-----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, LQfyN85tWlTCsOmFC4ytAmDw5EFcukrI3m+JXwSbccVaJJjFcdJEEY2CP2A90n4A 3l6ud84QTV9k1kJwP6luaQ== 0000897101-98-000852.txt : 19980817 0000897101-98-000852.hdr.sgml : 19980817 ACCESSION NUMBER: 0000897101-98-000852 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98690481 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 of 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 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 preceding 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 August 14, 1998. DAKOTAH, INCORPORATED INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets: June 30, 1998 (Unaudited) and December 31,1997 (Audited) Statements of Operations (Unaudited): Three and six month periods ended June 30, 1998, and June 30, 1997 Statements of Cash Flows (Unaudited): Six month periods ended June 30, 1998, and June 30, 1997 Notes to Financial Statements 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: --------------- ------------ 27.1 Financial Data Schedule b) Reports on Form 8-K None ITEM 1: Financial Statements DAKOTAH, INCORPORATED BALANCE SHEETS
(Unaudited) (Audited) June 30, December 31, ASSETS 1998 1997 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 15,604 $ 45,084 Accounts receivable less allowance for doubtful accounts of $277,714 in 1998 and $326,000 in 1997 2,384,920 4,491,697 Inventories 12,384,443 15,423,002 Income taxes receivable -- 963,000 Prepaid expenses and other 431,378 449,323 Deferred income taxes 848,800 568,800 ------------ ------------ Total current assets 16,065,145 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 3,288,046 3,278,933 Office equipment, furniture and fixtures and other 3,347,096 2,858,139 ------------ ------------ 9,219,562 8,721,492 Less accumulated depreciation & amortization 3,873,806 3,382,135 ------------ ------------ 5,345,756 5,339,357 OTHER ASSETS Deferred income taxes 179,000 179,000 Other 9,200 9,200 ------------ ------------ 188,200 188,200 ------------ ------------ $ 21,599,101 $ 27,468,463 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Outstanding checks in excess of bank balances $ 382,418 $ 452,784 Short-term debt 11,480,603 12,797,736 Current maturities of long-term obligations 161,685 80,549 Current maturities of capital lease obligations, including $14,803 and $27,117 to related parties in 1998 and 1997 225,392 197,942 Current maturities of note payable to officer 263,800 263,800 Accounts payable 1,358,283 1,781,996 Accrued liabilities Compensation and related benefits 545,412 566,165 Other 589,787 758,343 ------------ ------------ Total current liabilities 15,007,380 16,899,315 LONG-TERM LIABILITIES Long-term portion of long-term obligations 1,091,541 1,211,895 Long-term portion of capital lease obligations, including -- $57,069 and $57,069 to relates parties in 1998 and 1997 645,246 601,311 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) (2,360,919) 1,540,089 ------------ ------------ 4,854,934 8,755,942 ------------ ------------ $ 21,599,101 $ 27,468,463 ============ ============
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF OPERATIONS (Unaudited)
For the three months ended June 30, For the six months ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 4,219,671 $ 6,856,237 $ 9,095,769 $ 13,538,086 Cost of goods sold 4,149,181 5,221,003 8,746,030 10,178,176 ------------ ------------ ------------ ------------ Gross profit 70,490 1,635,234 349,739 3,359,910 Operating expenses Selling 942,955 1,022,175 1,849,178 2,205,453 General and administrative 947,114 1,297,050 1,970,925 2,266,203 ------------ ------------ ------------ ------------ 1,890,069 2,319,225 3,820,103 4,471,656 ------------ ------------ ------------ ------------ Operating loss (1,819,579) (683,991) (3,470,364) (1,111,746) Other income (expense) Interest expense (370,323) (210,102) (735,080) (353,599) Other 1,901 -- (18,120) -- ------------ ------------ ------------ ------------ (368,422) (210,102) (753,200) (353,599) Loss before income taxes (2,188,001) (894,093) (4,223,564) (1,465,345) Income tax benefit (42,556) (311,000) (322,556) (491,000) ------------ ------------ ------------ ------------ NET LOSS $ (2,145,445) $ (583,093) $ (3,901,008) $ (974,345) ============ ============ ============ ============ Net loss per share - basic and dilutive $ (0.61) $ (0.17) $ (1.11) $ (0.28) ============ ============ ============ ============ Weighted average common shares outstanding - basic and dilutive 3,499,755 3,499,755 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 six months ended June 30, 1998 1997 ---- ---- Cash flows from operating activities: Net loss $(3,901,008) $ (974,345) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 491,671 339,453 Compensation to outside consultant -- 63,000 Deferred income taxes (280,000) -- Changes in assets and liabilities: Accounts receivable 2,106,777 2,981,988 Inventories 3,038,559 (9,917,193) Prepaid expenses 17,945 184,752 Accounts payable (423,713) 3,944,805 Accrued liabilities (189,309) (437,402) Income taxes 963,000 (613,066) ----------- ----------- Total adjustments 5,724,930 (3,453,663) ----------- ----------- Net cash provided by (used in) operating activities 1,823,922 (4,428,008) Cash flows from investing activities: Capital expenditures (316,742) (491,543) Other -- (306,093) ----------- ----------- Net cash used in investing activities (316,742) (797,636) Cash flows from financing activities: Outstanding checks in excess of bank balance (70,366) 626,722 Net payments under short-term debt agreements (1,317,133) 3,996,931 Proceeds from issuance of long-term obligations -- 880,000 Principal payments on long-term and capital lease obligations (149,161) (77,242) Principal payments on note payable to officer -- (197,501) ----------- ----------- Net cash provided by (used in) financing activities (1,536,660) 5,228,910 ----------- ----------- Net increase (decrease) in cash and cash equivalents (29,480) 3,266 Cash and cash equivalents at beginning of period 45,084 2,690 ----------- ----------- Cash and cash equivalents at end of period $ 15,604 $ 5,956 =========== =========== Supplemental disclosure of non-cash investing/financing activity: Acquisitions of property, plant and equipment through capital lease arrangements $ 181,328 $ 502,707 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 764,743 $ 323,435 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 June 30, 1998 and the results of operations for the three and six month periods ended June 30, 1998 and 1997 and the cash flows for the six month periods ended June 30, 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) or market and consist of the following: June 30, 1998 December 31, 1997 ------------- ----------------- Raw Materials $ 5,607,238 $ 7,606,938 Work-In-Process 1,210,942 957,972 Finished Goods 5,566,263 6,858,092 ----------- ----------- $12,384,443 $15,423,002 =========== =========== NOTE C: RECLASSIFICATIONS Certain amounts from the 1997 financial statements have been reclassified to conform with 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 June 30, 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 June 30, 1998). The outstanding balances on the revolving note and term note were $9,880,599 and $1,600,004 at June 30, 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%. The renegotiated terms originally intended for the additional $1,000,000 availability to expire on July 31, 1998. However, the financial institution has allowed the Company to retain this additional availability subsequent to July 31. 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 not in compliance with the minimum net earnings and net worth covenants as of June 30, 1998; however, the financial institution has not exercised any of its remedies available to it in under the terms of the agreement in the case of default, nor has it informed the Company of its intention to do so. NOTE E: FINANCING EFFORTS 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 throughout the second quarter has significantly exceeded what was originally anticipated by management. As a result of the declining margins and sales in the first and second quarter of 1998, the Company determined that additional funds, in the form of debt or equity, would be required to continue operations through the second half of 1998 and into 1999, as the Company's 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 hired a consultant in the second quarter of 1998 to assist in obtaining this financing. At this time, the Company has not obtained the necessary debt financing nor has it received a commitment for such financing. While the Company continues to review various options and proposals for appropriate financing, it has further expanded it's search for funding, including exploring equity options, such as strategic alliances or other alternatives. 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 the percentage relationship to net sales of certain items in the Company's statements of operations for the three and six month periods ended June 30, 1998 and 1997.
Percentage of Net Sales for the Percentage of Net Sales for the three month period ended June 30, six month period ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Gross Profit 1.7 23.8 3.8 24.8 Selling Expenses 22.3 14.9 20.3 16.3 General & Administrative 22.4 18.9 21.7 16.7 Operating Loss (43.1) (10.0) (38.2) (8.2) Interest Expense 8.8 3.0 8.1 2.6 Loss Before Income Taxes (51.9) (13.0) (46.4) (10.8) Net Loss (50.8) (8.5) (42.9) (7.2)
NET SALES decreased 32.8% to $9,096,000 for the six months ended June 30, 1998 from $13,538,000 in the same period of 1997. Net sales decreased from $6,856,000 in the second quarter of 1997, to $4,220,000 in the second quarter of 1998. The decrease in sales for the six months ended June 30,1998 is primarily due to the heavy discounting the Company has undertaken to liquidate its excess inventories which it carried from 1997, an overall decline in orders for the first half of the year due to excess inventory levels of its primary customers, and a fall off in orders resulting from dissatisfaction of certain customers resulting from poor delivery performance primarily related to poor performance of certain suppliers of the Company in the prior year. Additionally, in connection with the changeover of operations associated with the computer systems conversion in June, the Company experienced a slow down of manufacturing and shipping operations. This slowdown resulted in the Company's inability to meet delivery dates for a number of scheduled orders for June. As a result, orders representing approximately $500,000 in net sales and gross margin of approximately $125,000 were forgone for the second quarter. The majority of these orders were re-scheduled for shipment in the third quarter. In order to diminish the Company's dependence on retailers and the associated risks of returns, markdowns, inappropriate chargebacks and other issues, the Company is currently focusing substantial resources toward the development of the institutional and the gift and specialty markets. During the second quarter, the Company was successful in significantly expanding its sales force in the gift and specialty markets by aligning itself with several premier representative organizations located throughout the United States. The Company expects to see the results of these efforts late in the third and into the fourth quarter of 1998. With this expanded market potential and the normal heavy fall seasonality of its traditional customer base, sales for the second half of 1998 are expected to be substantially higher than the first six months of 1998. GROSS MARGIN PERCENTAGES decreased from 24.8% in the first six months of 1997 to 3.8% in the first six months of 1998. During the second quarter of 1998, compared to the same period of 1997, gross profit percentages decreased to 1.7% from 23.9%. This decline in gross margin is due primarily to (1) the heavy discounting of inventory, as mentioned above, (2) an increase in closeout sales as compared to the same periods of 1998, (3) substantial impact to cost of goods sold due to volume variances resulting from the slowdown of manufacturing and shipping in January 1998 and again in June of 1998, following the computer systems conversion. The negative impacts were somewhat offset by the positive impacts on variances of (1) decreased manufacturing overhead spending which declined from $3,700,000 in the first half of 1997 to $2,300,000 in the first half of 1998 and (2) increased direct labor efficiencies which increased to in excess of 75% in the first half of 1998 from 62% in the first half of 1997. The Company expects gross margins to increase as sales increase over the second half of 1998, as the Company returns to selling in-line products for the fall season and sales to the higher-margin gift and specialty market increase. Finally, in its efforts to gain further control over inventory write-downs, which have risen over the past three years, the Company is in the process of further reducing and narrowing its 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 decreased $356,000 from $2,205,000 in the first six months of 1997 to $1,849,000 in the first six months of 1998. The decrease is primarily the result of the lower level of sales for the period, as well as the Company's cost reduction efforts. The net decrease is comprised largely of (1) decreased commission expense of $340,000, which directly correlates to the decreased sales for the period (2) decreased costs of catalog and promotional literature of approximately $80,000, (3) decreased cost of showroom decorating and supplies of approximately $91,000 and (4) a $28,000 decrease in travel and lodging for the sales force. These decreases were somewhat offset by higher salary and payroll expenses of $188,000, resulting from the Company's hiring of two full-time sales regional representatives in the second half of 1997, as well as its Vice President of Sales and Marketing in March of 1998. As a percentage of net sales, selling expenses increased to 20.3% in the first six months of 1998 from 16.3% in the first six months of 1997 as a result of the substantially lower sales levels. GENERAL AND ADMINISTRATIVE EXPENSES decreased from $2,266,000 in the first six months of 1997 to $1,970,000 in the first six months of 1998. The decrease is primarily due to the Company's cost reduction efforts, specifically (1) a decrease in professional fees of $113,000, resulting from reduced legal and accounting fees, as well as a decrease in other professional fees for the compensation paid to the Company's former Chief Executive Officer, (2) a decrease in recruiting fees of $90,000, which related to senior management recruiting in 1997, (3) decreased computer leasing and supplies expense of $88,000 and numerous other smaller decreases. These decreases were partially offset by increased depreciation expense of $140,000, relating to substantial computer hardware acquisitions which were put into service in the second half of 1997. As a percentage of net sales, general and administrative expenses increased from 16.7% in the first six months of 1997 to 21.7% in the first six months of 1998 as the substantially lower net sales more than countered the expense reductions. The Company has instituted a plan to substantially reduce general and administrative expenses from 1997 levels. During the last month of 1997 and continuing in the first half of 1998, the Company has reduced the majority of the monthly expenses which had increased in 1997. The reductions, as compared to 1997, are expected to continue for the remainder of 1998. INTEREST EXPENSE increased from $354,000 in the first six months of 1997 to $735,000 in the first six months of 1998. The increase is 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 through the first half of 1998. The EFFECTIVE INCOME TAX RATE was 7.6% for the first six months of 1998, as compared to 33.5% for the first six 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 ability 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 also continues to work toward improvement of 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. As mentioned above, the Company has been successful, in varying degrees, in its cost cutting efforts. Part of this restructuring process undertaken included the restructuring of the Company's product lines. During the second quarter, the Company distinguished two separate distinct lines, Dakotah Home and Dakotah Limited, which focus on the major retailer and gift and specialty markets, respectively. As a part of this line distinction, the Company also substantially reduced the number of products offered, which is expected to provide product development and manufacturing efficiencies into the second half of 1998 and forward. The ability of the Company to succeed with its plans is dependent on an increased sales in the second half of 1998. The Company believes that the most promising source of such sales is within the gift, specialty and institutional markets. 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. To further enhance the Company's opportunity in these markets, in the second quarter the Company was successful in hiring a Director of Product Development and a National Sales Manager-Gift from a competitor of the Company. 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 throughout the second quarter has significantly exceeded what was originally anticipated by management. As a result of the declining margins and sales in the first and second quarter of 1998, the Company determined that additional funds, in the form of debt or equity, would be required to continue operations through the second half of 1998 and into1999, as the Company's 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 requirements for 1998 and the future. In conjunction with these needs, the Company hired a consultant in the second quarter of 1998 to assist in obtaining this financing. To date, the Company has not obtained the necessary debt financing nor has it received a commitment for such financing. While the Company continues to review various options and proposals for appropriate financing, it has further expanded its search for funding, including exploring equity options, such as strategic alliances or other alternatives. There is no assurance that the Company will receive the necessary financing. LIQUIDITY AND CAPITAL RESOURCES Working capital was $1.1 million as of June 30, 1998 and $5.0 million as December 31, 1997. The net cash provided by operating activities during the first six months of 1998 was primarily used to repay borrowings under the revolving note, make principal and interest payments on term debt obligations and for capital expenditures, primarily for equipment and external consulting costs necessary to complete the computer systems conversion during the second quarter. Accounts receivable were approximately $2,385,000 as of June 30, 1998 and $4,492,000 as of December 31, 1997. The decrease in the first six months of 1998 was due to lower sales for the second quarter of 1998 as compared to the fourth quarter of 1997. The allowance for doubtful accounts decreased from $326,000 at December 31, 1997 to $278,000 at June 30, 1998. The Company estimates the allowance for doubtful accounts based on the best information available to management. The decrease from December 31, 1997 is directly related to the overall decrease in accounts receivable as well as liquidation in the second quarter of the Company's claim in a bankruptcy of customer, as well as the completion of bankruptcy proceedings for a number of smaller customers. Management believes that the allowance is adequate to cover any additional losses which may occur. Inventories were approximately $12,384,000 as of June 30, 1998 and $15,423,000 as of December 31, 1997. The decrease of $3 million from December 31, 1997 to June 30, 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 first six months of 1998, the reduction was not as significant as the Company had expected. The Company expects to continue this gradual reduction of inventory levels through the end of 1998 and into 1999. Accounts payable were approximately $1,358,000 as of June 30, 1998 and $1,782,000 as of December 31, 1997. The decrease as of June 30, 1998 as compared to year end 1997 is primarily related to reduced raw materials purchases for the second 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 six months of 1998. The reduction in accounts payable due to decreased purchasing was partially offset by a longer average outstanding period for the Company's payables, necessitated by reduced borrowing availability under the Company's revolving line of credit throughout the quarter. This limited borrowing capacity and the need for continued support of trade creditors through lengthened credit terms has continued into the third 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 June 30, 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 June 30, 1998). The outstanding balances on the revolving note and term note were $9,880,599 and $1,600,004 at June 30, 1998 and $10,997,734 and $1,800,002 at December 31, 1997. For the six months ended June 30, 1998, the Company's capital expenditures were $498,000. These expenditures include $455,000 for the acquisition of additional computer hardware and software and capitalized external consulting costs necessary for the Company's information systems conversion which occurred during the second quarter. The remaining $43,000 was primarily used for trade show exhibit structures and equipment. 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 June 30, 1998 and December 31, 1997. This indebtedness bears interest at 12% per annum and is due on demand. As stated above, the Company determined and presented in its release of the results of operations for the first quarter of 1998, that additional funds, in the form of debt or equity, would be required to continue operations through the second half of 1998 and into 1999, as the Company's 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 hired a consultant in the second quarter of 1998 to assist in obtaining this financing. At this time, the Company has not obtained the necessary debt financing nor has it received a commitment for such financing. While the Company continues to review various options and proposals for appropriate financing, it has further expanded it's search for funding, including exploring equity options, such as strategic alliances or other alternatives. There is no assurance that the Company will obtain the necessary 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 August 14, 1998 By: /S/ GEORGE C. WHYTE. ---------------------------------- George C. Whyte Chief Executive Officer August 14, 1998 By: /S/ WILLIAM R. RETTERATH ---------------------------------- William R. Retterath Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JUN-30-1998 15,604 0 2,662,634 277,714 12,384,443 16,065,145 9,219,562 3,873,806 21,599,101 15,007,380 1,736,787 0 0 34,998 4,819,936 21,599,101 9,095,769 9,095,769 8,746,030 8,746,030 0 62,000 735,080 (4,223,564) (322,556) (3,901,008) 0 0 0 (3,901,008) (1.11) (1.11)
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