-----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, O1Uf1rHBws7CpnDK01k0FonoS4OxPyMTxFUHt+yePNbkn8RSpfs7W29e1zcudfzJ MaNo3MhOgQ9rPlAvzGR7aw== 0000897101-97-000943.txt : 19970815 0000897101-97-000943.hdr.sgml : 19970815 ACCESSION NUMBER: 0000897101-97-000943 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAKOTAH INC CENTRAL INDEX KEY: 0000859944 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 460339860 STATE OF INCORPORATION: SD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23604 FILM NUMBER: 97664076 BUSINESS ADDRESS: STREET 1: ONE N PARK LN CITY: WEBSTER STATE: SD ZIP: 57274-0120 BUSINESS PHONE: 6053454646 MAIL ADDRESS: STREET 1: ONE NORTH PARK LANE CITY: WEBSTER STATE: SD ZIP: 57274-0120 10-Q 1 UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1997 Commission File Number 0-23604 DAKOTAH, INCORPORATED (Exact Name of Registrant as Specified in Its Charter) South Dakota 46-0339860 (State or Other Jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification Number) One North Park Lane Webster, SD 57274 (Address of Principal Executive Offices, Zip Code) Registrant's Telephone Number, Including Zip Code: (605) 345-4646 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes: __X__ No: ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common stock, $.01 par value, 3,499,755 shares outstanding as of August 12, 1997. DAKOTAH, INCORPORATED INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets (Unaudited): June 30, 1997 and December 31,1996 Statements of Operations (Unaudited): Three and six month periods ended June 30, 1997, and June 30, 1996 Statements of Cash Flows (Unaudited): Six month periods ended June 30, 1997, and June 30, 1996 Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Items 1 through 3 and 5 have been omitted since items are inapplicable or answer is negative Item 4. Submission of Matters to a vote of Security Holders Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.1 Credit and Security Agreement dated June 30, 1997 with Diversified Business Credit, Inc. 10.2 First Amendment dated July 7, 1997 to Credit and Security Agreement with Diversified Business Credit, Inc. 27.1 Financial Data Schedule b) Reports on Form 8-K None DAKOTAH, INCORPORATED BALANCE SHEETS (Unaudited)
June 30, December 31, ASSETS 1997 1996 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 5,956 $ 2,690 Accounts receivable less allowance for doubtful accounts of $439,000 in 1997 and $382,000 in 1996 4,556,736 7,538,724 Inventories 19,473,090 9,555,897 Prepaid expenses and other 551,177 735,929 Income taxes receivable 425,987 Deferred income taxes 496,000 496,000 ----------- ----------- Total current assets 25,508,946 18,329,240 PROPERTY, PLANT AND EQUIPMENT - AT COST Land 36,000 36,000 Buildings and improvements 2,399,645 2,334,516 Leasehold improvements 122,362 123,731 Machinery and equipment 3,227,898 3,009,792 Office equipment, furniture and fixtures and other 1,671,143 958,758 ----------- ----------- 7,457,048 6,462,797 Less accumulated depreciation & amortization 2,895,221 2,555,767 ----------- ----------- 4,561,827 3,907,030 OTHER ASSETS Deferred income taxes 185,000 185,000 Other 814,783 508,690 ----------- ----------- 999,783 693,690 ----------- ----------- $31,070,556 $22,929,960 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Outstanding checks in excess of bank balances $ 1,006,639 $ Notes payable to bank 10,740,014 7,123,000 Current maturities of long-term obligations, including $288,800 in 1997 and $332,139 in 1996 to related parties 959,281 482,835 Accounts payable 6,079,650 2,134,845 Accrued liabilities Compensation and related benefits 699,243 925,739 Other 505,311 716,217 Income taxes payable -- 187,079 ----------- ----------- Total current liabilities 19,990,138 11,569,715 LONG TERM OBLIGATIONS, less current maturities, including $129,162 in 1996 to related parties 1,544,103 912,585 STOCKHOLDERS' EQUITY Common stock, par value $.01; 10,000,000 shares authorized; issued & outstanding shares 3,499,755 34,998 34,998 Additional contributed capital 6,967,156 6,904,156 Retained earnings 2,534,161 3,508,506 ----------- ----------- 9,536,315 10,447,660 ----------- ----------- $31,070,556 $22,929,960 =========== ===========
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF OPERATIONS (Unaudited)
For the three months ended June 30, For the six months ended June 30, 1997 1996 1997 1996 ----------- ----------- ------------ ------------ Net sales $ 6,856,237 $ 6,559,731 $ 13,538,086 $ 13,964,555 Cost of goods sold 5,221,003 4,929,806 10,178,176 10,370,397 ----------- ----------- ------------ ------------ Gross profit 1,635,234 1,629,925 3,359,910 3,594,158 Operating expenses Selling 1,022,175 984,484 2,205,453 2,078,682 General and administrative 1,297,050 842,126 2,266,203 1,617,052 ----------- ----------- ------------ ------------ 2,319,225 1,826,610 4,471,656 3,695,734 ----------- ----------- ------------ ------------ Operating profit (loss) (683,991) (196,685) (1,111,746) (101,576) Other income (expense) Interest expense (210,102) (124,969) (353,599) (203,847) Gain on sale of equipment 6,867 6,867 Other (11,866) (25,000) ----------- ----------- ------------ ------------ (210,102) (129,968) (353,599) (221,980) Earnings (loss) before income (894,093) (326,653) (1,465,345) (323,556) taxes Income tax expense (benefit) (311,000) (107,595) (491,000) (106,480) ----------- ----------- ------------ ------------ NET EARNINGS (LOSS) $ (583,093) $ (219,058) $ (974,345) $ (217,076) =========== =========== ============ ============ Net earnings (loss) per share $ (0.17) $ (0.06) $ (0.28) $ (0.06) =========== =========== ============ ============ Weighted average common shares outstanding 3,499,755 3,499,755 3,499,755 3,499,755 =========== =========== ============ ============
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF CASH FLOWS (Unaudited)
For the six months ended June 30, 1997 1996 ------------ ----------- Cash flows from operating activities: Net earnings (loss) $ (974,345) $ (217,076) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 339,453 341,259 Compensation to outside consultant 63,000 Changes in assets and liabilities: Accounts receivable 2,981,988 1,967,727 Inventories (9,917,193) (3,688,672) Prepaid expenses 184,752 (160,923) Income taxes receivable (425,987) Accounts payable 3,944,805 92,733 Accrued liabilities (437,402) 12,488 Income taxes payable (187,079) (134,000) ------------ ----------- Total adjustments (3,453,663) (1,569,388) ------------ ----------- Net cash used in operating activities (4,428,008) (1,786,464) Cash flows from investing activities: Capital expenditures (994,250) (898,602) Other (306,093) -- ------------ ----------- Net cash used in investing activities (1,300,343) (898,602) Cash flows from financing activities: Outstanding checks in excess of bank balances 1,006,639 Net borrowings under notes payable 3,617,014 2,211,113 Proceeds from issuance of long-term obligations 1,495,673 300,000 Principal payments on long-term obligations (387,709) (271,464) ------------ ----------- Net cash provided by financing activities 5,731,617 2,239,649 ------------ ----------- Net increase (decrease) in cash and cash equivalents 3,266 (445,417) Cash and cash equivalents at beginning of period 2,690 477,330 ------------ ----------- Cash and cash equivalents at end of period $ 5,956 $ 31,913 ============ =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest 323,435 155,575 Income taxes 120,000 --
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS NOTE A: BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions of Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the financial position of the Company as of June 30, 1997 and the results of operations for the three and six month periods ended June 30, 1997 and 1996 and the cash flows for the six month periods ended June 30, 1997 and 1996. These results are not necessarily indicative of results which may be expected for the year as a whole. The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B: INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following: June 30, 1997 December 31, 1996 ------------- ----------------- Raw Materials $ 9,483,192 $5,722,944 Work-In-Process 2,221,859 1,667,023 Finished Goods 7,768,039 2,165,930 ----------- ---------- $19,473,090 $9,555,897 =========== ========== NOTE C: NEW ACCOUNTING PRONOUNCEMENT The FASB has issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, which is effective for financial statements issued after December 15, 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The effect of adopting this new standard has not been determined. NOTE D: NOTES PAYABLE TO BANK During the second quarter of 1997, the Company refinanced its credit facility and further amended it in July of 1997. The total amount available under the revolving note, which is due on demand is limited to the lesser of $15 million or a defined borrowing base of eligible accounts receivable, inventory, and outstanding amounts under the term note. The term note is due on demand and requires monthly principal payments of $33,333. Advances under the revolving note, based on inventory balances, provide for monthly interest payments at 3% above the bank's prime rate (9.5% at June 30, 1997). The outstanding balances on the revolving note and term note were $8,740,000 and $2,000,000 at June 30, 1997. The outstanding balances on the previous revolving note and term note were $6,415,000 and $708,000 at December 31, 1996. The current credit facility contains affirmative and negative covenants including among other things, provisions for minimum net earnings and net worth requirements and limitations on capital expenditures. Additionally, the Company may not incur additional borrowings, sell certain assets, aquire other businesses or pay cash dividends without prior consent. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: The following table sets forth the percentage relationship to net sales of certain items in the Company's statements of operations for the three and six month periods ended June 30, 1997 and 1996.
Percentage of Net Sales for the Percentage of Net Sales for the three month period ended June 30, six month period ended June 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Gross Profit 23.8 24.9 24.8 25.7 Selling Expenses 14.9 15.0 16.3 14.9 General & Administrative 18.9 12.9 16.7 11.5 Operating Profit (Loss) (10.0) (3.0) (8.2) (0.7) Interest Expense 3.0 1.9 2.6 1.6 Earnings (Loss) Before Income Taxes (13.0) (5.0) (10.8) (2.3) Net Earnings (Loss) (8.5) (3.3) (7.2) (1.6)
NET SALES decreased 3% to $13,538,000 for the six months ended June 30, 1997 from $13,965,000 in the same period of 1996. Net sales increased from $6,560,000 in the second quarter of 1996, to $6,856,000 in the second quarter of 1997. The decrease in sales for the six months ended June 30,1997 is primarily related to the negative effect on production time as a result of (1) the Company's consolidation of its primary warehouse and shipping and receiving facility to the main Webster, SD manufacturing facility, (2) the move of the Webster, SD pillow finishing manufacturing equipment to the main Webster, SD manufacturing facility, (3) the comprehensive reconfiguration of the main Webster, SD manufacturing facility and (4) the effect of the severe winter weather. The increase in net sales for the second quarter of 1997 from the second quarter of 1996 is the result of increasing sales of the Company's Polarfleece(R) line of products and blankets offset by a decline in sales of pillows and table linens. GROSS MARGIN PERCENTAGES decreased from 25.7% in the first six months of 1996 to 24.8% in the first six months of 1997. During the second quarter of 1997, compared to the same period of 1996, gross profit percentages decreased to 23.8% from 24.9%. Gross margin percentages were adversely affected in the first six months of 1997 by the costs associated with the Company's efforts to build capacity and infrastructure for the Fall selling season, by lost production time and an increase of off-standard and indirect labor and other related costs associated with the Company's move of its Webster, SD warehouse and pillow finishing manufacturing and the Webster, SD plant reconfiguration. In the first six months of 1996, gross profit percentages were negatively affected by the April, 1996 startup of the Company's Polarfleece(R) manufacturing facility in Redfield, South Dakota. SELLING EXPENSES grew from $2,079,000 in the first six months of 1996 to $2,205,000 in the first six months of 1997. The $126,000 increase is primarily the result of (1) increased costs of catalog and promotional literature of approximately $73,000, (2) increased cost of showroom decorating and supplies of approximately $45,000 and (3) increased costs of travel and lodging for the sales force. These increases are related to the Company's efforts to increase 1997 net sales and expand its sales distribution channels and markets. As a percentage of net sales, selling expenses increased to 16.3% in the first six months of 1997 from 14.9% in the first six months of 1996 as a result of higher selling expenses and lower sales. GENERAL AND ADMINISTRATIVE EXPENSES increased from $1,617,000 in the first six months of 1996 to $2,266,000 in the first six months of 1997. The increase is primarily due to (1) an increase in administrative, clerical and management staff of $150,000, to support the anticipated general growth of the Company and the need to provide staff to accomplish the planned computer conversion and re-engineering of the Company's processes and systems, (2) an increase of approximately $80,000 in senior management recruiting costs and (3) increased professional fees of approximately $74,000 primarily related to expanding product distribution to international markets and increased accounting fees, and (4) a general increase in costs related to the Company's planned computer conversion. As a percentage of net sales, general and administrative expenses increased from 11.5% in the first six months of 1996 to 16.7% in the first six months of 1997 as a result of lower net sales and higher general and administrative expenses. INTEREST EXPENSE increased from $204,000 in the first six months of 1996 to $354,000 in the first six months of 1997. The increase is the result of higher average borrowings during the first six months related to previous capital expenditures and the buildup of inventory to support the Company's sales in the third and fourth quarters of 1997. RESTATEMENT OF SECOND AND THIRD QUARTER FORM 10-Q'S. During the close of the Company's 1996 annual close procedures, the Company noted that it had inadvertently overlooked certain items during the preparation of its second and third quarter Form 10-Q's. Upon identification of those matters, the Company amended the respective Form 10-Q's to adjust for those items. The discussion and analysis herein reflects these amendments. LIQUIDITY AND CAPITAL RESOURCES Working capital was $7.5 million as of June 30, 1997 and $6.8 million as December 31, 1996. The net cash used in operating activities during the first six months of 1997 was primarily used to fund the Company's buildup of inventory to support the Company's anticipated sales in the third and fourth quarters of 1997. The net cash used in investing activities during the first six months of 1997 was primarily provided by the refinancing and increased borrowings of term debt. Accounts receivable were approximately $4,557,000 as of June 30, 1997 and $7,500,000 as of December 31, 1996. The decrease in the first six months of 1997 was due to lower sales in the second quarter of 1997 as compared to the fourth quarter of 1996. The allowance for doubtful accounts increased from $382,000 at December 31, 1996 t0 $439,000 at June 30, 1997. The Company estimates the allowance for doubtful accounts based upon the best information available to management. In addition to a substantial increase in sales and new customers, the Company had a number of customers go into bankruptcy for which bankruptcy proceedings have not been concluded. Management believes that the allowance is adequate to cover any losses as a result of these items. The seasonality of the Company's sales cycle and the planned increase of sales volume has resulted in increased working capital requirements. In addition, the buying habits of the Company's customers indicate a trend away from substantial advance stocking orders to smaller, more frequent orders. This trend requires the Company to carry larger levels of work in process and finished goods inventories than historically maintained. Inventories were approximately $19,473,000 as of June 30, 1997 and $9,600,000 as of December 31, 1996. The increase in the first six months of 1997 as compared to year end 1996 is primarily related to an increase of finished goods inventory of Polarfleece(R) to support the Company's planned sales in the third and fourth quarters of 1997. Accounts payable were approximately $6,080,000 as of June 30, 1997 and $2,135,000 as of December 31, 1996. The increase as of June 30, 1997 as compared to year end 1996 is primarily related to an increase in inventory to support the Company's planned sales in the third and fourth quarters of 1997. The Company has used and expects to continue to use its revolving line of credit to meet its short-term working capital requirements. During the second quarter of 1997, the Company refinanced its credit facility. The Company also amended the credit facility in July of 1997. The new credit facility, which expires in June 1999, accommodates the Company's planned buildup of inventory, primarily Polarfleece(R) throws, to allow the Company to maximize the sales opportunities in the third and fourth quarters, optimize production capacity, and better serve the Company's customers. The total amount available under the revolving note, which is due on demand, is limited to the lesser of $15 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 $33,333. Advances under the revolving note, based on inventory balances, provide for monthly interest payments at 3% above the bank's prime rate (11.5% at June 30, 1997). The term note and other advances under the revolving note provide for monthly interest payments at 1.0% above the bank's prime rate (9.5% at June 30, 1997). The outstanding balances on the revolving note and term note were $8,740,000 and $2,000,000 at June 30, 1997. The outstanding balances on the revolving note and term note were $6,415,000 and $708,000 at December 31, 1996. For the six months ended June 30, 1997, the Company's capital expenditures were $994,000. These capital expenditures include $493,000 to upgrade computer hardware and refinance operating leases existing prior to the upgrade. The remaining $501,000 was used primarily to upgrade and purchase additional manufacturing and transportation equipment. The Company expects to spend an additional $500,000 in 1997 to expand capacity and to up-grade existing buildings and production equipment. 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 June 30, 1997, the total outstanding indebtedness was approximately $268,000 compared to $461,000 at December 31, 1996. 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 Forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward looking statements involve risks and uncertainties, including, without limitation, continued acceptance of the Company's products, cancellation of orders, increased levels of competition for the Company, new products and technological changes, the Company's dependence upon third party suppliers, and intellectual property rights. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the Annual Meeting of Stockholders on June 12, 1997, the Company submitted to a vote of security-holders the following matters which received the indicated votes. 1. Election of Directors: For Withhold Authority Broker Non-Votes --- ------------------ ---------------- Leo T. Reynolds 3,293,239 20,343 0 Troy Jones, Jr. 3,293,133 20,449 0 Michael G. Grosek 3,293,239 20,343 0 2. Ratify the appointment of Grant Thorton LLP as independent auditors for the current fiscal year: For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 3,288,560 16,270 8,752 0 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registered has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAKOTAH, INCORPORATED July 14, 1997 By: /s/ TROY JONES, JR. ------------------------------------ Troy Jones, Jr. Chief Executive Officer July 14, 1997 By: /s/ WILLIAM R. RETTERATH ------------------------------------ William R. Retterath Chief Financial Officer (Principal Financial and Accounting Officer) EX-10.1 2 CREDIT AND SECURITY AGREEMENT CREDIT AND SECURITY AGREEMENT AGREEMENT made this 30th day of June, 1997, DAKOTAH, INCORPORATED, a South Dakota corporation (herein called "Borrower"), for the benefit of Diversified Business Credit, Inc., a Minnesota corporation (herein, with its participants, successors and assigns, called "Lender"). RECITALS Borrower has requested that Lender make loans to Borrower from time to time at Lender's sole discretion and, in connection therewith, has executed and delivered for Lender's benefit the following security documents (herein called the "Security Documents"): 1. UCC Financing Statements 2. Various ancillary and supplemental agreements and documents executed and delivered in connection with the foregoing. This Agreement sets forth certain additional obligations undertaken by Borrower to induce Lender to make such loans. ACCORDINGLY, to induce Lender to make one or more loans to Borrower, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower hereby represents, warrants and agrees for the benefit of Lender that: 1. THE LOANS. Lender and Borrower understand that Borrowers intends to request advances from time to time under this terms of this Agreement in an aggregate principal amount not to exceed $12,000,000 outstanding at any time, including a $2,000,000 request that, if made, would be subject to the Term Loan Supplement to Credit Agreement of even date herewith. Lender shall not be obligated to make any loans to Borrower. All loans which Lender may determine to make under this Agreement in its sole discretion shall be repayable on demand. Borrower will comply with the following procedure in requesting loans from Lender: (a) Borrower will request loans from Lender in such manner as Lender may from time to time prescribe. (b) Lender may make loans in any amount and in any manner requested orally or in writing (i) by any officer of Borrower; or (ii) by any person designated as Borrower's agent by any officer of Borrower in a writing delivered to Lender; or (iii) by any person reasonably believed by Lender to be an officer of Borrower or such a designated agent. Except as otherwise instructed in writing by such officer, agent or person, Lender may disburse loan proceeds by deposit with any bank to or for the account of Borrower or to or for the account of any third party designated by such officer, agent or person, or by an instrument payable to Borrower or to any such third party, or in any other manner deemed appropriate by Lender. All principal of and interest on loans made by Lender shall be repayable at the offices of Lender in Minneapolis, Minnesota, unless Lender designates a different place of payment by written notice to Borrower. (c) Lender may make loans on the basis of Collateral available hereunder and under the Security Documents or any other basis deemed appropriate by Lender from time to time. Lender may change from time to time, at its sole discretion and without notice to Borrower, the standards, criteria and formulae used by Lender in determining the type and amount of Collateral eligible for advance. In any event, subject to change at Lender's discretion, Borrower shall not request loans on the basis of the following Collateral: (1) Accounts receivable which are (i) disputed or subject to claims or setoffs; or (ii) progress billings; or (iii) owed by an account debtor not located in the United States or Canada and not secured by a bank letter of credit satisfactory to Lender in its sole discretion; or (iv) owed by an account debtor which is the subject of any bankruptcy or insolvency proceeding or is insolvent or has made an assignment for the benefit of creditors or has failed or suspended or gone out of business. (2) Collateral which is not as warranted herein or in the Security Documents. (3) Collateral which Lender, in its discretion, has declared ineligible collateral by written notice to Borrower. (4) Accounts receivable not paid within 90 days after invoice or, if Lender in its discretion has determined that a particular dated receivable is eligible for advance, within 30 days after the due date stated. (5) Accounts receivable owed to Borrower by any shareholder, subsidiary or affiliate of Borrower or by any person or company obligated to pay any receivable deemed ineligible under clauses (1) through (4), if such ineligible receivable is 10% or more of the total amount due from such person or company. Notwithstanding any apportionment, exclusion or segregation of collateral made by Lender for purposes of determining the amount or maximum amount of loans made to Borrower, all rights and interests of Lender hereunder and under the Security Documents, and all other collateral rights, interests and properties available to Lender, shall secure and may be applied to pay any or all indebtedness of Borrower secured thereby, in any manner or order of application and without regard to any such apportionment, exclusion or segregation. (d) Borrower will pay interest on all outstanding loans under this Agreement (except for Inventory Loans, as hereinafter defined) at an annual rate (computed on the basis of actual days elapsed in a 360-day year) which shall at all times be equal to the greater of (i) seven and one half percent (7.5%) per annum, or (ii) one percent (1%) above the rate of interest publicly announced by National City Bank of Minneapolis from time to time as its base rate (or any similar successor rate), and Borrower will pay interest on all outstanding loans advanced against Borrower's eligible inventory as determined by Lender under this Agreement ("Inventory Loans") at an annual rate (computed on the basis of actual days elapsed in a 360-day year) which shall at all times be equal to the greater of (i) eight and one half percent (8.5%) per annum, or (ii) three percent (3%) above the rate of interest publicly announced by National City Bank of Minneapolis from time to time as its base rate (or any similar successor rate)." Each change in the interest rate to take effect simultaneously with the corresponding change in the designated bank's base rate or any similar successor rate. In no event shall the Borrower pay interest at a rate greater than the highest rate permitted by law. All interest shall accrue on the principal balance outstanding from time to time and shall be payable on the first day of the next month in which accrued and in any event on demand. Borrower agrees that Lender may at any time or from time to time, without further request by Borrower, make a loan to Borrower, or apply the proceeds of any loans, for the purpose of paying all such interest promptly when due. In the computation of interest, Lender may allow two (2) banking days for the collection of uncollected funds. (e) Lender may maintain from time to time, at its discretion, liability records as to any and all loans made or repaid and interest accrued or paid under this Agreement. All entries made on any such record shall be presumed correct until Borrower establishes the contrary. On demand by Lender, Borrower will admit and certify in writing the exact principal balance which Borrower then asserts to be outstanding to Lender for loans under this Agreement. Any billing statement or accounting rendered by Lender shall be conclusive and fully binding on Borrower unless specific written notice of exception is given to Lender by Borrower within 30 days after its receipt by Borrower. (f) Borrower's obligations with respect to all loans shall be fully binding and enforceable without any note or other evidence of indebtedness. Nevertheless, if Lender so requests, Borrower will duly execute and deliver to Lender a promissory note negotiable in form payable on demand to the order of Lender in a principal amount equal to the principal balance then outstanding to Lender for loans under this Agreement, together with interest as set forth in Paragraph 1(d). (g) In requesting any loans under this Agreement, Borrower shall be deemed to represent and warrant to Lender that, as of the date of the proposed loans, (i) all of the representations and warranties made in Paragraphs 3 and 4 will be true and correct except for changes caused by transactions permitted under this Agreement, and (ii) no breach or default under, and no Event of Default defined or described in, this Agreement or any of the Security Documents will exist. 2. AFFILIATE. For the purposes of this Agreement, "Affiliate" refers to any corporation, partnership, individual or other entity which now or hereafter controls, is controlled by, or is under common control with Borrower. Borrower agrees that any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and Lender shall constitute a breach of this Agreement and an Event of Default hereunder and under the Security Documents. 3. SECURITY INTEREST (a) GRANT OF SECURITY INTEREST. Borrower hereby assigns to Lender and grants Lender a security interest (collectively referred to as the "Security Interests") in the property described below, as security for the payment and performance of each and every debt, liability and obligation of every type and description which Borrower may now or at any time hereafter owe to Lender (whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving Lender alone or in a transaction involving other creditors of 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 or Borrower arising under this or any other present or future loan or credit agreement, promissory note, guaranty or other undertaking of Borrower enforceable by Lender; all such debts, liabilities and obligations are herein collectively referred to as the "Obligations"). The Security Interests shall attach to the following property of Borrower (the "Collateral"), including all proceeds and products thereof: INVENTORY: All inventory of every type and description, now owned or hereafter acquired by Borrower, including inventory consisting of whole goods, spare parts or components, supplies or materials and inventory acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, or any other purpose, and wherever located. DOCUMENTS OF TITLE; All warehouse receipts, bills of lading and other documents of title of every type and description now owned or hereafter acquired by Borrower. RECEIVABLES: Each and every right of Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or any other transaction or event, whether such right to payment is created, generated or earned by Borrower or by some other person whose interest is subsequently transferred to Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens, security interests and guaranties) which Borrower may at any time have by law or agreement against any account debtor or other person obligated to make any such payment or against any property of such account debtor or other person; all contract rights, chattel papers, bonds, notes and other debt instruments, and all loans and obligations receivable, tax refunds and other rights to payment in the nature of general intangibles; all checking accounts, savings accounts and other depository accounts and all savings certificates and certificates of deposit maintained with or issued by Lender or any other bank or other financial institution. EQUIPMENT AND FIXTURES: All equipment and fixtures of every type and description now owned or hereafter acquired by Borrower, including (without limitation) all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies and all other goods (except inventory) used or bought for use by Borrower for any business or enterprise; including (without limitation) all goods that are or may be attached or affixed or otherwise become fixtures upon any real property; and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to Lender by Borrower, all accessions thereto, all substitutions and replacements thereof, and all like or similar property now owned or hereafter acquired by Borrower. (No such schedule or list need be furnished in order for the security interest granted herein to be valid as to all of Borrower's equipment.) EQUITY SECURITIES: All stocks and other instruments, now owned or hereafter acquired by Borrower, evidencing an ownership interest in any partnership, corporation, entity or enterprise. GENERAL INTANGIBLES: All general intangibles of every type and description now owned or hereafter acquired by Borrower, including (without limitation) all present and future foreign and domestic patents, patent applications, trademarks, trademark applications, copyrights, trade names, trade secrets, shop drawings, engineering drawings, blueprints, specifications, parts lists, manuals, operating instructions, customer or supplier lists and contracts, licenses, permits, franchises, the right to use Borrower's corporate name, and the goodwill of Borrower's business, provided, however, for licenses in which Borrower is licensee the grant of this security interest shall be limited by any restrictions upon Borrower's right to grant security interests made in the ordinary course of business. (b) REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower represents, warrants and covenants as follows: (1) Except as set forth in Schedule 3(b)(1), Borrower has (or will have at the time it acquires rights in Collateral hereafter arising) and will maintain so long as the Security Interests may remain outstanding, absolute title to each item of Collateral and all proceeds thereof, free and clear of all interests, liens, attachments, encumbrances and security interests except the Security Interests and as provided herein and except as Lender may otherwise agree in writing. Borrower will defend the Collateral against all claims or demands of all persons (other than Lender) claiming the Collateral or any interest therein. Borrower will not sell or otherwise dispose of the Collateral or any interest therein, except the sale of inventory in the ordinary course of Borrower's business, without Lender's prior written consent. Notwithstanding the foregoing, prior to an Event of Default Borrower may sell up to $25,000 worth of equipment per fiscal year for fair market value, provided that the proceeds are paid to Lender. Borrower's interest in the Collateral is freely transferable to any person, without condition, limitation, jurisdiction or restriction of governmental authority, or any other qualification whatsoever. (2) Borrower does business solely under its own name and trade names (if any) set forth below. The place(s) of business and chief executive office of Borrower are located at the address(es) set forth below, and all tangible Collateral is located at such address(es). All of Borrower's records relating to its business or the Collateral are kept at its chief executive office. Borrower will not permit any tangible Collateral or any records pertaining to Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security interests. Borrower will not change its name, identity or corporate structure or the location of its place of business, without prior written notice to Lender. (3) None of the Collateral is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. (4) Each account and other right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral is (or, in the case of all future Collateral, will be when arising or issued) the valid genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in Borrower's records pertaining thereto as being obligated to pay such obligation. Borrower will not modify, amend, subordinate, cancel or terminate the obligation of any such account debtor or other obligor, without Lender's prior written consent. (5) Borrower will keep all tangible Collateral in good repair, working order and condition, normal depreciation excepted, and will, from time to time, replace any worn, broken or defective parts. (6) Borrower will promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interests. (7) Borrower will keep all Collateral free and clear of all security interests, liens and encumbrances except the Security Interests and as provided herein and except other security interests approved in writing by Lender. (8) Borrower will at all reasonable times permit Lender or its representatives to examine or inspect any Collateral, or any evidence of Collateral, wherever located. (9) Borrower will promptly notify Lender of any loss of or material damage to any Collateral or of any substantial adverse change, known to Borrower, in any Collateral or the prospect of payment thereof. (10) Upon request by Lender, whether such request is made before or after the occurrence of any Event of Default, Borrower will promptly deliver to Lender a pledge of all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by Borrower. (11) Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as Lender may reasonably request, with any loss payable to Lender to the extent of its interest. (12) Borrower will use and keep the Collateral, and will require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. (13) Borrower from time to time will execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings which Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interests or the rights of Lender under this Agreement (but any failure to request or assure that Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interests, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Without limitation, Borrower agrees to use its best efforts to obtain whatever consents and assignments Lender requests from licensors of the Borrower to protect Lender's right to market inventory collateral without unreasonable restrictions following the occurrence of an Event of Default. (14) The proper places to file financing statements to perfect the Security Interests are the Secretary of State, Minnesota; the Day County Recorder, South Dakota; Spink County Recorder, South Dakota; Roberts County Recorder, South Dakota; Marshall County Recorder, South Dakota; Charles Mix County Recorder, South Dakota; Grant County Recorder, South Dakota; the Secretary of State, New York; the Secretary of State, Illinois; and the Secretary of State, Georgia. When the financing statements heretofore signed by Borrower are filed there, Lender will have valid and perfected security interests in the Collateral, subject to no prior security interest, assignment, lien or encumbrance (except interests, if any, specifically approved by Lender in writing). If Borrower at any time fails to perform or observe any of the foregoing agreements, and if such failure shall continue for a period of ten calendar days after Lender gives Borrower written notice thereof (or in the case of the agreements contained in subsections (7) and (11) above, immediately upon the occurrence of such failure, without notice or lapse of time), Lender may, but need not, perform or observe such agreement on behalf and in the name, place and stead of Borrower (or, at Lender's option, in the name of Lender) and may, but need not, take any and all other actions which Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and Borrower shall thereupon pay to Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by Lender, together with interest thereon from the date expended or incurred at the highest lawful rate then applicable to any of the Obligations. To facilitate the performance or observance by Lender of such agreements of Borrower, Borrower hereby irrevocably appoints Lender, or the delegate of Lender, acting alone, as the attorney in fact of Borrower with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Borrower under this subparagraph (b). (c) PROCEEDS; COLLATERAL ACCOUNT. Borrower agrees to deliver to Lender, or, at Lender's option, to deposit in one or more special collateral accounts maintained for Lender by any bank reasonably satisfactory to Lender, all proceeds of cash sales of inventory, all collections on accounts, contract rights, chattel paper and other rights to payment constituting Collateral, and all other cash proceeds of Collateral, immediately upon receipt thereof, in the form received, except for Borrower's endorsement when deemed necessary. Amounts deposited in a collateral account shall not bear interest and shall not be subject to withdrawal by Borrower, except after full payment and discharge of all Obligations. All such collections shall constitute proceeds of Collateral and shall not constitute payment of any Obligation. Until delivered to Lender or deposited in a collateral account, all proceeds or collections of Collateral shall be held in trust by Borrower for and as the property of Lender and shall not be commingled with any funds or property of Borrower. Lender may deposit any and all collections received by it from Borrower or out of any collateral account in Lender's general account and may commingle such collections with other property of Lender or any other person. All items shall be delivered to Lender or deposited in any collateral account subject to final payment. If any such item is returned uncollected, Borrower will immediately pay Lender, or, for items deposited in a collateral account, the bank maintaining such account, the amount of that item, or such bank in its discretion may charge any uncollected item to Borrower's commercial account or other account. Borrower shall be liable as an endorser on all items deposited in any collateral account, whether or not in fact endorsed by Borrower. Lender from time to time at its discretion may apply funds on deposit in a collateral account to the payment of any or all Obligations, in any order or manner of application satisfactory to Lender. (d) COLLECTION RIGHTS OF LENDER. In addition to the rights of Lender under subparagraph (c), with respect to any and all rights to payment constituting Collateral Lender may at any time (either before or after the occurrence of an Event of Default under Paragraph 7) notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to Lender for security and shall be paid directly to Lender. Borrower will join in giving such notice, if Lender so requests. At any time after Borrower or Lender gives such notice to an account debtor or other obligor, Lender may, but need not, in Lender's name or in Borrower's name (i) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (ii) as agent and attorney in fact of Borrower, notify the United States Postal Service to change the address for delivery of Borrower's mail to any address designated by Lender and otherwise intercept, receive, open and dispose of Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for Borrower's account or forwarding such mail to Borrower's last known address. (e) ASSIGNMENT OF INSURANCE. As additional security for the payment and performance of the Obligations, Borrower hereby assigns to Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and Borrower hereby directs the issuer of any such policy to pay all such monies directly to Lender. At any time, whether before or after the occurrence of any Event of Default, Lender may (but need not), in Lender's name or in Borrower's name, execute and deliver proofs of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. (f) REPRODUCTIONS. A carbon, photographic or other reproduction of this Agreement or of any financing statement signed by Borrower shall be sufficient as a financing statement. (g) VERIFICATION. At any time or from time to time, under its own name or under a trade name, Lender may (but shall not be obligated to) send to and discuss with Borrower's account debtors requests for verification of amounts owed to Borrower. If Lender so requests at any time, Borrower will send requests for verification to its account debtors or join in any requests for verification sent by Lender. (h) SURPLUS AND DEFICIENCY; CARE OF COLLATERAL. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, Borrower is entitled to any surplus and shall remain liable for any deficiency. Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Lender need not otherwise preserve, protect, insure or care for any Collateral. Lender shall not be obligated to preserve any rights Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender that: (a) Borrower is a corporation duly organized and existing in good standing under the laws of the State of South Dakota. It has the corporate power to own its property and to carry on its business as now conducted and is duly qualified to do business in all states in which such qualification is required. During the ten years preceding the date of this Agreement, Borrower has done business solely under the name DAKOTAH, INCORPORATED . Borrower does not own any capital stock of any corporation except for an investment in Webster Development Corporation, as disclosed to Lender. (b) Borrower is duly authorized and empowered to execute, deliver and perform this Agreement and the Security Documents and to borrow money from Lender. (c) The execution and delivery of this Agreement and the Security Documents, and the performance by Borrower of its obligations thereunder, do not and will not violate or conflict with any provision of law or the Articles of Incorporation or By-Laws of Borrower and do not and will not violate or conflict with, or cause any default or event of default to occur under, any agreement binding upon Borrower. (d) The execution and delivery of this Agreement and the Security Documents have been duly approved by all necessary action of the directors and shareholders of Borrower; and this Agreement and the Security Documents have in fact been duly executed and delivered by Borrower and constitute its lawful and binding obligations, legally enforceable against it in accordance with their respective terms (subject to laws generally affecting the enforcement of creditors' rights). (e) No litigation, tax claims or governmental proceedings are pending or are threatened against Borrower or any Affiliate and no judgment or order of any court or administrative agency is outstanding against Borrower or any Affiliate. (f) The transaction evidenced by this Agreement does not violate any law pertaining to usury or the payment of interest on loans. (g) The authorization, execution, delivery and performance of this Agreement and the Security Documents are not and will not be subject to the jurisdiction, approval or consent of, or to any requirement of registration with or notification to, any federal, state or local regulatory body or administrative agency. (h) The conduct of its business by Borrower is not subject to registration with, notification to, or regulation, licensing, franchising, consent or approval by any state or federal governmental authority or administrative agency, except general laws and regulations which are not related or applicable particularly or uniquely to the type of business conducted by Borrower, which do not materially restrict or limit the business of Borrower, and with which Borrower is in full compliance. All registrations and notifications required to be made, and all licenses, franchises, permits, operating certificates, approvals and consents required to be issued, to enter into or conduct such business have been duly and lawfully made or obtained and issued, and all terms and conditions set forth therein or imposed thereby have been duly met and complied with. (i) To the best knowledge of Borrower based upon reasonable inquiry, no director, shareholder, officer, employee or agent of, or consultant to, Borrower is prohibited by law, by regulation, by contract, or by the terms of any license, franchise, permit, certificate, approval or consent from participating in the business of Borrower as director, shareholder, officer, employee or agent of, or as consultant to, Borrower, or is the subject of any pending or, to Borrower's best knowledge, threatened proceeding which, if determined adversely, would or could result in such a prohibition. (j) All assets of Borrower and any Affiliates are free and clear of liens, security interests and encumbrances, except those permitted under Paragraph 6(b). (k) Borrower and all Affiliates have filed all federal and state tax returns which are required to be filed, and all taxes shown as due thereon have been paid. Borrower and all Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by them. (l) Borrower has furnished to Lender the financial statements described below for the periods described below: 3/31/97 ------------------------------ 12/31/96 ------------------------------ 12/31/95 ------------------------------ ------------------------------ These statements were prepared in accordance with generally accepted accounting principles consistently maintained, present fairly the financial condition of Borrower as at the dates thereof, and disclose fully all liabilities of Borrower, whether or not contingent, with respect to any pension plan. Since the date of the most recent financial statement, there has been no material adverse change in the financial condition of Borrower. (m) Each qualified retirement plan of Borrower presently conforms to and is administered in a manner consistent with the Employee Retirement Income Security Act of 1974. (n) Borrower will not request or maintain any credit for the purpose of purchasing or carrying any security, within the meaning of Regulations G or U of the Board of Governors of the Federal Reserve System. 5. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that it will: (a) Use the proceeds of any and all loans made by Lender solely for lawful and proper corporate purposes of the Borrower. (b) Pay all taxes, assessments and governmental charges prior to the time when any penalties or interest accrue, unless contested in good faith with an adequate reserve for payment; and pay to the proper authorities when due all federal, state and local taxes required to be withheld by it. (c) Continue the conduct of its business; maintain its corporate existence; maintain all rights, licenses and franchises necessary for Borrower to conduct its business substantially in the manner currently conducted; and comply with all applicable laws and regulations. (d) Maintain its property in good working order and condition and make all needful and proper repairs, replacements, additions and improvements thereto. (e) Deliver to Lender: (1) Within 90 days after the end of each fiscal year, a statement of Borrower's financial condition as at the end of such fiscal year and a statement of earnings and retained earnings of Borrower for such fiscal year, with comparative figures for the preceding fiscal year, prepared, if Lender so requests, on a consolidating and consolidated basis to include any Affiliated Corporation, certified without qualification by independent certified public accountants acceptable to Lender. (2) Within 30 days after the end of each fiscal month, a statement of Borrower's financial condition and an operating statement and statement of earnings and retained earnings of Borrower for such month, in each case with comparative figures for the same month in the preceding fiscal year, prepared on the same basis as the most recent annual statement provided pursuant to clause (1) above, certified by an officer of Borrower. (3) Within 15 days after the end of each month, an aging of Borrower's accounts receivable as of the end of such month. (4) Within 10 days after the end of each month, an inventory certification as of the end of such month. (5) Within 20 days after the end of each month, an aging of Borrower's accounts payable as at the end of such month. (6) From time to time, any and all receivables, schedules, collection reports, equipment schedules, copies of invoices to account debtors and shipment documents and delivery receipts for goods sold, and other material, reports, records or information required by Lender. (f) Permit any officer, employee, attorney or accountant for Lender to audit, review, make extracts from, or copy any and all corporate and financial books, records and properties of Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors' requests for verification of amounts owed to Borrower, and to discuss the affairs of Borrower with any of its directors, officers, employees, agents. (g) Maintain property, liability, business interruption, workman's compensation and other forms of insurance in reasonable amounts designated at any time or from time to time by Lender. (h) Earn net income in each fiscal year measured as of its fiscal year end equal to, or greater than the annual net income reported for the 1996 fiscal year end. Earn net income of not less than $1.00 for each fiscal year to date as of the end of the third fiscal quarter of each fiscal year. (i) At all times maintain the book net worth of Borrower at amounts in excess of $9,750,000.00 and maintain Borrower's tangible net worth (excluding all intangible assets designated by Lender) at amounts in excess of $8,100,000.00. (j) Notify Lender promptly of (i) any disputes or claims by customers of Borrower; (ii) any goods returned to or recovered by Borrower; (iii) any change in the persons constituting the officers and directors of Borrower; and (iv) the occurrence of any breach, default or event of default by or attributable to Borrower under this Agreement or any of the Security Documents. 6. NEGATIVE COVENANTS. Borrower covenants and agrees that it will not, except with the prior written approval of Lender: (a) Become or remain liable in any manner in respect of any indebtedness or contractual liability (including, without limitation, notes, bonds, debentures, loans, guaranties, obligations of partnerships, and pension liabilities, in each case whether or not contingent and whether or not subordinated), except: (1) Indebtedness arising under this Agreement; (2) Unsecured indebtedness, other than for money borrowed or for the purchase of a capital asset, incurred in the ordinary course of its business, which becomes due and must be fully satisfied within twelve months after the date on which it is incurred; (3) Indebtedness arising out of the purchase of real property and either unsecured or secured only by a purchase money security interest or mortgage lien, provided, however, that the aggregate amount of such indebtedness shall not exceed $400,000.00. (4) Indebtedness arising out of the lease or purchase of goods constituting equipment and either unsecured or secured only by a purchase money security interest securing purchase money indebtedness, but in any event only if such equipment is acquired in compliance with Paragraph 6(c). (5) Presently outstanding unsecured borrowings, if any, disclosed in the financial statements referred to in Paragraph 4(m), but not including any extensions or renewals thereof. (b) Create, incur or cause to exist any mortgage, security interest, encumbrance, lien or other charge of any kind upon any of its property or assets, whether now owned or hereafter acquired, except: (1) The interests created by this Agreement and the Security Documents; (2) Liens for taxes or assessments not yet due or contested in good faith by appropriate proceedings; (3) A purchase money security interest or lessor's interest securing indebtedness permitted to be outstanding or incurred under Paragraph 6(a)(4); (4) Security interests and mortgage liens approved by Lender in writing; and (5) Other liens, charges and encumbrances incidental to the conduct of its business or the ownership of its property which were not incurred in connection with the borrowing of money or the purchase of property on credit and which do not in the aggregate materially detract from the value of its property or materially impair the use thereof in its business. (c) Expend or contract to expend, in any one calendar year, more than $1,360,000 in the aggregate for the fiscal year ending 12/31/97; $500,000 in the aggregate for any fiscal year thereafter; or more than $150,000 in any one transaction for the lease, purchase or other acquisition of any capital asset, or for the lease of any other asset, whether payable currently or in the future. (d) Sell, lease, or otherwise dispose of all or any substantial part of its property, except as expressly permitted hereunder or under the Security Documents. (e) Consolidate or merge with any other corporation; or acquire any business; or acquire stock of any corporation; or enter into any partnership or joint venture. (f) Substantially alter the nature of the business in which it is engaged. (g) Declare or pay any dividends (except dividends payable solely in its capital stock), or purchase or redeem any of its capital stock, or otherwise distribute any property on account of its capital stock; or enter into any agreement therefor. (h) Purchase stock or securities of, extend credit to or make investments in, become liable as surety for, or guarantee or endorse any obligation of, any person, firm or corporation, except investments in direct obligations of the United States and commercial bank deposits and extensions of credit reflected by trade accounts receivable arising for goods sold by Borrower in the ordinary course of its business. (i) After notice from Lender, grant any discount, credit or allowance to any customer of Borrower or accept any return of goods sold. (j) In any manner transfer any property without prior or present receipt of full and adequate consideration. (k) Permit more than $15,000.00 in the aggregate to be owing to Borrower by the officers, directors or shareholders of Borrower or any Affiliated Corporation, or members of their families, on account of any loan, travel advance, credit sale or other transaction or event. (l) Pay excessive or unreasonable salaries, bonuses, commissions, consultant fees, or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any director, officer, or consultant, or any member of their families, by any unreasonable amount in any one year, either individually or for all such persons in the aggregate, or pay any such increase from any source other than profits earned in the year of payment. (m) Permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon Borrower. (n) Change its fiscal year or fail to apply GAAP in a manner materially consistent with the financial statements dated as of 12/31/96, except to the extent that changes in GAAP necessitate changes in the manner in which it is applied or Lender consents thereto. 7. EVENT OF DEFAULT. Any breach of any representation, warranty or agreement of Borrower set forth herein or in the Security Documents or in any other instrument or agreement securing any of the Obligations shall constitute an Event of Default hereunder and under the Security Documents. 8. REMEDIES UPON DEFAULT. Upon the occurrence of any Event of Default, and at any time thereafter unless and until such Event of Default is waived in writing by Lender, Lender may exercise one or several or all of the following rights and remedies: (a) Lender may terminate this Agreement with immediate effectiveness and without notice or lapse of time. Notwithstanding such termination, all claims, rights and security interests of Lender and all debts, liabilities, obligations and duties of Borrower shall remain in full force and effect. (b) Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process (without a prior hearing or notice thereof, which Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and in connection therewith Borrower will on demand assemble the Collateral and make it available to Lender at a place to be designated by Lender which is reasonably convenient to all parties. If notice to Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Paragraph 13(a) at least ten calendar days prior to the date of intended disposition or other action. For the purpose of enabling Lender to exercise such rights and remedies: (1) Borrower hereby grants Lender (in addition to Lender's security interest in general intangibles) a non-exclusive license to use, sell or otherwise exploit in any manner any and all trade names, trademarks, patents, copyrights, licenses (in cases where Borrower is a licensee, limited to the extent permitted by the governing license agreement) and other intangible properties necessary, appropriate or useful in the enforcement of the Security Interests; and (2) Borrower hereby grants Lender the right to possess and hold all premises owned, leased or held by Borrower upon which any Collateral is or may be located (the "Premises"), subject to the following terms and conditions: A. Lender may take possession of the Premises only upon the occurrence of an Event of Default. B. Lender may use the Premises only to hold, process, manufacture and sell or otherwise dispose of goods which are inventory, or to provide services under contracts for receivables, or to use, operate, store, liquidate or realize upon goods which are equipment or any other Collateral granted under this Agreement and for other purposes which Lender may in good faith deem to be related or incidental purposes. C. The right of Lender to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations; (ii) final sale or disposition of all goods constituting Collateral (including both inventory and equipment) and delivery of all such goods to purchasers. D. Lender shall not be obligated to pay or account for any rent or other compensation for this grant or for the possession, occupancy or use of any of the Premises. E. Borrower acknowledges and agrees that the breach of this grant is not fully compensable by money damages, and that, accordingly, this grant may be enforced by an action for specific performance. (c) Lender may exercise or enforce any and all other rights or remedies available by law or agreement against the Collateral, against Borrower, or against any other person or property. 9. ACCELERATION UPON BANKRUPTCY. All of the Obligations shall be immediately and automatically due and payable, without further act or condition, if any case under the United States Bankruptcy Code is commenced voluntarily by Borrower or involuntarily against Borrower. 10. SETOFF. Borrower agrees that Lender may at any time or from time to time, at its sole discretion and without demand and without notice to anyone, set off any deposit or other liability owed to Borrower by Lender, whether or not due, against any indebtedness owed to Lender by Borrower (for loans under this Agreement or for any other transaction or event), whether or not due. In addition, each person holding a participating interest in any loans made to Borrower by Lender shall have the right to appropriate or set off any deposit or other liability then owed by such person to Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such person had lent directly to Borrower the amount of such participating interest. 11. TERMINATION BY BORROWER. So long as Lender, in its sole discretion, is willing to make loans to Borrower for ordinary working capital purposes subject to the availability of Collateral deemed eligible by Lender, Borrower may terminate this Agreement and (subject to payment and performance of all outstanding secured obligations) may obtain any release or termination of the Security Documents to which Borrower is otherwise entitled by law, effective only on the second or any subsequent anniversary date of this Agreement, and then only if Lender receives at least 60 days' prior written notice of Borrower's intent to terminate this Agreement effective on such anniversary date. Upon any such termination, all obligations of Borrower under this Agreement and the Security Documents shall remain in full force and effect until all indebtedness arising under this Agreement and all other debts, liabilities and obligations of Borrower secured hereby, or by the Security Documents or any other collateral security have been fully paid and satisfied. Subject to paying all obligations of Borrower to Lender and survival of all indemnifications of Borrower in any of the Loan Documents, Borrower may terminate this Agreement upon sixty days' prior written notice in the event that Lender exercises its discretion to (i) refuse to make any further requested advances under this Agreement or (ii) to reduce its formula without the consent of Borrower for making advances up to the specific percentage values of eligible collateral specified in that certain letter from Lender to Borrower dated of even date herewith; or (iii) to refuse to amend this Agreement upon request of Borrower to permit outstanding Advances in excess of $12,000,000 even though sufficient eligible collateral exists in order for such higher level of borrowing under the then existing formula of Lender. 12. RESERVATION OF RIGHT TO MAKE DEMAND AND TO REFUSE TO LEND. Notwithstanding any other provisions contained herein, Borrower acknowledges that Lender reserves the right to demand immediate payment of any or all loans and the interest thereon and of all other obligations of Borrower payable on demand, and the right to refuse to make any loans hereunder, whether or not (a) an Event of Default has occurred hereunder, (b) Borrower has failed to comply with the terms of this Agreement or the Security Documents, (c) Borrower's financial or other condition has changed, (d) Lender has at that time or in connection with any previous demand or refusal to lend given notice of its intention to make demand or to refuse to lend or (e) such demand or refusal to lend shall not cause any loss or damage to the Borrower. 13. MISCELLANEOUS. Borrower agrees that: (a) This Agreement can be waived, amended, terminated or discharged, and the Security Interests can be released, only explicitly in a writing signed by Lender. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to Lender. All rights and remedies of Lender shall be cumulative and may be exercised singularly in any order or sequence, or concurrently, at Lender's option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise of enforcement of any other. All notices to be given to Borrower shall be deemed sufficiently given if actually received by any officer of Borrower or if delivered or mailed by registered, certified or ordinary mail, postage prepaid, to Borrower at its address set forth below or at its most recent address shown on Lender's records. (b) Borrower will furnish to Lender, prior to the first advance hereunder, (i) a certified copy of resolutions of the directors and, if required, the shareholders of Borrower, authorizing the execution, delivery and performance of this Agreement and the Security Documents; (ii) a certificate of an officer of Borrower confirming, in his personal capacity, the representations and warranties set forth in Paragraphs 3 and 4; (iii) a written opinion of Borrower's independent legal counsel, addressed to Lender, confirming to the satisfaction of Lender the representations and warranties set forth in clause (b)(14) of Paragraph 3 and clauses (a) through (h) of Paragraph 4; and (iv) currently certified copies of the Articles of Incorporation and Bylaws of Borrower and a Certificate of Good Standing issued as to Borrower by the Secretary of State of the state of its incorporation; and (v) all certificates of insurance and insurance endorsements required hereunder and under the Security Documents; and (vi) all collateral schedules, security interest subordination agreements, searches, abstracts, releases and termination statements which Lender may request adequately to assure and confirm the creation, perfection and priority of the security interests created hereunder or under the Security Documents. (c) On demand, Borrower will pay or reimburse Lender for all expenses, including all reasonable fees and disbursements of legal counsel, incurred by Lender in connection with the preparation, negotiation, execution, performance or enforcement of this Agreement or the Security Documents, or any document contemplated thereby, or the perfection, protection, enforcement or foreclosure of the security interests created hereby or by the Security Documents, or in connection with the protection or enforcement of the interests and collateral security of Lender in any litigation or bankruptcy or insolvency proceeding or the prosecution or defense or any action or proceeding relating in any way to the transactions contemplated by this Agreement. (d) Lender and its participants, if any, are not partners or joint venturers, and Lender shall have no liability or responsibility for any obligation, act or omission of its participants under or as to this Agreement. (e) This Agreement shall be binding upon Borrower and its successors and assigns and shall inure to the benefit of Lender and its participants, successors and assigns. This Agreement shall be effective when executed by Borrower and delivered to Lender, whether or not this Agreement is executed by Lender. All rights and powers specifically conferred upon Lender may be transferred or delegated by Lender to any of its participants, successors or assigns. Except to the extent otherwise required by law, this Agreement and the transactions evidenced hereby shall be governed by the substantive laws of the State in which this Agreement is accepted by Lender. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement or in any other agreement between Borrower and Lender shall survive the execution, delivery and performance of this Agreement and the creation and payment of any indebtedness to Lender. Borrower waives notice of the acceptance of this Agreement by Lender. 14. Nothing herein contained nor any transaction related hereto shall be construed or shall operate so as to require the Borrower or any person liable for repayment of loans made hereunder to pay interest in an amount or at a rate greater than the maximum allowed, from time to time, by applicable laws, if any. Should any interest or other charges, including any property, tangible or intangible, or other items of value received by the Lender, imposed against or paid by the Borrower or any party liable for the payment of such loans, result in a computation of earning of interest in excess of the maximum legal rate of interest permitted under applicable law in effect while such interest is being earned, then any and all of that excess shall be waived by the Lender, and all of that excess shall be automatically credited against and in reduction of the principal balance of such loans, without premium, with the same force and effect as though the Borrower had specifically designated such extra sums to be so applied to principal and the Lender to accept such extra payment(s) as a premium-free prepayment, and any portion of the excess that exceeds the principal balance of loans made hereunder shall be paid by the Lender to the Borrower or to any party liable for the payment of such loans, applicable, it being the intent of the parties hereto that under no circumstances shall the Borrower or any party liable for the payment of the indebtedness evidenced hereby be required to pay interest in excess of the maximum rate allowed by any applicable laws. The provisions of this Agreement are hereby modified to the extent necessary to conform with the limitations and provisions of this paragraph, and this paragraph shall govern over all other provisions in any document or agreement now or hereafter existing. This paragraph shall never be superseded or waived unless there is a written document executed by the Lender and the Borrower, expressly declaring the usury limitation of this Agreement to be null and void, and no other method or language shall be effective to supersede or waive this paragraph. 15. ENVIRONMENTAL LAWS. Borrower is and will continue to be throughout the term of this Agreement in full and complete compliance with all federal, state and local laws, rules and regulations governing hazardous and toxic substances, waste or materials, any pollutants or contaminants or any other similar substances, or pertaining to environmental regulations, contamination or cleanup, including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act, as amended, the Minnesota Petroleum Tank Release Cleanup Act, as amended, or any other state lien or state super lien or environmental cleanup statute (all such laws, rules and regulations being referred to collectively as "Environmental Laws"). Borrower indemnifies, defends and holds Lender and its officers, directors, employees and agents, harmless from and against any liability, laws, claims, damages or expense (including attorneys' fees and disbursements) arising out of or based upon any violation or claim of violation of Environmental Laws by any Borrower or with respect to any assets owned or used by any Borrower or any properties leased or occupied by any properties of any Borrower by Lender. This indemnity shall be continuing and remain in full force and effect and shall survive this Agreement and the Security Documents or any exercise of any remedy by Lender even if all indebtedness and other obligations to Lender have been satisfied in full. 16. WAIVER OF JURY TRIAL. BORROWER AND LENDER EACH HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT, THE SECURITY DOCUMENTS OR ANY OTHER AGREEMENTS OR TRANSACTIONS BETWEEN THE BORROWER AND LENDER. 17. JURISDICTION AND VENUE. BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT SITUATED IN HENNEPIN COUNTY, MINNESOTA AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, WITH REGARD TO ANY ACTIONS, CLAIMS, DISPUTES OR PROCEEDINGS RELATED TO THIS AGREEMENT, THE COLLATERAL, ANY OTHER LOAN DOCUMENT, OR ANY TRANSACTIONS ARISING THEREFROM, OR ENFORCEMENT AND/OR INTERPRETATION OF ANY OF THE FOREGOING. Nothing herein shall affect Lender's rights to serve process in any manner permitted by law, or limit Lender's right to bring proceedings against Borrower in the competent courts of any other jurisdiction or jurisdictions. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the proper officers thereunto duly authorized on the day and year first above written. DAKOTAH, INCORPORATED By /s/ Troy Jones, Jr. --------------------------------- Chief Executive Officer TRADE NAMES OF BORROWER: ADDRESS OF CHIEF EXECUTIVE OFFICES: None One North Park Lane Webster, SD 57274-0120 COLLATERAL LOCATIONS: OTHER LOCATIONS: See attached Exhibit A None Accepted at Minneapolis, Minnesota on June 30, 1997. DIVERSIFIED BUSINESS CREDIT, INC. By /s/ Bridget A. Manahan --------------------------------- Vice President EXHIBIT A TO CREDIT AND SECURITY AGREEMENT COLLATERAL LOCATIONS Dakotah, Inc. Dakotah, Inc. North Park Lane One North Park Lane Webster, SD 57274 Webster, SD 57274 Dakotah, Inc. Dakotah, Inc. 715 West Highway 12 East Highway 12 Webster, SD 57274 Webster, SD 57274 Dakotah, Inc. Dakotah, Inc. 10 Redfield Industrial Pk 2 Fifth Avenue West Redfield, SD 57469 Sisseton, SD 57262 Dakotah, Inc. Dakotah, Inc. South Main Street 27480 SD Hwy 45 Veblen, SD 57270 Platte, SD 57369 Dakotah, Inc. Dakotah, Inc. 1340 Industrial Drive 295 Fifth Avenue Milbank, SD 57252 Suite 107 New York, NY 10016 Dakotah, Inc. Dakotah, Inc. Atlanta Merchandise Mart 12-332 Merchandise Mart 240 Peachtree St. NW Chicago, IL 60654 Suite 10E20 Atlanta, GA 30303 EX-10.2 3 FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT This First Amendment to Credit and Security Agreement is made and entered into as of this 7th day of July, 1997, by and between DAKOTAH, INCORPORATED, a South Dakota corporation (herein called "Borrower"), and Diversified Business Credit, Inc., a Minnesota corporation (herein called "Lender"). Recitals A. Borrower executed and delivered to Lender a Credit and Security Agreement on June 30, 1997 (the "Credit Agreement"). B. Borrower and Lender desire to alter, amend and modify the Credit Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Paragraph 1 of the Credit Agreement is hereby amended as follows: "1. THE LOANS. The Lender shall not be obligated to make any loans to Borrower. All loans which Lender may determined to make under this Agreement shall be repayable upon demand. Borrower will comply with the following procedure in requesting loans from Lender:" The remainder of Paragraph 1, including subparagraphs 1.(a), 1.(b), 1.(c), 1.(d), 1.(e), 1.(f) and 1.(g) shall remain unchanged. 2. Except as expressly amended hereby, the Credit Agreement and the Security Documents (as defined in the Credit Agreement) shall remain in full force and effect in accordance with their original terms and binding upon and enforceable against Borrower, and not subject to any defense, counterclaim or right of setoff. IN WITNESS WHEREOF, the parties have executed and delivered this First Amendment to Credit and Security Agreement as of the day and year first above written. DAKOTAH, INCORPORATED By /s/ Troy Jones, Jr. ---------------------------------- Its Chief Executive Officer DIVERSIFIED BUSINESS CREDIT, INC. By /s/ Bridget A. Manahan ---------------------------------- Its Vice President EX-27 4 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 5,956 0 4,995,736 439,000 19,473,090 25,508,946 7,457,048 2,895,221 31,070,556 19,990,138 1,544,103 0 0 34,998 9,501,317 31,070,556 13,538,086 13,538,086 10,178,176 10,178,176 0 62,672 353,599 (1,465,345) (491,000) (974,345) 0 0 0 (974,345) (.28) 0
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