the corporation, in such manner as they may deem in the best interests of the corporation, including, without limitation, for the election of directors of any subsidiary corporation, for any amendments to the charter or bylaws of any such subsidiary corporation or for the liquidation, merger or sale of -15- assets of any such subsidiary corporation. The Board of Directors, the Chief Executive Officer or any executive officer designated by the Board of Directors may cause to be elected to the Board of Directors of any such subsidiary corporation such persons as they shall designate, any of whom may, but need not be, directors, executive officers or other employees or agents of the corporation. The Board of Directors, the Chief Executive Officer or any executive officer designated by the Board of Directors may instruct the directors of any such subsidiary corporation as to the manner in which they are to vote upon any issue properly coming before them as the directors of such subsidiary corporation and such directors shall have no liability to the corporation as the result of any action taken in accordance with such instructions. SECTION 2. SUBSIDIARY OFFICERS NOT EXECUTIVE OFFICERS. The officers of any subsidiary corporation shall not, by virtue of holding such title and position, be deemed to be officers of the corporation, nor shall any such officer of a subsidiary corporation, unless such officer shall also be a director or officer of the corporation, be entitled to have access to any files, records or other information relating or pertaining to the corporation, its business and finances or to attend or receive the minutes of any meetings of the Board of Directors or any committee of the corporation, except as and to the extent expressly authorized and permitted by the Board of Directors or the Chief Executive Officer. ARTICLE VIII CERTIFICATES OF STOCK SECTION 1. FORM. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chief Executive Officer, President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by such stockholder in the corporation. SECTION 2. FACSIMILE SIGNATURE. Where a certificate is signed (a) by a transfer agent or an assistant transfer agent, or (b) by a transfer clerk acting on behalf of the corporation and a registrar, the signature of any such Chief Executive Officer, President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon a certificate, shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if the person were such officer, transfer agent or registrar at the date of issue. -16- SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or the person's legal representative, to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. SECTION 4. TRANSFERS OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 5. FIXING OF RECORD DATE BY BOARD. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or to express consent to or dissent from any corporate action in writing without a meeting, or for the purpose of determining stockholders entitled to receive payments of any dividend or the distribution or allotment of any rights or evidences of interests arising out of any change, conversion or exchange of capital stock, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be more than 60 days nor less than 10 days before the date of any such meeting, nor more than 60 days prior to effectuation of any other action proposed to be taken. Only stockholders of record on a record date so fixed shall be entitled to notice of and to vote at such meeting or to receive payment of any dividend or the distribution or allotment of any rights or evidences of interests arising out of any change, conversion or exchange of capital stock. SECTION 6. ADJOURNMENTS. When a determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders has been made as provided in this Article, the determination applies to any adjournment of the meeting, unless the Board fixes a new record date for the adjourned meeting. SECTION 7. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether -17- or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX GENERAL PROVISIONS SECTION 1. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 2. RESERVES. Before payment of any dividends, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, for equalizing dividends, for repairing or maintaining any property of the corporation or for such other purpose as the directors shall think conducive to the interests of the corporation and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 3. CHECKS. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 4. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SECTION 5. SEAL. The corporate seal, if any, shall have inscribed thereon the name of the corporation, and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed, affixed, reproduced or otherwise. ARTICLE X AMENDMENTS Subject to any provisions of the Certificate of Incorporation, these Bylaws may be amended, altered, changed or repealed at any regular or special meeting of the Board of Directors. Subject to any revisions of the Certificate of Incorporation, these Bylaws may also be amended, altered, changed or repealed at any regular or special meeting of stockholders -18- provided that notice that amendment of the Bylaws is a purpose of the meeting, and the proposed amendment has been provided to the stockholders as required under these Bylaws and applicable law. ARTICLE XI ADVISORY AND EMERITUS DIRECTORS SECTION 1. INVITATIONS TO NON-DIRECTORS TO ATTEND MEETINGS OF BOARD OF DIRECTORS. The President or Chairman of the Board may from time to time invite one or more non-directors to attend meetings of the Board of Directors for the purpose of (i) consulting with the officers and directors of the corporation; and (ii) providing guidance (but not direction) concerning the management and operation of the business of the corporation. SECTION 2. DESIGNATION OF PERSONS AS ADVISORY OR EMERITUS DIRECTORS. To the extent that the Board of Directors desires one or more persons to regularly attend meetings of the Board of Directors, the Board of Directors may confer upon any such person the honorary title of "Advisory Director" or, if such person previously served as a director of the corporation, the title of "Director Emeritus." Any person designated as an Advisory Director or Director Emeritus may be invited to attend any meeting of the Board of Directors of the corporation or any committee meeting of the Board of Directors by the President or the Chairman of the Board without further action by the Board of Directors. SECTION 3. ROLE OF ADVISORY AND EMERITUS DIRECTORS. The business of the corporation shall remain solely under the direction of the Board of Directors and any such person designated as Advisory Director or Director Emeritus shall not by virtue of such designation or by virtue of their willingness to provide consultation to the corporation be deemed to have undertaken any duty to the corporation or its stockbrokers. SECTION 4. INDEMNIFICATION. An Advisory Director or Director Emeritus shall enjoy limitations of liability to the maximum extent permissible under law and shall also be entitled to the protection of Article XIV of the corporation's Certificate of Incorporation, Article VI of the Bylaws of the corporation, and any other indemnification or limitation of liability provisions that may exist from time to time with respect to members of the Board of Directors, either in the Certificate of Incorporation, Bylaws, minutes, agreements, or other documents of the corporation or applicable law. SECTION 5. COMPENSATION. An Advisory Director or Director Emeritus shall be compensated in such manner and in such amounts as the Board of Directors may from time to time determine. -19- SECTION 6. TERMINATION OF STATUS AS ADVISORY OR EMERITUS DIRECTOR. Except as otherwise provided by agreement or resolution of the Board of Directors, the Board of Directors may terminate the status as an Advisory Director or Director Emeritus of any person so designated at any time without any liability or obligation to such person whatsoever; provided, however, that the obligation of the corporation to indemnify the Advisory Director or Director Emeritus as provided in Section 4 above and the obligation of the corporation to pay the Advisory Director or Director Emeritus the full amount of compensation earned through the date of termination as provided in Section 5 above shall continue notwithstanding any such termination of status. (Article XI as amended 1/27/98) -20- EX-27 3 ART. 5 FDS FOR PERIOD ENDED SEPTEMBER 30, 1998 10-QSB
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES FOR THE YEAR- TO-DATE PERIOD ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,705,383 0 4,191,814 415,400 1,883,839 7,892,933 40,789,058 14,484,828 43,671,374 9,806,951 28,393,121 10,979,987 0 0 1,176,298 43,671,374 13,008,166 24,222,476 10,376,666 26,630,516 0 124,747 1,653,047 (3,836,231) 8,000 (3,828,231) 0 0 0 (3,828,231) (2.04) (2.04)
EX-99 4 Exhibit 99.5 PRIOR YEAR 2000 READINESS DISCLOSURES Each of the following statements previously made by the Company is being designated as a "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act. These prior Year 2000 Readiness Disclosures were based in part upon and repeated information provided by the Company's customers, suppliers and other third parties without independent verification by the Company. These prior Year 2000 Readiness Disclosures are superseded by the Year 2000 Readiness Disclosure in the Quarterly Report on Form 10-QSB for the period ended September 30, 1998. QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 1998 YEAR 2000 COMPUTER SOFTWARE ISSUES The Company is highly dependent upon advanced computer systems and specialized software for the conduct of its business. These systems include switching and network operations, billing and customer care, accounting and reporting and Internet operating systems, as well as a wide assortment of personal computer productivity software. In 1997, as part of its reorganization plan, the Company installed new accounting and reporting systems and began the installation of a new billing and customer service system, currently scheduled for completion in 1998. It also rebuilt its Internet operating systems and installed a new switching platform and software system. As part of its systems replacement process, the Company addressed an issue that is facing all users of automated information systems. The issue is that many computer systems that process date sensitive information based on two digits representing the year of the event may recognize a date using "00" as the year 1900 rather than the year 2000. The inability to correctly recognize "00" as the year 2000 could affect a wide variety of automated information systems, such as mainframe applications, invoicing and receivables tracking systems, event scheduling systems, personal computers and communication systems, in the form of software failure, errors or miscalculations. The Company's system vendors have assured the Company that its new systems will not experience year 2000 problems. However, given the complexity of the specialized software used by the Company and the relative newness of the year 2000 problem, there can be no assurance that the Company's new or remaining systems will not experience some problems as these systems begin to operate using year 2000 dates. The Company will continue to assess the impact of the year 2000 issue on the remainder of its computer-based systems and applications throughout 1998. The Company's goal is to perform tests of its systems and applications during 1998 and to have all systems and applications compliant with the century change by December 31, 1998. The Company believes that with modifications to existing software and conversions to new software, the year 2000 issue will not pose significant operational problems for its computer systems. While the Company will continue to monitor and test its systems for potential problems, failure of key software systems to properly recognize and handleyear 2000 dates could result in material and wide-spread failures in the Company's operations, possibly leading to severe service outages and customer complaints. Such failures, were they to occur, would have severe adverse effects on the Company's results of operations, liquidity and capital resources. ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 YEAR 2000 COMPUTER SOFTWARE ISSUES The Company is highly dependent upon advanced computer systems and specialized software for the conduct of its business. These systems include switching and network operations, billing and customer care, accounting and reporting and Internet operating systems, as well as a wide assortment of personal computer productivity software. In 1997, as part of its reorganization plan, the Company installed new accounting and reporting systems and began the installation of a new billing and customer service system, currently scheduled for completion in 1998. The Company also rebuilt its Internet operating systems and installed a new switching platform and software system in 1997. As part of its systems replacement process, the Company addressed an issue that is facing all users of automated information systems. The issue is that many computer systems that process date sensitive information based on two digits representing the year of the event may recognize a date using "00" as the year 1900 rather than the year 2000. The inability to correctly recognize "00" as the year 2000 could affect a wide variety of automated information systems, such as mainframe applications, invoicing and receivables tracking systems, event scheduling systems, personal computers and communication systems, in the form of software failure, errors or miscalculations. The Company's software suppliers have assured the Company that its new systems will not experience year 2000 problems. However, given the complexity of the specialized software used by the Company and the relative newness of the year 2000 problem, there can be no assurance that the Company's new or remaining systems will not experience some problems as these systems begin to operate using year 2000 dates. While the Company will continue to monitor and test its systems for potential problems, failure of key software systems to properly recognize and handle year 2000 -2- dates could result in material and wide-spread failures in the Company's operations, possibly leading to severe service outages and customer complaints. Such failures, were they to occur, would have severe adverse effects on the Company's results of operations, liquidity and capital resources. -3- -----END PRIVACY-ENHANCED MESSAGE-----