-----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, DR4dlU/CaQE9OUrutvkBjn7evyiYYaiKWbXnxShHN1sW5zKg9ZZFG+8dRbA1jzWm MXzyl/63RlnMa+KL0kqdAA== 0000897101-98-000573.txt : 19980518 0000897101-98-000573.hdr.sgml : 19980518 ACCESSION NUMBER: 0000897101-98-000573 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAKOTAH INC CENTRAL INDEX KEY: 0000859944 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 460339860 STATE OF INCORPORATION: SD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23604 FILM NUMBER: 98624531 BUSINESS ADDRESS: STREET 1: ONE N PARK LN CITY: WEBSTER STATE: SD ZIP: 57274-0120 BUSINESS PHONE: 6053454646 MAIL ADDRESS: STREET 1: ONE NORTH PARK LANE CITY: WEBSTER STATE: SD ZIP: 57274-0120 10-Q 1 UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1998 Commission File Number 0-23604 DAKOTAH, INCORPORATED (Exact Name of Registrant as Specified in Its Charter) South Dakota 46-0339860 (State or Other Jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification Number) One North Park Lane Webster, SD 57274 (Address of Principal Executive Offices, Zip Code) Registrant's Telephone Number, Including Zip Code: (605) 345-4646 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common stock, $.01 par value, 3,499,755 shares outstanding as of May 10, 1998. DAKOTAH, INCORPORATED INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets (Unaudited): March 31, 1998 and December 31,1997 Statements of Operations (Unaudited): Three month periods ended March 31, 1998, and March 31, 1997 Statements of Cash Flows (Unaudited): Three month periods ended March 31, 1998, and March 31, 1997 Notes to Financial Statements: March 31, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Items 1 through 5 have been omitted since items are inapplicable or answer is negative Item 6. Exhibits and Reports on Form 8-K (a.) Exhibit Number: Description: 10.28 Employment Agreement dated effective April 8, 1997 between the Company and William R. Retterath 27.1 Financial Data Schedule (b.) Reports on Form 8-K None ITEM 1: Financial Statements DAKOTAH, INCORPORATED BALANCE SHEETS
(Unaudited) March 31, December 31, ASSETS 1998 1997 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 9,300 $ 45,084 Accounts receivable less allowance for doubtful accounts of $370,094 in 1998 and $326,000 in 1997 3,040,563 4,491,697 Inventories 13,619,599 15,423,002 Income taxes receivable 963,000 963,000 Prepaid expenses 458,063 449,323 Deferred income taxes 848,800 568,800 ------------ ------------ Total current assets 18,939,325 21,940,906 PROPERTY, PLANT AND EQUIPMENT - AT COST Land 36,000 36,000 Buildings and improvements 2,418,374 2,418,374 Leasehold improvements 130,046 130,046 Machinery and equipment 3,284,979 3,278,933 Office equipment, furniture and fixtures and other 3,125,276 2,858,139 ------------ ------------ 8,994,675 8,721,492 Less accumulated depreciation & amortization 3,617,306 3,382,135 ------------ ------------ 5,377,369 5,339,357 OTHER ASSETS Deferred income taxes 179,000 179,000 Other 9,200 9,200 ------------ ------------ 188,200 188,200 ------------ ------------ $ 24,504,894 $ 27,468,463 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Outstanding checks in excess of bank balances $ 704,611 $ 452,784 Short-term debt 11,961,938 12,797,736 Current maturities of long-term obligations 81,324 80,549 Current maturities of capital lease obligations, including $25,460 and $27,117 to related parties in 1997 and 1996 234,025 197,942 Current maturities of note payable to officer 263,800 263,800 Accounts payable 1,066,305 1,781,996 Accrued liabilities Compensation and related benefits 532,320 566,165 Other 777,712 758,343 ------------ ------------ Total current liabilities 15,622,035 16,899,315 LONG-TERM LIABILITIES Long-term portion of long-term obligations 1,191,267 1,211,895 Long-term portion of capital lease obligations, including -- $50,537 and $57,069 to relates parties in 1998 and 1997 691,213 601,311 STOCKHOLDERS' EQUITY Common stock, par value $.01; 10,000,000 shares authorized; issued & outstanding shares 3,499,755 34,998 34,998 Additional contributed capital 7,180,855 7,180,855 Retained earnings (accumulated deficit) (215,474) 1,540,089 ------------ ------------ 7,000,379 8,755,942 ------------ ------------ $ 24,504,894 $ 27,468,463 ============ ============
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended March 31, 1998 1997 ----------- ----------- Net sales $ 4,876,098 $ 6,681,849 Cost of goods sold 4,596,849 4,957,173 ----------- ----------- Gross profit 279,249 1,724,676 Operating expenses Selling 906,223 1,183,278 General and administrative 1,023,811 969,153 ----------- ----------- 1,930,034 2,152,431 ----------- ----------- Operating loss (1,650,785) (427,755) Other income (expense) Interest expense (364,757) (143,497) Other (20,021) -- ----------- ----------- (384,778) (143,497) Loss before income taxes (2,035,563) (571,252) Income tax benefit (280,000) (180,000) ----------- ----------- NET LOSS $(1,755,563) $ (391,252) =========== =========== Net loss per share - basic and dilutive $ (0.50) $ (0.11) =========== =========== Weighted average common shares outstanding Basic 3,499,755 3,499,755 =========== =========== Dilutive 3,499,755 3,499,755 =========== =========== The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited)
For the three months ended March 31, 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $(1,755,563) $ (391,252) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 235,171 165,746 Compensation to outside consultant -- 25,000 Deferred income taxes (280,000) -- Changes in assets and liabilities: Accounts receivable 1,451,134 2,942,936 Inventories 1,803,403 (4,461,927) Prepaid expenses (8,740) (13,818) Accounts payable (715,691) 2,865,917 Accrued liabilities (14,476) (198,355) Income taxes -- (302,067) ----------- ----------- Total adjustments 2,470,801 1,023,432 ----------- ----------- Net cash provided by operating activities 715,238 632,180 Cash flows from investing activities: Capital expenditures (91,945) (282,776) Other -- (116,107) ----------- ----------- Net cash used in investing activities (91,945) (398,883) Cash flows from financing activities: Outstanding checks in excess of bank balance 251,827 735,741 Net payments under short-term debt agreements (835,798) (1,609,644) Proceeds from issuance of long-term obligations -- 880,000 Principal payments on long-term obligations (19,853) (15,062) Principal payments on capital lease obligations (55,253) (21,290) Principal payments on note payable to officer -- (197,501) ----------- ----------- Net cash used in financing activities (659,077) (227,756) ----------- ----------- Net increase (decrease) in cash and cash equivalents (35,784) 5,541 Cash and cash equivalents at beginning of period 45,084 2,690 ----------- ----------- Cash and cash equivalents at end of period $ 9,300 $ 8,231 =========== =========== Supplemental disclosure of non-cash investing/financing activity: Acquisitions of property, plant and equipment through capital lease arrangements $ 181,328 -- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 366,055 $ 127,415 Income taxes -- 120,000
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS NOTE A: BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions of Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the financial position of the Company as of March 31, 1998, the results of operations and cash flows for the three month periods ended March 31, 1998 and 1997. These results are not necessarily indicative of results which may be expected for the year as a whole. The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B: INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of the following: March 31, 1998 December 31, 1997 ----------- ----------- Raw Materials $ 7,253,268 $ 7,606,938 Work In Progress 758,739 957,972 Finished Goods 5,607,592 6,858,092 ----------- ----------- $13,619,599 $15,423,002 =========== =========== NOTE C: RECLASSIFICATIONS Certain amounts from the 1997 financial statements have been reclassified to conform to the 1998 presentation. NOTE D: SHORT-TERM DEBT The Company has a credit facility with a financial institution consisting of a revolving note and a term note which terminate in June 1999. The total amount available under the revolving note, which is due on demand, is the lesser of $15,000,000 or a defined borrowing base of eligible receivables, and inventory balances, plus outstanding amounts under the term note, plus $1,000,000. Advances under the revolving note, based on eligible receivables, inventory balances and the additional $1,000,000 provide for monthly interest payments at 1%, 3% and 4% above the financial institution's prime rate (effective rates of 9.5%, 11.5% and 12.5% at March 31, 1998). Advances under the term note, which is due on demand, requires monthly principal payments of $33,333. Monthly interest payments are computed based on 1% above the financial institution's prime rate (effective rate of 9.5% at March 31, 1998). The outstanding balances on the revolving note and term note were $10,261,935 and $1,700,003 at March 31, 1998 and $10,997,734 and $1,800,002 at December 31, 1997. In March, 1998, the Company renegotiated certain terms and covenants of its credit facility. As part of that process, the Company obtained the additional $1,000,000 of availability, above the amount of its borrowing base, under the revolving note at the financial institution's prime rate plus 4%. This additional funding is available to the Company through July 31, 1998. The total amount provided for all of the notes, cannot exceed $15,000,000. The current credit facility contains affirmative and negative covenants including, among other things, provisions for minimum net earnings, minimum tangible and book net worth requirements, and limitations on capital expenditures. Additionally, the Company may not incur additional borrowings, sell certain assets, acquire other businesses or pay cash dividends without prior written consent. The Company was in compliance with or obtained waivers for all covenants through May 31, 1998. While the Company had anticipated a decline in sales and gross margin for the first half of 1998, the extent of those declines in the later part of the first quarter and continuing into the second quarter has significantly exceeded what was anticipated by management. As a result of the declining margins and sales in the first and second quarter of 1998, the Company has determined that additional funds, in the form of debt or equity, are required to continue operations into the fall of 1998, as its current cash flows generated from operations and funds available as a result of its borrowing capacity are insufficient to meet its working capital, projected capital expenditures and other financing needs for 1998 and the future. In conjunction with these needs, the Company has hired a consultant to assist in obtaining this financing. The ability to obtain such financing is dependent upon an increase in sales. Although management believes that this funding can be obtained, there is no assurance the Company will receive such financing. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW: Dakotah(R) Inc. (the "Company") designs, manufactures and markets textile home fashion furnishings which are both functional and decorative. Its principal products are decorative pillows, throws (polyester fleece and cotton), blankets, bedroom ensembles and other home accessory products such as footstools, chair pads and table linens. The Company's objective has been to build a strong brand image associated with fashionable styling and high quality products. It markets its products (primarily under the Dakotah(R) and Polarfleece(R) names and various licensed names) tO a broad range of major retailers, including department stores, specialty retailers, mass merchandisers and mail order houses, both domestic and international. Showrooms for the Company's products, which support sales are located across the country in New York, Atlanta, Chicago, Denver and Seattle. RESULTS OF OPERATIONS: The following table sets forth selected financial information and the percentage relationship to net sales of certain items in the Company's statements of operations for the three months ended March 31, 1998 and 1997.
Percentage of Net Sales Selected Financial Data for the three month period for the three months ending March 31, ended March 31, (000's) 1998 1997 1998 1997 ----------------------------- ----------------- Net Sales 100.0% 100.0% 4,876 6,682 Gross Profit 5.7 25.8 279 1,725 Selling Expenses 18.6 17.7 906 1,183 General & Administrative 21.0 14.5 1,024 969 Operating Loss (33.9) (6.4) (1,651) (427) Interest and Other Expense 7.9 2.1 385 143 Loss Before Income Taxes (41.7) (8.5) (2,036) (571) Net Loss (36.0) (5.9) (1,756) (391)
NET SALES decreased $1,806,000 to $4,876,000 for the three months ended March 31, 1998 from $6,682,000 in the same period of 1997. The decrease in net sales in the first three months of 1998, as compared to the first three months of 1997, is due primarily to the heavy discounting the Company has undertaken to liquidate inventory, the overall decline in orders for the first half of the year due to excess inventories of customers, and dissatisfaction of certain customers resulting from inadequate delivery performance primarily related to the poor performance of certain suppliers of the Company. Sales of Polarfleece(R) throws and pillows declined dramatically in the first quarter of 1998 as compared to the first quarter of 1997. The decline in sales of Polarfleece throws resulted from the excessive inventory buildup of customers in the last quarter of 1997, due to the warm weather. The decline in pillow sales has continued due to the Company's past emphasis on Polarfleece(R). The company has restructured its pillow pricing and introduced a new line of pillows, which it expects to offset part or all of this decline. The decline in these product categories was partially offset by a slight increase in blankets and bedding and accessories. During the first quarter of 1998, sales discounts amounted to approximately $483,000 as compared to $85,000 in the first quarter of 1997. This increase has been offset by a decline in sales returns which decreased approximately $124,000 in the first quarter of 1998 from the first quarter of 1997. In order to diminish the Company's dependence on retailers and the associated risks of returns, markdowns, inappropriate charge backs and other issues, the Company is developing the institutional and the gift and specialty markets, and is reorganizing its international marketing efforts. It is currently working to substantially increase its sales force in the gift and specialty markets and expects to see the results of its efforts to show late in the third quarter and into the fourth quarter of 1998. In addition, the Company believes it has taken and is continuing to take the necessary steps to reestablish its pillow sales. As a result of these factors, the Company does not expect sales to continue to decline at this rate for the remainder of 1998. GROSS PROFIT MARGINS decreased from 25.8% in the first three months of 1997 to 5.7% for the same period of 1998. The decline in gross margins is due to (1) the heavy discounting of inventory mentioned above, (2) the increase in sales of closeouts which increased in the first quarter of 1998 over the same period of 1997, (3) the charge to cost of goods sold of approximately $206,000 of manufacturing overhead relating to volume variances and (4) an increase in direct labor wage rates. These negative effects were partially offset by positive impacts resulting from (1) an increase in direct labor efficiencies to 77% in the first quarter of 1998 as compared to 60% in the first quarter of 1997, and (2) an overall decline in manufacturing overhead spending, which decreased from $1,777,000 in the first quarter of 1997 to $1,157,000 in the first quarter of 1998. These positive impacts had the effect of reducing manufacturing variances from the levels incurred in previous years and would have been capitalized in inventory or expensed through costs of goods sold. The improvements are the result of efforts the Company has made in restructuring during the end of the fourth quarter of 1997 and the first quarter of 1998. The Company expects gross margins to increase as sales increase over the remainder of 1998 and as a result of its declining levels of excess inventories. In addition, the Company plans on overall spending in manufacturing overhead to decline significantly in 1998 as compared to 1997 and for direct labor efficiencies to continue to rise. Finally, in its efforts to gain control over inventory writedowns, which have risen dramatically over the past three years, the Company is in the process of substantially reducing its number of product offerings where the rates of sale do not support the product. This will have the impact of reducing fabric requirements and excess inventories. SELLING EXPENSES declined from $1,183,000 in the first three months of 1997 to $906,000 in the first three months of 1998. This decrease of $277,000 is primarily the net result of (1) a decline of $32,000 in travel expenses, (2) a decline in commission expense of approximately $214,000, which also declined to 3.3% of sales in the first quarter of 1998 as compared to 5.6% of sales in the first quarter of 1997, (3) a decline of $15,000 for participation in trade shows as the Company eliminated participation in shows, (4) a $20,000 decline in showroom decorating and supplies and (5) a decline of approximately $122,000 in advertising costs. These decreases were partially offset by an increase in recruiting costs of approximately $87,000 relating to the hiring of a new Vice President of Sales and Marketing, as well as an increase in wages for sales staff offset by a decline in commissions as a percent of sales due to certain changes in sales compensation programs, as mentioned above. As a percentage of net sales, selling expenses increased from 17.7% in the first three months of 1997 to 18.6% in the first three months of 1998 as a result of the lower sales and the factors mentioned above. GENERAL AND ADMINISTRATIVE EXPENSES increased from $969,000 in the first three months of 1997 to $1,024,000 during the same period in 1998. The increase is primarily due to the addition of a Chief Financial Officer in the second quarter and the addition of a Controller in the fourth quarter of 1997 and an increase of approximately $60,000 in depreciation costs on computer equipment purchased in 1997, offset by (1) a decline in administrative and clerical support costs , (2) decreased office and computer supplies expenses of $31,000, and (3) decreased professional fees of approximately $28,000 relating to reduced legal costs and compensation paid to the Company's former Chief Executive Officer . As a percentage of net sales, general and administrative expenses increased from 14.5% in the first three months of 1997 to 21.0% in the first three months of 1998 as a result of the above mentioned changes and lower sales levels. The Company has instituted a plan to reduce general and administrative expenses by more than $1,500,000 from 1997 annual levels. During the last month of 1997 and continuing into the first quarter of 1998 the Company began reducing costs and through the first quarter of 1998 had reduced the majority of the monthly expenses which had increased in 1997. Significant reductions, as compared to 1997, are expected for the rest of 1998. INTEREST EXPENSE increased from $143,000 in the first three months of 1997 to $365,000 in the first three months of 1998. This increase was the result of higher average borrowings to finance the higher levels of inventory carried into 1998 as compared to 1997, and to finance losses and capital expenditures occurring in 1997 and into 1998. The EFFECTIVE INCOME TAX RATE was 13.8% for the first three months of 1998, as compared to 31.5% for the first three months of 1997. This decline in the benefit resulted from the recording of a valuation allowance which offsets the deferred tax asset created by the net operating loss carryforward. In addition, the Company has deferred tax assets of approximately $748,000. Realization of these assets is dependent on the Company's return to profitability, which is expected to occur in 1999. Realization of these tax benefits is dependent on margins returning to pre-1997 levels and management's efforts at cost reductions. The Company believes that it is more likely than not that it will recover these deferred tax assets in the future. RESTRUCTURING PLANS - During the first quarter of 1998, the Company presented an annual budget for 1998 which called for, among other items (1) a reduction of general and administrative expenses of approximately $1,500,000, (2) a reduction of manufacturing overhead expenses of approximately $2,000,000 and (3) a substantial reduction in capital expenditures. The Company is also working diligently to improve systems and controls over inventory, including improvements in purchasing, forecasting, disposition of slow moving products and pricing controls. It is expected that the changes in inventory will substantially reduce inventory writedowns in 1999 and future years which have grown from less than $400,000 in 1995 to almost $1,500,000 in 1997. Part of this process includes the restructuring of the Company's current line of products, which it believes will not only improve the line offered, but will also allow the Company to more aggressively pursue other markets. In addition, the process will be facilitated by the implementation of new computer systems, which are expected to be implemented at the end of May, 1998. These new systems should position the Company to capitalize on additional cost reduction measures throughout the organization. The ability of the Company to succeed with its plans is dependent on an increase in sales, which management believes can occur. The Company's plan primarily focuses on development of the gift, specialty and institutional markets. In the gift and specialty markets, it is currently in the process of increasing the sales staff. During the first quarter of 1998, the Company also announced the hiring of Michael Morton as its Vice President of Sales and Marketing. Mr. Morton is experienced in growing sales in these types of markets. Finally, one of the key factors in the Company's plans is the improvement of deliveries to customers. As mentioned above, a primary cause of this has been poor performance by certain suppliers. As part of the efforts to improve this performance, the Company will be working with its key suppliers to improve this performance. While the Company had anticipated a decline in sales and gross margin for the first half of 1998, the extent of those declines in the later part of the first quarter and continuing into the second quarter has significantly exceeded what was anticipated by management. As a result of the declining margins and sales in the first and second quarter of 1998, the Company has determined that additional funds, in the form of debt or equity, are required to continue operations into the fall of 1998, as its current cash flows generated from operations and funds available as a result of its borrowing capacity are insufficient to meet its working capital, projected capital expenditures and other financing needs for 1998 and the future. In conjunction with these needs, the Company has hired a consultant to assist in obtaining this financing. The ability to obtain such financing is dependent upon an increase in sales. Although management believes that this funding can be obtained, there is no assurance the Company will receive such financing. LIQUIDITY AND CAPITAL RESOURCES Working capital was $3.3 million as of March 31, 1998 and $5.0 million as of December 31, 1997. The net cash provided by operating activities during the first quarter of 1998 was primarily used to repay borrowings under the revolving note, make principal and interest payments on term debt obligations and acquire property and equipment. Accounts receivable were approximately $3,041,000 as of March 31, 1998 and $4,492,000 as of December 31, 1997. The decrease in the first three months of 1998 was due to lower sales for the first quarter of 1998 as compared to the fourth quarter of 1997. The allowance for doubtful accounts increased from $326,000 at December 31, 1997 to $370,000 at March 31, 1998. The Company estimates the allowance for doubtful accounts based on the best information available to management. Additionally, a customer with which the Company has an outstanding balance of $118,000, went into bankruptcy during the first quarter of 1998. Bankruptcy proceedings have not yet been concluded, however the Company estimates that it will recover approximately 46% of the amounts owed. Management believes that the allowance is adequate to cover this and any additional losses which may occur. Inventories were approximately $13,620,000 as of March 31, 1998 and $15,423,000 as of December 31, 1997. The decrease of $1.8 million from December 31, 1997 to March 31, 1998 is primarily related to decreases of finished goods and raw materials of Polarfleece(R) products as well as decreased pillow inventories. The decreases were the results of the Company's efforts to reduce inventory levels. However, due to continued slow sales during the quarter, the reduction was not as significant as the Company had expected. The trend of decreasing inventory levels is expected to continue into the second quarter of 1998. Accounts payable were approximately $1,066,000 as of March 31, 1998 and $1,782,000 as of December 31, 1997. The decrease as of March 31, 1998 as compared to year end 1997 is primarily related to reduced raw materials purchases in the first quarter of 1998 compared to the fourth quarter of 1997. The reduction in purchasing is the result of the Company's efforts to reduce inventories, coupled with lower requirements due to the sales decline in the first three months of 1998 and continuing into the second quarter. The total amount available under the revolving note, which is due on demand, is limited to the lesser of $15,000,000 or a defined borrowing base of receivables, inventory balances, plus outstanding amounts under the term note, plus $1,000,000. Advances under the revolving note, based on eligible receivables, inventory balances, and the additional $1,000,000, provide for monthly interest payments at 1%, 3% and 4%, respectively, above the financial institution's prime rate (effective rates of 9.5%, 11.5% and 12.5%, respectively at March 31, 1998). Advances under the term note, which is due on demand and which requires monthly principal payments of $33,333, provide for monthly interest payments at 1% above the financial institution's prime rate (effective rate of 9.5% at March 31, 1998). The outstanding balances on the revolving note and term note were $10,261,935 and $1,700,003 at March 31, 1998 and $10,997,734 and $1,800,002 at December 31, 1997. For the three months ended March 31, 1998, the Company's capital expenditures were $273,000. These expenditures include $240,000 for the acquisition of additional computer hardware and software necessary for the Company's impending information systems conversion. The remaining $33,000 was primarily used for trade show exhibit structures and equipment. During the first quarter of 1998, the Company completed negotiations for the expansion of its facilities in Sisseton, SD, which were to be financed through the issuance of a long-term lease-purchase agreement and the exchange of its current facility in Sisseton, SD. At this time, the Company does not intend to go forward with the transaction. The Company does not have any additional plans for material capital expenditures in 1998 as a result of its cost reduction initiatives. Upon termination of the officers' stock appreciation program in 1994, the Company became indebted to the Company's President and a former Executive Vice President in the aggregate amount of $1,318,000. The total outstanding indebtedness was $263,800 as of March 31, 1998 and December 31, 1997. This indebtedness bears interest at 12% per annum and is due on demand. As stated above, the Company has determined that additional funds, in the form of debt or equity, are required to continue operations into the fall of 1998, as its current cash flows generated from operations and funds available as a result of its borrowing capacity are insufficient to meet its working capital, projected capital expenditures and other financing needs for 1998 and the future. In conjunction with these needs, the Company has hired a consultant to assist in obtaining this financing. The ability to obtain such financing is dependent upon an increase in sales. Although management believes that this funding can be obtained, there is no assurance the Company will receive such financing. FORWARD LOOKING STATEMENTS Forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward looking statements involve risks and uncertainties, including, without limitation, continued acceptance of the Company's products, cancellation of orders, increased levels of competition for the Company, new products and technological changes, the Company's dependence upon third party suppliers, intellectual property rights and the Company's ability to obtain financing. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registered has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAKOTAH, INCORPORATED May 14, 1998 By: /S/ GEORGE C. WHYTE. ------------------------ George C. Whyte Chief Executive Officer May 14, 1998 By: /S/ WILLIAM R. RETTERATH ---------------------------- William R. Retterath Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) EX-10.28 2 EMPLOYMENT AGREEMENT Exhibit 10.28 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made effective this 8th day of April, 1997, by and between DAKOTAH, INCORPORATED, a South Dakota corporation ("Company"), and WILLIAM RETTERATH ("Employee"). RECITALS: A. The Company desires to employ Employee in accordance with the terms of this Employment Agreement. B. The Company and Employee desire to enter into this Employment Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained in this Agreement, the parties agree as follows: 1. Nature and Capacity of Employment. The Company hereby agrees to employ Employee pursuant to the terms of this Agreement. Employee agrees to perform, or to hold himself available to perform, on a full-time basis, any reasonable functions prescribed by his superior or the Executive Committee of the Board of Directors. In addition, Employee's duties shall include the following: (a) Participation in the Senior Management Group at Dakotah. The Senior Management Group includes the CEO, President, CFO, VP-National Sales, VP-Corporate Sales and Manufacturing Manager. (b) Responsible, in concert with the CEO, for the day-to-day coordination of Sales and Manufacturing functions of the company with the Finance functions. (c) Responsible, in concert with the CEO, for the day-to-day implementation of the Strategic Plan and Budget. (d) Responsible for all Financial functions including, but not limited to, financial accounting, financial and capital management, cost accounting, internal auditing, Securities and Exchange Commission reporting and compliance, banking relationships, most contractual relationships (ie: insurance) and other related responsibilities. (e) Responsible for coordinating with the CEO and Corporate Counsel on Trademark and Licensing activities. (f) Responsible for the Strategic Planning, Financial Projections and Budgeting Process. (g) Responsible for all Management Information Systems including the supervision of the MIS department and the conversion of Dakotah's Computer Software System. (h) Responsible for the supervision of the Human Resource Department. (i) Responsible for the supervision of all general administrative support personnel. (j) Responsible for coordinating with Corporate Counsel on matters within his purview. (k) Responsible for coordinating with the CEO on banking and investor relations matters. (l) Responsible for assisting in the preparation of and participation in all Board of Director's Meetings. (m) Responsible for coordinating with the CEO on strategic opportunities. (n) Responsible for acting as Chair of corporate "War on Waste and Cost Reduction Team". (o) Responsible for coordinating a monthly meeting with Associates on operating performance of the company and their facility. (p) Responsible for assisting the CEO and Chairman of the Board in any manner deemed appropriate. 2. Term of Employment. The term of this Agreement shall commence as of the date hereof and shall continue until: (a) the Company gives twelve (12) months written notice of its intent to non-renew this contract or (b) Employee gives thirty (30) days written notice of its intent to non-renew this contract. 3. Compensation; Executive Compensation Plan. During the first year of the Term of this Agreement, the Company shall pay Employee an annual base salary ("Base Salary") of One Hundred Twenty-Five Thousand Dollars ($125,000.00), payable in equal semi-monthly installments. Employee shall also receive a $25,000.00 signing bonus in lieu of moving expenses, as well as a $25,000.00 Guaranteed Bonus payable on December 1, 1997. In addition, Employee shall be entitled to participate in the Dakotah Executive Discretionary Bonus Plan, as well as Dakotah's Standard Employee Benefit Plan. 4. Employee Benefits. (a) Employee shall be entitled to participate in all retirement plans and all other employee benefits and policies of the Company so long as he is employed by the Company, and all payments or other benefits paid or payable to Employee under such employee benefit plan or program of the Company shall not be affected or modified by this Agreement and shall be in addition to the compensation payable to Employee from time to time under this Agreement; provided, Employee shall not be entitled to payments of Base Salary or bonuses while receiving disability payments under a Company disability plan. (b) The Company shall reimburse Employee for his actual and reasonable out-of-pocket expenses incurred in the performance of his duties in accordance with the policies of the Company in effect from time to time. 5. Stock Options. Upon the date of this Agreement, Employee shall be granted an option ("Option") to purchase 100,000 shares of the Company's common stock ("Option Shares") pursuant to the Dakotah, Incorporated 1995 Stock Option Plan. The Option shall have an exercise price equal to the fair market value of such stock on the NASDAQ National Market System as of the close of such market on April 8, 1997, which was $2.6875. The Option shall vest on the following schedule: (a) On and after the effective date of this Agreement, the Option may be exercised for not in excess of twenty percent (20%) of the shares originally subject to the Option; (b) On or after January 1, 1998, the Option may be exercised for not in excess of forty percent (40%) of the shares originally subject to the Option; (c) On or after January 1, 1999, the Option may be exercised for not in excess of sixty percent (60%) of the shares originally subject to the Option; (d) On or after January 1, 2000, the Option may be exercised for not in excess of eighty percent (80%) of the shares originally subject to the Option; (e) On and after January 1, 2001, the Option may be exercised at any time and from time to time within its terms in whole or in part, but it shall not be exercisable after the seventh anniversary of the date hereof. The remaining terms and provisions of the Option shall be governed by the Dakotah, Incorporated 1995 Stock Option Plan and the Option actually issued. 6. Undertakings of Employee. Employee agrees that he shall use best efforts to perform the functions of his employment in a professional manner consistent with executives in other businesses performing similar functions, and he shall spend his full working time and effort in performance of his duties with the Company so long as Employee is employed by the Company, and Employee will not, during the course of his employment by the Company, without prior written approval of the Board of Directors of the Company, become an employee, director, officer, agent, partner of or consultant to, or a stockholder of (except a stockholder of a public company in which Employee owns less than 5% of the issued and outstanding capital stock of such company) any company or other business entity which is a significant competitor, supplier or customer of the Company. 7. Termination of Agreement. This Agreement and Employee's employment may be terminated prior to the expiration of the Term as follows: (a) Notwithstanding anything contained herein to the contrary, the Company, acting by and through its Board of Directors, shall have the right to immediately terminate this Agreement and thereby terminate the employment of Employee for "cause," which means: (i) criminal activity or dishonesty of Employee which is proven or admitted, (ii) acts of disloyalty to the Company during Employee's employment with the Company, including without limitation, repeated public or private disparagement of the Company, its products or condition, the disclosure of any of the Company's trade secrets to competitors, or the employment of Employee by a business entity directly competitive with the Company, or (iii) the failure of Employee to use his best efforts to perform the functions of his employment in a professional manner consistent with executives in other businesses performing similar functions (a bona fide disability shall not result in a failure to "use best efforts"). (b) If the Board votes to terminate this Agreement and Employee's employment with the Company for "cause," notice stating the effective date of such termination shall be delivered to Employee, which date may be the date of the delivery of such notice. As of the effective date of such termination of Employee's employment by the Company, the Company shall be relieved of all further obligations and liabilities to Employee under this Agreement. (c) This Agreement, Employee's employment with the Company, and the Company's obligation to pay Employee his Base Salary and bonus, except for the Guaranteed Bonus, if any, and any earned but not paid Base Salary amounts, shall immediately terminate upon Employee's death. (d) If Employee voluntarily terminates his employment with the Company, the Company shall no longer be obligated to pay Employee his Base Salary or any bonus or other compensation provided for hereunder, with the exception of any Guaranteed Bonus or earned, but unpaid Base Salary. (e) If the Company terminates Employee's employment for any reason other than cause or death, the Company shall pay Employee a severance payment equal to his current annual Base Salary in effect as of the date of termination, provided that if such termination is the direct result of a change in control (as defined below), such severance payment shall be equal to his annual Base Salary in effect as of the date of termination, which payment may be made by the Company in twenty-four (24) semi-monthly installments. 8. Confidentiality. Employee acknowledges that in the course of employment, Employee will acquire confidential information of a special and unique nature and value relating to Company's business. Such information shall be considered a trade secret owned by Company, which information shall include, but is not limited to, the names and addresses of customers and potential customers, records concerning customer contacts and customer purchases, the identity of customers' key employees, information concerning Company's systems, policies, methods of operation, procedures, manuals, pricing, sales strategies, sales methods, and all other non-public information acquired by Employee as a result of or during the course of employment. Employee agrees that all such information acquired during the course of employment, whether such information is communicated in written or verbal form and whether such information is kept in recorded or unrecorded form, constitute trade secrets of Company. Employee agrees that Employee shall not at any time or in any manner, either directly or indirectly, divulge or disclose Company's trade secrets to any other person or entity. In addition, Employee agrees that Employee shall not use such trade secrets in competition with Company or for the gain or benefit of Employee or any other person or company. It is expressly agreed and understood that the obligations of Employee under this paragraph shall survive the termination of the Agreement. Employee further agrees that, following termination of employment, Employee shall not remove or retain any document, copy of document or any other recording, in any type or form, relating to said trade secrets and, further, Employee shall not utilize or divulge said trade secrets to any other person or company, regardless of whether such knowledge or information is in recorded form or otherwise. 9. Non-Compete. Subject to the payment obligations described below, during the (i) Term of this Agreement, (ii) any period of Employee's employment with the Company after the Term of this Agreement, or (iii) the twelve (12) month period immediately following the termination of Employee's employment (whether such termination is during or after the Term of this Agreement), Employee shall not, directly or indirectly, on his own behalf or as a partner, employee, agent, director, or equity owner of any person, firm, corporation or otherwise, enter or engage in any business that is competitive with the Company's business within the continental United States ("Territory"), or, without limiting the generality of the foregoing, solicit or attempt to solicit within the Territory any customers or employees of the Company, or persons who were customers of the Company within the one (1) year period prior to Employee's termination of employment (whether such termination is during or after the Term of this Agreement), with the intent to provide such customers with goods or services which are competitive with those provided by the Company. The parties agree that the Company's market includes the continental United States and that limiting competition by Employee in the continental United States is a reasonable restriction. Notwithstanding the foregoing, in the event of a termination for any reason other than for "cause" as defined in Section 7(a), Employee shall be subject to the non-competition provision set forth in this Section 9 hereof, while the Company continues to pay Employee his current salary in effect as of the date of termination as provided in Section 7(e). In the event of a termination for "cause," as defined in Section 7(a), Employee shall be subject to the non-competition provision set forth in this Section 9 without any payment of additional salary to Employee. 10. Injunctive Relief. The parties agree that monetary damages will not be an adequate remedy in the event of any breach of Section 8 or Section 9 of this Agreement. Accordingly, in addition to any claim for damages, the parties agree that the Company shall have the right to seek and obtain injunctive or other equitable relief in the event of any breach or threatened breach of the provisions of Section 8 or Section 9 hereof. 11. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of South Dakota. 12. Notices. All notices or communications given under this Employment Agreement by one party to the other shall be in writing and shall be deemed to have been given when personally delivered or when mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Dakotah, Incorporated North Park Lane Webster, SD 57274 Attn: Vice Chairman If to Employee: William Retterath RR 1 Box 81 C Webster, SD 57274 or to such other addresses as may be communicated in writing by either party to the other. 13. Partial Invalidity. In the event that any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Agreement shall continue in full force and effect. 14. Entire Agreement; Amendments. This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and shall not be amended except in a writing signed by both parties. 15. Survival of Provisions. The provisions contained in Sections 8 and 9 of this Agreement shall survive the Term and any termination of the other portions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. DAKOTAH, INCORPORATED By: Printed Name: Title: WILLIAM RETTERATH, Employee WILLIAM RETTERATH EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 MAR-31-1998 9,300 0 3,410,657 370,094 13,619,599 18,939,325 8,994,675 3,617,306 24,504,894 15,622,035 1,882,480 34,998 0 0 6,965,381 24,504,894 4,876,098 4,876,098 4,596,849 4,596,849 0 47,000 364,757 (2,035,563) (280,000) (1,755,563) 0 0 0 (1,755,563) (.50) (.50)
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