-----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, PcTXvyGLgrSxEiuQJBwy0837nPPkpD9BPGgBck9vHZUgqLv5k6OKeKUau6Tm71Eu Afz6H0Jtc6+0wogCJ4kX3g== 0000897101-97-000350.txt : 19970401 0000897101-97-000350.hdr.sgml : 19970401 ACCESSION NUMBER: 0000897101-97-000350 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23604 FILM NUMBER: 97568623 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-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number DECEMBER 31, 1996 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 or organization) Identification No.) ONE NORTH PARK LANE, WEBSTER, SD 57274-0120 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (605) 345-4646 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [___]. Aggregate market value of voting stock held by non-affiliates of Registrant as of March 21, 1997: Approximately $6,314,000. Number of shares of Common Stock, $.01 par value, outstanding as of March 21, 1997: 3,499,755. PART I ITEM 1. BUSINESS. INTRODUCTION Dakotah, Incorporated ("Company" or "Dakotah") designs, manufactures and markets textile home fashion furnishings which are both functional and decorative. The Company's principal products are decorative pillows, chair pads, throws (polyester fleece and cotton), footstools and table linens. The Company's objective has been to build a strong brand image associated with fashionable styling and high quality products. The Company markets its products (primarily under the Dakotah(R) and Polarfleece(R)* name and various licensed names) to a broad range of major retailers, including department stores, specialty retailers, mass merchandisers and mail order houses. Founded in l971 as a craft cooperative, the Company has over 570 employees. The Company's employees are referred to as "associates" in recognition of the need for all associates to work together as a team to make the Company successful. Initially, the Company emphasized fashionable quilted and hand-crafted applique bedspreads and comforters. Applique, one of the oldest handicraft forms, is a process of making a design by sewing small pieces of fabric onto a larger base fabric. The Company utilizes creative design and manufacturing processes to develop superior fashionable products. During the 1980's, the Company shifted its focus from bedcoverings to decorative pillows as it believed the decorative pillow market presented significant opportunities for the Company to capitalize on its reputation for fashionable styling and high quality products. In October 1994, the Company announced its decision to discontinue the manufacture of quilted comforters and bedspreads and concentrate on higher margin products. During the previous ten years, demand for the Company's bedspreads and comforters had declined due to price erosion from an increase in imports. Business in decorative accessory products has substantially increased during the same decade. The decision to discontinue the quilted comforters and bedspreads enabled the Company to convert several thousand square feet of manufacturing space, plus many of its associates, from manufacturing bedspreads and comforters to other products. * Polarfleece(R) is a registered trademark of Malden Mills Industries for which Dakotah has an exclusive license to use the trademark Polarfleece(R) and other trademarks in most home furnishing's product categories. PRODUCTS GENERAL. The Company's principal product groups are decorative pillows, chair pads, throws (polyester fleece and cotton), footstools, bedding and bedding accessories, and table linens. At the end of the second quarter of 1995, the Company began to manufacture polyester fleece throws. The Company's products are both functional and decorative. They allow homeowners to redecorate a room by changing the accessory items, such as decorative pillows and throws, in the room. Many of the Company's customers own more than one set of decorative accessory items for a room, so that they can change the room's appearance from time to time, for example, to match the different seasons of the year. The following table sets forth certain information regarding net sales of these product groups during the past three years:
YEARS ENDED DECEMBER 31 -------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ------------------------- ----------------------------- Net Sales Percent Net Sales Percent Net Sales Percent Decorative pillows and $20,147,683 48.5% $19,165,502 62.1% $21,892,832 72.0% chairpads Throws 15,748,395 37.9% 7,119,118 23.1% 3,337,687 11.0% Other products 5,663,519 13.6% 4,599,461 14.8% 5,171,286 17.0% ----------- ------ ------------ ------ ------------ ------ TOTAL $41,559,597 100.0% $30,884,081 100.0% $30,401,805 100.0% =========== ====== ============ ====== ============ ======
DECORATIVE PILLOWS AND CHAIRPADS. The Company offers a wide variety of decorative pillows ranging from basic solid-colored pillows to high-fashion embellished tapestry and velvet pillows. Decorative pillows vary in size, are manufactured in various fabric blends and are filled with 100% polyester or a polyester/cotton blend fiberfill. The Company offers decorative pillows in a wide variety of styles and patterns, currently including over 500 different designs. The Company's decorative pillows generally sell at retail prices ranging from $9 to $70. The Company designs its pillows to meet the style standards of its customers. The Company has used the experience gained in making applique bedcovering products to make creative trims and embellishments for its pillows. The Company's chair pad product line consists of 50 different designs for chair pads and 20 different designs for rocker sets. Rocker sets consist of pads plus coordinated backs for the chairs. Many of the same fabrics selected by the Company for its decorative pillows are used to make chair pads. THROWS. The Company sells both cotton and polyester throws. The Company's line of cotton throws consists of approximately 50 different designs and is produced by non-affiliated manufacturers. The Polarfleece(R) line consists of 25 different solid colors and 15 various prints or yarn-dyed patterns. Polarfleece(R) is a non-pill polyester fleece fabric. To satisfy certain discount customers, the Company also offers a low-pill fleece throw. The new Dakotah(R) Luxe(TM) line of throws consists of 22 solid colors. The Polarfleece(R) Plus(TM) line consists of 9 styles. OTHER PRODUCTS. The Company's other products include bedcoverings, Polarfleece(R) and Dakotah(R) Luxe(TM) blankets, table linens, footstools and accessories. The Company's bedcoverings include a line of duvets (comforter covers) which slip over a comforter like a pillowcase and fasten at the end, offering consumers a quick and easy way to change bedroom decor without the expense of replacing the comforter. The target market for the Company's duvet covers is upscale retailers, including specialty retailers, department stores and mail order houses. The Company's current duvet cover line includes over 25 different designs. The Company's duvet covers generally sell at retail prices ranging from $120 to $750. The Company's table linen products consist of a coordinated line of placemats and napkins. This line consists of 50 different designs. The Company's line of footstools is also produced by non-affiliated manufacturers. This footstool line includes 30 different designs. The other products category also includes wall art, miscellaneous low volume products and fabric sold by the yard. Many of these other products utilize the same fabrics as are used to make decorative pillows, chair pads and table linens or are coordinated with the designs for such products. PRODUCT DESIGN Design and color are key components of the Company's successful marketing strategy. The Company's designs include traditional, contemporary, western and novelty patterns. The Company has worked to associate the Dakotah(R) name with products that have unique and innovative designs. For its inaugural awards ceremony in 1988, the Home Fashion Products Association selected George C. Whyte, a founder and the President of the Company, as the winner of the Home-Tex-Design Award, which recognizes individuals who have made a major contribution to the industry in home textiles design. The Company has consistently worked to be an innovator in using fabric, color, texture and technique, in bringing innovative and exciting designs to the marketplace. In 1996, the Company's Polarfleece(R) throw was selected by Home Textiles Today, a trade publication, as the product of the year in its category. The Company employs a product development staff of eleven persons and a product design staff of five persons who work closely with the marketing staff to develop new designs. The Company obtains its designs from numerous sources, including independent free-lance designers, fabric manufacturers and the Company's associates. The Company utilizes computer assisted design to increase its design capability and reduce costs. The Company obtains design licenses from a number of sources, including other home textile products producers (which allows the Company and such producers to offer complementary goods) and independent designers. The Company has licensed and has sold fabric for certain of its more successful designs to manufacturers of complementary products, although net sales from this activity have not been significant. The Company's expenses for product development were approximately $730,000 in 1996, $560,000 in 1995, and $450,000 in 1994. The expenditures were for the development of new products, upgrading of existing product lines and the creation and purchase of new designs. LICENSED PRODUCTS The Company's products are marketed under the Dakotah(R) name and various licensed names including Polarfleece(R), Harley-Davidson(R), Roy Rogers(R), and Currier & Ives(R). Beginning in 1997, Dakotah(R) will begin selling products under the Dakotah(R) Luxe(TM) and the upscale Disney(R) licenses, Mickey & Co.(R) and Baby Mickey and Co.(R) * In December 1993, the Company introduced Harley-Davidson(R) pillows, together with a line of jacquard-woven throws (small blankets) and other accessory products. * At the October 1994 Home Textile Market, the Company introduced its Elvis Presley(R) line of products. * At the April 1995 Home Textile Market, the Company introduced its Polarfleece(R) and Campbell's Soup(R) line of products. * At the October 1995 Home Textile Market, the Company introduced its Polarfleece(R) collegiate licensed and outdoor furniture line of products. * At the April 1996 Home Textile Market, the Company introduced its new line of Polarfleece(R) blankets. * At the October 1996 Home Textile Market, the Company introduced Dakotah(R) Luxe(TM), the Company's new line of luxurious microfiber throws, pillows, bedcoverings and accessories and a new line of pillows, throws and bedcoverings with the Disney licenses, Mickey and Co.(R) and Baby Mickey and Co(R). SALES AND MARKETING Virtually all of the Company's products are sold directly to the retail trade primarily through 30 independent sales representative organizations. The Company's showroom and primary sales office is located in New York City on Fifth Avenue. The sales representatives who sell to the gift industry have showrooms in Atlanta, Chicago, Denver, Dallas, San Francisco and Seattle. The Company's primary customers are department stores, specialty retailers, mass merchandisers and mail order houses in the United States. The Company markets its designs and products so that conflicts do not develop between customers in order to give the Company's customers flexibility in setting their own marketing and pricing strategies. In 1996, the Company began developing sales distribution in Canada and Europe. During 1996, the Company sold to over 2,400 customers, including buyers representing divisions of larger corporations. The Company emphasizes quick and dependable delivery of complete orders. The Company's on-line computer system allows customers to place orders, and allows the Company to fill, track and bill orders. Sales representatives assist in maintaining appropriate stocking levels, maintain store displays of Company merchandise, assure proper presentation of Company products, replace damaged packaging and assist with credit and account reconciliation and collection. The Company provides point-of-sale advertising and attractive and informative packaging to obtain consumer interest. The Company generally introduces new products during February, April and October in connection with the major Home Fashion Textile shows. During these markets, buyers from all classes of the textile trade throughout the United States come to New York City to preview the products from the home textiles manufacturers. Most sales of successful new designs generally occur six months or more after the product introduction as more conservative buyers follow the lead of market innovators. Additionally, the Company participates in the regular home fashion textile shows at each of its showrooms and the major European home textile show, Heimextil. During 1996, the Company and Malden Mills, Industries, the supplier and licensor of Polarfleece(R), advertised Dakotah's Polarfleece(R) products in the following magazines: BHG Better By Design, Country Living, House Beautiful, Martha Stewart Living, Metropolitan Home and Southern Living. At December 31, 1996, the Company had approximately $3.0 million of firm orders, compared to approximately $2.7 million on December 31, 1995 and approximately $2.1 million on December 31, 1994. On March 15, 1997, the Company had approximately $3.8 million of firm orders as compared to approximately $3.3 million on March 15, 1996. In general, orders require shipment within six to ten weeks. Accordingly, the Company's firm orders backlog at any time is not necessarily indicative of the level of its future sales. The Company maintains inventory levels sufficient to permit it to fill orders on a timely basis. The Company and the home furnishing industry as a whole build up finished goods inventory in the first and second calendar quarters for shipment in the third and fourth calendar quarters. This results in a significant use of working capital during the first and second quarters. Although 15% of the Company's 1996 sales were made to a single customer, the Company believes the loss of this customer would not have a material adverse effect on the Company. MANUFACTURING AND DISTRIBUTION The Company's manufacturing operations consist principally of cutting sewing, and embroidering fabric. The Company primarily utilizes two independent contractors, one to produce all of its footstool products and one to produce its jacquard-woven cotton throws. The Company does not have the manufacturing capabilities to produce jacquard-woven textiles and footstools. Additionally, the Company uses contract manufacturers to cut and sew fabric during certain peak periods of the year. For several years, the Company has committed significant efforts to improve the productivity of its associates through the use of various total quality management concepts and automation. The Company has devoted significant resources to support its quality improvement efforts. The Company attempts to maintain close contact with customer quality control personnel to assure the Company's understanding of customer requirements. RAW MATERIALS The principal raw materials that the Company uses in manufacturing its products are solid color, print and jacquard fabrics, solid color and print polyester fleece fabrics from Malden Mills Industries, Inc. and fiberfill. The Company purchases certain fabrics with the exclusive right to the designs in the Company's markets. The Company does not import any significant portion of its raw materials. Although the Company usually purchases raw materials from only a limited number of suppliers, these raw materials are generally readily available from several manufacturers, a few of which are competitors of the Company. Purchase commitments for raw materials are generally insignificant in comparison to the total amount of a raw material to be purchased. During 1996, Malden Mills supplied the Company with 46% of its raw material requirements for 1996. The Company receives a significant portion of its annual supply of raw materials from Malden Mills and manufactures a significant amount of finished goods Polarfleece(R) inventory during its first and second quarters and sells to its customers in the third and fourth quarters. As a result of this timing, the Company would have the flexibility to convert its facilities to produce other products or procure substitute fleece supplies in the event the delivery of supplies from Malden Mills would be substantially interrupted. The use of a substitute fleece would require the use of a trademark other than Polarfleece(R). The Company acquires most of its cotton throws from Mount Vernon Mills, Inc. In order to provide quick response to customers' orders and the lead times sometimes associated with the purchase of its raw materials, the Company makes commitments for future purchases of fabrics and cotton yarns. COMPETITION The Company participates in a highly competitive industry. The Company competes with a number of established designers, manufacturers, importers, and distributors of textile home fashion furnishings, some of which have greater financial, distribution, and marketing resources than the Company. The Company believes the principal competitive factors affecting its business include its ability to continue to create and develop quality products offering creative and fashionable designs, its marketing expertise, its relationships with customers, and its manufacturing and distribution capabilities. The Company also competes on the basis of quality, brand names, price and service. GOVERNMENT REGULATION The Company is subject to federal and state laws and regulations that require most of its products to bear product content labels containing specified information, including their place of origin and fiber content. The Company's operations are governed by a variety of federal, state, local, and foreign laws and regulations relating to the environment, worker safety and health, advertising, importing and exporting, and other matters applicable to businesses in general. All laws and regulations are subject to change and the Company cannot predict what effect, if any, changes in laws and regulations might have on its business. TRADEMARKS AND COPYRIGHTS The Company owns various trademarks and trade names, including Dakotah(R) ,Dakotah Luxe(TM), Beach Buddy(R), Dakotah Outdoors(R), Lustrah(R), Thermofleece(TM) and Comfortfleece(R). The Company copyrights many of its fabric designs. The Company regards its trademarks, trade names and copyrights as valuable assets and seeks to protect them against infringement. There can be no assurance, however, that any effort to protect its trademarks, trade names and copyrights will be successful or that any such effort will not be prohibitively costly and time consuming. The Company has been licensed to market and manufacture products bearing trademarks owned by others, including but not limited to, Polarfleece(R), Malden Mills(R), Mickey & Co.(R) (Disney(R)), Baby Mickey & Co.(R) (Disney(R)), Harley-Davidson(R), Elvis Presley(R), Campbell's Soup(R), Roy Rogers(R), and Currier & Ives(R). EMPLOYEES At March 15, 1997, the Company had 575 associates, of whom 508 were full-time and 67 were part-time. None of the Company's associates is represented by a labor union, and the Company considers its relations with its associates to be good. Due to a shortage of labor in the northeast South Dakota area, any significant expansion of the Company's manufacturing capabilities in the future may be outside of this area. In addition, due to this labor shortage, the Company manages its operating activities in order to avoid any temporary reductions in its work force. At least 276 of the Company's associates own directly or through their interests in the Company's profit sharing plan, shares of the Company's Common Stock. ITEM 2. PROPERTIES. The following table summarizes certain information concerning the Company's principal facilities:
APPROX. OWNED/ LOCATION PRINCIPAL USE SQ. FT. LEASED (1) Webster, South Dakota(3) Headquarters and Manufacturing 72,000 Owned (2) Webster, South Dakota Manufacturing and distribution 23,000 Owned (2) Webster, South Dakota(3) Warehouse and distribution 14,000 Leased Webster, South Dakotah Sales, Design and Administration 4,500 Owned Webster, South Dakota Factory outlet store 8,000 Leased Redfield, South Dakota Manufacturing and distribution 42,000 Leased Sisseton, South Dakota Manufacturing and distribution 12,000 Owned Veblen, South Dakota Manufacturing and distribution 20,000 Owned (2) Platte, South Dakota Manufacturing and distribution 20,000 Leased Milbank, South Dakota Manufacturing and distribution 10,000 Owned New York, New York Sales office and showroom 5,300 Leased Atlanta, Georgia Sales office and showroom 4,500 Leased Chicago, Illinois Sales office and showroom 3,419 Leased
(1) For additional information concerning the Company's leases, see Notes F and G to Financial Statements. (2) These properties are being purchased by means of capital lease purchase agreements. (3) In the Fall of 1996, the Company began a 32,000 square foot expansion of its main manufacturing facility. In January, 1997, the Company began to move its manufacturing from its 23,000 square foot facility to its expanded 72,000 square foot facility. Also in January, 1997, the Company moved most its Warehouse and Distribution activities to its expanded 72,000 square foot facility. In March of 1997, the Company ceased leasing its 14,000 square foot facility. The Company believes that its facilities are generally well maintained and in good operating condition. ITEM 3. LEGAL PROCEEDINGS. From time to time the Company is a party to various legal proceedings arising in the ordinary course of business. The Company is not currently a party to any material litigation and is not aware of any litigation threatened against it that could have a material adverse effect on its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ National Market System under the symbol DKTH. The following table sets forth for each period indicated the high and low closing sale prices for the Company's Common Stock, as reported by National Association of Securities Dealers Automated Quotation System: HIGH LOW 1995 First Quarter $3.75 $2.625 Second Quarter $3.875 $3.25 Third Quarter $4.75 $3.25 Fourth Quarter $4.75 $3.875 1996 First Quarter $4.25 $3.50 Second Quarter $4.50 $3.625 Third Quarter $5.00 $4.25 Fourth Quarter $5.00 $4.00 These quotations represent prices between dealers, and do not include retail markups, markdowns or commissions. The number of record holders of the Company's Common Stock on March 24, 1997 was 277. The Company estimates that an additional 1,200 shareholders own stock held for their account at brokerage firms and other financial institutions. The Company has never paid a cash dividend and expects to retain future earnings for operations and expansion of its business. The future payment of dividends, if any, rests within the discretion of the Company's Board of Directors and will depend, among other things, upon the Company's earnings, capital requirements and financial condition. There were no unregistered sales of the Company's Common Stock during the fourth quarter of 1996. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial information for the periods indicated. The information should be read in conjunction with the Company's financial statements included in this report.
Years ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands, except per share data) Net sales $41,560 $30,884 $30,402 $23,428 $18,709 Cost of goods sold 30,599 22,485 22,377 16,302 13,267 ---------------------------------------------------------------------- Gross profit 10,961 8,399 8,025 7,126 5,442 Selling, general and administrative expense 9,229 7,542 6,346 5,259 4,803 ---------------------------------------------------------------------- Operating profit 1,732 857 1,679 1,867 639 Other income (expense) (500) (141) (98) (149) (261) ---------------------------------------------------------------------- Earnings before income taxes and cumulative effect of a change in accounting principle 1,232 716 1,581 1,718 378 Income taxes 404 256 550 465 89 ---------------------------------------------------------------------- Earning before cumulative effect of a change in accounting principle 828 460 1,031 1,253 289 Cumulative effect on prior years of a change in accounting for income taxes - - - 179 - ---------------------------------------------------------------------- Net earnings $828 $460 $1,031 $1,432 $289 ====================================================================== PER SHARE AMOUNTS Earnings before cumulative effect of a change in accounting principle $0.24 $0.13 $0.32 $0.47 $0.12 Cumulative effect of a change in accounting principle - - - 0.07 - ---------------------------------------------------------------------- Net earnings $0.24 $0.13 $0.32 $0.54 $0.12 ---------------------------------------------------------------------- Weighted average common shares outstanding 3,500 3,500 3,256 2,661 2,390 ---------------------------------------------------------------------- BALANCE SHEET DATA Working capital $6,760 $7,587 $8,400 $2,969 $1,947 Total assets 22,930 18,136 14,072 11,485 8,386 Notes payable to bank 7,123 3,667 647 549 706 Long term obligations, less current maturities 913 1,051 1,368 729 915 Redeemable common stock - - - 8,131 4,861 Stockholders' equity (deficit) 10,448 9,520 9,060 (4,229) (2,527)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL 1996 marked the sixth consecutive year of sales increases for the Company. Sales increased .2% in 1991, 19.8% in 1992, 25.2% in 1993, 29.8% in 1994, 1.6% in 1995 and 34.6% in 1996. In December of 1993, the Company purchased an additional manufacturing plant in Milbank, South Dakota. In September, 1995, the Company leased an additional manufacturing plant in Platte, South Dakota to manufacture Polarfleece(R) throws. In the Spring of 1996, the Company began to lease an additional manufacturing plant in Redfield, South Dakota to manufacture Polarfleece(R) throws, blankets and other bedcovering items. In the Fall of 1996, the Company began a 32,000 square foot expansion of its main manufacturing facility in Webster, South Dakota. The move into this expansion will be completed before the end of the first quarter of 1997 and the Company will no longer lease the current Webster, South Dakota, warehouse and distribution facility. These expansions, along with the purchase of additional equipment and the reconfiguration of the Webster, South Dakota manufacturing facilities, should allow the Company adequate flexibility and capacity to satisfy projected sales volume in 1997. RESULTS OF OPERATIONS: Statements of earnings data as a percent of net sales: ------------------------------- Year Ended December 31, 1996 1995 1994 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Gross profit 26.4 27.2 26.4 Selling expenses 13.2 14.1 12.7 General and administrative expenses 9.0 10.3 8.2 Operating profit 4.2 2.8 5.5 Interest expense 1.5 .8 .5 Earnings before income taxes 3.0 2.3 5.2 Net earnings 2.0 1.5 3.4 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Net sales increased from $30.4 million in 1994 to $30.9 million in 1995 and to $41.6 million in 1996. The 1996 net sales increase was due primarily to the sales growth of the Company's Polarfleece(R) line of products, pillow products, bedcoverings and accessories, and cotton throws. Only the Company's table linen products and footstool products did not experience growth. The 1995 net sales increase of Polarfleece(R) products was mostly offset by a decrease in the sales of cotton throws, the Company's decision to cease doing business with a significant customer and the Company's decision to cease the manufacture of quilted bedcoverings. The decision to cease doing business with this significant customer was generally due to unsatisfactory profit margins. Additionally, during the first and second quarters of 1995, sales declined 17% from the same period in 1994 primarily due to a general slowdown in the Home Fashion Textile Industry. Gross profit margins were 26.4% in 1996, 27.2% in 1995, and 26.4% in 1994. In 1996, the gross margin was negatively affected by the start-up of the Redfield manufacturing facility and changing product mix. The Polarfleece(R) line of products have a higher percentage of sales related to raw materials which reduces gross margins. Although the cost of fiberfill decreased in 1996, substantially all of this cost savings was passed on to the Company's customers. In 1995, the gross margin was negatively affected by the lower sales and pricing pressure during the first seven months of the year, polyester fiberfill cost increases, and the startup of Polarfleece(R) throw manufacturing in Webster and Platte, South Dakota. Selling expenses were $5.5 million in 1996, $4.3 million in 1995 and $3.8 million in 1994. Selling expenses during 1996 increased primarily due to the additional personnel and related expenses to support higher sales, including the addition of a Vice President-Corporate Sales, and the expenses related to the development of new markets and distribution channels for the Company's products. Selling expenses were also higher because of costs directly related to higher sales, such as commissions and shipping expenses. Selling expenses as a percentage of net sales were 13.2% in 1996, 14.1% in 1995, and 12.7% in 1994. Selling expenses decreased as a percentage of sales in 1996 due to increased sales. Selling expenses during 1995 were higher, in part, due to higher sales commissions related to replacing the business from the former significant customer with commissioned sales, additional expenses related to the development of additional sales and marketing tools, expanded Trade Show participation, and the Company's expansion of its showroom in the Atlanta Merchandise Mart. General and administrative expenses were $3.7 million in 1996, $3.2 million in 1995, and $2.5 million in 1994. General and administrative expenses increased in 1996 from 1995 due to increased administrative and management staff to support higher sales, computer expenses related to the planned 1997 computer software conversion and higher product development expenses. General and administrative expenses, as a percent of net sales, were 9.0% in 1996, 10.3% in 1995, and 8.2% in 1994. General and administrative expenses decreased as a percentage of sales in 1996 due to increased sales. General and administrative expenses increased in 1995 as compared to 1994, primarily as the result of the following: $300,000 due to the addition of senior management and other administrative personnel, $150,000 due to expenses related to the Company's purchase and implementation of new computer, information and communication systems, $170,000 due to increased bad debt expense, $150,000 due to the addition of design staff and related costs, and $80,000 due to increased professional fees. The Company accrued $464,000 in 1994 under the officers' stock appreciation program. No additional compensation expense was accrued after 1994 relating to this program as it was terminated upon the effectiveness of the Company's initial public stock offering in 1994. Interest expense was $613,000 in 1996, $241,000 in 1995, and $173,000 in 1994. The increase in 1996 was due to the increased use of the Company's revolving line of credit to finance 1996 capital expenditures and working capital needs. The effective income tax rate was 32.8% in 1996, 35.8% in 1995, and 34.8% in 1994. The lower rate in 1996 was primarily due to the Company's donation of obsolete fabric and second quality product to certain charities. LIQUIDITY AND CAPITAL RESOURCES: The Company had cash and cash equivalents of $3,000 as of December 31, 1996, $477,000 as of December 31, 1995 and $576,000 as of December 31, 1994. Working capital was $6.8 million as of December 31, 1996, $7.6 million as of December 31, 1995 and $8.4 million as of December 31, 1994. The 1996 decrease in cash and cash equivalents and in working capital was primarily due to the use of cash and cash equivalents and the Company's line of credit to finance 1996 capital expenditures. In the first quarter of 1997, the Company refinanced over $900,000 of the capital expenditures with low-interest loans from the State of South Dakota and the Northeast South Dakota Energy Conservation District. The 1995 decrease in working capital from 1994 was due primarily to the financing of 1995 capital expenditures with a term note obligation that is classified as a current liability. The net cash used in operating activities and investing activities during 1996 was primarily financed from net borrowings under the Company's revolving line of credit. The net cash used in operating and investing activities are primarily related to the increase in sales and manufacturing capacity during 1996. The net cash used in operating activities and investing activities during 1995 was primarily financed from net borrowings under the Company's revolving line of credit. The net cash used in operating and investing activities are primarily related to the increase in manufacturing capacity during 1995 and the increase in sales during the fourth quarter of 1995 as compared to the same period of 1994. Accounts receivable were $7,500,000 as of December 31, 1996, $6,400,000 as of December 31, 1995, and $4,800,000 as of December 31, 1994. The increase in 1996 was due to increased sales during the fourth quarter of 1996 as compared to the same period of 1995. The increase in 1995 was due to increased sales during the fourth quarter of 1995 as compared to the same period of 1994. Inventories were $9,600,000 as of December 31, 1996, $7,400,000 as of December 31, 1995, and $5,900,000 as of December 31, 1994. The increases in 1996 and 1995 were primarily due to increased raw material and finished goods inventory of Polarfleece(R). The Company has used and expects to continue to use its revolving line of credit to meet its short-term working capital requirements. During 1996, the Company renegotiated its credit facility. The new credit facility, which expires August 1998, consists of a revolving note and a term note. The total amount available under the revolving note, which is due on demand, is limited to the lesser of $9 million or a defined borrowing base of eligible accounts receivable and inventory. The term note is due on demand and requires monthly principal payments of $20,833. Inventory advances under the revolving note, as defined in the agreement, provide for monthly interest payments at 2% above the bank's prime rate (effectively 10.25% at December 31, 1996). The term note and other advances under the revolving note provide for monthly interest payments at 1.5% above the bank's prime rate (effective rates of 9.75% and 10% at December 31, 1996 and 1995). Both notes are collateralized by accounts receivable, inventory, equipment, and general intangibles. The outstanding balances on the revolving note and term note were $6,415,000 and $708,000 at December 31, 1996. The outstanding balances on the revolving note and term note were $2,708,000 and $958,000 at December 31, 1995. For the year ended December 31, 1996, the Company's capital expenditures were $2,381,000. The 1996 capital expenditures include $1,891,000 to expand manufacturing capacity, upgrade existing buildings and additional production equipment and $399,000 to upgrade the Company's computer system. For the year ended December 31, 1995, the Company's capital expenditures were $1,061,000. The 1995 capital expenditures include $724,000 to expand manufacturing capacity, upgrade existing buildings, and additional production equipment and $302,000 to upgrade the Company's computer system. For the year ended December 31, 1994, the Company's capital expenditures were $337,000. The Company expects to spend an aggregate of approximately $1,000,000 in 1997 to expand capacity and to up-grade existing buildings and production equipment. In addition, the Company expects to spend between $250,000 and $400,000 to continue the upgrade and expansion of the Company's computer system. The Company is pursuing long term financing for its 1997 planned capital expenditures and for capital expenditures previously financed through its revolving line of credit. Upon termination of the officers' stock appreciation program, the Company became indebted to the Company's President and a former Executive Vice President in the aggregate amount of $1,318,000. As of December 31, 1996, the total outstanding indebtedness was $461,000 compared to $923,000 at December 31, 1995 and $1,186,000 at December 31, 1994. This indebtedness bears interest at 6% per annum and is payable in varying installments through January 1998. The Company believes that cash flows generated from operations and funds available as a result of its borrowing capacity will be adequate to meet its short-term working capital, projected capital expenditures and other financing needs. FORWARD LOOKING STATEMENTS With the exception of historical information, the matters discussed or incorporated by reference in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties including, but not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development, availability of raw materials, new plant startups, financing needs or plans, intellectual property rights, and other risks indicated in filings with the Securities and Exchange Commission. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following financial statements and schedules relating to the Company are included herein:
Financial Statements: Report of Independent Certified Public Accountants...............................................28 Balance Sheets at December 31, 1996 and 1995.....................................................29 Statements of Earnings for years ended December 31, 1996, 1995 and 1994..........................30 Statements of Changes in Stockholders' Equity (Deficit) for years ended December 31, 1996, 1995 and 1994.........................................................................31 Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994........................32 Notes to Financial Statements....................................................................33 Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for years ended December 31, 1996, 1995 and 1994 ...................................................................................43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of Dakotah are as follows:
Director Name Since Age Positions With The Company ---- ----- --- -------------------------- George C. Whyte(1) 1980 47 President and Chairman of the Board of Directors Troy Jones, Jr. (1) 1994 36 Chief Executive Officer, Treasurer and Director James D. Becker(2) 1990 36 Mechanic, Director Dorothy A. Benson(2) 1986 52 Product Development Specialist, Director Gary L. Conradi (1,2,3) 1984 57 Vice Chairman of the Board of Directors Michael G. Grosek(1,3) 1991 41 Director Linda J. Laskowski(2) 1994 47 Director Leo T. Reynolds(3) 1995 51 Director Lee A. Schoenbeck(1,2) 1993 38 Secretary, Director Daniel F. Harper -- 42 Vice President, Corporate Sales Georgie Olson Harper -- 42 Vice President, National Sales
---------------------------------------- (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee GEORGE C. WHYTE is a founder of the Company and has been its Chairman of the Board of Directors since June 1988. Mr. Whyte also served as President from the Company's inception to June 1988 and from April 1991 to the present, and as Chief Executive Officer from June 1988 to January 1995. He was elected to the Board of Directors in July 1980. TROY JONES, JR. was elected to the Board of Directors in August 1994, elected Chief Executive Officer in January 1995 and elected Treasurer in June 1996. Mr. Jones has been President of Orion Financial Corp. of South Dakota since July 1993. For more than six years prior to that, he was Director of Finance in the South Dakota Governor's Office of Economic Development. JAMES D. BECKER was elected to the Board of Directors in July 1990. He has been a sewing machine mechanic for the Company since April 1988. DOROTHY A. BENSON was elected to the Board of Directors in July 1986. From July 1993 to the present, she has been a Product Development Specialist for the Company. Ms. Benson, a Company associate since July 1983, has worked in various other Company positions including as a Pattern Maker and Data Design Specialist. GARY L. CONRADI was elected to the Board of Directors in 1984 and serves as the Vice Chairman of the Board of Directors. Since 1980, Mr. Conradi has served as the Vice President of Corporate Services for Raven Industries, Inc., a manufacturer of specialized plastics, electronics and apparel. MICHAEL G. GROSEK was elected to the Board of Directors in July 1991. Mr. Grosek has been the Mayor of the City of Webster, South Dakota since 1985. For more than five years, he has also owned and operated Mike's Jack & Jill, a supermarket in Webster, South Dakota. LINDA J. LASKOWSKI was elected to the Board of Directors in August 1994. Ms. Laskowski has been with U.S. West Communications since 1987, as Vice President and General Manager of Information Provider Market until October 1991, as Chief Executive Officer of CLM Associates (a joint venture between U.S. West Communications and France Telecom) from October 1991 to January 1994, as Vice President - South Dakota from March 1993 to December, 1996, and as Vice President of Telephony of Continental Cablevision (which was acquired by U.S. West in 1996) since January, 1997. LEE A. SCHOENBECK returned to the Board of Directors in December 1993, having previously served on the Board of Directors from July 1985 through July 1991. Mr. Schoenbeck has served as Secretary of the Company since October, 1995 and served as Treasurer from October 1995 to June 1996. Mr. Schoenbeck has been an attorney in Webster, South Dakota since 1984, and currently provides services as outside General Counsel to the Company. GEORGIE OLSON HARPER has been the Company's Vice President of National Sales since February 1996 and National Sales Manager from April 1991 through January 1996. Ms. Olson Harper, a Company associate since 1975, has worked in various other Company positions including Contract Sales Manager and Customer Service Manager. In February, 1996, Ms. Harper was promoted to Vice President - National Sales. DANIEL F. HARPER has been the Company's Vice President of Corporate Sales since joining the Company in February 1996. For approximately 20 years prior to joining the Company, Mr. Harper worked for HW Baker Company, Incorporated, a distributor of textile products, most recently as a vice president. LEO T. REYNOLDS was elected to the Board of Directors in December 1995. Mr. Reynolds is the President of Electronic Systems, Inc., a electronics manufacturing company. Pursuant to the Company's Articles of Incorporation, the Board of Directors is divided into three classes serving staggered three-year terms expiring at each successive annual meeting of stockholders. The officers of the Company are appointed by the Board of Directors and hold office until their successors are chosen and qualified. CERTAIN FILINGS Section 16(a) of the 1934 Act requires the Company's directors, executive officers, and persons who own more than ten percent of the common Stock of the Company to file with the Securities and Exchange Commission ("Commission") initial reports of beneficial ownership and reports of changes in beneficial ownership of common shares of the Company. directors, officers, and greater than ten percent shareholders are required by the regulations of the Commission to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 1996, all required reports were filed timely with the exception of initial statements of beneficial ownership for Daniel Harper and Georgie Olson Harper. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth certain information for the Company's fiscal years ended December 31, 1996, 1995, and 1994 regarding compensation earned by or awarded to the Company's Chairman, Chief Executive Officer, and Vice President - National Sales, the only executive officers whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers").
ANNUAL COMPENSATION ($) ------------------------------------- LONG-TERM COMPENSATION NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTION ALL OTHER POSITION YEAR SALARY BONUS(1) COMPENSATION AWARDS(#) COMPENSATION ($) -------- ---- ------ ----- ------------ --------- ---------------- George C. Whyte 1996 145,000 29,000 -0- 100,000 -(2) President and 1995 141,000 58,000 -0- 25,000 1,545(3) Chairman of the 1994 136,650 -0- -0- 184,300 309,333(4) Board Troy Jones, Jr.(5) Chief Executive 1996 -0- -0- 150,000 242,745 -0- Officer 1995 -0- -0- 200,000 100,000 -0- Georgie Olson Harper(6) Vice President - 1996 94,100 17,500 -0- -0- -(2) National Sales
- ----------------------- (1) Cash bonuses have been included as compensation for the year earned, calculated in accordance with the terms of the individual's incentive compensation plan, even though actually paid in the subsequent year. (2) For 1996 the Company contributed a total of $59,000 for all employees to the Company's Profit Sharing Plan. As of the date of filing this report this contribution had not been allocated and accordingly no portion of this contribution is included herein. (3) Consists of the value of the cash contributions to the Company's Profit Sharing Plan allocated to the executive officer . (4) Includes the amount earned on stock appreciation rights granted pursuant to deferred compensation agreements. See "Stock Appreciation Rights Plan." (5) All compensation for Mr. Jones' service to the Company is paid to Orion Financial Corporation of South Dakota ("Orion"). The Company has engaged Orion to provide such services. Mr. Jones is the President and controlling shareholder of Orion. (6) Ms. Harper became an executive officer of the Company on February 12, 1996. OPTIONS GRANTED DURING FISCAL 1996 The following table provides information relating to options granted to the Named Executive Officers during the Company's fiscal year ended December 31, 1996:
INDIVIDUAL GRANTS ----------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE OPTIONS PERCENT OF TOTAL EXERCISE AT ASSUMED ANNUAL RATES GRANTED OPTIONS GRANTED IN PRICE EXPIRATION OF STOCK PRICE NAME (#)(1) FISCAL YEAR (#/SH) ($)(2) DATE APPRECIATION FOR OPTION TERM 5%($)(3) 10%($)(3) ----------------------------------------------------------------------------------------- George C. Whyte(4) ........ 100,000 25.6% $4.75 9/16/03 131,000 290,000 Troy Jones, Jr.(5)(6)...... 242,745 62.1% 3.88 12/31/00 259,737 725,808
(1) The number indicated is the number of shares of Common Stock that can be acquired upon exercise of the option. The Company has not granted any stock appreciation rights. (2) Exercise prices are equal to the fair market value at the date of grant. (3) The assumed 5% and 10% annual rates of appreciation are hypothetical rates selected by the Securities and Exchange Commission and are not intended to, and do not, forecast or assume actual future stock prices. (4) The options vest annually in five equal installments beginning September 16, 1997. (5) One third of these options is exercisable on January 1 of 1997, 1998 and 1999. (6) These options are issued in the name of Orion. AGGREGATED OPTION EXERCISES DURING FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES The following table provides information related to the number and value of options held by the Named Executive Officers as of December 31, 1996. The Company does not have any outstanding stock appreciation rights.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT ACQUIRED ON VALUE YEAR-END (#) FISCAL YEAR-END ($)(2) NAME EXERCISE (#)(1) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ($)(1) ----------------- ------------- ------------------------ ----------------------------- George C. Whyte -0- -0- 209,300 / 100,000 17,188 / -0- Troy Jones, Jr. (3) -0- -0- 100,000 / 242,745 68,750 / 106,201 Georgie Olson Harper -0- -0- 6,000 / 34,000 4,110 / 24,540
(1) See "Stock Appreciation Right Plan" for a description of the termination of certain stock appreciation rights. (2) Options are "in-the-money" if the fair market value of the underlying shares at fiscal year end is greater than the exercise price. (3) These options are issued in the name of Orion. 1995 STOCK OPTION PLAN The 1995 Stock Option Plan ("1995 Plan") was approved by the Board of Directors, effective December 19, 1995 and by the shareholders on June 12, 1996. All employees and consultants of the Company, including officers and directors, are eligible to receive options under the 1995 Plan. The 1995 Plan authorizes the granting of options to purchase up to 800,000 shares of Common Stock. The 1995 Plan provides both for incentive stock options specifically tailored to the provisions of the Internal Revenue Code of 1986 and for options not qualifying as incentive options. The 1995 Plan is administered by a committee of the Board of Directors. The 1995 Plan generally does not specify the terms and conditions of options to be granted under the Plan, and options issued shall be exercisable at such times and subject to such restrictions and conditions as the committee shall in each instance approve. The 1995 Plan further provides that upon the occurrence of certain "acceleration events" the options will become fully vested. An acceleration event occurs (i) when a person, or group of persons acting together, becomes the beneficial owner of 30 percent or more of the Company's outstanding shares; (ii) when a change in majority of the Board occurs without the approval of at least 60% of the prior Board; or (iii) the approval by stockholders of a sale of all or substantially all the assets or of a liquidation or dissolution of the Company. STOCK APPRECIATION RIGHTS PLAN Effective January 19, 1990, the Company entered into a deferred compensation agreement with George C. Whyte providing for the award of stock appreciation rights ("SARs"). In general, Mr. Whyte was entitled to the appreciation in the value of the Common Stock on the date of exercise of the SARs over the value of the Common Stock on the date of award. The SARs were two-thirds vested as of December 31, 1993 and would have been fully vested as of December 31, 1994. The Company entered into an agreement with Mr. Whyte to terminate his deferred compensation agreements effective upon the date of the Company's public offering which was March 23, 1994. The agreement provided that the SARs were fully vested as of the date of the public offering and fixed the amounts earned under the SARs based on the initial public offering price of $5.125. As a result of the agreement fixing the amount owed pursuant to the SARs, Mr. Whyte was issued, effective upon the date of the public offering, a promissory note in the principal amount of $878,666. The indebtedness bears interest at six percent per annum and is payable in varying installments through January 1998. The termination agreement also provided for the grant of options, with a term of five years and exercise price of $5.125 per share, to purchase 184,300 shares of Common Stock to Mr. Whyte. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with George C. Whyte. The Agreement provides for an initial term of employment ending on December 31, 2001, annual compensation, annual percentage increases in base salary, and participation in bonus and benefit plans of the Company in effect from time to time. In connection with the Agreement, Mr. Whyte was granted an option to purchase 100,000 shares of the Company's Common Stock. The Agreement also provides that the Company shall make available to Mr. Whyte a loan to fund a portion of the exercise price of such options. The Agreement terminates automatically upon the death of the employee and the Company may terminate the agreement only for cause (as defined in the agreement). Subject to certain conditions and exceptions, the Agreement provides that Mr. Whyte may not compete with the Company in the United States nor solicit any of its customers or employees for a period of one year following termination of his employment. EMPLOYEE PROFIT SHARING PLAN Effective January 1, 1988, the Company adopted the Dakotah, Incorporated Employee Profit Sharing Plan (the "Plan"). In general, all employees who are not covered by a collective bargaining agreement are eligible to participate in the Plan after completing one year of service as defined in the Plan. Plan benefits are 100% vested at the completion of five years of service. Prior to the completion of five years of service there is no vesting. The Plan also provides for 100% vesting at the normal retirement date or upon death or disability of the participant. Contributions to the Plan are determined each year by the Board of Directors at its discretion, but are limited to maximum permissible amounts as defined in the Plan. Contributions to the Plan may be made in the form of shares of the Company's Common Stock, valued at their fair market value, or cash. The Company may direct that contributions made in cash will be used to purchase Company Stock in the open market. Contributions to the Plan are allocated among eligible participants in the proportion of each participant's salary to the total salaries of all participants for the year in which the contribution was made, and are held in trust until each participant's retirement, disability, death or other termination of employment. All future distributions shall be made in Common Stock, unless the recipient elects to receive cash. The Company administers the Plan. First American Trust is the Trustee of the Plan. A $75,000 cash contribution was made for the year ended December 31, 1994. For 1996 and 1995, cash contributions of $59,000 and $50,000 were made which the Company directed be used to purchase the Company's issued and outstanding Common Stock. DIRECTOR COMPENSATION Effective January 1, 1995, a new director's compensation plan was approved by the Executive Committee of the Board of Directors which provides that each director who is not employed by the Company will receive $550 per Board or committee meeting held in person, will receive $300 for any such meeting held by telephone conference, and will receive an annual retainer of either $1,500 (for executive committee members) or $1,000 (for other outside directors). Each employee director who is not an officer will receive $150 per Board or committee meeting. Travel expenses for directors will continue to be reimbursed. 1996 STOCK OPTION PLAN FOR DIRECTORS The 1996 Stock Option Plan for Directors ("Director Plan") was approved by Board of Directors effective May 9, 1996 and by the shareholders on June 12, 1996. The Director Plan provided that effective upon approval of the Director Plan to the shareholders that each director who is not an officer of the Company would receive an option to purchase 4,000 shares. For purposes of the Director Plan, the director who is also the secretary of the Company is not considered an "officer". A person not currently a member of the Board of Directors will receive an option to purchase 4,000 shares upon his or her initial election as a director. On the date of each subsequent annual meeting of shareholders, each director will receive an additional option to purchase 2,000 shares; provided that such director has received no other option under the Director Plan during the immediately preceding six month period. The exercise price of all options under the Director Plan is equal to the fair market value on the grant date, and each option will be fully vested on the grant date. If an optionee ceases to serve as a director of the Company for any reason other than death, disability of for cause, the option may be exercised subject to the expiration date of the option for three months after such termination. If the director is terminated because of death and disability the option may be exercised for up to one year after such termination. If the director is terminated for cause, all unexercised options shall terminate immediately. The Director Plan authorizes the granting of options to purchase up to 100,000 shares of Common Stock. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the number of shares of Common Stock beneficially owned by: (i) each person or entity known by the Company to own 5% or more of the Company's Common Stock; (ii) each director of the Company (iii) named Executive Officer; and (iv) all executive officers and directors as a group. All persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned unless otherwise noted. The number of shares listed is as of March 24, 1997.
PERCENT OF NUMBER OF SHARES OUTSTANDING NAME AND ADDRESS BENEFICIALLY OWNED SHARES - ---------------- ------------------ ------ Dakotah Incorporated Employee Profit Sharing Plan 1,669,969 42.7% First American Trust, Trustee One North Park Lane Webster, South Dakota 57274 Heartland Advisors, Inc. 368,000 9.4% 790 North Milwaukee Street Milwaukee, Wisconsin 53202 George C. Whyte(1,2) 396,597 10.1% One North Park Lane Webster, South Dakota 57274 Troy Jones, Jr.(3) 180,915 4.6% One North Park Lane Webster, South Dakota 57274 James D. Becker(1,4) 9,409 .2% One North Park Lane Webster, South Dakota 57274 Dorothy A. Benson(1,5) 13,568 .3% One North Park Lane Webster, South Dakota 57274 Gary L. Conradi(6) 7,200 .2% 205 East Sixth Sioux Falls, South Dakota 57102 Michael G. Grosek(7) 6,000 .2% P.O. Box 543 Webster, South Dakota 57274 Linda J. Laskowski(8) 6,000 .2% One North Park Lane Webster, South Dakota 57274 Leo T. Reynolds(9) 4,000 .1% One North Park Lane Webster, South Dakota 57274 Lee A. Schoenbeck(10) 18,400 .5% One North Park Lane Webster, South Dakota 57274 Georgie Olson Harper(11) 47,548 1.2% One North Park Lane Webster, South Dakota 57274 All executive officers and directors as a group 672,970 17.1% (11 persons)(1,2,3,4,5,6,7,8,9,10,11) - --------------------
(1) Includes shares allocated to the person's or group's account in the Employee Profit Sharing Plan. (2) Includes 209,300 shares issuable upon exercise of outstanding options, 58,831 shares allocated to Mr. Whyte in the Employee Profit Sharing Plan, 2,233 shares owned directly by Mr. Whyte's wife and 25,488 shares allocated to Mr. Whyte's wife in the Employee Profit Sharing Plan. (3) Includes 180,915 shares issuable upon exercise of an outstanding option. (4) Includes 4,500 shares issuable upon exercise of an outstanding option, and 4,832 shares allocated to Mr. Becker in the Employee Profit Sharing Plan. (5) Includes 4,500 shares issuable upon exercise of an outstanding option, and 7,915 shares allocated to Ms. Benson in the Employee Profit Sharing Plan. (6) Includes 6,000 shares issuable upon exercise of an outstanding option. (7) Includes 6,000 shares issuable upon exercise of an outstanding option. (8) Includes 5,000 shares issuable upon exercise of an outstanding option. (9) Includes 4,000 shares issuable upon exercise of an outstanding option. (10) Includes 6,000 shares issuable upon exercise of an outstanding option, 11,000 shares held in Mr. Schoenbeck's IRA and 600 shares held by Mr. Schoenbeck as custodian for his children. (11) Includes 6,000 shares issuable upon exercise of outstanding options, 38,091 shares allocated to Ms. Harper in the Employee Profit Sharing Plan and 1,000 shares owned directly by Ms. Harper's spouse. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS: The following financial statements of the Company are incorporated herein by reference as part of this report at Item 8. Report of Independent Certified Public Accountants Balance Sheets at December 31, 1996 and 1995 Statements of Earnings for years ended December 31, 1996, 1995 and 1994 Statements of Changes in Stockholders' Equity (Deficit) for years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994 Notes to Financial Statements 2. FINANCIAL STATEMENTS SCHEDULES: The following financial statement schedule of the Company is incorporated herein by reference as part of this report at Item 8. Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1996, 1995 and 1994 3. LISTING OF EXHIBITS:
EXHIBITS DESCRIPTION PAGE -------- ----------- ---- 3.1 Articles of Incorporation (Exhibit 3.1)(1) --- 3.2 Bylaws (Exhibit 3.2)(1) --- 4.2 Form of Representative's Warrant to Purchase Common Stock --- 10.1 Amended and Restated Credit and Security Agreement dated August --- 17, 1995 with Norwest Business Credit, Inc. (Exhibit 10.1)(5) 10.2 First Amendment dated October 5, 1995 to Amended and Restated --- Credit and Security Agreement with Norwest Business Credit, Inc. (Exhibit 10.2)(5) 10.3 Second Amendment dated November 15, 1995 to Amended and Restated --- Credit and Security Agreement with Norwest Business Credit, Inc. (Exhibit 10.3)(5) 10.4 Third Amendment dated March 15, 1996 to Amended and Restated 44 Credit and Security Agreement with Norwest Business Credit, Inc. 10.5 Fourth Amendment dated June 18, 1996 to Amended and Restated 49 Credit and Security Agreement with Norwest Business Credit, Inc. 10.6 Fifth Amendment dated July 11, 1996 to Amended and Restated Credit 52 and Security Agreement with Norwest Business Credit, Inc. 10.7 Sixth Amendment dated September 11, 1996 to Amended and Restated 59 Credit and Security Agreement with Norwest Business Credit, Inc. 10.8 Seventh Amendment dated January 17, 1997 to Amended and Restated 66 Credit and Security Agreement with Norwest Business Credit, Inc. 10.9 Promissory Note dated December 31, 1995 with the State of South --- Dakota Board of Economic Development (Exhibit 10.5)(5) 10.10 Promissory Note, Mortgage and Agreement Relating to Employment --- dated February 17, 1994, between the Company and South Dakota Board of Economic Development (Exhibit 10.13)(3) 10.11 Loan Agreement dated December 2, 1974, among the Small Business --- Administration, Webster Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.13)(1) 10.12 Loan Agreement dated September 29, 1976, among the Small Business --- Administration, Webster Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.14)(1) 10.13 Lease Purchase Agreement dated November 26, 1974, between Webster --- Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.15)(1) 10.14 Lease Purchase Agreement dated September 29, 1976, between Webster --- Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.16)(1) 10.15 Lease Purchase Agreement dated June 1, 1977, between Veblen --- Development Corporation and the Company (Exhibit 10.17)(1) 10.16 Amended and Restated Deferred Compensation Agreement (Phantom --- Stock) dated May 1, 1993, but effective as of January 1, 1990, between the Company and Terry G. Sampson (Exhibit 10.18)(1)(2) 10.17 Amended and Restated Deferred Compensation Agreement dated May 1, --- 1993, but effective as of January 1, 1990, between the Company and George C. Whyte, Jr. (Exhibit 10.19)(1)(2) 10.18 Form of Nonqualified Stock Option (Exhibit 10.20)(1) --- 10.19 Employment Agreement dated January 31, 1994, between the Company --- and George C. Whyte (Exhibit 10.23)(1)(2) 10.20 Employment Agreement dated January 31, 1994, between the Company --- and Terry G. Sampson (Exhibit 10.24)(1)(2) 10.21 Description of 1996 Incentive Compensation Plans(2) --- 10.22 Form of Nonstatutory Option Agreement for Directors (Exhibit --- 10.1)(4) 10.23 Nonstatutory Option Agreement with George C. Whyte dated effective --- May 25, 1995 (Exhibit 10.2)(2)(3)(4) 10.24 Nonstatutory Option Agreement with Orion Financial Corporation of --- South Dakota dated effective January 27, 1995 (Exhibit 10.3)(2)(4) 10.25 Form of Officer and Director Indemnification Agreement (Exhibit --- 10.26)(1)(2) 10.26 Dakotah, Incorporated Employee Profit Sharing Plan, as amended --- through March 1995 (Exhibit 10.22)(2)(5) 10.27 Dakotah, Incorporated 1995 Stock Option Plan (Exhibit 10.1)(2)(6) --- 10.28 Dakotah, Incorporated 1996 Stock Option Plan for Directors --- (Exhibit 10.2)(2)(6) 10.29 Dakotah, Incorporated Nonstatutory Option Agreement Under the 1995 --- Stock Option Plan Between the Company and Orion Financial Corp. dated effective January 1, 1996 (Exhibit 10.3)(2)(6) 10.30 Employment Agreement dated January 1, 1997, between the Company 71 and George C. Whyte(2) 23.1 Consent of Grant Thornton LLP 76 24.1 Powers of Attorney (included in Signature Page) --- 27.1 Financial Data Schedule
(1) Incorporated herein by reference to the specified exhibit to the Registration Statement on Form SB-2, Reg. No. 33-74766-D. (2) Indicates management contracts, compensation plans or arrangements required to be filed as exhibits. (3) Incorporated herein by reference to the specified exhibit to the Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994. (4) Incorporated herein by reference to the specified exhibit in the Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995. (5) Incorporated herein by reference to the specified exhibit to the Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995. (6) Incorporated herein by reference to the specified exhibit in the Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (b) Registrant was not required to file a report on Form 8-K during the fourth quarter ended December 31, 1996. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAKOTAH, INCORPORATED Date: March 27, 1997 /s/ Troy Jones, Jr. -------------------- Troy Jones, Jr., Chief Executive Officer KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Troy Jones, Jr., George C. Whyte and Lee A. Schoenbeck, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof. In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ George C. Whyte President and Chairman of the Board of Directors March 27, 1997 - ---------------------- George C. Whyte /s/ Troy Jones, Jr. Chief Executive Officer, Treasurer and Director March 27, 1997 - ---------------------- (Principal Financial and Accounting Officer) Troy Jones, Jr. /s/ Leo T. Reynolds Director March 27, 1997 - ---------------------- Leo T. Reynolds /s/ James D. Becker Director March 27, 1997 - ---------------------- James D. Becker /s/ Dorothy A. Benson Director March 27, 1997 - ---------------------- Dorothy A. Benson /s/ Gary L. Conradi Vice Chairman of Board of Directors, Director March 27, 1997 - ---------------------- Gary L. Conradi /s/ Michael G. Grosek Director March 27, 1997 - ---------------------- Michael G. Grosek /s/ Linda J. Laskowski Director March 27, 1997 - ---------------------- Linda J. Laskowski /s/ Lee A. Schoenbeck Secretary, Director March 27, 1997 - ---------------------- Lee A. Schoenbeck
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Dakotah, Incorporated We have audited the accompanying balance sheets of Dakotah, Incorporated as of December 31, 1996 and 1995, and the related statements of earnings, changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dakotah, Incorporated as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. We have also audited Schedule II for each of the three years in the period ended December 31, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Minneapolis, Minnesota February 28, 1997
DAKOTAH, INCORPORATED BALANCE SHEETS DECEMBER 31, ASSETS 1996 1995 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 2,690 $ 477,330 Accounts receivable, less allowance for doubtful accounts of $382,000 and $324,000 in 1996 and 1995 7,538,724 6,365,606 Inventories 9,555,897 7,364,035 Prepaid expenses and other 735,929 477,507 Deferred income taxes 496,000 467,000 ----------- ----------- Total current assets 18,329,240 15,151,478 PROPERTY, PLANT AND EQUIPMENT - NET 3,907,030 2,209,485 OTHER ASSETS Deferred income taxes 185,000 349,000 Other 508,690 425,869 ----------- ----------- $22,929,960 $18,135,832 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to bank $ 7,123,000 $ 3,666,796 Current maturities of long-term obligations, including $332,139 and $234,077 to related parties in 1996 and 1995 482,835 577,152 Accounts payable 2,134,845 2,253,281 Accrued liabilities Compensation and related benefits 925,739 654,036 Other 716,217 413,025 Income taxes payable 187,079 - ----------- ----------- Total current liabilities 11,569,715 7,564,290 LONG-TERM OBLIGATIONS, less current maturities, including $129,162 and $572,062 to related parties in 1996 and 1995 912,585 1,051,487 COMMITMENTS - - STOCKHOLDERS' EQUITY Common stock, par value $.01, 10,000,000 shares authorized; 3,499,755 shares issued and outstanding 34,998 34,998 Additional contributed capital 6,904,156 6,804,156 Retained earnings 3,508,506 2,680,901 ----------- ----------- 10,447,660 9,520,055 ----------- ----------- $22,929,960 $18,135,832 =========== ===========
The accompanying notes are an integral part of these statements.
DAKOTAH, INCORPORATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Net sales $ 41,559,597 $ 30,884,081 $ 30,401,805 Costs of goods sold 30,599,183 22,485,346 22,376,413 ------------ ------------ ------------ Gross profit 10,960,414 8,398,735 8,025,392 Operating expenses Selling 5,501,681 4,347,309 3,842,286 General and administrative 3,727,231 3,194,235 2,503,707 ------------ ------------ ------------ 9,228,912 7,541,544 6,345,993 ------------ ------------ ------------ Operating profit 1,731,502 857,191 1,679,399 Other income (expense) Interest expense (612,717) (241,285) (172,965) Gain on sale of equipment 109,700 56,210 44,631 Other 3,120 43,923 29,839 ------------ ------------ ------------ (499,897) (141,152) (98,495) ------------ ------------ ------------ Earnings before income taxes 1,231,605 716,039 1,580,904 Income taxes 404,000 256,000 550,000 ------------ ------------ ------------ NET EARNINGS $ 827,605 $ 460,039 $ 1,030,904 ============ ============ ============ Net earnings per share $ .24 $ .13 $ .32 ============ ============ ============ Weighted average common shares outstanding 3,499,755 3,499,755 3,255,919 ============ ============ ============
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Obligation for Total Common Stock Additional redeemable stockholders' ------------ contributed Retained common equity Shares Amount capital earnings stock (deficit) ------------ ------------ ------------ ------------ ------------ ------------ Balance at January 1, 1994 259,630 $ 2,596 $ 279,509 $ 1,189,958 $ (5,700,720) $ (4,228,657) Elimination of Company's obligation to redeem common 2,240,125 22,402 2,408,078 - 5,700,720 8,131,200 stock Issuance of common stock in initial public offering, net 1,000,000 10,000 4,116,569 - - 4,126,569 Net earnings - - - 1,030,904 - 1,030,904 ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1994 3,499,755 34,998 6,804,156 2,220,862 - 9,060,016 Net earnings - - - 460,039 - 460,039 ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1995 3,499,755 34,998 6,804,156 2,680,901 - 9,520,055 Compensation to outside consultant - - 100,000 - - 100,000 Net earnings - - - 827,605 - 827,605 ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996 3,499,755 $ 34,998 $ 6,904,156 $ 3,508,506 $ - $ 10,447,660 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
DAKOTAH, INCORPORATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net earnings $ 827,605 $ 460,039 $ 1,030,904 Adjustments to reconcile net earnings to net cash used in operating activities Depreciation and amortization 683,166 445,951 372,469 Gain on sale of equipment (109,700) (56,210) (44,631) Deferred income taxes 135,000 156,000 (545,000) Compensation to outside consultant 100,000 - - Changes in assets and liabilities: Accounts receivable (1,173,118) (1,546,601) (1,165,976) Inventories (2,191,862) (1,494,989) (316,584) Prepaid expenses and other (258,422) (225,254) (63,331) Accounts payable (118,436) 535,993 (563,749) Accrued liabilities 574,895 304,341 594,209 Income taxes payable 187,079 (290,847) (101,426) ----------- ----------- ----------- Net cash used in operating activities (1,343,793) (1,711,577) (803,115) Cash flows from investing activities: Capital expenditures (2,380,711) (1,060,640) (337,343) Proceeds from sale of equipment 109,700 56,210 87,500 Other (82,821) (59,746) 149 ----------- ----------- ----------- Net cash used in investing activities (2,353,832) (1,064,176) (249,694) Cash flows from financing activities: Net borrowings (payments) under notes payable 3,456,204 3,019,448 (1,797,474) Proceeds from issuance of long-term obligations 377,425 - 100,000 Principal payments on long-term obligations (610,644) (342,049) (802,269) Proceeds from issuance of common stock - - 4,126,569 ----------- ----------- ----------- Net cash provided by financing activities 3,222,985 2,677,399 1,626,826 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (474,640) (98,354) 574,017 Cash and cash equivalents at beginning of year 477,330 575,684 1,667 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 2,690 $ 477,330 $ 575,684 =========== =========== ===========
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 NOTE A - NATURE OF BUSINESS Dakotah, Incorporated (the "Company") designs and manufactures decorative pillows, bedroom ensembles, decorative throws, table linens and other accessory products through its manufacturing facilities principally located in South Dakota. The Company sells its products nationwide to department stores, specialty retailers, mass merchandisers and mail order houses primarily in the United States. The Company has showrooms located in New York, Atlanta, Los Angeles, San Francisco, Denver, Seattle, Chicago and Dallas. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies consistently applied in the preparation of the financial statements follows: Cash and Cash Equivalents The Company considers all highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Accounts Receivable The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of customers. The Company maintains allowances for potential credit losses. Inventories Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. During 1996, 1995 and 1994, the Company recorded charges of $821,000, $390,000 and $1,355,000 to cost of goods sold to reduce the value of inventory to market. Depreciation and Amortization Depreciation and amortization are provided in amounts sufficient to relate the cost of assets to operations over their estimated useful lives, using straight-line and accelerated methods for financial reporting and income tax purposes. Estimated useful lives range from 3 to 39 years for buildings and improvements and leasehold improvements and 4 to 7 years for machinery and equipment and office equipment, furniture and fixtures and other. Employee Benefits The Company acts as a self-insurer for employee medical and short-term disability income plans. Specific stop loss coverage is provided for catastrophic claims. Losses and claims are recorded as incurred, based upon actual and estimated losses and claims outstanding. Advertising The Company expenses advertising costs as incurred. Advertising expense was approximately $589,000, $461,000 and $262,000 during 1996, 1995 and 1994. Stock Based Compensation The Company's employee stock option plans are accounted for under the intrinsic value method. Earnings Per Share All earnings per share amounts are based on the weighted average outstanding common shares, and outstanding common share equivalents, if dilutive. Revenue Recognition The Company records a sale at the time the goods are shipped. Redeemable Common Stock At December 31, 1993, all shares of common stock held by the Company's profit sharing plan (2,240,125 shares) were excluded from stockholders' equity due to the existence of a put option exercisable by the participants of the plan upon termination of their employment. This contingent liability was recorded based upon the amount the Company would have been required to pay pursuant to the terms of the profit sharing plan assuming all employment had been terminated by the participants and all shares had been surrendered for redemption. Upon the effectiveness of the Company's initial public offering of common stock, the obligation of the Company to redeem these shares was terminated and reclassified to stockholders' equity (see note H). Supplemental Disclosures of Cash Flow Information
1996 1995 1994 ------ ------ ----- Cash paid during the years ended December 31 for: Interest $627,039 $215,146 $ 172,965 Income taxes 152,148 333,260 1,218,800
Supplemental disclosure of noncash investing and financing activities: During 1995, the Company issued $376,838 of debt to acquire certain other assets. During 1994, redeemable common stock was reclassified into stockholders' equity as the Company's obligation to redeem the shares terminated upon effectiveness of the Company's initial public offering of common stock (notes B and H). During 1994, the Company issued $1,318,003 of notes payable to officers in settlement of deferred compensation liabilities (notes F and G). Accounting Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts 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 C - INVENTORIES The principal classifications of inventory and their corresponding values are summarized as follows at December 31:
1996 1995 ------ ----- Finished goods $2,165,930 $1,225,179 Work in process 1,667,023 1,019,664 Raw materials 5,722,944 5,119,192 --------- --------- $9,555,897 $7,364,035 ========= =========
NOTE D - PROPERTY, PLANT AND EQUIPMENT The principal classifications of property, plant and equipment and their corresponding values are summarized below at cost as of December 31:
1996 1995 ------ ----- Buildings and improvements $2,334,516 $1,405,536 Leasehold improvements 123,731 123,731 Machinery and equipment 3,009,792 2,047,676 Office equipment, furniture and fixtures and other 958,758 481,816 -------- -------- 6,426,797 4,058,759 Less accumulated depreciation and amortization 2,555,767 1,885,274 --------- --------- 3,871,030 2,173,485 Land 36,000 36,000 --------- --------- $3,907,030 $2,209,485 ========= =========
NOTE E - NOTES PAYABLE TO BANK The Company has a credit facility with a bank consisting of a revolving note and a term note which terminate in August 1998. The total amount available under the revolving note, which is due on demand, is limited to the lesser of $9,000,000 or a defined borrowing base of eligible accounts receivable and inventory. The term note is due on demand and requires monthly principal payments of $20,833. Inventory advances under the revolving note, as defined in the agreement, provide for monthly interest payments at 2% above the bank's prime rate (effective rate of 10.25% at December 31, 1996). The term note and other advances under the revolving note provide for monthly interest payments at 1.5% above the bank's prime rate (effective rate of 9.75% and 10% at December 31, 1996 and 1995). Both notes are collateralized by accounts receivable, inventory, equipment, and general intangibles. The outstanding balances on the revolving note and term note, which were equal to their fair values, were $6,414,667 and $708,333, and $2,708,463 and $958,333 at December 31, 1996 and 1995. The current credit facility contains affirmative and negative covenants including, among other things, provisions for minimum net earnings and net worth requirements, limitations on capital expenditures, and compliance with certain debt service ratios. Additionally, the Company may not incur additional borrowings, sell certain assets, acquire other businesses or pay cash dividends without prior written consent. NOTE F - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31: 1996 1995 ------ ----- Note payable to officer - due January 1998, payable in varying semi-annual installments, including interest at 6% (see note G) $ 461,301 $ 659,000 Note payable to former officer including interest at 6% (see note G); paid in full during 1996 - 263,603 Note payable to a finance company - due November 2000, payable in monthly installments, including interest at 9% 337,762 371,836 Note payable to State of South Dakota - due February 2001, payable in monthly installments, including interest at 3% with a balloon payment of $161,215 in February 2001, collateralized by certain equipment $ 269,260 $ - Note payable to State of South Dakota - due February 1999, payable in monthly installments, including interest at 3% with a balloon payment of $80,309 in February 1999, collateralized by a building 89,767 93,116 Capital lease obligations to related parties for three lease/purchase agreements for land and buildings, due in varying monthly payments, including imputed interest ranging from 7.2% to 9.5% 112,104 147,139 Note payable to a bank - due January 2003, payable in monthly installments, including interest at .5% over prime, (effective rate of 9.0% at December 31, 1996 and 1995), collateralized by certain property 80,808 90,551 Other 44,418 3,394 --------- --------- 1,395,420 1,628,639 Less current maturities 482,835 577,152 --------- ---------- $ 912,585 $1,051,487 ========= ==========
Scheduled principal repayments on long-term obligations are as follows for the years ending December 31: 1997 $ 482,835 1998 282,100 1999 238,006 2000 157,690 2001 200,526 Thereafter 34,263 ------- $1,395,420 ==========
Based upon the borrowing rates currently available to the Company for loans with similar terms and average maturities, the carrying amount of long-term obligations approximates fair value. In January 1997, the Company entered into a $730,000 long-term debt agreement with the State of South Dakota. The agreement calls for monthly payments of $4,049 beginning in March 1997, including interest at 3%, with a balloon payment of $590,000 in February 2002. The agreement is collateralized by certain equipment and a mortgage on buildings leased by the Company from related parties. The Company paid interest to related parties on long-term obligations of approximately $38,000, $56,000 and $78,000 during the years ended December 31, 1996, 1995 and 1994. NOTE G - COMMITMENTS Operating Lease Obligations The Company leases space for its sales offices, showrooms and certain manufacturing facilities. These leases require a base rental fee plus charges for utilities and other costs. The Company also leases a computer system, phone system and office equipment for its main office and plant. The aggregate minimum rental payment obligations under noncancelable operating leases are approximately as follows for the years ending December 31: 1997 $ 560,000 1998 345,000 1999 268,000 2000 213,000 2001 103,000 -------- $1,489,000 ==========
Total rent expense for all operating leases was approximately $555,000, $438,000 and $363,000 for the years ended December 31, 1996, 1995 and 1994. Deferred Compensation The Company's stock appreciation plan (the "plan") provided for deferred compensation to be paid to certain key employees. Under the terms of the plan, deferred compensation units ("units") were awarded to key employees at the discretion of management. The units had an initial value equal to the fair market value of an equivalent number of shares of the Company's common stock on the day units were awarded. Deferred compensation paid under the plan was defined as the excess, if any, of the aggregate fair market value of the units awarded on the date of termination over the aggregate fair market value of the units awarded, based on the fair market value of each unit on the date awarded. This deferred compensation was to accrue over a five year period. The Company awarded 276,450 units under this plan to certain key employees and recorded a liability for deferred compensation of $854,000 at December 31, 1993. On January 31, 1994, the Company's Board of Directors and plan participants entered into agreements that became effective as of the effective date of the Company's initial public offering of its common stock. These agreements provided for the units to be fully vested as of the effective date of the offering, fixed the amounts earned based on the public offering price and provided for payment over three and a half years (see note F). As a result of these agreements, the Company recorded an additional $464,003 of compensation expense upon the effectiveness of the Company's initial public offering of common stock in March 1994 (note I). Licensing Arrangements The Company has entered into various licensing arrangements which require royalty payments ranging from 2% to 12% of net sales of each product. Certain license agreements also require guaranteed minimum royalties, which can be reduced through royalty payments on net sales. At December 31, 1996, guaranteed future minimum royalty payments totaled approximately $117,000. Royalty expense was approximately $364,000, $245,000 and $385,000 in 1996, 1995 and 1994. NOTE H - EMPLOYEE PROFIT SHARING PLAN The Company maintains a profit sharing plan ("Plan") for the benefit of essentially all employees who are not covered by a collective bargaining agreement and who have completed one year of service as defined in the Plan. Contributions to the Plan for any year are determined by the Company's Board of Directors at its discretion, but are limited to maximum permissible amounts as defined in the Plan. Contributions to the Plan may be made in the form of shares of the Company's common stock or cash. The Company administers the Plan. Plan participants who retire, die, or become disabled have the option either to receive their account balance in the year following such termination or to leave their account balance in the Plan until a later date, but no later than age 70-1/2. Plan participants who have terminated employment for any other reason have these same options except that they may defer distribution no later than normal retirement age. On December 21, 1993, the Company amended the Plan. The amendment, which became effective after the Company completed its initial public offering of common stock, removed the participant's ability to require the Company to repurchase any stock distributed to the participant, established pass-through voting to the participants, established the fair market value per share, for most purposes, as the last published closing price of the stock and required the Plan to make distributions in stock, unless the recipient elects to receive cash (see note B). At December 31, 1996 and 1995, the Plan held 1,669,969 and 1,900,310 shares of the Company's common stock. Company contributions to the Plan were $59,000, $50,000 and $75,000 for 1996, 1995 and 1994. NOTE I - STOCKHOLDERS' EQUITY Common Stock On March 30, 1994, the Company completed its initial public offering of 1,000,000 shares of common stock for $4,126,569, net of offering costs. Stock Options and Warrants The Company has stock option plans for the benefit of selected officers, employees, directors and outside consultants of the Company. A total of 1,267,300 shares of common stock are reserved for issuance under the plans. Options under the Company's plans are generally granted at fair market value and expire between five and seven years from the grant date. A summary of all of the Company's stock option transactions for the years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ------------------------------------------------------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 367,300 $4.41 306,450 $4.97 - $ - Granted 390,745 4.15 163,000 3.69 306,450 4.97 Forfeited - - (102,150) 4.97 - - ------- ------- ------- Outstanding at end of year 758,045 $4.27 367,300 $4.41 306,450 $4.97 ======= ======= ======= Options exercisable at end of year 354,300 $4.49 317,300 $4.54 276,450 $5.13 ======= ======= ======= Weighted average fair value of options granted to employees and directors during the year $2.07 $1.34 N/A Weighted average exercise price of options granted to employees and directors during the year $4.59 $3.61 N/A
The following information applies to all stock options that are outstanding at December 31, 1996:
Options outstanding Options exercisable ------------------- ------------------- Weighted Weighted Weighted average average average Range of Number remaining exercise Number exercise exercise prices outstanding contractual life price exercisable price --------------- ----------- ---------------- ----- ----------- ----- $3.50 to $5.13 758,045 4 years $4.27 354,300 $4.49
During 1994, the Company issued a warrant to purchase 100,000 shares of common stock. The warrant is exercisable until March 1999 at $7.17 per share. The Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock Based Compensation" (SFAS 123), which introduced an alternative method for recognizing compensation costs based upon the fair value of the awards on the date they are granted. SFAS 123 allows entities to continue to account for employee stock option plans using the intrinsic value method, which exists under current accounting literature, provided pro forma net earnings and net earnings per share, as if the fair value based method had been used, are disclosed. The Company has elected to continue using the intrinsic value based method for its employee options. In January 1996, the Company granted options to purchase 242,745 shares of common stock at $3.875 per share to an outside consultant. The market value per share was $4.25 when the options were approved by the shareholders. The options vest over three years and have a term of five years; none of the options were exercisable at December 31, 1996. The Company was required to apply the fair value method of accounting for these options and recorded compensation expense of $100,000 during 1996. The fair value of the options was estimated to be $1.71 per share using the Black Scholes options - pricing model with the following assumptions used: zero dividend yield; expected volatility of 30% and risk-free interest rate of 5.42%. The fair value of each option grant to employees and directors was estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 1996 and 1995: zero dividend yield; expected volatility of 30%; risk-free interest rates of 6.40% and 5.98%; and expected lives of 6.62 and 5.00 years. The Company's net earnings and net earnings per share for 1996 and 1995 would have been reduced to the pro forma amounts indicated below had the fair value method been used for options granted to employees and directors. These effects may not be representative of the future effects of applying this statement.
1996 1995 -------------------------- ------------------------- As Pro As Pro reported forma reported forma -------- ----- -------- ----- Net earnings $827,605 $777,605 $460,039 $424,039 Net earnings per share $.24 $.22 $.13 $.12
NOTE J - INCOME TAXES Income tax expense (benefit) consists of the following for the years ended December 31:
1996 1995 1994 ------ ------ ----- Current $269,000 $100,000 $1,095,000 Deferred 135,000 156,000 (545,000) ------- ------- --------- $404,000 $256,000 $ 550,000 ======= ======= ========
The tax effect of the cumulative temporary differences resulting in the current and long-term deferred tax assets (liabilities) are as follows at December 31:
1996 1995 ------ ----- Current Accounts receivable allowance $135,000 $115,000 Inventory write-down 104,000 141,000 Accrued compensation and related accruals 94,000 79,000 Accrued expenses 117,000 132,000 Charitable contributions carryforward 46,000 - ------- -- $496,000 $467,000 ======= ======= Long-Term Notes payable (a) $163,000 $328,000 Depreciation (13,000) 21,000 Other 35,000 - ------- -- $185,000 $349,000 ======= =======
(a) This temporary difference relates to the Company's terminated stock appreciation plan (see note G). The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate for the years ended December 31:
1996 1995 1994 ---- ---- ---- Statutory income tax rate 34.0% 34.0% 34.0% State taxes 1.4 1.3 1.6 Charitable contribution of inventory (2.6) - - Targeted jobs program tax credits (.2) (.9) (1.4) Other .2 1.4 .6 ---- ---- ---- 32.8% 35.8% 34.8% ==== ==== ====
NOTE K - CONCENTRATIONS The Company had sales to a single customer representing 15 percent of net sales for the year ended December 31, 1996. Accounts receivable from two customers, including the customer above, totaled $2,585,000 at December 31, 1996. The Company licenses certain trademarks and tradenames and purchases a significant portion of its raw material requirements for its fleece products from a major supplier. Fleece product sales accounted for approximately 47% and 20% of the Company's net sales for 1996 and 1995. Substantially all fleece raw material used to manufacture fleece products is required to be purchased from this supplier. If the supply from the major supplier was interrupted, the Company believes there are alternative sources that could supply fleece raw material. The use of a substitute fleece would require the use of a trademark other than trademarks from the major supplier. NOTE L - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1996, aggregate adjustments were made of approximately $350,000 to increase cost of goods sold and $80,000 to decrease operating expenses. These adjustments relate primarily to the accounting for inventory and general and administrative expenses in the second and third quarters. After giving effect to these adjustments, the second quarter reflects a loss before income taxes of $327,000, compared to the previously reported earnings before income taxes of $73,000, and a net loss of $219,000, or $.06 net loss per share, compared to the previously reported net earnings of $47,000, or $.01 net earnings per share. Similarly, the third quarter reflects earnings before income taxes of $674,000, compared to the previously reported earnings before income taxes of $544,000, and net earnings of $451,000, or $.13 net earnings per share, compared to the previously reported net earnings of $348,000, or $.10 net earnings per share.
DAKOTAH, INCORPORATED SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1996 Column A Column B Column C Column D Column E - ------------------------------------- ------------ -------------------- ---------- --------- Balance at Charged to Charged to Balance Description beginning of costs and other at end ----------- period expenses accounts Deductions of period ------ -------- -------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1994 $ 46,000 $ 71,000 $ - $ 7,000 (a) $110,000 Year ended December 31, 1995 110,000 230,000 - 16,000 (a) 324,000 Year ended December 31, 1996 324,000 85,000 - 27,000 (a) 382,000 (a) Write-offs, less recoveries.
EX-10.4 2 Exhibit 10.4 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Third Amendment, dated as of March 15, 1996, is made by and between DAKOTAH, INCORPORATED, a South Dakota corporation (the "Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into an Amended and Restated Credit and Security Agreement dated as of August 17, 1995, (as amended by a First Amendment to Credit and Security Agreement dated as of October 5, 1995, and a Second Amendment to Credit and Security Agreement dated as of November 15, 1995 (as so amended, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that certain amendments be made to the Credit Agreement to provide for Revolving Advances against Inventory. The Lender is willing to grant the Borrower's request subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Third Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions: " 'Borrowing Base' means, at any time and subject to change from time to time in the Lender's sole discretion, the lesser of: (a) the Maximum Line; or (b) the sum of: (i) 80% of Eligible Accounts; and (ii) on or before June 15, 1996, the lesser of ( A) 20% of Eligible Inventory or ( B) $1,500,000." " 'Eligible Inventory' means all Inventory of the Borrower, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: (1) Inventory that is: in-transit; located at any warehouse or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from any Person; on consignment to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with the Lender; (2) Supplies, packaging or parts Inventory; (3) Work-in-process Inventory; (4) Inventory that is damaged, obsolete or not currently saleable in the normal course of the Borrower's operations; (5) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (6) Inventory that is subject to a security interest in favor of any Person other than the Lender; and (7) Inventory otherwise deemed ineligible by the Lender in its sole discretion." " 'Floating Rate' means, subject to Paragraph 2 of the Third Amendment, ( I) except for Inventory Advances, an annual rate equal to the sum of the Base Rate plus one and one-half percent (1.5%), and ( II) for Inventory Advances, an annual rate equal to the sum of the Base Rate plus two percent (2.0%), which annual rates in each case shall change when and as the Base Rate changes." " 'Inventory Advances' means on or before June 15, 1996, the difference of ( I) the outstanding principal balance of the Revolving Note and ( II) 80% of Eligible Accounts, if greater than zero ($-0)." " 'Third Amendment' means that certain Third Amendment to Amended and Restated Credit and Security Agreement dated as of March __, 1996." 2. Allocation of Revolving Advances. The Lender shall strive to minimize that portion of Revolving Advances constituting Inventory Advances by allocating payments on Revolving Advances to Inventory Advances first and by exhausting borrowing availability under clause (ii) of the definition of "Borrowing Base" first before making Inventory Advances. If the Lender fails to do so, however, the Borrower may notify the Lender and the Lender shall promptly remedy the situation, but the Borrower shall not be entitled to any return of any excess interest that was charged to the Borrower because of such failure. 3. No Other Changes. Except as explicitly amended by this Third Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 4. Conditions Precedent. This Third Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) A Certificate of the Secretary of the Borrower certifying as to (I) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Third Amendment, (II) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of the Borrower's Secretary dated as of August 15, 1995 continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered , and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority of the Borrower's Secretary dated as of November 15, 1995, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Third Amendment and all other documents, agreements and certificates on behalf of the Borrower. (b) An opinion of the Borrower's counsel as to the matters set forth in paragraphs 5(A) and 5(B) hereof and as to such other matters as the Lender shall require. (c) Such other matters as the Lender may require. 5. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite power and authority to execute this Third Amendment and to perform all of its obligations hereunder, and this Third Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Third Amendment have been duly authorized by all necessary corporate action and do not (I) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or ( III) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 6. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 7. No Waiver. The execution of this Third Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Third Amendment. 8. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Third Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 9. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Third Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 10. Miscellaneous. This Third Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be duly executed as of the date first written above. NORWEST BUSINESS CREDIT, INC. DAKOTAH, INCORPORATED By ______________________________ By ______________________________ Its ___________________________ Its ___________________________ EX-10.5 3 Exhibit 10.5 FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Fourth Amendment, dated as of June 18, 1996, is made by and between DAKOTAH, INCORPORATED, a South Dakota corporation (the "Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into an Amended and Restated Credit and Security Agreement dated as of August 17, 1995, (as amended by a First Amendment to Credit and Security Agreement dated as of October 5, 1995, a Second Amendment to Credit and Security Agreement dated as of November 15, 1995 and a Third Amendment to Credit and Security Agreement dated as of March 15, 1995 (as so amended, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that certain amendments be made to the Credit Agreement. The Lender is willing to grant the Borrower's request subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Fourth Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions: " 'Borrowing Base' means, at any time and subject to change from time to time in the Lender's sole discretion, the lesser of: (a) the Maximum Line; or (b) the sum of: (i) 80% of Eligible Accounts; and (ii) on or before July 15, 1996, the lesser of (A) 25% of Eligible Inventory or (B) $2,000,000; and zero (0) thereafter." " 'Fourth Amendment' means that certain Fourth Amendment to Amended and Restated Credit and Security Agreement dated as of June __, 1996." 2. No Other Changes. Except as explicitly amended by this Fourth Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 3. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has all requisite power and authority to execute this Fourth Amendment and to perform all of its obligations hereunder, and this Fourth Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Fourth Amendment have been duly authorized by all necessary corporate action and do not (I) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or ( III) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 4. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 5. No Waiver. The execution of this Fourth Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Fourth Amendment. 6. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Fourth Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 7. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Fourth Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 8. Miscellaneous. This Fourth Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to be duly executed as of the date first written above. NORWEST BUSINESS CREDIT, INC. DAKOTAH, INCORPORATED By ______________________________ By ______________________________ Its ___________________________ Its ___________________________ EX-10.6 4 Exhibit 10.6 FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Fifth Amendment, dated as of July 11, 1996, is made by and between DAKOTAH, INCORPORATED, a South Dakota corporation (the "Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into an Amended and Restated Credit and Security Agreement dated as of August 17, 1995, as amended by a First Amendment to Amended and Restated Credit and Security Agreement dated as of October 5, 1995, a Second Amendment to Amended and Restated Credit and Security Agreement dated as of November 15, 1995, a Third Amendment to Amended and Restated Credit and Security Agreement dated as of March 15, 1996 and a Fourth Amendment to Amended and Restated Credit and Security Agreement dated as of June 14, 1996 (as so amended, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The loan advances under the Credit Agreement are evidenced by the Borrower's First Replacement Revolving Note dated as of November 15, 1995, in the maximum principal amount of $6,000,000 and payable to the order of the Lender (the "Old Revolving Note"), and the Borrower's demand promissory note dated as of October 5, 1995, in the maximum principal amount of $1,000,000 and payable to the order of the Lender. The Borrower has requested that certain amendments be made to the Credit Agreement. The Lender is willing to grant the Borrower's request subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Fifth Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions: " 'Borrowing Base' means, at any time and subject to change from time to time in the Lender's sole discretion, the lesser of: (a) the Maximum Line; or (b) the sum of: (i) 80% of Eligible Accounts; and (ii) the lesser of (A) the product of the Inventory Advance Rate and Eligible Inventory or (B) the Inventory Cap. " 'Inventory Advance Rate' means, during the calendar months of each fiscal year described below, the percentage set forth opposite such calendar month: Month January, February 20% March 25% April 30% May 35% June, July, August 40% September 35% October 30% November 25% December 20% " 'Inventory Cap' means, during the calendar months of each fiscal year described below, the amount set forth opposite such calendar month: Month January, February $1,000M March $1,500M April $2,500M May $4,000M June, July, August $4,500M September, $4,000M October, November December $2,000M " 'Fifth Amendment' means that certain Fifth Amendment to Amended and Restated Credit and Security Agreement dated as of July 11, 1996." " 'Maturity Date' means August 31, 1998." " 'Maximum Line' means $9,000,000." " 'Revolving Note' means the Borrower's Second Replacement Revolving Note, payable to the Lender in substantially the form of Exhibit A to the Fifth Amendment." 2. Audits Upon Default. Section 2.4(b) of the Credit Agreement is hereby amended by inserting at the end of said Section 2.4(b) the following: "further provided, however, that upon and after any Default or Event of Default, the Borrower shall be required to reimburse the Lender for any and all audit or inspection expenses relating to any audit or inspection performed by the Lender or any third party as required by the Lender in its sole and absolute discretion." 3. Minimum Debt Service Coverage Ratio. Section 6.12 of the Credit Agreement is amended in its entirety and replaced with the following new Section 6.12: "Section 6.12 Minimum Debt Service Coverage Ratio. The Borrower will maintain its Debt Service Coverage Ratio, determined at the end of each fiscal year, at not less than 1.5 to 1.0." 4. Section 6.13 Deleted. Section 6.13 of the Credit Agreement, relating to Minimum Tangible Net Worth, is hereby deleted in its entirety. 5. Minimum Book Net Worth. Section 6.14 of the Credit Agreement is amended in its entirety and replaced with the following new Section 6.14: "Section 6.14 Minimum Book Net Worth. The Borrower will maintain as of the end of each month-end provided below, its Book Net Worth, determined as at the end of each month, at an amount not less than the amount set forth opposite such period: Period Minimum Book Net Worth 6/30/96 $9,180,000 7/31/96 $8,970,000 8/31/96 $9,145,000 9/30/96 $9,370,000 10/31/96 $9,820,000 11/30/96 $10,220,000 12/31/96 $10,420,000 6. Minimum Net Income. Section 6.15 of the Credit Agreement is amended in its entirety and replaced with the following new Section 6.15: "Section 6.15 Minimum Net Income. The Borrower will achieve as of each date described below, Net Income, of not less than the amount set forth opposite such date: Date Minimum Net Income 6/30/96 ($340,000) 7/31/96 ($550,000) 8/31/96 ($375,000) 9/30/96 ($150,000) 10/31/96 $300,000 11/30/96 $700,000 12/31/96 $900,000 7. Capital Expenditures. Section 7.10 of the Credit Agreement is amended in its entirety and replaced with the following new Section 7.10: "Section 7.10 Capital Expenditures. The Borrower will not incur Capital Expenditures or contract to incur Capital Expenditures of more than $2,000,000 in the aggregate during fiscal year 1996 or more than $750,000 in the aggregate during any fiscal year thereafter, or more than $100,000 in any one transaction at any time; provided, however, that notwithstanding the $100,000 per transaction limitation, the Borrower may, without the consent of the Lender, incur Capital Expenditures during fiscal year 1996 (i) in an amount not to exceed $200,000 for roof repairs to be performed on certain of the Borrower's facilities and (ii) in an amount not to exceed $600,000 for expansion of the Premises in Webster, South Dakota." 8. No Other Changes. Except as explicitly amended by this Fifth Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 9. Amendment Fee. The Borrower agrees to pay the Lender as of the date hereof a fully earned, non-refundable fee in the amount of $5,000 in consideration of the execution by the Lender of this Amendment. 10. Conditions Precedent. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (d) The Second Replacement Revolving Note substantially in the form of Exhibit A hereto, duly executed on behalf of the Borrower (the "Replacement Revolving Note"). (e) The Trademark Security Agreement substantially in the form of Exhibit C hereto, duly executed on behalf of the Borrower (the "Trademark Security Agreement"). (f) Consent of the Participant. (g) A Certificate of the Secretary of the Borrower certifying as to (1) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (2) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of Authority of the Borrower's Secretary dated as of August 17, 1995 (the "Certificate of Authority") in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (3) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (h) Payment of the fee described in Paragraph 9. (i) Such other matters as the Lender may require. 11. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: (j) The Borrower has all requisite power and authority to execute this Fifth Amendment, the Replacement Revolving Note and the Trademark Security Agreement and to perform all of its obligations hereunder, and this Fifth Amendment, the Replacement Revolving Note and the Trademark Security Agreement have been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (k) The execution, delivery and performance by the Borrower of this Fifth Amendment, the Replacement Revolving Note and the Trademark Security Agreement have been duly authorized by all necessary corporate action and do not (I) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (II) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (III) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (l) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 12. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in any other Loan Document to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. Upon the satisfaction of each of the conditions set forth in paragraph 10 hereof, all references in the Credit Agreement or any other Loan Document to the "Revolving Note" shall be deemed amended to describe the Replacement Revolving Note, which Replacement Revolving Note (to the extent it evidences Advances under the Old Revolving Note) shall be issued by the Borrower to the Lender in substitution for and replacement of, but not in payment of, the Old Revolving Note. 13. No Waiver. The execution of this Fifth Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Fifth Amendment. 14. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Fifth Amendment, whether such claims, demands and causes of action are matured or unmatured. 15. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Fifth Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 9 hereof. 16. Miscellaneous. This Fifth Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to be duly executed as of the date first written above. DAKOTAH, INCORPORATED By_____________________________________________ Troy Jones, Jr. Its Chief Executive Officer NORWEST BUSINESS CREDIT, INC. By_____________________________________________ Warren G. Lindman Its Assistant Vice President EXHIBIT A TO FIFTH AMENDMENT SECOND REPLACEMENT REVOLVING NOTE $9,000,000 Minneapolis, Minnesota July 11, 1996 For value received, the undersigned, DAKOTAH, INCORPORATED, a South Dakota corporation (the "Borrower"), hereby promises to pay ON DEMAND, to the order of NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Nine Million Dollars ($9,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Amended and Restated Credit and Security Agreement dated as of August 17, 1995, as amended by a First Amendment to Amended and Restated Credit and Security Agreement dated as of October 5, 1995, a Second Amendment to Amended and Restated Credit and Security Agreement dated as of November 15, 1995, a Third Amendment to Amended and Restated Credit and Security Agreement dated as of March 15, 1996, a Fourth Amendment to Amended and Restated Credit and Security Agreement dated as of June 14, 1996 and a Fifth Amendment to Amended and Restated Credit and Security Agreement dated as of July 11, 1996 (as the same has been heretofore and may hereafter be amended or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. To the extent this Note evidences the Borrower's obligations to the Lender under the Borrower's promissory note dated as of November 15, 1995, payable to the Lender in the original principal amount of $6,000,000 (herein the "Old Revolving Note"), this Note is issued in substitution for and replacement of, but not in payment of, the Old Revolving Note. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. DAKOTAH, INCORPORATED By_____________________________________________ Troy Jones, Jr. Its Chief Executive officer EX-10.7 5 Exhibit 10.7 SIXTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Sixth Amendment, dated as of September 11, 1996, is made by and between DAKOTAH, INCORPORATED, a South Dakota corporation (the "Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into an Amended and Restated Credit and Security Agreement dated as of August 17, 1995, as amended by a First Amendment to Amended and Restated Credit and Security Agreement dated as of October 5, 1995, a Second Amendment to Amended and Restated Credit and Security Agreement dated as of November 15, 1995, a Third Amendment to Amended and Restated Credit and Security Agreement dated as of March 15, 1996, a Fourth Amendment to Amended and Restated Credit and Security Agreement dated as of June 14, 1996 and a Fifth Amendment to Amended and Restated Credit and Security Agreement dated as of July 11, 1996 (as so amended, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The loan advances under the Credit Agreement are evidenced by the Borrower's Second Replacement Revolving Note dated as of July 11, 1996, in the maximum principal amount of $9,000,000 and payable to the order of the Lender, and the Borrower's demand promissory note dated as of October 5, 1995, in the maximum principal amount of $1,000,000 and payable to the order of the Lender. The Borrower has requested that the Lender, in its sole discretion, cause letters of credit to be issued for the Borrower's account from time to time in an amount not to exceed $200,000 at any one time outstanding. The Lender is willing to grant the Borrower's request subject to the terms of this Sixth Amendment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Sixth Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions: " 'Issuer' means the issuer of any Letter of Credit." " 'L/C Amount' means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement." " 'L/C Application' means an application and agreement for Letters of Credit in a form acceptable to the Issuer and the Lender." " 'Letter of Credit' has the meaning given in Section 2.13." " 'Obligation of Reimbursement' has the meaning given in Section 2.14(a)." " 'Obligations' means each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, all indebtedness of the Borrower arising under this Agreement (including but not limited to the Notes and the Obligation of Reimbursement) or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into." " 'Sixth Amendment' means that certain Sixth Amendment to Amended and Restated Credit and Security Agreement dated as of September __, 1996." " 'Special Account' means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Sections 2.15 and 3.8." 2. Advances. The first paragraph of Section 2.2 of the Credit Agreement is amended to read as follows: "Section 2.2 Revolving Advances. The Lender may, in its sole discretion, make Advances to the Borrower from time to time during the period from the date all of the conditions set forth in Section 4.1 are satisfied (the "Funding Date") to the Termination Date, on the terms and subject to the conditions herein set forth (the "Revolving Advances"). The Lender shall not consider any request for a Revolving Advance if, after giving effect to such requested Revolving Advance, the sum of the outstanding and unpaid Revolving Advances would exceed the Borrowing Base less the L/C Amount. The Borrower's obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral as provided in Article III. Within the limits set forth in this Section 2.2, the Borrower may request Revolving Advances, prepay pursuant to Section 2.7 and request additional Revolving Advances. The Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.2." 3. Fees. The following new Sections 2.4(c) and 2.4(d) are added to the Credit Agreement immediately after Section 2.4(b): "(c) Letter of Credit Fees. The Borrower agrees to pay the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and, effective as of June 1, 1996, computed at the annual rate of two percent (2.0%) of the aggregate amount (the "L/C Exposure") that may then be drawn on all issued and outstanding Letters of Credit, assuming compliance with all conditions for drawing thereunder from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; provided, however, that from the first day of any month during which any Default or Event of Default occurs or exists at any time, in the Lender's discretion and without waiving any of its other rights and remedies, the Lender may increase the above-described fee to an amount not to exceed an annual rate of three percent (3.0%) of the L/C Exposure. The foregoing fee shall be in addition to any and all fees, commissions and charges of any Issuer of a Letter of Credit with respect to or in connection with such Letter of Credit. (d) Letter of Credit Administrative Fees. The Borrower agrees to pay the Lender, on demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally." 4. Mandatory Prepayment. Section 2.8 of the Credit Agreement is amended to read as follows: "Section 2.8 Mandatory Prepayment. The Borrower shall repay the Revolving Advances immediately upon demand of the Lender. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.8 or under Section 2.7 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine." 5. Letter of Credit Provisions. The following new Sections are added to the Credit Agreement at the end of Article II: "Section 2.13 Issuance of Letters of Credit. (a) The Lender may, in its sole discretion, cause to be issued by an Issuer one or more letters of credit for the account of the Borrower (each a "Letter of Credit") from time to time during the period from the date of the Sixth Amendment until the earlier of the date the Lender demands payment of the Revolving Advances or the Termination Date, in an aggregate amount at any time outstanding not to exceed the lesser of: (i) $200,000 less the L/C Amount, or (i) the Borrowing Base less the sum of (A) all outstanding and unpaid Advances hereunder and (B) the L/C Amount. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into by the Borrower and the Lender as co-applicants for the benefit of the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but in the event of inconsistency between the terms of any such L/C Application and the terms hereof, the terms hereof shall control. (b) No Letter of Credit shall be issued with an expire date later than the Maturity Date. (c) Any request for the issuance of a Letter of Credit under this Section 2.13 shall be deemed to be a representation by the Borrower that the statements set forth in Section 4.2 hereof are correct as of the time of the request. Section 2.14 Payment of Amounts Drawn Under Letters of Credit. The Borrower acknowledges that the Lender, as co-applicant, will be liable to the Issuer of any Letter of Credit for reimbursement of any and all draws thereunder and all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrower agrees to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw, plus interest on all such amounts, charges and expenses as set forth below (all such amounts are hereinafter referred to, collectively, as the "Obligation of Reimbursement"). (b) The Borrower hereby agrees to pay the Lender on demand interest on all amounts, charges and expenses payable by the Borrower to the Lender under this Section 2.14, accrued from the date any such draft, charge or expense is paid by the Issuer until payment in full by the Borrower at the Floating Rate. If the Borrower fails to pay to the Lender promptly the amount of its Obligation of Reimbursement in accordance with the terms hereof and the L/C Application pursuant to which such Letter of Credit was issued, the Lender is hereby irrevocably authorized and directed, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement, including all interest accrued thereon but unpaid at the time of such Revolving Advance, and such Revolving Advance shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.3 hereof. Section 2.15 Special Account. If the Lender terminates this Credit Facility pursuant to Section 2.6, or this Credit Facility is otherwise terminated for any reason whatsoever, while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the maximum aggregate amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder. The Special Account shall be maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to the Borrower's Obligation of Reimbursement or any other Obligations, in the Lender's sole discretion, and shall not be subject to withdrawal by the Borrower so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law. Section 2.16 Obligations Absolute. The obligations of the Borrower arising under Section 2.14 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by or on behalf of the Issuer or the Lender under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing." 6. Pledge of Special Account and Collateral Account. The following new Section 3.8 is added at the end of Article III: "Section 3.8 Security Interest in Special Account. The Borrower hereby pledges, and grants to the Lender a security interest in, all funds held in the Special Account from time to time and all proceeds thereof, as security for the payment of all Obligations." 7. Conditions Precedent to Each Advance and Each Letter of Credit. Section 4.2 of the Credit Agreement is amended to read as follows: "Section 4.2 Conditions Precedent to the Lender's Willingness to Consider Making All Advances and Causing All Letters of Credit to be Issued. The Lender will not consider a request for any Advance or the issuance of any Letter of Credit unless on the date thereof: (a) the representations and warranties contained in Article V hereof are correct on and as of such date as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance or the issuance of such Letter of Credit, as the case may be, which constitutes a Default or an Event of Default." 8. No Other Changes. Except as explicitly amended by this Sixth Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 9. Conditions Precedent. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (m) Consent of the Participant. (n) Such other matters as the Lender may require. 10. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: (o) The Borrower has all requisite power and authority to execute this Sixth Amendment and to perform all of its obligations hereunder, and this Sixth Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (p) The execution, delivery and performance by the Borrower of this Sixth Amendment have been duly authorized by all necessary corporate action and do not (I) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or ( III) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (q) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 11. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in any other Loan Document to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 12. No Waiver. The execution of this Sixth Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Sixth Amendment. 13. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Sixth Amendment, whether such claims, demands and causes of action are matured or unmatured. 14. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Sixth Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 15. Miscellaneous. This Sixth Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment to be duly executed as of the date first written above. DAKOTAH, INCORPORATED By____________________________________________________ Troy Jones, Jr. Its Chief Executive Officer NORWEST BUSINESS CREDIT, INC. By____________________________________________________ Warren G. Lindman Its Assistant Vice President EX-10.8 6 Exhibit 10.8 SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT This Seventh Amendment, dated as of January 17, 1997, is made by and between DAKOTAH, INCORPORATED, a South Dakota corporation (the "Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into an Amended and Restated Credit and Security Agreement dated as of August 17, 1995, as amended by a First Amendment to Amended and Restated Credit and Security Agreement dated as of October 5, 1995, a Second Amendment to Amended and Restated Credit and Security Agreement dated as of November 15, 1995, a Third Amendment to Amended and Restated Credit and Security Agreement dated as of March 15, 1996, a Fourth Amendment to Amended and Restated Credit and Security Agreement dated as of June 14, 1996, a Fifth Amendment to Amended and Restated Credit and Security Agreement dated as of July 11, 1996 and a Sixth Amendment to Amended and Restated Credit and Security Agreement dated as of September 11, 1996 (as so amended, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The loan advances under the Credit Agreement are evidenced by the Borrower's Second Replacement Revolving Note dated as of July 11, 1996, in the maximum principal amount of $9,000,000 and payable to the order of the Lender, and the Borrower's demand promissory note dated as of October 5, 1995, in the maximum principal amount of $1,000,000 and payable to the order of the Lender. The Borrower has requested that the Lender, in its sole discretion, increase the Inventory Cap for a temporary period. The Lender is willing to grant the Borrower's request subject to the terms of this Seventh Amendment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Seventh Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions: " 'Inventory Cap' means, during the calendar months of each fiscal year described below, the amount set forth opposite such calendar month: Month Amount Amount 1997 1998 and each year thereafter January and February $2,000,000 $1,000,000 March $1,500,000 $1,500,000 April $2,500,000 $2,500,000 May $4,000,000 $4,000,000 June, July and August $4,500,000 $4,500,000 September, October, $4,000,000 $4,000,000 and November December $2,000,000 $2,000,000 " 'Seventh Amendment' means that certain Seventh Amendment to Amended and Restated Credit and Security Agreement dated as of January 17, 1997." 2. No Other Changes. Except as explicitly amended by this Seventh Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 3. Conditions Precedent. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (r) Consent of the Participant. (s) A Certificate of the Secretary of the Borrower certifying as to (1) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Seventh Amendment, (2) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of Authority of the Borrower's Secretary dated as of August 17, 1995 (the "Certificate of Authority") in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (3) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of Authority, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Seventh Amendment and all other documents, agreements and certificates on behalf of the Borrower. (t) Such other matters as the Lender may require. 4. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: (u) The Borrower has all requisite power and authority to execute this Seventh Amendment and to perform all of its obligations hereunder, and this Seventh Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (v) The execution, delivery and performance by the Borrower of this Seventh Amendment have been duly authorized by all necessary corporate action and do not (I) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or ( III) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (w) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 5. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in any other Loan Document to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 6. No Waiver. The execution of this Seventh Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Seventh Amendment. 7. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Seventh Amendment, whether such claims, demands and causes of action are matured or unmatured. 8. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Seventh Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 9. Miscellaneous. This Seventh Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Seventh Amendment to be duly executed as of the date first written above. DAKOTAH, INCORPORATED By____________________________________________________ Troy Jones, Jr. Its Chief Executive Officer NORWEST BUSINESS CREDIT, INC. By____________________________________________________ Warren G. Lindman Its Assistant Vice President EX-10.21 7 Exhibit 10.21 DESCRIPTION OF 1996 INCENTIVE COMPENSATION PLANS Dakotah, Incorporated (the "Company") has approved individual incentive compensation plans (the "Bonus Plans") for George C. Whyte, President; Georgie Olson Harper, Vice President of National Sales and Daniel Harper, Vice President of Corporate Sales. Under the Bonus Plans, the named associates are eligible to receive a bonus of a specified percentage of their salaries if certain individualized sales, profitability and expense limitation goals are met in 1996. In addition to the individualized goals, the Bonus Plans are subject to the following terms and conditions. 1. Named associates must be employed by the Company on December 31, 1996; 2. Any bonuses paid are to be included as an expense before determining whether profit goals have been achieved; and 3. Any bonuses will be paid after results for fiscal year 1996 are determined. EX-10.30 8 Exhibit 10.30 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made effective this 1st day of January, 1997, by and between DAKOTAH, INCORPORATED, a South Dakota corporation (the "Company"), and GEORGE C. WHYTE ("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. 2. Term of Employment. The term of this Agreement shall commence as of the date hereof and continue until December 31, 2001, unless earlier terminated as provided herein ("Term"). 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 Fifty Thousand Dollars ($150,000.00), payable in equal semi-monthly installments. Such annual Base Salary shall increase each year by a percentage equal to the average percentage increase given to other corporate employees of the Company, up to a maximum of five percent (5%) per year. Employee shall also be entitled to participate in the executive compensation plan as established and modified from time to time by the Company. 4. Employee Benefits; Vacation. (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 (the "Option") to purchase 100,000 shares of Company Common Stock (the "Option Shares") pursuant to the Dakotah, Incorporated 1995 Stock Option Plan. The Option shall have an exercise price equal to the market price of such stock on the NASDAQ National Market System as of the close of such market on September 16, 1996 and a term of seven (7) years. Employee's rights in the Option Shares shall vest as set forth in the Option. The remaining terms and provisions of the Option shall be governed by the Dakotah, Incorporated 1995 Stock Option Plan. 6. Loan. Upon the date of this Agreement, the Company shall make available to Employee a loan in the principal amount equal to the sum of (i) $2.56 per share multiplied by the number of shares of common stock of the Company to be purchased by Employee under his stock options granted in 1994 plus (ii) an amount equal to the tax liability to be incurred by Employee in connection with the exercise of such options. Such loan shall be evidenced by a written promissory note, in form and substance reasonably acceptable to the parties, and the proceeds of the loan shall be used solely in connection with the exercise of the stock options granted to Employee in 1994. Such loan shall be a full recourse obligation of Employee, shall bear interest at a variable rate per annum equal to the rate paid by the Company on its revolving line of credit, and shall be amortized over a period of five (5) years with annual payments of principal and accrued interest. The loan shall be secured by a pledge of all stock of the Company owned by Employee, whether now owned or hereafter acquired, but excluding shares held by the Company profit plan and shares Employee owned prior to the date of this Agreement. Employee shall execute and deliver all documents necessary to grant and perfect such lien, including, without limitation, a pledge or security agreement, blank stock powers, stock certificates, and a UCC-1 financing statement. Fifty percent (50%) of any bonus received by Employee during each year, as determined on an after-tax basis, shall be applied as a mandatory prepayment on the amounts to become due under the loan during such year. In addition, the proceeds, as determined on an after-tax basis, from the sale by Employee of any stock of the Company shall be applied as a mandatory prepayment on the amounts to become due under the loan during the year of such sale. 7. Undertakings of Employee. Employee agrees that he shall use his 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. 8. 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, if any, 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. (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 two (2) times his annual Base Salary in effect as of the date of termination. For purposes of this Agreement, a "change in control" shall be deemed to occur upon any of the following transactions: (i) a merger or acquisition in which the Company is not the surviving entity; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company; or (iii) the acquisition of more than fifty percent (50%) of the Company's outstanding voting stock directly from the Company's stockholders by a person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by or is under common control of the Company). 9. Confidentiality. During and after the Term of this Agreement, Employee shall not communicate, divulge or use any secret, confidential information, trade secret, or confidential customer list or information of the Company, to, or on behalf of any person or entity, except as consented to in writing by the Company. This obligation shall apply with respect to any such item until such item ceases (other than through the action of Employee) to be secret or confidential. 10. Non-Competition. 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 8(a)(i) or 8(a)(ii), Employee shall be subject to the non-competition provision set forth in this Section 10 hereof, but only if and so long as the Company at its discretion continues to pay Employee his current salary in effect as of the date of termination. In the event of a termination for "cause," as defined in Section 8(a)(i) or 8(a)(ii), Employee shall be subject to the non-competition provision set forth in this Section 10 without any payment of additional salary to Employee. 11. Injunctive Relief. The parties agree that monetary damages will not be an adequate remedy in the event of any breach of Section 9 or Section 10 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 9 or Section 10 hereof. 12. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of South Dakota. 13. 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: George C. Whyte North Park Lane Webster, SD 57274 or to such other addresses as may be communicated in writing by either party to the other. 14. 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. 15. 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. 16. Survival of Provisions. The provisions contained in Sections 9 and 10 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_______________________________ Its____________________________ George C. Whyte EX-23.1 9 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 28, 1997, accompanying the financial statements included in the Annual Report of Dakotah, Incorporated on Form 10-K for the year ended December 31, 1996. We hereby consent to the incorporation by reference of said report in the Registration Statement of Dakotah, Incorporated on Form S-8 (File No. 33-86868, effective November 29, 1994). GRANT THORNTON LLP Minneapolis, Minnesota February 28, 1997 EX-27.1 10
5 12-MOS DEC-31-1996 DEC-31-1996 2,690 0 7,920,724 382,000 9,555,897 18,329,240 6,462,797 2,555,767 22,929,960 11,569,715 912,585 0 0 34,998 10,412,662 22,929,960 41,559,597 41,559,597 30,599,183 30,599,183 0 85,000 612,717 1,231,605 404,000 827,605 0 0 0 827,605 .24 0
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