SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1997 0-23604
DAKOTAH, INCORPORATED
(Exact name of registrant as specified in its charter)
SOUTH DAKOTA 46-0339860
(State or other jurisdiction of (IRS 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 17, 1998: Approximately $1,838,000.
Number of shares of Common Stock, $.01 par value, outstanding as of
March 17, 1998: 3,499,755.
<PAGE>
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, throws
(polyester fleece and cotton), blankets, bedding ensembles and other home
accessory products such as footstools, chair pads and table linens. The
Company's objective has been to build a strong brand image associated with
fashionable styling and high quality products. It markets its products
(primarily under the Dakotah(R) and Polarfleece(R)* names and various licensed
names) to a broad range of major retailers, including department stores,
specialty retailers, mass merchandisers and mail order houses, both domestic and
international. Showrooms for the Company's products, which support sales, are
located across the country in New York, Atlanta, Chicago, Denver and Seattle.
Founded in l971 as a craft cooperative, the Company has over 378
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 furnishings product categories.
PRODUCTS
GENERAL. The Company's principal product groups are decorative
pillows, throws (polyester fleece and cotton), blankets, bedding ensembles and
other home accessory products such as footstools, chair pads and table linens.
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.
<PAGE>
The following table sets forth certain information regarding net
sales of these product groups during the past three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Net Sales Percent Net Sales Percent Net Sales Percent
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Decorative
pillows and
chair pads $15,138,931 39.1% $20,147,683 48.5% $19,165,502 62.1%
Throws 12,866,523 33.2% 15,748,395 37.9% 7,119,118 23.1%
Blankets and
bedding
ensembles 7,971,950 20.6% 4,335,946 10.4% 1,912,318 6.2%
Other products 2,734,080 7.1% 1,327,573 3.2% 2,687,143 8.6%
----------- ------ ----------- ------ ----------- ------
TOTAL $38,711,484 100.0% $41,559,597 100.0% $30,884,081 100.0%
=========== ====== =========== ====== =========== ======
</TABLE>
DECORATIVE PILLOWS AND CHAIR PADS. The Company offers a wide variety
of decorative pillows in over 500 styles 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'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 25 different
designs for chair pads and 4 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) product
group consists of 25 solid colors in the classic Polarfleece(R) line, 17 solid
colors in the Polarfleece(R) Wide Wale line, 25 solid colors in the Dakotah(R)
Luxe(TM) line, 9 styles in the Polarfleece(R) Plus(TM) line, and 20 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.
BLANKETS AND BEDDING ENSEMBLES. The Company offers a variety of
blankets consisting primarily of the Polarfleece(R) and Dakotah(R) Luxe(TM)
lines of fabric in a number of different color schemes. The Company's bedding
ensembles include a line of over 40 different duvets (comforter covers) and
coverlets 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 duvet covers generally sell at retail prices ranging
from $120 to $750.
<PAGE>
OTHER PRODUCTS. The Company's other products include table linens,
footstools, stuffed bears and accessories. 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 and includes 30 different designs. The stuffed bear
line is comprised of two sizes of stuffed polar bears designed from the
Polarfleece(R) logo used by Malden Mills. The Company sells these bears to
retailers as a promotion to enhance sales of the entire line of Polarfleece(R)
products.
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)
brand 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 Chief Executive Officer
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.
In 1997, the Company was awarded the Gold Star Gallery Award by Potentials in
Marketing for its embroidered Polarfleece(R) products.
The Company employs a product development staff of six persons and a
product design staff of three persons who work closely with the marketing staff
to develop new designs. The Company obtains its designs from numerous sources,
including the Company's associates, independent free-lance designers and fabric
manufacturers. Computer assisted design is used to increase design capabilities
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
$962,000 in 1997, $730,000 in 1996, and $560,000 in 1995. The expenditures were
for the development of new products, upgrading and management 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), Dakotah(R) Luxe(TM),
Harley-Davidson(R), upscale Disney(R) Licenses, Mickey & Co.(R) , and Baby
Mickey & Co.(R), Elvis Presley(R), Roy Rogers(R), and Currier & Ives(R).
<PAGE>
NEW PRODUCT INTRODUCTIONS
* In December 1993, the Company introduced Harley-Davidson(R) pillows,
together with a line of jacquard-woven throws 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), a new line of luxurious microfiber throws, pillows, bedcoverings
and accessories and a new line of pillows, throws and bedcoverings with the
Disney(R) licenses, Mickey and Co.(R) and Baby Mickey and Co(R).
* At the April 1997 Home Textile Market, the Company introduced its new line
of Home-Knit(TM) throws and pillows.
* At the October 1997 Home Textile Market, the Company introduced its
Polarfleece(R) Wide Wale line of throws, blankets and bedding ensembles
along with a new line of coordinated bedding ensembles and window
treatments.
SALES AND MARKETING
Virtually all of the Company's products are sold directly to the
retail trade primarily through 40 independent sales representative organizations
and 4 full time sales professionals employed by the Company. The Company's
showroom and primary sales office is located in New York City on Fifth Avenue.
The sales representatives who sell to the specialty retailers have showrooms in
Atlanta, Chicago, Denver, 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, and in 1997, began
developing sales distribution in Japan, and to a lesser degree in other
countries.
During 1997, the Company sold to over 2,100 customers, including
buyers representing divisions of larger corporations.
The Company emphasizes quick and dependable delivery of complete
orders. The Company's computer systems allow customers to place orders and the
Company to fill, track and bill orders. Sales representatives assist in
maintaining appropriate stocking levels, maintain store displays of Company
<PAGE>
merchandise, assure proper presentation of Company products, replace damaged
packaging and assist with credit, 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 markets. 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
home fashion textile shows at each of its showrooms and the major European home
textile show, Heimtextil.
During 1997, the Company and its products were featured in many
major publications, including, American Baby, BHG Bedroom & Bath, Country
Living, Home, Self Magazine, New York Times Home Section and Chicago Tribune
Sunday Home Section. The Company was also featured in several trade publications
including Home Textiles Today and Home Furnishings Network.
At December 31, 1997, the Company had approximately $2.4 million of
firm orders, compared to approximately $3.0 million on December 31, 1996 and
approximately $2.7 million on December 31, 1995. On March 22, 1998, the Company
had approximately $2.5 million of firm orders as compared to approximately $3.5
million on March 23, 1997. 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 three quarters of each year.
Although approximately 18% and 11% of the Company's 1997 sales were
made to two customers, the Company believes the loss of these customers 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. Significant resources have been
devoted to support its quality improvement efforts. The Company attempts to
maintain close contact with customer quality control personnel to assure its
understanding of customer requirements.
<PAGE>
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 raw materials are purchased 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.
The Company receives a significant portion of its annual supply of
raw materials from Malden Mills, approximately 57% of all its raw material
requirements in 1997, and in the past has manufactured a significant amount of
finished goods Polarfleece(R) inventory during its first and second quarters and
sold to its customers in the third and fourth quarters. As a result of this
timing, the Company has had 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 does not intend to continue this practice of
building inventories to the extent it has in the past.
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, competing
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 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. There is also significant competition on the
basis of quality, brand names, price and service.
GOVERNMENT REGULATION
Federal and state laws and regulations require most of the Company's
products to bear product content labels containing specified information,
including their place of origin and fiber content. In addition, 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), DKTH(TM), Home-Knits(TM), Dakotah
Outdoors(R), Lustrah(R), Snapwrap(TM), Snugglefleece(TM), Thermofleece(TM),
Cuddlefleece(TM) and Comfortfleece(R). The Company copyrights
<PAGE>
many of its fabric designs. All trademarks, trade names and copyrights are
valuable assets, and the Company 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), Harley-Davidson(R), Elvis Presley(R), Campbell's Soup(R),
Roy Rogers(R), Wesley Mancini, Ltd. (R) and Currier & Ives(R).
EMPLOYEES
At March 14, 1998, the Company had 378 associates, of whom 342 were
full-time and 36 were part-time. Seventy-three of these associates were on
temporary lay-off as of March 14, 1998. 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 generally attempts to manage its operating activities in order to
avoid any temporary reductions in its work force. At least 290 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:
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE APPROX. SQ. FT. OWNED/ LEASED(1)
<S> <C> <C> <C>
Webster, South Dakotah Headquarters and Manufacturing 72,000 Owned(2)
Webster, South Dakotah Manufacturing and Distribution 23,000 Owned(2)
Webster, South Dakotah 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
Platte, South Dakota Manufacturing and distribution 20,000 Leased(3)
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
</TABLE>
(1) For additional information concerning the Company's leases, see Note F to
the Financial Statements.
(2) These properties are being purchased by means of capital lease purchase
agreements.
(3) In November, 1997, the Company terminated this lease effective April 1,
1998 and consolidated its operations in Platte, SD with the operations in
Redfield, SD.
The Company believes that its facilities are generally well maintained and in
good operating condition.
<PAGE>
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 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System ("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 NASDAQ:
HIGH LOW
---- ---
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
1997
First Quarter $4.625 $3.125
Second Quarter 3.50 2.125
Third Quarter 3.375 2.375
Fourth Quarter 3.25 1.438
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
18, 1998 was 276. The Company estimates that an additional 1,100 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.
<PAGE>
There were no unregistered sales of the Company's Common Stock
during the fourth quarter of 1997.
On February 23, 1998, the National Association of Securities Dealers
placed into effect new rules that require, among other things, issuers of
securities to maintain a market value of public float of at least $5 million to
continue listing on the NASDAQ National Market System. The Company is not
currently meeting these new requirements and as a result, it is the Company's
intention to apply for listing on the NASDAQ SmallCap Market.
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.
STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 38,712 $ 41,560 $ 30,884 $ 30,402 $ 23,428
Cost of goods sold 30,169 30,599 22,485 22,377 16,302
-------- -------- -------- -------- --------
Gross profit 8,543 10,961 8,399 8,025 7,126
Selling, general and administrative expense 10,266 9,229 7,542 6,346 5,259
-------- -------- -------- -------- --------
Operating profit (loss) (1,723) 1,732 857 1,679 1,867
Other expense (1,194) (500) (141) (98) (149)
-------- -------- -------- -------- --------
Earnings (loss) before income taxes and
cumulative effect of a change in
accounting principle (2,917) 1,232 716 1,581 1,718
Income tax expense (benefit) (1,030) 404 256 550 465
-------- -------- -------- -------- --------
Earnings (loss) before cumulative effect
of a change in accounting principle (1,887) 828 460 1,031 1,253
Cumulative effect of a
change in accounting principle, net of taxes (81) -- -- -- 179
-------- -------- -------- -------- --------
Net earnings (loss) ($ 1,968) $ 828 $ 460 $ 1,031 $ 1,432
======== ======== ======== ======== ========
PER SHARE AMOUNTS
Earnings (loss) before cumulative effect
of a change in accounting principle -
Basic ($ 0.54) $ 0.24 $ 0.13 $ 0.32 $ 0.47
======== ======== ======== ======== ========
Dilutive ($ 0.54) $ 0.23 $ 0.13 $ 0.32 $ 0.47
======== ======== ======== ======== ========
Cumulative effect of a change in
accounting principle - basic and dilutive (0.02) -- -- -- 0.07
-------- -------- -------- -------- --------
Net earnings (loss)
Basic ($ 0.56) $ 0.24 $ 0.13 $ 0.32 $ 0.54
======== ======== ======== ======== ========
Dilutive ($ 0.56) $ 0.23 $ 0.13 $ 0.32 $ 0.54
======== ======== ======== ======== ========
<PAGE>
Weighted average common and common
equivalent shares outstanding
-------- -------- -------- -------- --------
Basic 3,500 3,500 3,500 3,256 2,661
Dilutive 3,500 3,550 3,509 3,259 2,661
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Working capital $ 5,042 $ 6,760 $ 7,587 $ 8,400 $ 2,969
Total assets 27,468 22,930 18,136 14,072 11,485
Short-term debt 12,798 6,743 3,667 647 549
Long-term obligations, less current
maturities 1,813 913 1,051 1,368 729
Redeemable common stock -- -- -- -- 8,131
Stockholders' equity (deficit) 8,756 10,448 9,520 9,060 (4,229)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL:
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, throws (polyester fleece
and cotton), blankets, bedding ensembles and other home accessory products such
as footstools, chair pads and table linens. The Company's objective has been to
build a strong brand image associated with fashionable styling and high quality
products. It markets its products (primarily under the Dakotah(R) and
Polarfleece(R) names and various licensed names) to a broad range of major
retailers, including department stores, specialty retailers, mass merchandisers
and mail order houses, both domestic and international. Showrooms for the
Company's products, which support sales, are located across the country in New
York, Atlanta, Chicago, Denver and Seattle.
In December of 1993, the Company purchased manufacturing facilities in Milbank,
South Dakota. In September, 1995, the Company leased a manufacturing plant in
Platte, South Dakota to manufacture Polarfleece(R) throws. In November, 1997,
this facility was closed, as described below. In the Spring of 1996, the Company
leased a manufacturing plant in Redfield, South Dakota to manufacture
Polarfleece(R) throws, blankets and other bedcovering items. In the first
quarter of 1997, the Company completed a 32,000 square foot expansion of its
main manufacturing facility in Webster, South Dakota and terminated its lease of
another facility in Webster, South Dakota which was used primarily as a
warehouse and distribution center.
The current facilities should allow the Company adequate flexibility and
capacity to satisfy projected sales volume in 1998.
RESTATEMENT OF SECOND AND THIRD QUARTER 1996 FORM 10-Q'S. During the course of
the Company's 1996 annual close procedures, the Company noted that it had
inadvertently overlooked certain items during the preparation of its 1996 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.
YEAR 2000 INITIATIVE. The Company has studied its computer hardware and software
and is contacting external vendors and other suppliers to determine its exposure
to the change of the century date problem. The year 2000 date problem consists
of a date format shortcoming where the year is represented by only
<PAGE>
two digits causing programs that perform arithmetic operations, comparisons, or
sorting of date fields to yield incorrect results. Based on the study performed,
and analysis of the software the Company is currently implementing, it does not
believe that the year 2000 and beyond will present any system problems as the
software being implemented is expected to be fully compliant with year 2000. The
Company expects to spend approximately $200,000 in capital expenditures in 1998
to complete its planned computer conversion which is expected to happen in
second quarter of 1998.
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 years ended
December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
Years Ended December 31,
Statements of operations -----------------------------------
data as a percent of net sales: 1997 1996 1995
------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 22.1 26.4 27.2
Selling expenses 13.2 13.2 14.1
General and administrative expenses 13.3 9.0 10.3
Operating profit (loss) (4.4) 4.2 2.8
Interest expense 3.1 1.5 .8
Earnings (loss) before income taxes and
cumulative effect of a change in
accounting principle (7.5) 3.0 2.3
Net earnings (loss) (5.1) 2.0 1.5
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NET SALES increased from $30.9 million in 1995 to $41.6 million in 1996, then
declined to $38.7 million in 1997. The 1997 sales decline was due to a number of
factors. Sales in the fourth quarter of 1997 declined approximately 20% from the
same period of 1996 as a result of the warmer than normal weather, which caused
a decline in demand for throws and blankets, the demands of certain customers of
the Company to return products due to their excess inventories and demands of
certain customers to provide sales incentives and discounts on sales of the
Company's Polarfleece(R) and Dakotah(R) Luxe(TM) products. Also, during the
fourth quarter, as a result of declining sales, coupled with excess inventories,
the Company became more aggressive on lowering prices to deplete inventory
levels. The decline in the fourth quarter of 1997 was offset by an increase in
sales of the Company's Polarfleece(R) line of products and bedding ensembles
during the first three quarters of 1997 as compared to the first three quarters
of 1996. Additionally, during 1997, as compared to 1996, the Company experienced
an overall decline in sales of decorative pillows and throws, partially offset
by an increase in sales of blankets and bedding ensembles. Finally, the results
reflect the negative effects 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 facility to the main Webster, SD manufacturing facility, (3) the
effect of the severe winter weather in early 1997 and (4) inadequate fabric
delivery from certain suppliers which adversely effected the Company's ability
to meet delivery expectations of certain customers.
<PAGE>
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 trend of declining sales and the effects of reducing prices on certain
products in an effort to decrease inventories has continued into the first
quarter of 1998. Management believes that the decline in sales is due in part to
the downturn in the business of the Company's customers and the excess
inventories that they carried into 1998. During the first quarter of 1998 the
Company hired a new Vice President of Sales and Marketing from a competitor of
the Company in an effort to reverse these trends and help develop other markets
for the Company's products. The Company expects the trend of declining sales to
reverse in the third and fourth quarters of 1998 and expects to see a growth in
the specialty store market.
GROSS PROFIT MARGINS were 22.1% in 1997, 26.4% in 1996 and 27.2% in 1995. In
1997, the decline in gross margins was the result of sales discounts and
incentives, mentioned above, an increase in charges to cost of goods sold to
reduce the value of inventory to market, due to the excessive inventory levels
at the end of 1997, an increase in manufacturing overhead resulting from
capacity and infrastructure built with the expectation of higher sales for 1997
and a decline in manufacturing efficiencies in the third and fourth quarter of
1997. Margins were also negatively impacted as compared to 1996 by the indirect
costs associated with the Company's move of its Webster, SD warehouse and pillow
finishing manufacturing and reconfiguration. Margins were positively effected in
1997, as compared to 1996 by an improved product mix during the first three
quarters of 1997 which was comprised of increased volume of the Company's
Polarfleece(R) line of products, improved margins in bedding ensembles, and a
decreased volume of lower margin products, such as chairpads and table linens,
partially offset by a decline in the volume of decorative pillow sales. Margins
were also positively affected in 1997 by the negative effect in April, 1996 of
the start-up of the Redfield, SD manufacturing facility.
The trend of declining margins is expected to continue into the first half of
1998 as the Company continues to reduce inventories. That declining trend is
expected to be offset partially by the efforts of the Company in (1) reducing
indirect labor costs, (2) the consolidation of the Company's Polarfleece(R)
manufacturing in Redfield, SD and the closing of its facility in Platte, SD, (3)
improving manufacturing efficiencies, (4) improving inventory management and (5)
reducing other items of manufacturing overhead.
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 raw materials, relative to sales
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.
SELLING EXPENSES were $5.1 million in 1997, $5.5 million in 1996 and $4.3
million in 1995. Selling expenses during 1997 decreased primarily due to the net
effect of (1) a decrease in sales commissions of approximately $394,000
resulting from a decrease in sales, changes in the compensation structure and
product mix, (2) increased cost of showroom rent, supplies and decorating of
approximately $191,000, (3) increased sales support and shipping personnel to
support the growth of sales expected for 1997 of approximately $173,000, (4) a
decline in the costs of advertising in 1997 of approximately $210,000 and (5)
various other factors, including increased participation in trade shows and
international marketing. As a percentage of net sales, selling expenses were
13.2% in 1997 and in 1996 and 14.1% in 1995.
Selling expenses decreased as a percentage of sales in 1996 due to increased
sales.
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES were $5.2 million in 1997, $3.7 million in
1996, and $3.2 million in 1995. General and administrative expenses increased
approximately $1,437,000 in 1997 due to (1) an increase in administrative,
clerical, and management staff of approximately $425,000 to support the expected
growth of the Company, the need to provide staff to accomplish the planned
computer conversion and re-engineering of the Company's processes and systems,
and a growth in product development and design personnel, (2) an increase of
approximately $100,000 in recruiting costs for senior management and staff
positions, (3) increased professional fees of approximately $117,000 primarily
related to expanding product distribution to international markets and increased
accounting and reporting costs, (4) increased computer and communication costs
of approximately $137,000, (5) the recognition of approximately $177,000 of
additional compensation due to the termination of the consulting agreement with
the Company's former Chief Executive Officer in 1997, (6) an increase of
approximately $130,000 in product design and development staff to support the
growth of the Company's product line, (7) the write-down of approximately
$144,000 of previously capitalized costs relating to the planned computer
conversion, in which management determined that the carrying amount of the asset
was not fully recoverable and (8) a general increase in costs relating to the
Company's planned computer conversion and planned sales in the fourth quarter of
1997. As a percentage of net sales, general and administrative expenses
increased from 9.0% in 1996 to 13.3% in 1997 as a result of the above mentioned
increases.
The Company has implemented cost reduction programs which are expected to reduce
general and administrative expenses by more than $800,000 in 1998. Additional
reductions can be expected into 1999. A significant amount of this reduction
will come from (1) decreases in staffing at all levels, (2) a reduction in
consulting fees relating to the implementation of the computer system, (3) a
decline in professional fees, insurance and communication costs, and (4) various
other items. The Company anticipates making further reductions in 1999.
INTEREST EXPENSE increased from $613,000 in 1996 to $1,201,000 in 1997. This
increase was primarily the result of higher average borrowings to finance
capital expenditures and the buildup of inventory to support the Company's
expected sales in the third and fourth quarters of 1997.
The EFFECTIVE INCOME TAX RATE was 35.3% in 1997, 32.8% in 1996 and 35.8% in
1995. The higher effective rate in 1997 as compared to 1996 was due to a
decrease in the amount of charitable contributions of obsolete fabric and second
quality product to certain charities. The Company has recognized deferred tax
assets of approximately $748,000. Realization of these assets is dependent on
the Company's return to profitability, which as indicated below is expected to
occur in 1999. Realization of these tax benefits is dependent on margins
returning to pre 1997 levels and managements' efforts at cost reductions. The
Company believes that it is more likely than not that it will fully recover
these deferred tax assets in the future.
COST REDUCTION INITIATIVES. During the fourth quarter of 1997, the Company
announced the consolidation of its Polarfleece(R) manufacturing in Redfield, SD,
and the closing of its facility in Platte, SD, which employed approximately 39
full time personnel and 13 temporary personnel. During the first quarter of
1998, the Company initiated a number of cost reduction initiatives, some of
which were discussed above. The Company has reduced its labor force from over
540 associates on September 30, 1997 to 378 associates, some of which are
currently on a temporary layoff status. The Company expects to decrease the
number of associates laid off as it moves into the second quarter and during
which time sales are expected to increase.
<PAGE>
As a result of the efforts to reduce inventory, which is anticipated to cause a
reduction in margins, the Company does not expect to generate income from
operations in 1998, unless a substantial increase in sales occurs. The Company
expects to return to profitability in 1999 as a result of the cost reductions
put in place for 1998 and its ability to return margins to historical levels.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. Pursuant to Emerging
Issues Task Force (EITF) Issue No. 97-13, the Company changed its accounting
policy in the fourth quarter of 1997, relating to costs of a planned software
system conversion. Previously, substantially all direct costs relating to the
project were capitalized, including the portion relating to business process
reengineering . Under this pronouncement, all future costs for business
reengineering must be expensed as incurred and previously capitalized costs as
of September 30, 1997 of approximately $125,000, approximately $81,000, net of
income tax benefits, were written off as a cumulative adjustment in the fourth
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES:
The Company had cash and cash equivalents of $45,000 as of December 31, 1997,
and $3,000 as of December 31, 1996.
Working capital was $5.0 million as of December 31, 1997, and $6.8 million as of
December 31, 1996. The 1997 increase in cash and cash equivalents and decrease
in working capital was primarily due to the losses from operations, offset by
the long-term financing provided by new term loans to fund the purchase of
capital expenditures in 1996 and 1997 which decreased the amounts outstanding on
the Company's line of credit. In the first quarter of 1997, the Company
refinanced over $900,000 of the 1996 capital expenditures with low-interest
loans from the State of South Dakota and the Northeast South Dakota Energy
Conservation Corporation. In the third quarter, as explained below, the Company
refinanced approximately $2,000,000 of the 1996 and 1997 capital expenditures
with a term loan provided by the Company's primary lender.
The net cash used in operating activities and investing activities during 1997
was primarily financed from net borrowings under the Company's line of credit
and proceeds from the issuance of long-term debt mentioned above. The net cash
used in operating activities is primarily due to net losses incurred in 1997 and
the $6.0 million increase in inventory, offset by a $3.0 million decrease in
accounts receivable. The net cash used in investing activities is due to capital
expenditures and the capitalized costs of the computer conversion.
Accounts receivable were $4,492,000 as of December 31, 1997, and $7,539,000 as
of December 31, 1996. The decrease in 1997 was due to decreased sales during the
fourth quarter of 1997 as compared to the same period of 1996.
Inventories were $15,423,000 as of December 31, 1997, and $9,556,000 as of
December 31, 1996. The increase in 1997 was due to increased raw material and
finished goods inventory of Polarfleece(R) and less than expected sales in the
fourth quarter of 1997. The Company has introduced a plan under which it expects
to reduce its average level of inventory during 1998.
The allowance for doubtful accounts decreased from $382,000 at December 31, 1996
to $326,000 at December 31, 1997. The decline is the result of the resolution of
accounts which had associated reserves established against them in 1996 and the
decline in sales. The Company estimates the allowance for
<PAGE>
doubtful accounts based on the best information available to management.
Management believes that the allowance is adequate to cover any losses which may
occur.
Accounts payable were approximately $1,782,000 as of December 31, 1997 and
$2,135,000 as of December 31, 1996. The decrease as of December 31, 1997 as
compared to 1996 is primarily related to the reduction of raw material purchases
late in the fourth quarter of 1997 as compared to 1996, as the Company reacted
to the decline in sales late in the year.
The Company has used and expects to continue using 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
its credit facility in the third quarter of 1997 and again in the first quarter
of 1998. The amended credit facility, which expires in June, 1999 is intended to
accommodate the Company's restructuring efforts in 1998, including its sales of
inventory at prices lower than historical levels.
The total amount available under the revolving note, which is due on demand, is
limited to the lesser of $15,000,000 or a defined borrowing base of eligible
trade accounts and income tax receivables, inventory balances, plus outstanding
amounts under the term note, plus $1,000,000. Advances under the revolving note,
based on eligible receivables, inventory balances, and the additional
$1,000,000, provide for monthly interest payments at 1%, 3% and 4%,
respectively, above the financial institution's prime rate (effective rates of
9.5%, 11.5% and 12.5%, respectively at December 31, 1997). Advances under the
term note, which is due on demand and which requires monthly principal payments
of $33,333, provide for monthly interest payments at 1% above the financial
institution's prime rate (effective rate of 9.5% at December 31, 1997.) The
outstanding balances on the revolving note and the term note were $10,997,734
and $1,800,002 at December 31, 1997. The outstanding balances on the previous
revolving note and term note were $6,034,750 and $708,333 at December 31, 1996
For the year ended December 31, 1997, the Company's capital expenditures were
$2,019,000. These expenditures include $503,000 to upgrade computer hardware and
refinance operating leases existing prior to the upgrade, approximately $306,000
was used to purchase additional manufacturing and transportation equipment,
approximately $376,000 was used for the purchase of additional computer network
workstation hardware and software and approximately $610,000 was capitalized for
internal and external costs incurred in connection with the planned computer
system conversion. The remaining $224,000 was primarily used for plant and
office space remodeling and expansion and the purchase of additional equipment.
For the year ended December 31, 1996, the Company's capital expenditures were
$2,381,000. These 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.
The Company expects to spend an aggregate of approximately $200,000 in 1998 to
complete the planned computer conversion which is expected to be completed
during the second quarter of 1998. During the first quarter of 1998, the Company
completed negotiations for the expansion of its facilities in Sisseton, SD,
which were to be financed through the issuance of a long-term lease purchase
agreement and the exchange of its current facility in Sisseton, SD. At this
time, the Company is not committed in any way to go forward with the transaction
and has delayed moving forward, pending the nature of the Company's financial
situation during the second quarter of 1998. In the event the transaction is
completed, it is not expected to have a material effect on the Company's
financial statements. The Company does not have any additional plans for
material capital expenditures in 1998 as a result of its cost reduction
initiatives, as mentioned above.
<PAGE>
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, 1997 and 1996, the total
outstanding indebtedness was $263,800 and $461,000, respectively. This
indebtedness bears interest at 6% per annum and is due on demand.
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
working capital, projected capital expenditures and other financing needs for
1998 and the future.
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 7A. QUANTITATIVE AND QUALITITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements and schedules relating to the Company are
included herein:
<TABLE>
<S> <C>
Financial Statements:
Report of Independent Certified Public Accountants.................................................... 31
Balance Sheets at December 31, 1997 and 1996.......................................................... 32
Statements of Operations for years ended December 31, 1997, 1996 and 1995............................. 33
Statements of Changes in Stockholders' Equity for years ended December 31, 1997, 1996 and 1995........ 34
Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995............................. 35
Notes to Financial Statements......................................................................... 36
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for years ended December 31, 1997, 1996 and 1995 ..... 51
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Dakotah are as follows:
<TABLE>
<CAPTION>
Name Director Since Age Positions With The Company
- ---- -------------- --- --------------------------
<S> <C> <C> <C>
George C. Whyte(1) 1980 48 President, Chief Executive Officer and
Chairman of the Board of Directors
Gary L. Conradi (1,2,3) 1984 58 Vice Chairman of the Board of
Directors
James D. Becker(2) 1990 37 Mechanic, Director
Dorothy A. Benson(2) 1986 53 Product Development Specialist,
Director
Michael G. Grosek(1,3) 1991 42 Director
Troy Jones, Jr. (1) 1994 37 Director
Linda J. Laskowski(2) 1994 48 Director
Leo T. Reynolds(3) 1995 52 Director
Lee A. Schoenbeck(1,2) 1993 39 Secretary, Director
Georgie Olson Harper -- 43 Vice President, Corporate Sales
William R. Retterath -- 36 Chief Operating Officer, Chief
Financial Officer, Treasurer
Michael G. Morton -- 52 Vice President, Sales and Marketing
</TABLE>
- -----------------------------------------
(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 and from
December 1997 to the present. He was elected to the Board of Directors in July
1980.
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.
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
<PAGE>
associate since July 1983, has worked in various other Company positions
including as a Pattern Maker and Data Design Specialist.
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.
TROY JONES, JR. was elected to the Board of Directors in August
1994, and served as the Company's Chief Executive Officer from January 1995 to
December 1997 and Treasurer from June 1996 to June, 1997. 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.
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. Mr. Schoenbeck has been an attorney in Webster, South Dakota since 1984,
and currently provides services as outside General Counsel to the Company.
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.
GEORGIE OLSON HARPER was named the Company's Vice President,
Corporate Sales in March of 1998. From February 1996 to March 1998, she served
as the Company's Vice President of National Sales and was its 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.
WILLIAM R. RETTERATH has been the Company's Chief Financial Officer
since April 1997 and was named its Treasurer in June 1997 and its Chief
Operating Officer in December 1997. Prior to joining the Company, he served as
the Chief Financial Officer and Treasurer of Juran & Moody, Inc. in St. Paul,
Minnesota. He also spent over 4 years with Deloitte and Touche in Minneapolis,
Minnesota.
MICHAEL G. MORTON was named Vice President of Sales and Marketing in
March of 1998. Prior to joining the Company, Mr. Morton served as the Vice
President of Sales and Marketing for The Manual Woodworkers and Weavers, Inc.
and previously served as the President of Crown Home and Gifts, Crown Crafts,
Inc.
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.
<PAGE>
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, 1997, all
required reports were filed timely.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for the Company's
fiscal years ended December 31, 1997, 1996, and 1995 regarding compensation
earned by or awarded to the Company's Chief Executive Officer, Chief Operating
Officer, and former Chief Executive Officer, the only executive officers whose
total annual salary and bonus exceeded $100,000 (the "Named Executive
Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION($)
---------------------------------------------- LONG-TERM
COMPENSATION
FISCAL OTHER ANNUAL OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION AWARDS(#) COMPENSATION($)
--------------------------- ---- ------ -------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
George C. Whyte
President, Chief Executive 1997 143,832 -0- -0- -0- -0-
Officer and Chairman of the 1996 145,000 29,000 -0- 100,000 -0-
Board 1995 141,000 58,000 -0- 25,000 1,545(2)
William R. Retterath (5)
Chief Financial Officer,
Chief Operating Officer and
Treasurer 1997 90,945 -0- -0- 100,000 50,000(3)
Troy Jones, Jr.(4) 1997 -0- -0- 152,462 -0- -0-
Former Chief Executive 1996 -0- -0- 150,000 242,745 -0-
Officer 1995 -0- -0- 200,000 100,000 -0-
</TABLE>
- -----------------------
(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) Consists of the value of the cash contributions to the Company's Profit
Sharing Plan allocated to the executive officer .
(3) Consists of compensation in lieu of payment for relocation costs. At
December 31, 1997, $25,000 of this amount remained due and payable to
Mr. Retterath.
(4) All compensation for Mr. Jones' service to the Company was paid to
Orion Financial Corporation of South Dakota ("Orion"). The Company had
engaged Orion to provide such services. Mr. Jones is the President and
controlling shareholder of Orion.
(5) Mr. Retterath became an executive officer of the Company in April,
1997.
<PAGE>
OPTIONS GRANTED DURING FISCAL 1997
The following table provides information relating to options granted
to the Named Executive Officers during the Company's fiscal year ended December
31, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
OPTIONS EXERCISE AT ASSUMED ANNUAL RATES OF STOCK
GRANTED PERCENT OF TOTAL OPTIONS PRICE EXPIRATION PRICE APPRECIATION FOR OPTION TERM
NAME (#)(1) GRANTED IN FISCAL YEAR(#/sh) ($)(2) DATE 5%($)(3) 10%($)(3)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William R. Retterath (4) 100,000 59.1% $2.6875 4/07/04 109,021 254,066
</TABLE>
(1) The number indicated is the number of shares of Common Stock that can
be acquired upon exercise of the option. The Company has not granted
any stock appreciation rights.
(2) Exercise prices are equal to the fair market value at the date of
grant.
(3) The assumed 5% and 10% annual rates of appreciation are hypothetical
rates selected by the Securities and Exchange Commission and are not
intended to, and do not, forecast or assume actual future stock prices.
(4) One-fifth of these options vested at the grant date. The remaining
options vest annually over the next four years beginning January 1,
1998.
AGGREGATED OPTION EXERCISES DURING FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to the number and
value of options held by the Named Executive Officers as of December 31, 1997.
The Company does not have any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON REALIZED YEAR-END(#) FISCAL YEAR-END($)(1)
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
George C. Whyte -0- -0- 209,300 / 100,000 - 0 - / - 0 -
William R. Retterath -0- -0- 20,000 / 80,000 - 0 - / - 0 -
</TABLE>
(1) Options are "in-the-money" if the fair market value of the underlying
shares at fiscal year end is greater than the exercise price.
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
<PAGE>
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.
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.
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. No contribution was made to the plan for the year ended December 31,
1997.
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 attended, 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 continue to be
<PAGE>
reimbursed. Certain Board members have voluntarily elected to temporarily forgo
any funds owing under this plan and any future funds earned.
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
or 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 20, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF OUTSTANDING
NAME AND ADDRESS BENEFICIALLY OWNED SHARES
- ---------------- ------------------ ------
<S> <C> <C>
Dakotah Incorporated Employee Profit Sharing Plan
First American Trust, Trustee
One North Park Lane
Webster, South Dakota 57274 1,438,500 35.1%
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202 368,000 9.0%
George C. Whyte(1,2)
One North Park Lane
Webster, South Dakota 57274 422,863 10.1%
<PAGE>
Troy Jones, Jr.(3)
One North Park Lane
Webster, South Dakota 57274 242,745 5.9%
James D. Becker(1,4)
One North Park Lane
Webster, South Dakota 57274 11,466 .3%
Dorothy A. Benson(1,5)
One North Park Lane
Webster, South Dakota 57274 15,622 .4%
Gary L. Conradi(6)
205 East Sixth
Sioux Falls, South Dakota 57102 10,000 .2%
Michael G. Grosek(7)
PO Box 543
Webster, South Dakota 57274 8,750 .2%
Linda J. Laskowski(8)
One North Park Lane
Webster, South Dakota 57274 9,000 .2%
Leo T. Reynolds(9)
One North Park Lane
Webster, South Dakota 57274 6,000 .1%
Lee A. Schoenbeck(10)
One North Park Lane
Webster, South Dakota 57274 29,400 .7%
William R. Retterath(12)
One North Park Lane
Webster, South Dakota 57274 45,000 1.2%
Georgie Olson Harper(11)
One North Park Lane
Webster, South Dakota 57274 64,892 1.6%
Michael G. Morton (13)
One North Park Lane
Webster, South Dakota 57274 20,000 .5%
All executive officers and directors as a group
(12 persons)(1,2,3,4,5,6,7,8,9,10,11,12,13) 885,738 21.63%
</TABLE>
<PAGE>
- ----------------------
(1) Includes shares allocated to the person's or group's account in the
Employee Profit Sharing Plan.
(2) Includes 229,300 shares issuable upon exercise of outstanding options,
58,998 shares allocated to Mr. Whyte in the Employee Profit Sharing
Plan, 2,233 shares owned directly by Mr. Whyte's wife and 25,587 shares
allocated to Mr. Whyte's wife in the Employee Profit Sharing Plan.
(3) Includes 242,745 shares issuable upon exercise of an outstanding
option.
(4) Includes 6,500 shares issuable upon exercise of an outstanding option,
and 4,889 shares allocated to Mr. Becker in the Employee Profit Sharing
Plan.
(5) Includes 6,500 shares issuable upon exercise of an outstanding option,
and 7,969 shares allocated to Ms. Benson in the Employee Profit Sharing
Plan.
(6) Includes 8,000 shares issuable upon exercise of an outstanding option.
(7) Includes 8,000 shares issuable upon exercise of an outstanding option.
(8) Includes 7,000 shares issuable upon exercise of an outstanding option.
(9) Includes 6,000 shares issuable upon exercise of an outstanding option.
(10) Includes 12,000 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 20,999 shares issuable upon exercise of outstanding options,
39,103 shares allocated to Ms. Harper in the Employee Profit Sharing
Plan and 1,000 shares owned directly by Ms. Harper's spouse.
(12) Includes 40,000 shares issuable upon exercise of an outstanding option
and 2,000 shares owned in Mr. Retterath's IRA.
(13) Includes 20,000 shares issuable upon exercise of an outstanding option.
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 included
herein as part of this report at Item 8.
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for years ended December 31, 1997, 1996 and
1995
Statements of Changes in Stockholders' Equity for years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows for years ended December 31, 1997, 1996 and
1995
Notes to Financial Statements
2. FINANCIAL STATEMENTS SCHEDULES:
The following financial statement schedule of the Company is
included herein as part of this report at Item 8.
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995
3. LISTING OF EXHIBITS:
EXHIBITS DESCRIPTION PAGE
-------- ----------- ----
3.1 Articles of Incorporation (Exhibit 3.1)(1) ---
3.2 Bylaws (Exhibit 3.2)(1) ---
<PAGE>
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 Promissory Note dated December 31, 1995 with
the State of South Dakota Board of Economic
Development (Exhibit 10.5)(5) ---
10.3 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) ---
10.4 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) ---
10.5 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) ---
10.6 Lease Purchase Agreement dated November 26,
1974, between Webster Development
Corporation and Tract Handcraft Industries
Cooperative (predecessor of the Company)
(Exhibit 10.15)(1) ---
10.7 Lease Purchase Agreement dated September 29,
1976, between Webster Development
Corporation and Tract Handcraft Industries
Cooperative (predecessor of the Company)
(Exhibit 10.16)(1) ---
10.8 Lease Purchase Agreement dated June 1, 1977,
between Veblen Development Corporation and
the Company (Exhibit 10.17)(1) ---
10.9 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) ---
10.10 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) ---
10.11 Form of Nonqualified Stock Option (Exhibit
10.20)(1) ---
10.12 Employment Agreement dated January 31, 1994,
between the Company and George C. Whyte
(Exhibit 10.23)(1)(2) ---
<PAGE>
10.13 Employment Agreement dated January 31, 1994,
between the Company and Terry G. Sampson
(Exhibit 10.24)(1)(2) ---
10.14 Description of 1996 Incentive Compensation
Plans(2) 52
10.15 Form of Nonstatutory Option Agreement for
Directors (Exhibit 10.1)(4) ---
10.16 Nonstatutory Option Agreement with George C.
Whyte dated effective May 25, 1995 (Exhibit
10.2)(2)(3)(4) ---
10.17 Nonstatutory Option Agreement with Orion
Financial Corporation of South Dakota dated
effective January 27, 1995 (Exhibit
10.3)(2)(4) ---
10.18 Nonstatutory Option Agreement with William
Retterath dated effective April 8, 1997 53
10.19 Form of Officer and Director Indemnification
Agreement (Exhibit 10.26)(1)(2) ---
10.20 Dakotah, Incorporated Employee Profit
Sharing Plan, as amended through March 1995
(Exhibit 10.22)(2)(5) ---
10.21 Dakotah, Incorporated 1995 Stock Option Plan
(Exhibit 10.1)(2)(6) ---
10.22 Dakotah, Incorporated 1996 Stock Option Plan
for Directors (Exhibit 10.2)(2)(6) ---
10.23 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) ---
10.24 Employment Agreement dated January 1, 1997,
between the Company and George C.
Whyte(2)(9) ---
10.25 Credit and Security Agreement dated June 30,
1997 with Diversified Business Credit,
Inc.(8) ---
10.26 First Amendment dated July 7, 1997 to Credit
and Security Agreement with Diversified
Business Credit, Inc.(8) ---
10.27 Second Amendment dated March 25, 1998 to
Credit and Security Agreement with
Diversified Business Credit, Inc. 57
23.1 Consent of Grant Thornton LLP 60
24.1 Powers of Attorney (included in Signature
Page) ---
27.1 Financial Data Schedule 61
27.2 Restated Financial Data Schedule 62
(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.
<PAGE>
(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.
(7) Incorporated herein by reference to the specified exhibit in the
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(8) Incorporated herein by reference to the specified exhibit in the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(9) Incorporated herein by reference to the specified exhibit in the
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
(b) Registrant was not required to file a report on Form 8-K during the
fourth quarter ended December 31, 1997.
<PAGE>
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, 1998 /s/ William R. Retterath
---------------------------------------------
William R. Retterath, Chief Financial Officer
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William R. Retterath, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ George C. Whyte President Chief Executive Officer March 27, 1998
- -------------------------------- and Chairman of the Board of Directors
George C. Whyte
/s/ William R. Retterath Chief Operating Officer and Chief Financial March 27, 1998
- -------------------------------- Officer
William R. Retterath
/s/ Troy Jones, Jr. Director March 27, 1998
- --------------------------------
Troy Jones, Jr.
/s/ Leo T. Reynolds Director March 27, 1998
- --------------------------------
Leo T. Reynolds
/s/ James D. Becker Director March 27, 1998
- --------------------------------
James D. Becker
/s/ Dorothy A. Benson Director March 27, 1998
- --------------------------------
Dorothy A. Benson
/s/ Gary L. Conradi Vice Chairman of Board of Directors, March 27, 1998
- -------------------------------- Director
Gary L. Conradi
/s/ Michael G. Grosek Director March 27, 1998
- --------------------------------
Michael G. Grosek
/s/ Linda J. Laskowski Director March 27, 1998
- --------------------------------
Linda J. Laskowski
/s/ Lee A. Schoenbeck Secretary, Director March 27, 1998
- --------------------------------
Lee A. Schoenbeck
</TABLE>
<PAGE>
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, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, 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, 1997. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
Minneapolis, Minnesota
February 27, 1998 (except for note E, as to
which the date is March 25, 1998)
<PAGE>
DAKOTAH, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 45,084 $ 2,690
Accounts receivable, less allowance for doubtful accounts
of $326,000 and $382,000 in 1997 and 1996 4,491,697 7,538,724
Inventories 15,423,002 9,555,897
Income taxes receivable 963,000 --
Prepaid expenses and other 449,323 735,929
Deferred income taxes 568,800 496,000
----------- -----------
Total current assets 21,940,906 18,329,240
PROPERTY, PLANT AND EQUIPMENT - NET 5,339,357 4,406,520
OTHER ASSETS
Deferred income taxes 179,000 185,000
Other 9,200 9,200
----------- -----------
$27,468,463 $22,929,960
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $12,797,736 $ 6,743,083
Current maturities of long-term obligations 80,549 46,383
Current maturities of capital lease obligations
including $27,117 and $29,541 to related parties
in 1997 and 1996 197,942 104,313
Current maturities of note payable to officers 263,800 332,139
Outstanding checks in excess of bank balances 452,784 379,917
Accounts payable 1,781,996 2,134,845
Accrued liabilities
Compensation and related benefits 566,165 925,739
Other 758,343 716,217
Income taxes payable -- 187,079
----------- -----------
Total current liabilities 16,899,315 11,569,715
LONG-TERM OBLIGATIONS
Long-term maturities of long-term obligations 1,211,895 438,140
Long-term maturities of capital lease obligations
including $57,069 and $82,563 to related parties
in 1997 and 1996 601,311 345,283
Long-term maturities of note payable to officers -- 129,162
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 7,180,855 6,904,156
Retained earnings 1,540,089 3,508,506
----------- -----------
8,755,942 10,447,660
----------- -----------
$27,468,463 $22,929,960
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
DAKOTAH, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 38,711,484 $ 41,559,597 $ 30,884,081
Costs of goods sold 30,168,977 30,599,183 22,485,346
------------ ------------ ------------
Gross profit 8,542,507 10,960,414 8,398,735
Operating expenses
Selling 5,101,705 5,501,681 4,347,309
General and administrative 5,163,937 3,727,231 3,194,235
------------ ------------ ------------
10,265,642 9,228,912 7,541,544
------------ ------------ ------------
Operating profit (loss) (1,723,135) 1,731,502 857,191
Other income (expense)
Interest (1,200,540) (612,717) (241,285)
Gain (loss) on sale of equipment (8,554) 109,700 56,210
Other 14,813 3,120 43,923
------------ ------------ ------------
(1,194,281) (499,897) (141,152)
------------ ------------ ------------
Earnings (loss) before income taxes and
cumulative effect of a change in accounting
principle (2,917,416) 1,231,605 716,039
Income tax expense (benefit) (1,030,400) 404,000 256,000
------------ ------------ ------------
Earnings (loss) before cumulative effect
of a change in accounting principle (1,887,016) 827,605 460,039
Cumulative effect of a change in accounting
principle, net of taxes of $43,446 (81,401) -- --
------------ ------------ ------------
Net earnings (loss) $ (1,968,417) $ 827,605 $ 460,039
============ ============ ============
Earnings (loss) per share before cumulative
effect of a change in accounting principle
Basic $ (.54) $ .24 $ .13
============ ============ ============
Dilutive $ (.54) $ .23 $ .13
============ ============ ============
Cumulative effect of a change in accounting
principle - basic and dilutive $ (.02) $ -- $ --
============ ============ ============
Net earnings (loss) per share
Basic $ (.56) $ .24 $ .13
============ ============ ============
Dilutive $ (.56) $ .23 $ .13
============ ============ ============
Weighted average common and common equivalent shares outstanding
Basic 3,499,755 3,499,755 3,499,755
============ ============ ============
Dilutive 3,499,755 3,550,128 3,508,561
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DAKOTAH, INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common stock Additional Total
---------------------------- contributed Retained stockholders'
Shares Amount capital earnings equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Compensation to outside consultant -- -- 276,699 -- 276,699
Net loss -- -- -- (1,968,417) (1,968,417)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 3,499,755 $ 34,998 $ 7,180,855 $ 1,540,089 $ 8,755,942
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DAKOTAH, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(1,968,417) $ 827,605 $ 460,039
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities
Depreciation and amortization 807,990 683,166 445,951
(Gain) loss on sale of equipment 8,554 (109,700) (56,210)
Loss on asset write-off and change in accounting principle 269,187 -- --
Deferred income taxes (66,800) 135,000 156,000
Compensation to outside consultant 276,699 100,000 --
Changes in assets and liabilities:
Accounts receivable 3,047,027 (1,173,118) (1,546,601)
Inventories (5,867,105) (2,191,862) (1,494,989)
Prepaid expenses and other 286,606 (258,422) (225,254)
Accounts payable (352,849) (118,436) 535,993
Accrued liabilities (317,448) 574,895 304,341
Income taxes (1,150,079) 187,079 (290,847)
----------- ----------- -----------
Net cash used in operating activities (5,026,635) (1,343,793) (1,711,577)
Cash flows from investing activities:
Capital expenditures (1,515,861) (2,380,711) (1,060,640)
Proceeds from sale of equipment -- 109,700 56,210
Other -- (82,821) (59,746)
----------- ----------- -----------
Net cash used in investing activities (1,515,861) (2,353,832) (1,064,176)
Cash flows from financing activities:
Outstanding checks in excess of bank balance 72,867 379,917 --
Net borrowings under short-term debt agreements 6,054,653 3,076,287 3,019,448
Proceeds from issuance of long-term obligations 880,000 377,539 --
Proceeds from borrowing from officers 25,000 -- --
Principal payments on long-term obligations (72,079) (51,289) (342,049)
Principal payments on capital lease obligations (153,050) (98,169) --
Principal payments on note payable to officers (222,501) (461,300) --
----------- ----------- -----------
Net cash provided by financing activities 6,584,890 3,222,985 2,677,399
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 42,394 (474,640) (98,354)
Cash and cash equivalents at beginning of year 2,690 477,330 575,684
----------- ----------- -----------
Cash and cash equivalents at end of year $ 45,084 $ 2,690 $ 477,330
=========== =========== ===========
Supplemental disclosure of noncash investing/financing activity:
Acquisition of computer hardware and software through capital
lease arrangements $ 502,707 $ -- $ 376,838
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,054,473 $ 627,039 $ 215,146
Income taxes $ 141,210 $ 152,148 $ 333,260
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE A - NATURE OF BUSINESS
Dakotah, Incorporated (the "Company") designs, manufactures and markets
textile home fashion furnishings which are both functional and decorative.
The Company's principal products are decorative pillows, throws (polyester
fleece and cotton), bedding ensembles, and other home accessory products such
as footstools, chairpads, and table linens which are manufactured through its
manufacturing facilities principally located in South Dakota. The Company
sells its products domestically and internationally to a broad range of major
retailers, including department stores, specialty retailers, mass
merchandisers and mail order houses primarily in the United States. Showrooms
for the Company's products which support sales are located across the United
States in New York, Atlanta, Denver, Seattle and Chicago.
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 purchased 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 which, when they
occur, have approximated the estimates of management.
Inventories
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method. During 1997, 1996, and 1995, the
Company recorded charges of $1,482,000, $821,000 and $390,000 to cost of
goods sold to reduce the value of inventory to market.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
At December 31, 1997, a portion of the Company's inventory exceeded its
current needs. Management has introduced a plan under which it expects to
reduce this inventory. During the fourth quarter of 1997, the Company
recorded a charge of $420,000 to cost of goods sold as its estimate of the
loss to be incurred in reducing this inventory. Although management believes
this estimate is sufficient, it is reasonably possible that in the near term
losses could be significantly different than estimated.
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. Aggregate and specific stop loss coverages are
provided to control overall costs and individual 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 $379,000, $589,000 and $461,000 during 1997, 1996 and 1995.
Stock Based Compensation
The Company's employee stock option plans are accounted for under the
intrinsic value method.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings (Loss) Per Share
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." As required, all net earnings
(loss) per share data in the financial statements have been restated to
conform to the provisions of SFAS 128.
The Company's basic net earnings (loss) per share amounts have been computed
by dividing net earnings (loss) by the weighted average outstanding common
shares. The Company's diluted net earnings (loss) per share have been
computed by dividing net earnings (loss) by the weighted average outstanding
common shares and common share equivalents relating to stock options and
warrants, when dilutive. Options to purchase 926,212, 284,300 and 184,300
shares of common stock with a weighted average exercise price of $3.99, $4.99
and $5.13 were outstanding at December 31, 1997, 1996 and 1995, but were not
included in the computation of diluted net earnings per share because to do
so would have been anti-dilutive.
Revenue Recognition
The Company records revenue at the time its products are shipped.
Change in Accounting Principle
The Company changed its method of accounting for costs of a planned software
system conversion in the fourth quarter of 1997, pursuant to Emerging Issues
Task Force (EITF) Issue No. 97-13. Previously, substantially all direct costs
relating to the project were capitalized, including the portion related to
business process reengineering. Under EITF 97-13, all costs for business
reengineering must be expensed as incurred. As a result of this change, the
Company wrote off $124,847 ($81,401, net of income tax benefit) of previously
capitalized reengineering costs as a cumulative effect of a change in
accounting principle in the fourth quarter of 1997.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING PLOICIES - Continued
Recent Accounting Pronouncements
SFAS 130 "Reporting Comprehensive Income" requires companies to display an
amount representing total comprehensive income, as defined by the statement,
as part of a company's basic financial statements. Additionally SFAS 131
"Disclosures about Segments of an Enterprise and Related Information"
requires a company to disclose financial and other information about its
business segments, their products and services, geographic areas, major
customers, revenues, profits, assets and other information. These statements
are effective for financial statements for periods beginning after December
15, 1997.
The adoption of these two statements is not expected to have a material
effect on the financial statements of the Company.
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.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
NOTE C - INVENTORIES
The principal classifications of inventory and their corresponding values are
summarized as follows at December 31:
1997 1996
----------- ----------
Finished goods $ 6,858,092 $2,165,930
Work in process 957,972 1,667,023
Raw materials 7,606,938 5,722,944
----------- ----------
$15,423,002 $9,555,897
=========== ==========
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Buildings and improvements $2,418,374 $2,334,516
Leasehold improvements 130,046 123,731
Machinery and equipment 3,278,933 3,009,792
Office equipment, furniture and fixtures and other 2,858,139 1,478,163
---------- ----------
8,685,492 6,946,202
Less accumulated depreciation and amortization 3,382,135 2,575,682
---------- ----------
5,303,357 4,370,520
Land 36,000 36,000
---------- ----------
$5,339,357 $4,406,520
========== ==========
</TABLE>
Impairment Loss
During the fourth quarter of 1997, the Company recorded within general and
administrative expenses a loss of $144,340 for the write-down of capitalized
costs associated with computer software development and system conversion.
The Company considers excessive costs over that expected to be incurred to be
its primary indicator of the impairment. As such, the carrying value of this
asset was written down to its estimated fair value at December 31, 1997. The
fair value of this asset was determined based upon certain management
estimates and assumptions including, but not limited to, actual capitalized
costs incurred compared with the total estimated cost of the software
conversion process.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE E - NOTES PAYABLE
Short-Term Debt
The Company has a credit facility with a financial institution consisting of
a revolving note and a term note which terminate in June 1999. The total
amount available under the revolving note, which is due on demand, is the
lesser of $15,000,000 or a defined borrowing base of eligible receivables and
inventory balances, plus outstanding amounts under the term note. Advances
under the revolving note, based on eligible receivables and inventory
balances, provide for monthly interest payments at 1% and 3% above the
financial institution's prime rate (effective rates of 9.5% and 11.5% at
December 31, 1997). Advances under the term note, which is due on demand,
requires monthly principal payments of $33,333. Monthly interest payments are
computed based on 1% above the financial institution's prime rate (effective
rate of 9.5% at December 31, 1997). The outstanding balances on the revolving
note and term note, which approximated their fair values, were $10,997,734
and $1,800,002 at December 31, 1997. The outstanding balances of $6,034,750
and $708,333 at December 31, 1996 related to notes payable with a bank that
were refinanced in 1997.
In March, 1998, the Company renegotiated certain terms and covenants of its
credit facility. As part of that process, the Company obtained an additional
$1,000,000 of availability, above the amount of its borrowing base, under the
revolving note at the financial institution's prime rate plus 4%. This
additional funding is available to the Company through July 31, 1998. The
total amount provided for all of the notes, cannot exceed $15,000,000.
The current credit facility contains affirmative and negative covenants
including, among other things, provisions for minimum net earnings, minimum
tangible and book net worth requirements, and limitations on capital
expenditures. Additionally, the Company may not incur additional borrowings,
sell certain assets, acquire other businesses or pay cash dividends without
prior written consent. The Company was in compliance with or obtained waivers
for all covenants at December 31, 1997. The Company expects to be able to
renew or replace all lines of credit with agreements under similar terms as
they become due.
Note Payable to Officer
The Company has a note payable to an officer of the Company with outstanding
balances of $263,800 and $461,301 at December 31, 1997 and 1996. The note
bears an interest rate of 6% and is due on demand. The Company recorded
interest of approximately $22,000, $27,000 and $42,000 for the years ended
December 31, 1997, 1996 and 1995.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE E - NOTES PAYABLE - Continued
Long-Term Obligations
Long-term notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Note payable to State of South Dakota - due February 2001, payable in
monthly installments of $2,897, including interest at 3% with a
balloon payment of $161,215 in February 2001, collateralized by
certain equipment $ 243,179 $ 269,260
Note payable to State of South Dakota - due February 1999, payable in
monthly installments of $555, including interest at 3% with a balloon
payment of $80,309 in February 1999, collateralized by a building 85,171 89,767
Note payable to State of South Dakota - due February 2002, payable in
monthly installments of $4,049, including interest at 3% with a balloon
payment of $590,373 in February 2002, collateralized by equipment 707,508 -
Note payable to Northeast South Dakota Conservation Corporation - due
February 2002, payable in monthly installments of $1,053, including
interest at 5.75%, collateralized by a second mortgage on a building 146,583 -
Notes payable to a bank - due January 2003, payable in monthly installments
of $1,455, including interest at 0.5% over prime, (effective rate of
9.0% at December 31, 1997 and 1996), collateralized by certain property 70,190 80,808
Other 39,813 44,688
---------- ---------
1,292,444 484,523
Less current maturities 80,549 46,383
---------- ---------
$1,211,895 $ 438,140
========== =========
</TABLE>
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE E - NOTES PAYABLE - Continued
Scheduled principal repayments on the long-term notes payable above are as
follows for the years ending December 31:
1998 $ 80,549
1999 160,460
2000 82,642
2001 213,622
2002 & thereafter 755,171
----------
$1,292,444
==========
Based upon the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the carrying amount of notes
payable approximates their fair value.
NOTE F - LEASES
The Company leases certain manufacturing facilities, sales offices and
showrooms, as well as communications, computer and office equipment under
both capital lease and operating lease arrangements. The facility and
showroom leases generally require a base rental fee plus charges for
utilities and other costs.
Capital lease obligations consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Capital lease obligation to a finance company for lease of
equipment, due in November 2000 with monthly payments of $7,814,
including imputed interest rate of 8.9% $253,980 $337,492
Capital lease obligations to related parties for lease/purchase
agreements for land and buildings, due in varying monthly
payments, including imputed interest ranging from 7.2% to 9.5% 84,186 112,104
</TABLE>
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE F - LEASES - Continued
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Capital lease obligations to a finance company for two lease
agreements of equipment, due in June 2002 with monthly payments
of $7,516 and $2,713, including imputed interest rates of
7.3% and 10.5% $461,087 $ -
-------- --------
799,253 449,596
Less current maturities 197,942 104,313
-------- --------
$601,311 $345,283
======== ========
</TABLE>
Property, plant and equipment includes the following amounts under capital
lease:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- --------
<S> <C> <C>
Building and improvements $ 386,000 $506,500
Office equipment, furniture, fixtures and other 879,545 376,838
--------- --------
1,265,545 883,338
Less accumulated depreciation 438,687 470,017
--------- --------
Net $ 826,858 $413,321
========= ========
</TABLE>
Future minimum lease payments under the above capital and operating lease
obligations are as follows for the years ending December 31:
<TABLE>
<CAPTION>
Operating Capital
--------- -------
<S> <C> <C>
1998 $ 500,686 $257,227
1999 411,995 251,552
2000 346,169 230,163
2001 282,690 135,706
2002 187,728 61,374
Thereafter 16,432 -
---------- --------
Total minimum payments $1,745,700 936,022
==========
Imputed interest 136,769
--------
Present value of minimum payments $799,253
========
</TABLE>
The Company recorded interest for related party capital lease obligations of
approximately $6,000, $11,000 and $14,000 during the years ended December 31,
1997, 1996 and 1995.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE F - LEASES - Continued
Total rent expense for all operating leases was approximately $657,000,
$555,000 and $438,000 for the years ended December 31, 1997, 1996 and 1995.
NOTE G - COMMITMENTS
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, 1997,
guaranteed future minimum royalty payments totaled approximately $125,000.
Royalty expense was approximately $225,000, $364,000 and $245,000 in 1997,
1996 and 1995.
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 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.
At December 31, 1997 and 1996, the Plan held 1,514,284 and 1,669,969 shares
of the Company's common stock. There were no Company contributions in 1997.
Company contributions to the Plan were $59,000 and $50,000 for 1996 and 1995.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE I - STOCKHOLDERS' EQUITY
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
900,000 shares of common stock are reserved for issuance under the plans and
an additional 367,300 shares were reserved for issuance of options granted
prior to the adoption of 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, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 758,045 $4.27 367,300 $4.41 306,450 $4.97
Granted 169,167 2.78 390,745 4.15 163,000 3.69
Forfeited (1,000) 2.88 - - (102,150) 4.97
------- ------- --------
Outstanding at end of year 926,212 $3.99 758,045 $4.27 367,300 $4.41
======= ======= ========
Options exercisable at end of year 512,880 $4.25 354,300 $4.49 317,300 $4.54
======= ======= ========
Weighted average fair value of
options granted to employees and
directors during the year $1.63 $2.07 $1.34
Weighted average exercise price of
options granted to employees and
directors during the year $2.78 $4.59 $3.61
</TABLE>
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE I - STOCKHOLDERS' EQUITY - Continued
The following information applies to all stock options that are outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
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
--------------- ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$2.56 - $3.75 351,167 4 years $3.21 195,665 $3.47
$3.88 - $5.13 575,045 3 years $4.46 317,215 $4.70
------- -------
926,212 512,880
======= =======
</TABLE>
In prior years, the Company issued a warrant to purchase 100,000 shares of
common stock which is exercisable until March 1999 at $7.17 per share.
In January 1996, the Company granted options to purchase 242,745 shares of
common stock at $3.875 per share to a consultant. The market value was $4.25
per share when the options were approved. The options vest over three years
and have a term of five years; 80,915 of the options were exercisable at
December 31, 1997. In December 1997, the consultant's services were
terminated. Compensation expense of $276,699 and $100,000 was recorded in
1997 and 1996, respectively.
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 the years ended
December 31:
1997 1996 1995
---- ---- ----
Dividend yield zero zero zero
Expected volatility 48% 30% 30%
Risk free interest rate 6.80% 6.40% 5.98%
Expected lives; in years 6.50 6.62 5.00
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE I - STOCKHOLDERS' EQUITY - Continued
The Company's pro forma net earnings (loss) and net earnings (loss) per share
for 1997, 1996 and 1995, had the fair value method been used for options
granted to employees and directors, are set forth below. These effects may
not be representative of the future effects of applying this method.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ------------------------ ----------------------
As Pro As Pro As Pro
reported forma reported forma reported forma
------------ ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $(1,968,417) $(2,060,909) $827,605 $777,605 $460,039 $424,039
Net earnings (loss) per share
Basic $(.56) $(.59) $.24 $.22 $.13 $.12
Dilutive $(.56) $(.59) $.23 $.22 $.13 $.12
</TABLE>
NOTE J - INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31:
1997 1996 1995
----------- -------- --------
Current $ (963,600) $269,000 $100,000
Deferred (66,800) 135,000 156,000
----------- -------- --------
$(1,030,400) $404,000 $256,000
=========== ======== ========
Deferred income tax expense (benefit) results from temporary differences in
the recognition of income and expense items for tax and financial statement
reporting purposes. Significant components of the Company's deferred tax
assets as of December 31 are as follows:
1997 1996
-------- --------
Current
Accounts receivable allowance $115,000 $135,000
Inventory write-down 235,800 104,000
Accrued compensation and related accruals 105,000 94,000
Accrued expenses 15,000 117,000
Charitable contributions carryforward 66,000 46,000
Other 32,000 -
-------- --------
$568,800 $496,000
======== ========
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE J - INCOME TAXES - Continued
1997 1996
-------- --------
Long-term
Notes payable $ 93,000 $163,000
Other 86,000 22,000
-------- --------
$179,000 $185,000
======== ========
The Company has recorded deferred tax assets of $747,800 at December 31,
1997, reflecting the benefit of future tax deductions. Realization of these
assets is dependent upon the Company generating sufficient future taxable
income. Although realization is not assured, management believes it is more
likely than not that all of the deferred tax assets will be realized. The
amount of the deferred tax assets considered realizable, however, could be
reduced if estimates of future taxable income are reduced.
The following is a reconciliation of the Federal statutory income tax rate to
the effective tax rate for the years ended December 31:
1997 1996 1995
---- ---- ----
Statutory income tax rate (34.0)% 34.0% 34.0%
State taxes (1.3) 1.4 1.3
Charitable contribution of inventory (0.2) (2.6) -
Targeted jobs program tax credits (0.1) (0.2) (0.9)
Other 0.3 0.2 1.4
----- ---- ----
(35.3)% 32.8% 35.8%
===== ==== ====
NOTE K - CONCENTRATIONS
The Company had sales to two customers representing 18% and 11% of net sales
for the year ended December 31, 1997. The Company had sales to a different
customer representing 15% of net sales for the year ended December 31, 1996.
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE K - CONCENTRATIONS - Continued
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 42%
and 47% of the Company's net sales for 1997 and 1996. 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 1997, the Company recorded a charge of $420,000
to cost of goods sold to reduce the value of inventory to market (see note
B). The Company also recorded $483,000 of additional operating expenses
during the fourth quarter that included $144,000 for the write-down of
computer software costs (see note D), $138,000 to record the remainder of
compensation expense in connection with a former consultant's stock options
(see note I) and various other expenses totaling $201,000. The Company
recorded an income tax benefit of $316,000 related to all of these amounts.
The Company recorded a charge of $81,401, net of an income tax benefit of
$43,446, during the fourth quarter of 1997, in connection with the cumulative
effect of a change in accounting principle (see note B). The net effect of
these fourth quarter adjustments was a $668,000 increase to the net loss for
the year ended December 31, 1997.
<PAGE>
DAKOTAH, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Charged to Balance
beginning of costs and other at end
Description period expenses accounts Deductions of period
----------- ------ -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
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
Year ended December 31, 1997 382,000 115,000 - 171,000 (a) 326,000
</TABLE>
(a) Write-offs, less recoveries.
EXHIBIT 10.14
DESCRIPTION OF 1997 INCENTIVE COMPENSATION PLANS
Dakotah, Incorporated (the "Company") has approved an individual
incentive compensation plan (the "Bonus Plan") for George C. Whyte, President.
Under the Bonus Plan, the named associate is eligible to receive a bonus of a
specified percentage of his salary if certain individualized sales,
profitability and expense limitation goals are met in 1997. In addition to the
individualized goals, the Bonus Plan is subject to the following terms and
conditions.
1. Named associate must be employed by the Company on December
31, 1997;
2. Any bonus paid is to be included as an expense before
determining whether profit goals have been achieved; and
3. Any bonus will be paid after results for fiscal year 1997 are
determined.
EXHIBIT 10.18
DAKOTAH, INCORPORATED
NONSTATUTORY OPTION AGREEMENT
UNDER THE 1995 STOCK OPTION PLAN
Between:
DAKOTAH, INCORPORATED (the "Company") and WILLIAM RETTERATH (the "Optionee"),
dated April 8, 1997.
The Company hereby grants to the Optionee an option (the "Option")
under the Dakotah, Incorporated 1995 Stock Option Plan (the "Plan") to purchase
One Hundred Thousand (100,000) Shares (the "Shares") of the Company's common
stock under the terms and conditions set forth below. The terms and conditions
applicable to the Option are as follows:
1. Nonstatutory Option. The Option shall be a nonstatutory Option and
is not intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
2. Purchase Price - The purchase price of the stock shall be $2.6875
per share ("Option Price") which is the Fair Market Value of the Stock on the
date of this Agreement.
3. Period of Exercise - The Option shall expire on the seventh
anniversary date of its grant (the "Expiration Date") unless otherwise
terminated as provided herein.
Except as otherwise provided herein, the Option will vest as
follows:
(a) On and after the effective date of this Agreement, the
Option may be exercised for not in excess of twenty percent (20%) of
the shares originally subject to the Option;
(b) On or after January 1, 1998, the Option may be exercised
for not in excess of forty percent (40%) of the shares originally
subject to the Option;
(c) On or after January 1, 1999, the Option may be exercised
for not in excess of sixty percent (60%) of the shares originally
subject to the Option;
(d) On or after January 1, 2000, the Option may be exercised
for not in excess of eighty percent (80%) of the shares originally
subject to the Option;
(e) On and after January 1, 2001, the Option may be exercised
at any time and from time to time within its terms in whole or in part,
but it shall not be exercisable after the seventh anniversary of the
date hereof.
Notwithstanding the foregoing, the Option may be exercised in whole or
in part in the event that the Optionee is disabled or dies, or if the Optionee's
employment is terminated by the Company for any reason other than cause (as that
term is defined below).
<PAGE>
4. Transferability - This Option is not transferable except by will or
the laws of descent and distribution and may be exercised during the lifetime of
the Optionee only by the Optionee.
5. Termination of Employment - Except as may be agreed between the
Committee and the Optionee, in the event that Optionee's employment is
terminated, the Option may be exercised within its terms in whole or in part by
the Optionee within three months after the date of termination; except that:
a. If the Optionee's employment is terminated because the
Optionee is disabled within the meaning of Code ss.422, the Optionee
has one year rather than three months to exercise the Option.
b. If the Optionee dies, the Option may be exercised by his or
her legal representative or by a person who acquired the right to
exercise the Option by bequest or inheritance or by reason of the death
of the Optionee, but the Option must be exercised within one year after
the date of the Optionee's death.
c. If the Optionee's employment is terminated for cause, the
Option terminates immediately, and the Optionee has no right to
exercise the Option. For purposes of this Agreement, the term "cause"
means (i) criminal activity or dishonesty of Optionee which is proven
or admitted, (ii) acts of disloyalty to the Company during Optionee'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 by Optionee by a business entity
directly competitive with the Company, or (iii) the failure of Optionee
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; provided, however, that a bona fide
disability shall not result in a failure to "use best efforts."
d. Notwithstanding the foregoing, in no event (including
disability or death of the Optionee) may the Option be exercised after
the Expiration Date.
6. No Guarantee of Service - This Agreement shall in no way restrict
the right of the Company or the Company's Board of Directors to terminate
Optionee at any time.
7. Method of Exercise; Use of Company Stock - The Option may be
exercised, subject to the terms and conditions of this Agreement, by written
notice to the Company. The notice shall be in the form attached to this
Agreement and will be accompanied by payment (in such form as the Company may
specify) of the full purchase price of the shares to be issued. The Company will
issue and deliver certificates representing the number of shares purchased under
the Option, registered in the name of the Optionee as soon as practicable after
receipt of the notice.
When exercising this Option, Optionee may make payment either
in money or by tendering shares of the Company Stock owned by the Optionee, or
by a combination of the two; provided, however, that (a) shares of the Company
Stock may be utilized only if, at the time of exercise, the Stock of the Company
is publicly traded, either on a stock exchange or nationally or locally over the
counter, and (b) the right to pay in the form of the Company Stock can be
utilized only twice in any calendar year. Where shares of Stock of the Company
are employed to pay all or part of the exercise price, the shares of said Stock
shall be valued at their Fair Market Value at the time of payment.
<PAGE>
8. Withholding; Taxable Income - In any case where withholding is
required or advisable under federal, state or local law in connection with any
exercise by an Optionee hereunder, the Company is authorized to withhold
appropriate amounts from amounts payable to Optionee, or may require Optionee to
remit to the Company an amount equal to such appropriate amounts.
9. Merger, Consolidation or Acceleration Event - The terms of this
Agreement are subject to modification upon the occurrence of certain events as
described in Article XIII of the Plan.
10. Incorporation of Plan - This Agreement is made pursuant to the
provisions of the Plan, which Plan is incorporated by reference herein. Terms
used herein shall have the meaning employed in the Plan, unless the context
clearly requires otherwise. In the event of a conflict between the provisions of
the Plan and the provisions of this Agreement, the provisions of the Plan shall
govern.
DAKOTAH, INCORPORATED
By
--------------------------------
Troy Jones, Jr.
Chief Executive Officer
<PAGE>
DAKOTAH, INCORPORATED
NOTICE OF EXERCISE OF STOCK OPTION ISSUED
UNDER THE 1995 STOCK OPTION PLAN
To: Stock Option Committee
DAKOTAH, INCORPORATED
I hereby exercise my Option dated to purchase shares of $.01 par value
common stock of the Company at the Option exercise price of $2.6875 per share.
Enclosed is a certified or cashier's check in the total amount of $ , or payment
in such other form as the Company has specified.
I request that my shares be issued to me as follows:
(Print your name in the form in which you wish to have the shares registered)
(Social Security Number)
(Street and Number)
(City) (State) (Zip Code)
Dated: ________________, 19___.
Signature:
EXHIBIT 10.27
SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Second Amendment to Credit and Security Agreement is made and
entered into as of this 25th day of March, 1998, 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 executed and delivered to Lender the First Amendment to
the Credit and Security Agreement dated as of July 7, 1997 (the "First
Amendment").
C. 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(d) of the Credit Agreement, as amended, is hereby
deleted therefrom in its entirety and the following is hereby inserted in lieu
thereof as an amendment thereto:
(d) Borrower will pay interest on all outstanding loans advanced
against Borrower's eligible accounts receivable or eligible machinery and
equipment as determined by Lender under this Agreement ("Accounts/Equipment
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) 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 (the "Base Rate"). 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 Base Rate.
Borrower will pay interest on all outstanding loans under this Agreement other
than Accounts/Equipment Loans or 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) nine and one-half percent (9.5%) per annum or (ii)
four percent (4%) above the Base 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
<PAGE>
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.
2. Paragraph 5(h) of the Credit Agreement, as amended, is hereby deleted
therefrom in its entirety and the following is hereby inserted in lieu thereof
as an amendment thereto:
"Earn net income of not less than $100,000.00 for the third fiscal
quarter of each fiscal year, and $100,000.00 for the fourth fiscal quarter of
each fiscal year."
3. Paragraph 5(i) of the Credit Agreement, as amended, is hereby deleted
therefrom in its entirety and the following is hereby inserted in lieu thereof
as an amendment thereto:
"From January 1, 1998 through March 31, 1998, maintain Borrower's book
net worth at amounts in excess of $7,800,000.00 and maintain Borrower's tangible
net worth (excluding all intangible assets designated by Lender) at amounts in
excess of $5,300,000.00.
Beginning April 1, 1998 through June 30, 1998, maintain Borrower's
book net worth at amounts in excess of $7,000,000.00 and maintain Borrower's
tangible net worth (excluding all intangible assets designated by Lender) at
amounts in excess of $4,800,000.00.
Beginning July 1, 1998 through September 30, 1998, maintain Borrower's
book net worth at amounts in excess of $6,900,000.00 and maintain Borrower's
tangible net worth (excluding all intangible assets designated by Lender) at
amounts in excess of $4,900,000.00.
Beginning October 1, 1998, and at all times thereafter, maintain
Borrower's book net worth at amounts in excess of $7,300,000.00 and maintain
Borrower's tangible net worth (excluding all intangible assets designated by
Lender) at amounts in excess of $5,500,000.00.
For the purposes of calculating book net worth and tangible net worth,
debt which has been subordinated to Lender on terms acceptable to Lender shall
be deemed to be equity."
4. Paragraph 6(c) of the Credit Agreement, as amended, is hereby
deleted therefrom in its entirety and the following is hereby inserted in lieu
thereof as an amendment thereto:
"Expend or contract to expend in any one calendar year, more than
$200,000.00 in the aggregate, or more than $100,000.00 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."
5. 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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Second Amendment to Credit and Security Agreement as of the day and year first
above written.
DAKOTAH, INCORPORATED
By_____________________________________
Its Chief Financial Officer
DIVERSIFIED BUSINESS CREDIT, INC.
By_____________________________________
Its Vice President
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 27, 1998, accompanying the financial
statements included in the Annual Report of Dakotah, Incorporated on Form 10-K
for the year ended December 31, 1997. We hereby consent to the incorporation by
reference of said report in the Registration Statements of Dakotah, Incorporated
on Form S-8 (File No. 33-86868, effective November 24, 1994; File No. 33-334185,
effective August 22, 1997; File No. 33-334186, effective August 22, 1997 and
File No. 33-334187, effective August 22, 1997).
GRANT THORNTON LLP
Minneapolis, Minnesota
February 27, 1998
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<ARTICLE> 5
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 45,084
<SECURITIES> 0
<RECEIVABLES> 4,817,697
<ALLOWANCES> 326,000
<INVENTORY> 15,423,002
<CURRENT-ASSETS> 21,940,906
<PP&E> 8,721,492
<DEPRECIATION> 3,382,135
<TOTAL-ASSETS> 27,468,463
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0
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<COMMON> 34,998
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<INCOME-PRETAX> (2,917,416)
<INCOME-TAX> (1,030,400)
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<EXTRAORDINARY> 0
<CHANGES> (81,401)
<NET-INCOME> (1,968,417)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,690
<SECURITIES> 0
<RECEIVABLES> 7,920,724
<ALLOWANCES> 382,000
<INVENTORY> 9,555,897
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0
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