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4/29/2008 1:53:00 PM
Lac du Flambeau tribal factions debate XIT investment
Does tribe, as part owner, have a say in operations?

Douglas Etten
Outdoors Writer

Whether plowing millions of dollars into a Texas-based computer security and communications company called XIT Networks is a smart investment depends upon whom you ask.

And, even if the company is sound, whether the Lac du Flambeau Band of Lake Superior Chippewa Indians adequately protected its own multi-million dollar commitment to the firm is a separate question entirely, the answer to which also depends upon whom you ask.

According to documents obtained by The Lakeland Times, the tribe has invested and committed to the venture at least $9 million in cash, lease agreements and letters of credit.

Some tribal members see the outlay as perilous and ill advised at a time when the tribe is deeply in debt and, they say, teetering on bankruptcy, having just secured a $50-million bond to support a new casino in Natchez, Miss., and to consolidate and pay about $22 million in outstanding loans.

This is no time to be shelling out more money, they say. What's more, there is much confusion about whether the tribe - a 12 percent owner in XIT - even has any say in operational decisions that could obligate it to millions more in capital contributions.

Other tribal members, such as council member Carl Edwards and president Victoria Doud, are confident the tribe will reap handsome financial benefits that will help put them in the black.

"This is a well-established corporation that we've gotten involved with and we're excited for the future," Edwards, who is also the tribal representative to XIT, said.

Others with high praise

An array of Omaha, Neb., officials have welcomed the company with open arms as it moves its official base of operations from Spring, Texas, to a new 4,000-square-foot Cyber Defense Security Center in the Scott Technology Center at the University of Nebraska.

XIT is creating 20 jobs and investing $9 million in the Omaha area.

"XIT Networks' investment is an example of the tremendous role and contribution our community makes to national defense," Omaha Mayor Mike Fahey said in announcing the move. "We are proud to have them on board and look forward to their success in our ever growing defense industry."

The director of the Scott Technology Center, Ken Moreano, called XIT "an important addition" to the center.

The investment

However, it is not clear exactly what contracts the company has, and Edwards says he is bound by a confidentiality agreement that prevents him from talking specifics.

In a June 19, 2007, memorandum from attorney Barry LeSieur to Doud, LeSieur stated the company had obtained a couple of contracts - subject to a tribal investment - while other deals would have to wait until after the new Omaha center was finished in 2008.

"XIT Networks has secured two government contracts which begin in July 2007 contingent on having the funding for equipment (hence, the immediate need for the $1 million investment)," LeSieur wrote. "The construction must be completed in Omaha, Nebraska and equipment purchased before XIT Networks can begin securing additional contracts."

The tribe's total investment was far more substantial than that $1 million. According to a May 24, 2007, proposed purchase of membership interest, the tribe was to ante up $3 million in cash, a $3 million standby letter of credit for expenditures approved by the company's board of managers, and $3 million in lease guarantees for the technology center and equipment.

In return, the tribe would receive a 12 percent ownership share.

Both Doud and XIT chief financial officer Robert Salveson signed the term sheet, but, even so, The Times has not determined how much the tribe actually paid or committed.

What is known is that at a special October 2007 tribal council meeting, Edwards and fellow council members Doud, Dee Mayo, Muriel Fralick, Julie Valliere, John Brown and Jerome "Brooks" Big John voted to approve a resolution to "secure a note from Chippewa Valley Bank to the favor of XIT Networks LLC in the amount of $2 million cash along with an additional letter of credit in the amount of $1.6 million letter of credit."

In a Feb. 6, 2008, memo to tribal members, the council confirmed that a line of credit existed, saying it has "deposited approximately $1.5 million of 638 funds into a master account with Chippewa Valley Bank that is subject to the 'hold' letter of credit for the XIT deal."

So-called 638 dollars are federal funds that were inappropriately put into the account; it is not clear how much more money, if any, was deposited in the master account.

Risks and rewards

While a council majority may have thought XIT was something they could literally take to the bank, tribal dissidents aren't so sure, and they point to the vague and ephemeral nature of the XIT contract deals - and the various contingencies they depend upon, such as the completion of the technology center and the acquisition of equipment - as proof that the risks were too high.

In his memo to Doud, LeSieur also cited the perils involved.

"The risk associated with the investment is that if XIT Networks is unable to secure the promised contracts or that the contracts secured and net income for distribution does not materialize," he wrote. "XIT Networks currently has no assets and even with the tribe's investment, XIT will have limited assets by which to secure the tribe's investment. Therefore, in the event that XIT does not perform in accordance with projections the tribe would have little probability in recovering much of its investment."

Still, LeSieur wrote, if the contracts were secured, it would be a "lucrative investment" for the tribe, resulting in $2 million quarterly distributions to the company's owners with an initial payment of $250,000 to the tribe.

In the Feb. 6 memo to tribal members, the council was more explicit about projected returns, saying revenue from XIT's business would total more than $16 million in the first two years, with quarterly payouts of $250,000 this October, another $1.25 million in January 2009, $2.2 million in April 2009, $3.25 million in July 2009, $4.5 million in October 2009, and $4.5 million in January 2010.

Devil in the details

However, whether the tribe's investment would be lucrative would also depend on the details of the deal, LeSieur wrote in his memo, and, especially, "the details of the operating agreement ..."

Those details have raised a series of questions, the most critical of which is whether the tribe has any power in deciding the operations of the company, meaning a voting seat on its board of managers.

There's no question that the tribe selected Edwards as its representative to the company. That occurred at the October 2007 special meeting in which he was given liaison responsibilities of relaying decisions and information regarding purchases and other financial transactions between XIT and the council.

But did that mean Edwards had a seat on the XIT board of managers?

Edwards has repeatedly told The Lakeland Times he does sit on the board, and certainly LeSieur's memo to Doud states that the tribe's 12 percent ownership interest includes a seat on the board.

However, Edwards name has not been included in two separate company releases of board membership sought by The Times.

On April 3, The Times asked Renee Massey, an administrative secretary at XIT, for a current, up-to-date list of the XIT board of directors. On that same day she responded with an email identifying Jim McMahon, Charles Stack, Steven Bloom, Joseph Baker and Bob Salveson as the members.

Notably not on the list was Edwards.

Asked about the exclusion on several occasions, Edwards told The Times he was indeed a voting member but was not an officer. On April 9, Edwards was asked via email if Massey's information about the board was incorrect.

On April 17, Edwards sent an email to Massey, asking simply, "Can you add me to the board?" That same day - in fact, 13 minutes after Edwards sent his email to Massey - Massey herself sent another email to The Times stating, "Please add Carl Edwards cedwards@ldfcasino. The other e-mail addresses are management/employees of XIT Networks, LLC."

Only five allowed

Not satisfied, The Times again asked Massey, this time to fax a complete list of the XIT managing board members and, more specifically, the names of those persons who are able to cast a vote in the company decision-making process.

On April 21, Massey faxed her response. This time the names were Di baa ji mo win Corporation, Charles K. Stack Jr., Joseph Baker, Robert Salveson, Jim McMahon and Steve Bloom.

According to Edwards, 'Di baa ji mo win' is Chippewa for communications. In an April 24 email, Edwards said he is the Di baa ji mo win Corporation person on the board.

Still, Edwards, or the Di baa ji mo win Corporation, would make the sixth member of the board in addition to the five Massey originally sent to The Times; the XIT operating agreements specifically limits the board to five voting members.

The composition of the voting board is crucial because of another devil in the details of the operating agreement - the board's power to incur new financial obligations that member owners must pay.

"If at anytime following the date of this Agreement, but, in any event, prior to the occurrence of a Capital Transaction, the Company does not have sufficient cash to pay its obligations, or to take advantage of a business opportunity presented to it, after making commercially reasonable attempts to borrow the necessary funding, and subject to the requirements for advance approval of the Board of Managers and Consent of the Members as described .... each of the Members shall be required to make additional capital contributions to the Company."

The contract goes on to state that, at any time, the board of managers has the ability to notify its partners of the need for operating funds. Those partners then have 20 business days to supply XIT with those funds. Should the executive board at XIT declare the monetary need an emergency, it can authorize payments in as few as five business days.

Such capital transactions do need the consent of two-thirds of the major membership interests, however, in addition to a majority of the Aggregate board.

Nonetheless, without a vote, the tribe has far less power to control future financial obligations to the company, critics say.

Two views, one tribe

All of which leads disgruntled tribal members frustrated and complaining that they are in the dark.

"Vicky (Doud) just doesn't want to tell us what is happening with our money," said tribal council member Tom Maulson, who was not present at the meeting in October 2007 when the XIT agreement was approved. "It's a sad day when not even her own council has an idea what is going on."

Others echo his concerns.

"We want a transparent government that is open and honest," said tribal member Rhonda Snow. "If what they are doing is wrong, then admit it and let us go on. Don't keep hiding it and thinking it's going to get better."

Doud sees it differently. She says the tribe has invested wisely and members should not be concerned.

In a recent press release to tribal employees, she said some financial decisions may have been controversial, but she feels they were smart, well-informed ones.

"We have gaming and non-gaming businesses in various stages of development, which if we work together, will help us in the future," Doud said. "The plan is to be debt free in five years, and have enough money saved by the sixth year to operate general fund programs on an actual budget instead of a proposed budget."

Doug Etten can be reached via email at detten@lakelandtimes.com.

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