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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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: 333-22025
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 1,961,261 shares of Dakota Telecommunications Group, Inc. Common
Stock, without par value, outstanding as of March 16, 1998.
Transitional Small Business Disclosure Format (check one): Yes _____
No __X__
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<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC.
INDEX
- ---------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. FINANCIAL STATEMENTS
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet -
March 31, 1998 (Unaudited) and December 31, 1997. . . . . . . 3
Consolidated Statement of Operations -
Three Months Ended March 31, 1998 and
1997 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1998 and
1997 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . . . . 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION. . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
=========================================================================================================
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,626,261 $ 4,297,938
Temporary Cash Investments 200,000 300,000
Accounts Receivable, Less Allowance for
Uncollectibles of $304,600 and $298,700 2,920,136 4,216,025
Income Taxes Receivable 62,987 62,987
Materials and Supplies 1,527,881 1,109,226
Prepaid Expenses 233,031 275,567
----------- -----------
Total Current Assets 7,570,296 10,261,743
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost over Net Assets Acquired 4,787,843 4,869,096
Other Intangible Assets 798,930 809,843
Other Investments 1,520,890 2,037,571
Deferred Charges 931,775 653,373
----------- -----------
Total Investments and Other Assets 8,039,438 8,369,883
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 25,776,797 25,408,266
----------- -----------
TOTAL ASSETS $41,386,531 $44,039,892
=========== ===========
3
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 1,390,000 $ 1,390,000
Notes Payable 500,000 1,500,000
Accounts Payable 1,966,516 2,290,727
Payable Under Floor Plan Arrangements 172,591 569,287
Other Current Liabilities 1,009,097 1,171,772
----------- -----------
Total Current Liabilities 5,038,204 6,921,786
----------- -----------
LONG-TERM DEBT 28,874,216 29,200,469
----------- -----------
DEFERRED CREDITS 112,669 113,565
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 9,952,332 8,523,870
Treasury Stock, at Cost (12,325) (12,325)
Other Capital 1,602,471 2,298,006
Accumulated Deficit (3,181,036) (2,005,479)
Unearned Employee Stock Ownership Plan Shares (1,000,000) (1,000,000)
----------- -----------
Total Stockholders' Equity 7,361,442 7,804,072
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $41,386,531 $44,039,892
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
=======================================================================================================
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Local Network $ 406,817 $ 306,911
Network Access 1,405,475 882,550
Long Distance Network 868,973 772,292
Cable Television Service 401,951 389,302
Computer Network Sales 3,427,329 --
Internet Service 423,170 222,122
Other 98,707 178,802
----------- -----------
Total Operating Revenues 7,032,422 2,751,979
----------- -----------
COSTS AND EXPENSES:
Plant Operations 1,346,350 817,822
Cost of Goods Sold 2,648,668 --
Depreciation and Amortization 1,045,737 761,425
Customer 725,560 207,849
General and Administrative 1,746,435 718,181
Other Operating Expenses 228,769 329,799
----------- -----------
Total Operating Expenses 7,741,519 2,835,076
----------- -----------
OPERATING LOSS (709,097) (83,097)
----------- -----------
OTHER INCOME AND (EXPENSES):
Interest and Dividend Income 29,159 48,072
Interest Expense (495,619) (199,137)
----------- -----------
Net Other Income and (Expenses) (466,460) (151,065)
----------- -----------
LOSS BEFORE INCOME TAXES (1,175,557) (234,162)
5
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INCOME TAX BENEFIT -- (36,499)
----------- -----------
NET LOSS $(1,175,557) $ (197,663)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.64)
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
<TABLE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
=====================================================================================================
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,175,557) $ (197,663)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 1,045,737 761,425
Deferred Charges 8,865 (418,951)
Deposits -- 274,889
Receivables 1,295,889 595,391
Income Taxes Receivable -- (51,591)
Prepaids 42,536 41,166
Accounts Payable (276,660) 72,150
Other Current Liabilities (559,371) 91,341
Deferred Credits (896) 12,340
Other 24,983 --
----------- -----------
Net Cash Provided By Operating Activities 405,526 1,180,497
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment, Net (1,317,611) (888,517)
Materials and Supplies (418,655) 103,705
Sale of Temporary Cash Investments 100,000 --
Purchase of Other Investments (13,586) 16,241
Sale of Other Investments 500,793 --
Deferred Charges (287,267) --
----------- -----------
Net Cash Used In Investing Activities (1,436,326) (768,571)
----------- -----------
7
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments of Long-Term Debt (326,253) (147,076)
Proceeds from Issuance of Note Payable 500,000 --
Principal Payments of Note Payable (1,500,000) --
Construction Contracts Payable (47,551) 245,077
Retirement of Patronage Capital -- (2,372)
Other 110 21,923
Issuance of Common Stock 250,815 --
Conversion of Warrants to Common Stock 482,002 --
----------- -----------
Net Cash Provided By (Used In)
Financing Activities (640,877) 117,552
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,671,677) 529,478
CASH AND CASH EQUIVALENTS at Beginning of Year 4,297,938 2,121,444
----------- -----------
CASH AND CASH EQUIVALENTS at End of Quarter $ 2,626,261 $ 2,650,922
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest Expense $ 495,619 $ 199,137
Income Taxes -- 18,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE>
DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===========================================================================
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheets as of March 31, 1998 and December 31, 1997, statements
of operations for the three months ended March 31, 1998 and 1997 and cash
flows for the three months ended March 31, 1998 and 1997 have been prepared
by the Company without audit. In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position, results of operations and changes in
cash flows have been made.
The Consolidated Financial Statements have been prepared in accordance with
the requirements of Item 310(b) of Regulation S-B and with the instructions
to Form 10-QSB. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These condensed financial statements should be read in conjunction with the
financial statements and accompanying notes for the years ended December
31, 1997 and 1996. The results of operations for the three-month period
ended March 31, 1998 are not necessarily indicative of the operating
results to be expected for the year ending December 31, 1998.
NOTE 2 - NOTE PAYABLE
The Company obtained an additional secured line of credit arrangement for
$4 million with the Rural Telephone Finance Cooperative ("RTFC") which
expires March 31, 1999. Interest is payable quarterly at variable monthly
rates based on the prevailing bank prime rate plus 1.5%. No funds have
been drawn on this line of credit arrangement as of March 31, 1998.
The Company renewed the line of credit arrangement for $800,000, at the
prime rate plus one percent, with Norwest Bank, South Dakota, N.A., which
expires April 1, 1999. No amounts were outstanding as of March 31, 1998.
NOTE 3 - 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
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DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===========================================================================
Internal Revenue Code of 1986 and therefore the Company's income was not
taxable prior to July 22, 1997.
At March 31, 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 full future utilization of these net
operating losses.
NOTE 4 - CAPITAL STOCK
On December 16, 1997, the Board of Directors declared a two-for-one common
stock split pursuant to a share dividend paid to common stockholders of
record on January 1, 1998. All common stock share amounts shown below have
been adjusted for the stock split.
At December 31, 1997, there were warrants outstanding which were
exercisable through January 21, 1998 to purchase 482 shares of preferred
stock, which were converted to 77,912 shares of common stock. These
warrants were exercised on January 21, 1998.
Former holders of cooperative common stock and capital credit accounts are
entitled to receive shares of common stock of the Company, without any
further consideration, upon receipt by the Company of properly executed
transmittal documents in acceptable form. If all such persons had
satisfied the conditions to receive shares at March 31, 1998 and December
31, 1997, a total of 633,134 and 911,320 additional shares of the Company's
common stock would have been issued and outstanding as of those dates.
Other capital includes that amount of stockholders' equity which would have
been included in common stock if those shares had been issued and
outstanding at March 31, 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 shareholders and employees as of
January 27, 1998. The offering expired on March 11, 1998 and 19,485 shares
of common stock were issued.
10
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DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===========================================================================
NOTE 5 - LOSS PER SHARE
Basic loss per share as of March 31, 1998 was based on the average number
of shares of common stock outstanding during the period. The number of
shares used in the calculation was 1,826,950 as of March 31, 1998. As of
March 31, 1997, the Company was still operating as a cooperative and
therefore did not have common stock outstanding.
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 633,134 shares issuable at March 31, 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 $(.48).
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to the results of
operation and financial condition of Dakota Telecommunications Group, Inc.
and its subsidiaries (collectively "DTG" or "the Company") on a
consolidated basis. This analysis should be read in conjunction with the
Company's consolidated financial statements and accompanying notes.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this report, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates and projections about the telecommunications
industry, the economy, and about the Company itself, such as information
relating to the Company's ongoing development plans, the effects of its
July 1997 refinancing of its long-term debt, and statements regarding the
Company's anticipated future net losses. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "predicts," "projects," variations of such words and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
certain known and unknown risks and uncertainties as well as assumptions
("Future Factors") that are difficult to predict with regard to timing,
extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements. 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.
Future Factors include, but are not limited to, uncertainties related to
economic conditions, acquisitions and divestitures, government and
regulatory policies, the pricing and availability of equipment, materials,
inventories and software, technological developments and changes in the
competitive environment in which the Company operates, changes in interest
rates, demand for the Company's products and services, the degree of
competition by traditional and non-traditional competitors, changes in tax
laws, changes in prices, levies and assessments, and the outcomes of
pending and future litigation and contingencies. These are representative
of the Future Factors that could cause a difference between an ultimate
actual outcome and a preceding forward-looking statement. Readers are
cautioned not to place undue reliance on the forward-looking statements
made below or elsewhere in this report.
OVERVIEW
The Company is a competitive local exchange carrier specializing in the
design, construction and operation of broadband hybrid fiber optic
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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, Internet access and related services and computer and data
networking products and services.
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. Also in December 1997, the Company signed a merger agreement
with Vantek, Inc. and Van/Alert, Inc. (together "Vantek"), a regional
specialized mobile radio and paging company in southeastern South Dakota.
The Company currently anticipates that this transaction will be completed
prior to July 1998, pending Federal Communications Commission ("FCC")
license transfer approvals. The Company currently anticipates that
additional acquisitions will form a part of its continuing expansion plans,
though no final agreements have been concluded at this time.
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.
During the first quarter of 1998, the Company incurred an additional $1.3
million in capital expenditures and also purchased $418,000 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 will combine to result in substantially higher depreciation
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and interest expenses with a corresponding reduction in the Company's net
income. In addition, to implement its growth plans, in 1996 the Company
completed the acquisitions described above and increased its employee base
from 34 employees at December 31, 1995, to 76 employees at December 31,
1996, and to 164 employees at March 31, 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, LIQUIDITY AND CAPITAL RESOURCES
ANALYSIS OF MATERIAL CHANGES IN BALANCE SHEET ITEMS
Cash and Temporary Cash Investments decreased from $4,598,000 at December
31, 1997, to $2,826,000 at March 31, 1998, a decrease of $1,772,000.
$1,000,000 of this decrease was attributable to the repayment of the
Company's short-term revolving loan from the Rural Telephone Finance
Cooperative ("RTFC") in early January 1998. The balance was used for
capital expenditures and operating expenses.
Net Accounts Receivable decreased from $4,216,000 at December 31, 1997, to
$2,920,000 at March 31, 1997, a decrease of $1,296,000. 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 $1,109,200 at December
31, 1997 to $1,528,000, an increase of $418,800. This increase represents
additional materials on hand to be used in the Company's Spring 1998
development projects.
Other Investments decreased from $2,038,000 at December 31, 1997 to
$1,521,000 at March 31, 1998, a decrease of $517,000. This decrease was
primarily due to the sale of a Treasury Bill by the Company during the
quarter.
Deferred Charges increased from $653,000 at December 31, 1997 to $932,000
at March 31, 1998, an increase of $279,000 which was primarily related to
engineering and other charges for the Company's 1998 development projects.
Current Liabilities decreased from $6,922,000 at December 31, 1997 to
$5,038,000, a decrease of $1,884,000 which was primarily due to the
repayment of the Company's revolving credit line with the RTFC and the
reduction in outstanding balances in the Company's floor plan financing
arrangements.
14
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Total Stockholders' Equity decreased from $7,804,000 at December 31, 1997
to $7,361,000 at March 31, 1998, a decrease of approximately $443,000.
This decrease was caused by the Company's first quarter net loss of
$1,175,557, offset by additional equity raised by the Company from the
exercise of outstanding warrants and the sale of stock to the Company's
existing stockholders. See Note 4 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it has adequate internal resources available to
finance its ongoing operating requirements. Net cash provided from
operations was $405,526 in the first quarter of 1998. See the Consolidated
Statement of Cash Flows included in the Company's Consolidated Financial
Statements. In addition, the Company maintains a $1,500,000 revolving line
of credit with the RTFC, $1 million of which was available and undrawn as
of March 31, 1998. In March 1998, the Company also arranged an additional
$4,000,000 secured line of credit from the RTFC, all of which was available
and undrawn as of March 31, 1998. Finally, the Company uses a combination
of the floor plan financing arrangements and an $800,000 working capital
line of credit to fund inventory holding costs in its DataNet operation.
At March 31, 1998, there were no amounts due under this line of credit.
See Note 2 to the Consolidated Financial Statements.
While the Company can finance its day-to-day operations using internal
funds, it will need additional long-term financing to complete additional
network construction programs. The Company's primary long-term lender is
the RTFC, which provided the funds for the Company's 1997 construction
projects. While there is no assurance that additional funds will be made
available to the Company, the Company and its subsidiaries expect the RTFC
and other sources to continue to be available for future borrowings.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Revenues increased from $2,752,000 during the first quarter of 1997 to
$7,032,000 in 1998, an increase of $4,280,000, or approximately 156%. Of
this increase, $3,427,000 reflects the addition of revenues from the
Company's DataNet operations acquired in December 1997. An additional
$523,000 of this increase represents additional access revenues, described
in more detail below. The balance reflects internal growth in the
Company's operations.
Access revenues are received by local exchange companies ("LECs") for
intrastate and interstate exchange services provided to long distance
carriers (generally referred to as interexchange carriers or "IXCs") which
enable IXCs to provide long distance service to end users in the local
15
<PAGE>
exchange network. Access revenues are determined, in the case of interstate
calls, according to rules issued by the FCC and administered by the
National Exchange Carrier Association ("NECA") and, in the case of
intrastate calls, by state regulatory agencies. A relatively small portion
of the Company's access revenues are derived from subscriber line fees
determined by the FCC and billed directly to end users for access to long
distance carriers. The balance of the Company's interstate access revenues
are received from NECA, which collects payments from IXCs and distributes
settlement payments to LECs based primarily on the cost of providing
service. Increases in the Company's operating expenses have therefore
resulted in the increase in the Company's access revenues.
Plant Operations expense increased from $818,000 during the first quarter
of 1997 to $1,346,000 in the same period of 1998, an increase of $528,000,
or approximately 65%. Approximately $88,000 of this increase was due to
the additional costs and expenses from the operation of DataNet. The
remaining increase is primarily due to increased costs in the Company's
competitive local exchange carrier operations in its new markets.
Cost of Goods Sold, a new category of operating expense, was $2,649,000 in
the first quarter of 1998 reflecting expenses associated with the Company's
DataNet operation.
Depreciation and Amortization expense increased from $761,000 in the first
quarter of 1997 to $1,046,000 in the same period of 1998, an increase of
$285,000 or approximately 37%. Approximately $69,000 of this increase was
due to the amortization of the excess of cost over net assets acquired in
the acquisition of DataNet and the depreciation of assets used in the
DataNet operation. The balance of this increase is due primarily to the
deprecation of additional assets placed in service by the Company during
1997 and in the first quarter of 1998 as part of its network construction
program.
Customer operating expenses increased from $208,000 in the first quarter of
1997 to $726,000 in the same period of 1998, an increase of $518,000 of
approximately 249%. Of this increase, $392,000 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.
Other costs and expenses, including General and Administrative and Other
Operating Expenses increased from $1,048,000 during the first quarter of
1997 to $1,975,000 for the same period in 1998, an increase of $927,000 or
approximately 88%. Of these expenses, $90,951 in 1997 were due to the
inclusion of one-time, nonrecurring charges associated with the Conversion
and Merger of the Company in July 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 shareholders during the
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quarter. See Note 4 to the Consolidated Financial Statements.
Approximately $230,000 of the increase in other costs and expenses was due
to the additional costs and expenses from the operation of DataNet. 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 $199,000 for the first quarter of 1997 to
$496,000 for the same period in 1998, an increase of $297,000, or
approximately 149%. This increase is primarily due to the increase in long-
term debt incurred by the Company to refinance its Rural Utilities Service
debt and to fund its 1997 capital expenditures.
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 significant income tax loss
carryovers. See Note 11 to the Consolidated Financial Statements contained
in the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997 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 companies 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 limits the Company's ability to implement rate
increases. In addition, the regulatory process inherently restricts the
Company's ability to immediately pass cost increases along to customers
unless the cost increases are anticipated and the rate increases are
implemented prospectively.
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 December 31, 1997 and at March 31, 1998. 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.
17
<PAGE>
COMPETITION
In February 1996, President Clinton signed into law the Telecommunications
Act of 1996 (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 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 service exchanges and directly competes with the
incumbent local service company in the four exchanges it built in 1997.
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. 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 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financing Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131, "Disclosures about
18
<PAGE>
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 use of the reporting segments currently
disclosed in its annual consolidated financial statements due to the
increasing convergence of its computer, telephone and cable television
businesses.
No other recently issued accounting pronouncements are expected to have a
significant effect on future financial statements.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective April 1, 1998, the Board of Directors of the Company appointed
Thomas W. Hertz as Chairman of the Board of Directors and Mr. Hertz will
continue in his position as Chief Executive Officer of the Company. Also
effective April 1, 1998, the Board of Directors appointed Craig A. Anderson
as President of the Company and he will also continue in his positions as
Chief Financial Officer and Treasurer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed as part of
this report:
EXHIBIT
NUMBER DOCUMENT
3.1 Certificate of Incorporation of Dakota Telecommunications
Group, Inc., a Delaware corporation. Filed as Exhibit 3.1 to
the Company's Form 10-QSB for the quarter ended June 30, 1997
and here incorporated by reference.
3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation, as amended. Filed as Exhibit 3.2 to the
Registrant's Report on Form 10-KSB for the fiscal year ended
December 31, 1997 and here incorporated by reference.
4.1 Certificate of Incorporation of Dakota Cooperative
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.
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
20
<PAGE>
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 Warrant
Agreement. Filed as Exhibit 4.11 to the S-4 Registration
Statement and here incorporated by reference.
4.7 Dakota Cooperative Telecommunications, Inc. Form of Option
Agreement. Filed as Exhibit 4.12 to the S-4 Registration
Statement and here incorporated by reference.
4.8 Agreement Regarding Stock (I-Way Partners, Inc.) dated
November 27, 1996. Filed as Exhibit 4.13 to the S-4
Registration Statement and here incorporated by reference.
4.9 Agreement Regarding Stock (TCIC Communications, Inc.) dated
November 27, 1996. Filed as Exhibit 4.14 to the S-4
Registration Statement and here incorporated by reference.
4.10 Dakota Telecommunications Group, Inc. Common Stock
Certificate. Filed as Exhibit 4.16 to the S-4 Registration
Statement and here incorporated by reference.
4.11 Dakota Telecom, Inc. Loan Agreement with Rural Telephone
Finance Cooperative dated January 29, 1996. Filed as Exhibit
4.34 to the S-4 Registration Statement and here incorporated
by reference.
4.12 Dakota Cooperative Telecommunications, Inc. and Dakota
Telecom, Inc. Loan Agreement with Rural Telephone Finance
Cooperative Report on Form 10-QSB for the quarter ended June
30, 1997 and here incorporated by reference.
4.13 Dakota Cooperative Telecommunications, Inc. and Dakota
Telecom, Inc. Mortgage and Security Agreement with Rural
Telephone Finance Cooperative dated June 24, 1997. Filed as
Exhibit 4.31 to the Registrant's Report on Form 10-QSB for the
quarter ended June 30, 1997 and here incorporated by
reference.
4.14 Dakota Cooperative Telecommunications, Inc. and Dakota
Telecom, Inc. Pledge and Security Agreement with Rural
21
<PAGE>
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.
4.15 The Company has several classes of long-term debt instruments
outstanding in addition to those described in Exhibits 4.11
through 4.14. The amount of these classes of debt outstanding
on December 1, 1997, does not exceed 10% of the Company's
total consolidated assets. The Company agrees to furnish
copies of any agreement defining the rights of holders of any
such long-term indebtedness to the Securities and Exchange
Commission upon request.
10.1 Rural Telephone Finance Cooperative Secured Revolving Line of
Credit Agreement dated as of March 31, 1998 between the
Registrant, Dakota Telecom, Inc. and Rural Telephone Finance
Cooperative.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed
during the period covered by this report.
22
<PAGE>
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: May 15, 1998 By /S/ THOMAS W. HERTZ
Thomas W. Hertz
Chairman and Chief Executive Officer
Date: May 15, 1998 By /S/ CRAIG A. ANDERSON
Craig A. Anderson
President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
3.1 Certificate of Incorporation of Dakota Telecommunications
Group, Inc., a Delaware corporation. Filed as Exhibit 3.1 to
the Company's Form 10-QSB for the quarter ended June 30, 1997
and here incorporated by reference.
3.2 Bylaws of Dakota Telecommunications Group, Inc., a Delaware
corporation, as amended. Filed as Exhibit 3.2 to the
Registrant's Report on Form 10-KSB for the fiscal year ended
December 31, 1997 and here incorporated by reference.
4.1 Certificate of Incorporation of Dakota Cooperative
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.
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 Warrant
Agreement. Filed as Exhibit 4.11 to the S-4 Registration
Statement and here incorporated by reference.
24
<PAGE>
4.7 Dakota Cooperative Telecommunications, Inc. Form of Option
Agreement. Filed as Exhibit 4.12 to the S-4 Registration
Statement and here incorporated by reference.
4.8 Agreement Regarding Stock (I-Way Partners, Inc.) dated
November 27, 1996. Filed as Exhibit 4.13 to the S-4
Registration Statement and here incorporated by reference.
4.9 Agreement Regarding Stock (TCIC Communications, Inc.) dated
November 27, 1996. Filed as Exhibit 4.14 to the S-4
Registration Statement and here incorporated by reference.
4.10 Dakota Telecommunications Group, Inc. Common Stock
Certificate. Filed as Exhibit 4.16 to the S-4 Registration
Statement and here incorporated by reference.
4.11 Dakota Telecom, Inc. Loan Agreement with Rural Telephone
Finance Cooperative dated January 29, 1996. Filed as Exhibit
4.34 to the S-4 Registration Statement and here incorporated
by reference.
4.12 Dakota Cooperative Telecommunications, Inc. and Dakota
Telecom, Inc. Loan Agreement with Rural Telephone Finance
Cooperative Report on Form 10-QSB for the quarter ended June
30, 1997 and here incorporated by reference.
4.13 Dakota Cooperative Telecommunications, Inc. and Dakota
Telecom, Inc. Mortgage and Security Agreement with Rural
Telephone Finance Cooperative dated June 24, 1997. Filed as
Exhibit 4.31 to the Registrant's Report on Form 10-QSB for the
quarter ended June 30, 1997 and here incorporated by
reference.
4.14 Dakota Cooperative Telecommunications, Inc. and Dakota
Telecom, Inc. Pledge and Security Agreement with Rural
Telephone Finance Cooperative dated June 24, 1997. Filed as
Exhibit 4.33 to the Registrant's Report on Form 10-QSB for the
quarter ended June 30, 1997 and incorporated by reference.
4.15 The Company has several classes of long-term debt instruments
outstanding in addition to those described in Exhibits 4.11
through 4.14. The amount of these classes of debt outstanding
on December 1, 1997, does not exceed 10% of the Company's
total consolidated assets. The Company agrees to furnish
copies of any agreement defining the rights of holders of any
such long-term indebtedness to the Securities and Exchange
Commission upon request.
25
<PAGE>
10.1 Rural Telephone Finance Cooperative Secured Revolving Line of
Credit Agreement dated as of March 31, 1998 between the
Registrant, Dakota Telecom, Inc. and Rural Telephone Finance
Cooperative.
27 Financial Data Schedule.
26
<PAGE>
EXHIBIT 10.1
RURAL TELEPHONE FINANCE COOPERATIVE
SECURED REVOLVING LINE OF CREDIT AGREEMENT
("Agreement")
DAKOTA TELECOMMUNICATIONS GROUP, INC. a Delaware corporation and DAKOTA
TELECOM, INC. a South Dakota corporation (hereinafter collectively called
the "Borrower"), hereby agrees to borrow from Rural Telephone Finance
Cooperative ("RTFC" or "Lender"), a South Dakota cooperative association,
pursuant to the terms of this Agreement, dated as of March 31, 1998, for a
revolving line of credit loan in amount not to exceed four million dollars
($4,000,000). In consideration of their mutual premises hereunder and
other valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Lender and Borrower agree to the following terms and
conditions:
1. REVOLVING CREDIT AND TERM. Lender agrees to make advances to the
Borrower pursuant to the terms of this Agreement ("Advances"). The
maximum principal amount outstanding a any point in time shall not
exceed $4,000,000. Within such limits, the Borrower may borrow, repay
and reborrow at any time or from time to time for a period up to 12
months from the date hereof (the "Maturity Date").
2. REQUISITIONS. The Borrower shall give Lender such prior notice of
requests for Advances as RTFC may reasonably require from time to
time.
3. INTEREST RATE AND PAYMENT. The Borrower unconditionally promises and
agrees to pay, as and when due, interest on all amounts advanced
hereunder from the date of each Advance and to repay all amounts
advanced hereunder with interest on the Maturity Date. Interest shall
be due and payable quarterly on the first day of each March, June,
September, and December, commencing on the first such date after such
initial Advance; except that if Lender gives notice thereof to the
Borrower before the first day of any month, interest shall thereafter
be due and payable on the 15th day of such month and each month
thereafter. Lender shall invoice the Borrower at least five days
prior to the due date of any such interest payment. All amounts shall
be payable at RTFC's main office at Woodland Park, 2201 Cooperative
Way, Herndon, Virginia 20171-3025 or at such other location as
designated by Lender from time to time.
The interest rate on all Advances will be equal to the Prevailing Bank
Prime Rate (as defined herein), plus one and one-half percent per
annum or such lesser total rate per annum as may be fixed by Lender
from time to time. Interest will be computed on the basis of a year
of 365 days. The interest rate will be adjusted as determined from
time to time by Lender, provided that no such adjustment may be
<PAGE>
effective on a date other than the first or sixteenth day of any
month, and will remain in effect until a subsequent change in rate
occurs.
The "Prevailing Bank Prime Rate" is that bank prime rate published in
the "Money Rates" column of any edition of The Wall Street Journal
which Lender determines in its discretion to be the representative
bank prime rate on the day preceding the day on which an adjustment in
the interest rate hereof shall become effective. If such preceding
day is not a publication day for The Wall Street Journal then the
Prevailing Bank Prime Rate shall be established by reference to such
"Money Rates" column as of the last publication day next preceding the
day on which such adjustment shall become effective; provided if The
Wall Street Journal shall cease to be published, then the Prevailing
Bank Prime Rate shall be determined by RTFC by reference to another
publication reporting bank prime rates in a similar manner.
4. RTFC ACCOUNTS. Lender shall maintain in accordance with its usual
practice an account or accounts evidencing the indebtedness of the
Borrower resulting from each Advance made from time to time and the
amounts of principal and interest payable and paid from time to time
hereunder. In any legal action or proceeding in respect of this
Agreement, the entries made in such account or accounts (whether
stored on computer memory, microfilm, invoices or otherwise) shall be
presumptive evidence (absent manifest error) of the existence and
amounts of the Borrower's transactions therein recorded.
5. CORPORATE AND REGULATORY APPROVALS. Borrower represents that it has
obtained any and all necessary corporate and regulatory approvals for
Borrower to execute and perform pursuant to this Agreement.
6. REPORTS. Borrower agrees to deliver to Lender, promptly upon their
beginning available, a copy of (i) any annual audit report prepared
subsequent to the submission of this Agreement; (ii) its monthly
operating report within thirty (30) days for any month in which there
are advances outstanding pursuant to this Agreement; and (iii) any
other reports which Lender reasonably requests during the term of this
Agreement.
7. COVENANTS/FINANCIAL RATIOS. Until the Maturity Date, Borrower agrees
to honor and be bound by the affirmative and negative covenants, and
financial ratios, (collectively, the "Covenants") contained in
Sections 6 ad 7 of the Loan Agreement by and between Borrower and
Lender dated as of June 24, 1997, as it may be amended from time-to-time
(the "Loan Agreement"), and such covenants shall be incorporated
by reference as if fully stated herein.
8. FEES. If any amount outstanding and due hereunder shall not be paid
when due, Borrower agrees to pay on demand Lender's reasonable costs
-2-
<PAGE>
of collection or enforcement of this Agreement, or preparation
therefor, including reasonable fees of counsel. If pay of any
principal and/or interest due under the terms of this Agreement is not
received at Lender's office in Herndon, Virginia, or such other
location designated by Lender within five (5) business days after the
due date thereof (such unpaid amount of principal and/or interest
being herein called the "delinquent amount," and the period beginning
after such due date being herein called the "late-payment period"),
Borrower will pay to Lender, on demand, in addition to all other
amounts due under the terms of this Agreement, any late-payment charge
as may then be in effect pursuant to Lender's policy on the delinquent
amount for the late payment period.
9. CREDIT SUPPORT. This Agreement may not be used as credit support for
any other financings without Lender's prior written approval.
10. NOTICES, ACCELERATION OF DEBT AND WAIVERS. While any amount hereunder
is outstanding, Borrower agrees to notify Lender of any delinquency or
default on any of its financial obligations, any material adverse
change in its financial or business condition, and if any
representation or warranty made in this Agreement has become untrue in
any respect having a material adverse effect on the financial
condition or business of the Borrower.
Lender may declare at any time all outstanding amounts hereunder
immediately due and payable in full with accrued interest, without
presentment or demand, and may withhold advances of funds upon the
occurrence of any of the following: (i) any delinquency or default in
payment of any sum due the Lender under the Agreement; (ii) a court
shall enter a decree or order for relief with respect to Borrower or
any subsidiary or guarantor in an insolvency or bankruptcy or appoint
a receiver, liquidator, trustee or similar official and such order
remains in effect for a period of sixty (60) days; (iii) Borrower or
any subsidiary shall commence a voluntary case under bankruptcy,
insolvency or similar law or consent to the appointment of a receiver,
liquidator, or trustee; (iv) the dissolution or liquidation of
Borrower or subsidiary or guarantor or failure to forestall or remove
any execution, garnishment or attachment of such consequence as to
impair its ability to continue business and such execution,
garnishment or attachment shall not be vacated within sixty (60) days;
or (v) any other event as a result of which any holder of indebtedness
may declare the same due and payable shall occur and continue for more
than any applicable grace period.
If any representation or warranty herein shall become untrue, or
Borrower shall fail to comply with any term of this Agreement or if
the financial condition of Borrower shall have changed to the extent
that such change in the reasonable judgment of RTFC, materially
increases RTFC's risk hereunder, then RTFC at its discretion may
-3-
<PAGE>
withhold advances of funds and/or declare all outstanding amounts
hereunder immediately due and payable in full with accrued interest,
without presentment or demand.
The Borrower waives the defense of usury and all rights to set off,
counterclaim, deduction or recoupment.
11. PURPOSE, REPAYMENTS AND DEPOSIT. Borrower agrees that any and all
Advances hereunder will be used only for proper corporate purposes and
consistently with the requirements of outstanding security documents
of Borrower relating to its operations. Borrower agrees that this
loan shall be repayable out of Borrower's general funds and that loan
proceeds will not be deposited in any other account dedicated for
secured financing advances.
12. ADDITIONAL INDEBTEDNESS. While any amount hereunder is outstanding
and unless otherwise disclosed in writing to Lender and permitted
pursuant to the Loan Agreement, Borrower agrees that it will not,
without the prior written consent of Lender, (i) make distributions of
cash to its shareholders, if applicable, or (ii) create, incur,
assume, guarantee or otherwise become obligated for any additional
indebtedness, other than t Lender except that the Borrower may borrow
against another loan previously approved by Lender.
13. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND PAYMENT OBLIGATIONS.
Borrower agrees that the representations and warranties made in this
Agreement shall survive the making of Advances hereunder. Any
unsatisfied payment obligation hereunder shall survive the maturity
and cancellation of this Agreement.
14. REPRESENTATIONS AND WARRANTIES. Except as set forth in writing and
attached hereto, Borrower represents and warrants as of the date of
its application and on the date of each and every Advance hereunder
that:
(a) The Borrower has and will meet all obligations and be in
compliance with all instruments under which it is bound and that
all information submitted in support of its application is true,
complete and correct;
(b) There has been no material adverse change in the Borrower's
business or financial condition from that set forth in its most
recent audited financial statements provided to Lender;
(c) The Borrower has no outstanding loans from sources other than
Lender, other than those previously disclosed in writing to
Lender;
-4-
<PAGE>
(d) The Borrower is not in default in any material respect of any of
its obligations and no litigation is threatened or pending which
would have a material adverse impact on the Borrower's ability to
perform under this Agreement; and
(e) The Borrower has no lines of credit with any other lenders.
15. Consent to Patronage Capital Distributions. Borrower hereby consents
that the amount of any distributions with respect to Borrower's
patronage which are made in written notices of allocation (as defined
in Section 1388 of the Internal Revenue Code of 1986, as amended
("Code") including any other comparable successor provision) and which
are received from Lender will be taken into account by Borrower at
their stated dollar amounts in the manner provided in Section 1385(a)
of the Code in the taxable year in which such written notices of
allocation are received.
16. SEVERABILITY. If any term, provision or condition, or any part
thereof, of this Agreement shall for any reason be found or held
invalid or unenforceable by any court or governmental agency of
competent jurisdiction, such invalidity or unenforceability shall not
affect the remainder of such term, provision or condition nor any
other term, provision or condition, and this Agreement shall survive
and be construed as if such invalid or unenforceable term, provision
or condition had not been contained therein.
17. SETOFF. Lender is hereby authorized at any time and from time to time
without prior notice to the Borrower to exercise rights of setoff or
recoupment and apply any and all amounts held, or hereafter held, by
Lender or owed to the Borrower or for the credit or account of the
Borrower against any and all ob the obligations of the Borrower now or
hereafter existing hereunder. Lender agrees to notify the Borrower
promptly after any such setoff or recoupment and the application
thereof, provided that the failure to give such notice shall not
affect the validity of such setoff, recoupment or application. The
rights of Lender under this section are in addition to any other
rights and remedies (including other rights of setoff or recoupment)
which Lender may have.
18. ADDITIONAL TERMS AND CONDITIONS. Additional terms and conditions set
forth herein or attached hereto as Exhibit A are an integral part of
this Agreement.
19. INTEGRATION. This Agreement and the matters incorporated by reference
contain the entire agreement of the parties hereto with respect to the
matters covered and the transactions contemplated hereby, and no other
agreement, statement or promise made by any party hereto, or by any
employee, officer, agent or attorney of any party hereto, which is not
contained herein, shall be valid and binding. No amendment or waiver
-5-
<PAGE>
to this Agreement shall be valid and binding except if in writing and
signed by both parties.
20. HEADINGS. The headings and sub-headings contains in this Agreement
are intended to be used for convenience only and do not constitute
part of this Agreement.
21. SECURITY. All Advances hereunder shall be secured by a security
interest in certain of Borrower's properties pursuant to a Mortgage
and Security Agreement by and between Borrower and RTFC entered into
as of June 24, 1997, which has been filed along with UCC-1 financing
statements in all such locations necessary to provide RTFC with a
first priority, perfected lien on all of Borrower's Mortgaged Property
(as defined in the Mortgage). This Agreement shall be deemed an
Additional Note, as such term is defined under the Mortgage. Such
Mortgage and Security Agreement and UCC-1 financing statements shall
continually exist until at least the later of (i) all Advances and
fees hereunder having been repaid or (ii) the Maturity Date. Borrower
agrees that, with respect to the Collateral which is subject to
Article 9 of the Uniform Commercial Code, the Lender shall have, but
not be limited to, all the rights and remedies of a secured party
under the Uniform Commercial Code.
22. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND BE CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF VIRGINIA.
23. SPECIAL CONDITIONS. None.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this Agreement under seal as of the date first above written.
DAKOTA TELECOMMUNICATIONS GROUP, INC.
By: /S/JAMES H. JIBBEN
Title: CHAIRMAN
(SEAL)
Attest: /S/TIM DUPIC
Secretary
DAKOTA TELECOM, INC.
By: /S/JEFFREY J. GOEMAN
Title: CHAIRMAN
(SEAL)
-6-
<PAGE>
Attest: /S/TIM DUPIC
Secretary
RURAL TELEPHONE FINANCE COOPERATIVE
By: /S/KENNETH C. FRIED
Title: CHAIRMAN
(SEAL)
Attest: /S/ROBIN C. RUE
Assistant Secretary-Treasurer
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS OF DAKOTA TELECOMMUNICATIONS GROUP, INC. AND SUBSIDIARIES FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 1998, INCLUDED IN ITS FORM 10-QSB, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,626,261
<SECURITIES> 0
<RECEIVABLES> 3,287,723
<ALLOWANCES> 304,600
<INVENTORY> 1,527,881
<CURRENT-ASSETS> 7,570,296
<PP&E> 38,244,925
<DEPRECIATION> 12,468,128
<TOTAL-ASSETS> 41,386,531
<CURRENT-LIABILITIES> 5,038,204
<BONDS> 28,874,216
<COMMON> 8,940,007
0
0
<OTHER-SE> 1,602,471
<TOTAL-LIABILITY-AND-EQUITY> 41,386,531
<SALES> 3,427,329
<TOTAL-REVENUES> 7,032,422
<CGS> 2,648,668
<TOTAL-COSTS> 7,741,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 495,619
<INCOME-PRETAX> (1,175,557)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,175,557)
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<NET-INCOME> (1,175,557)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
</TABLE>
