UNITED STATES SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly report pursuant to Section 13 of 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
Commission File Number 0-23604
DAKOTAH, INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
South Dakota 46-0339860
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification Number)
One North Park Lane
Webster, SD 57274
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Zip Code: (605) 345-4646
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock, $.01 par value, 3,499,755 shares outstanding
as of August 14, 1998.
<PAGE>
DAKOTAH, INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets:
June 30, 1998 (Unaudited) and
December 31,1997 (Audited)
Statements of Operations (Unaudited):
Three and six month periods ended
June 30, 1998, and June 30, 1997
Statements of Cash Flows (Unaudited):
Six month periods ended
June 30, 1998, and June 30, 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since items
are inapplicable or answer is negative
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit Number: Description:
--------------- ------------
27.1 Financial Data Schedule
b) Reports on Form 8-K None
<PAGE>
ITEM 1: Financial Statements
DAKOTAH, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 15,604 $ 45,084
Accounts receivable less allowance
for doubtful accounts of $277,714
in 1998 and $326,000 in 1997 2,384,920 4,491,697
Inventories 12,384,443 15,423,002
Income taxes receivable -- 963,000
Prepaid expenses and other 431,378 449,323
Deferred income taxes 848,800 568,800
------------ ------------
Total current assets 16,065,145 21,940,906
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 36,000 36,000
Buildings and improvements 2,418,374 2,418,374
Leasehold improvements 130,046 130,046
Machinery and equipment 3,288,046 3,278,933
Office equipment, furniture and fixtures and other 3,347,096 2,858,139
------------ ------------
9,219,562 8,721,492
Less accumulated depreciation & amortization 3,873,806 3,382,135
------------ ------------
5,345,756 5,339,357
OTHER ASSETS
Deferred income taxes 179,000 179,000
Other 9,200 9,200
------------ ------------
188,200 188,200
------------ ------------
$ 21,599,101 $ 27,468,463
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Outstanding checks in excess of bank balances $ 382,418 $ 452,784
Short-term debt 11,480,603 12,797,736
Current maturities of long-term obligations 161,685 80,549
Current maturities of capital lease obligations, including
$14,803 and $27,117 to related parties in 1998 and 1997 225,392 197,942
Current maturities of note payable to officer 263,800 263,800
Accounts payable 1,358,283 1,781,996
Accrued liabilities
Compensation and related benefits 545,412 566,165
Other 589,787 758,343
------------ ------------
Total current liabilities 15,007,380 16,899,315
LONG-TERM LIABILITIES
Long-term portion of long-term obligations 1,091,541 1,211,895
Long-term portion of capital lease obligations, including --
$57,069 and $57,069 to relates parties in 1998 and 1997 645,246 601,311
STOCKHOLDERS' EQUITY
Common stock, par value $.01; 10,000,000 shares authorized;
issued & outstanding shares 3,499,755 34,998 34,998
Additional contributed capital 7,180,855 7,180,855
Retained earnings (accumulated deficit) (2,360,919) 1,540,089
------------ ------------
4,854,934 8,755,942
------------ ------------
$ 21,599,101 $ 27,468,463
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DAKOTAH, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,219,671 $ 6,856,237 $ 9,095,769 $ 13,538,086
Cost of goods sold 4,149,181 5,221,003 8,746,030 10,178,176
------------ ------------ ------------ ------------
Gross profit 70,490 1,635,234 349,739 3,359,910
Operating expenses
Selling 942,955 1,022,175 1,849,178 2,205,453
General and administrative 947,114 1,297,050 1,970,925 2,266,203
------------ ------------ ------------ ------------
1,890,069 2,319,225 3,820,103 4,471,656
------------ ------------ ------------ ------------
Operating loss (1,819,579) (683,991) (3,470,364) (1,111,746)
Other income (expense)
Interest expense (370,323) (210,102) (735,080) (353,599)
Other 1,901 -- (18,120) --
------------ ------------ ------------ ------------
(368,422) (210,102) (753,200) (353,599)
Loss before income taxes (2,188,001) (894,093) (4,223,564) (1,465,345)
Income tax benefit (42,556) (311,000) (322,556) (491,000)
------------ ------------ ------------ ------------
NET LOSS $ (2,145,445) $ (583,093) $ (3,901,008) $ (974,345)
============ ============ ============ ============
Net loss per share -
basic and dilutive $ (0.61) $ (0.17) $ (1.11) $ (0.28)
============ ============ ============ ============
Weighted average
common shares outstanding -
basic and dilutive 3,499,755 3,499,755 3,499,755 3,499,755
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DAKOTAH, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,901,008) $ (974,345)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 491,671 339,453
Compensation to outside consultant -- 63,000
Deferred income taxes (280,000) --
Changes in assets and liabilities:
Accounts receivable 2,106,777 2,981,988
Inventories 3,038,559 (9,917,193)
Prepaid expenses 17,945 184,752
Accounts payable (423,713) 3,944,805
Accrued liabilities (189,309) (437,402)
Income taxes 963,000 (613,066)
----------- -----------
Total adjustments 5,724,930 (3,453,663)
----------- -----------
Net cash provided by (used in) operating activities 1,823,922 (4,428,008)
Cash flows from investing activities:
Capital expenditures (316,742) (491,543)
Other -- (306,093)
----------- -----------
Net cash used in investing activities (316,742) (797,636)
Cash flows from financing activities:
Outstanding checks in excess of bank balance (70,366) 626,722
Net payments under short-term debt agreements (1,317,133) 3,996,931
Proceeds from issuance of long-term obligations -- 880,000
Principal payments on long-term and
capital lease obligations (149,161) (77,242)
Principal payments on note payable to officer -- (197,501)
----------- -----------
Net cash provided by (used in) financing activities (1,536,660) 5,228,910
----------- -----------
Net increase (decrease) in cash and cash equivalents (29,480) 3,266
Cash and cash equivalents at beginning of period 45,084 2,690
----------- -----------
Cash and cash equivalents at end of period $ 15,604 $ 5,956
=========== ===========
Supplemental disclosure of non-cash investing/financing activity:
Acquisitions of property, plant and equipment through
capital lease arrangements $ 181,328 $ 502,707
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 764,743 $ 323,435
Income taxes - 120,000
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions of Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures are adequate to make the information presented not
misleading.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments consisting of normal recurring accruals necessary to
present fairly the financial position of the Company as of June 30, 1998 and the
results of operations for the three and six month periods ended June 30, 1998
and 1997 and the cash flows for the six month periods ended June 30, 1998 and
1997. These results are not necessarily indicative of results which may be
expected for the year as a whole.
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B: INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
June 30, 1998 December 31, 1997
------------- -----------------
Raw Materials $ 5,607,238 $ 7,606,938
Work-In-Process 1,210,942 957,972
Finished Goods 5,566,263 6,858,092
----------- -----------
$12,384,443 $15,423,002
=========== ===========
NOTE C: RECLASSIFICATIONS
Certain amounts from the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
<PAGE>
NOTE D: SHORT-TERM DEBT
The Company has a credit facility with a financial institution consisting of a
revolving note and a term note which terminate in June 1999. The total amount
available under the revolving note, which is due on demand, is the lesser of
$15,000,000 or a defined borrowing base of eligible receivables, and inventory
balances, plus outstanding amounts under the term note, plus $1,000,000.
Advances under the revolving note, based on eligible receivables, inventory
balances and the additional $1,000,000 provide for monthly interest payments at
1%, 3% and 4% above the financial institution's prime rate (effective rates of
9.5%, 11.5% and 12.5% at June 30, 1998). Advances under the term note, which is
due on demand, requires monthly principal payments of $33,333. Monthly interest
payments are computed based on 1% above the financial institution's prime rate
(effective rate of 9.5% at June 30, 1998). The outstanding balances on the
revolving note and term note were $9,880,599 and $1,600,004 at June 30, 1998 and
$10,997,734 and $1,800,002 at December 31, 1997.
In March, 1998, the Company renegotiated certain terms and covenants of its
credit facility. As part of that process, the Company obtained the additional
$1,000,000 of availability, above the amount of its borrowing base, under the
revolving note at the financial institution's prime rate plus 4%. The
renegotiated terms originally intended for the additional $1,000,000
availability to expire on July 31, 1998. However, the financial institution has
allowed the Company to retain this additional availability subsequent to July
31. The total amount provided for all of the notes, cannot exceed $15,000,000.
The current credit facility contains affirmative and negative covenants
including, among other things, provisions for minimum net earnings, minimum
tangible and book net worth requirements, and limitations on capital
expenditures. Additionally, the Company may not incur additional borrowings,
sell certain assets, acquire other businesses or pay cash dividends without
prior written consent. The Company was not in compliance with the minimum net
earnings and net worth covenants as of June 30, 1998; however, the financial
institution has not exercised any of its remedies available to it in under the
terms of the agreement in the case of default, nor has it informed the Company
of its intention to do so.
NOTE E: FINANCING EFFORTS
While the Company had anticipated a decline in sales and gross margin for the
first half of 1998, the extent of those declines in the later part of the first
quarter and throughout the second quarter has significantly exceeded what was
originally anticipated by management. As a result of the declining margins and
sales in the first and second quarter of 1998, the Company determined that
additional funds, in the form of debt or equity, would be required to continue
operations through the second half of 1998 and into 1999, as the Company's
current cash flows generated from operations and funds available as a result of
its borrowing capacity are insufficient to meet its working capital, projected
<PAGE>
capital expenditures and other financing needs for 1998 and the future. In
conjunction with these needs, the Company hired a consultant in the second
quarter of 1998 to assist in obtaining this financing.
At this time, the Company has not obtained the necessary debt financing nor has
it received a commitment for such financing. While the Company continues to
review various options and proposals for appropriate financing, it has further
expanded it's search for funding, including exploring equity options, such as
strategic alliances or other alternatives.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW:
Dakotah(R) Inc. (the "Company") designs, manufactures and markets textile home
fashion furnishings which are both functional and decorative. Its principal
products are decorative pillows, throws (polyester fleece and cotton), blankets,
bedroom ensembles and other home accessory products such as footstools, chair
pads and table linens. The Company's objective has been to build a strong brand
image associated with fashionable styling and high quality products. It markets
its products (primarily under the Dakotah(R) and Polarfleece(R) names and
various licensed names) to a broad range of major retailers, including
department stores, specialty retailers, mass merchandisers and mail order
houses, both domestic and international. Showrooms for the Company's products,
which support sales are located across the country in New York, Atlanta,
Chicago, Denver and Seattle.
RESULTS OF OPERATIONS:
The following table sets forth the percentage relationship to net sales of
certain items in the Company's statements of operations for the three and six
month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Percentage of Net Sales for the Percentage of Net Sales for the
three month period ended June 30, six month period ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Gross Profit 1.7 23.8 3.8 24.8
Selling Expenses 22.3 14.9 20.3 16.3
General & Administrative 22.4 18.9 21.7 16.7
Operating Loss (43.1) (10.0) (38.2) (8.2)
Interest Expense 8.8 3.0 8.1 2.6
Loss Before Income Taxes (51.9) (13.0) (46.4) (10.8)
Net Loss (50.8) (8.5) (42.9) (7.2)
</TABLE>
NET SALES decreased 32.8% to $9,096,000 for the six months ended June 30, 1998
from $13,538,000 in the same period of 1997. Net sales decreased from $6,856,000
in the second quarter of 1997, to $4,220,000 in the second quarter of 1998. The
decrease in sales for the six months ended June 30,1998 is primarily due to the
heavy discounting the Company has undertaken to liquidate its excess inventories
which it carried from 1997, an overall decline in orders for the first half of
the year due to excess inventory levels of
<PAGE>
its primary customers, and a fall off in orders resulting from dissatisfaction
of certain customers resulting from poor delivery performance primarily related
to poor performance of certain suppliers of the Company in the prior year.
Additionally, in connection with the changeover of operations associated with
the computer systems conversion in June, the Company experienced a slow down of
manufacturing and shipping operations. This slowdown resulted in the Company's
inability to meet delivery dates for a number of scheduled orders for June. As a
result, orders representing approximately $500,000 in net sales and gross margin
of approximately $125,000 were forgone for the second quarter. The majority of
these orders were re-scheduled for shipment in the third quarter.
In order to diminish the Company's dependence on retailers and the associated
risks of returns, markdowns, inappropriate chargebacks and other issues, the
Company is currently focusing substantial resources toward the development of
the institutional and the gift and specialty markets. During the second quarter,
the Company was successful in significantly expanding its sales force in the
gift and specialty markets by aligning itself with several premier
representative organizations located throughout the United States. The Company
expects to see the results of these efforts late in the third and into the
fourth quarter of 1998. With this expanded market potential and the normal heavy
fall seasonality of its traditional customer base, sales for the second half of
1998 are expected to be substantially higher than the first six months of 1998.
GROSS MARGIN PERCENTAGES decreased from 24.8% in the first six months of 1997 to
3.8% in the first six months of 1998. During the second quarter of 1998,
compared to the same period of 1997, gross profit percentages decreased to 1.7%
from 23.9%. This decline in gross margin is due primarily to (1) the heavy
discounting of inventory, as mentioned above, (2) an increase in closeout sales
as compared to the same periods of 1998, (3) substantial impact to cost of goods
sold due to volume variances resulting from the slowdown of manufacturing and
shipping in January 1998 and again in June of 1998, following the computer
systems conversion. The negative impacts were somewhat offset by the positive
impacts on variances of (1) decreased manufacturing overhead spending which
declined from $3,700,000 in the first half of 1997 to $2,300,000 in the first
half of 1998 and (2) increased direct labor efficiencies which increased to in
excess of 75% in the first half of 1998 from 62% in the first half of 1997.
The Company expects gross margins to increase as sales increase over the second
half of 1998, as the Company returns to selling in-line products for the fall
season and sales to the higher-margin gift and specialty market increase.
Finally, in its efforts to gain further control over inventory write-downs,
which have risen over the past three years, the Company is in the process of
further reducing and narrowing its product offerings where the rates of sale do
not support the product. This will have the impact of reducing fabric
requirements and excess inventories.
<PAGE>
SELLING EXPENSES decreased $356,000 from $2,205,000 in the first six months of
1997 to $1,849,000 in the first six months of 1998. The decrease is primarily
the result of the lower level of sales for the period, as well as the Company's
cost reduction efforts. The net decrease is comprised largely of (1) decreased
commission expense of $340,000, which directly correlates to the decreased sales
for the period (2) decreased costs of catalog and promotional literature of
approximately $80,000, (3) decreased cost of showroom decorating and supplies of
approximately $91,000 and (4) a $28,000 decrease in travel and lodging for the
sales force. These decreases were somewhat offset by higher salary and payroll
expenses of $188,000, resulting from the Company's hiring of two full-time sales
regional representatives in the second half of 1997, as well as its Vice
President of Sales and Marketing in March of 1998. As a percentage of net sales,
selling expenses increased to 20.3% in the first six months of 1998 from 16.3%
in the first six months of 1997 as a result of the substantially lower sales
levels.
GENERAL AND ADMINISTRATIVE EXPENSES decreased from $2,266,000 in the first six
months of 1997 to $1,970,000 in the first six months of 1998. The decrease is
primarily due to the Company's cost reduction efforts, specifically (1) a
decrease in professional fees of $113,000, resulting from reduced legal and
accounting fees, as well as a decrease in other professional fees for the
compensation paid to the Company's former Chief Executive Officer, (2) a
decrease in recruiting fees of $90,000, which related to senior management
recruiting in 1997, (3) decreased computer leasing and supplies expense of
$88,000 and numerous other smaller decreases. These decreases were partially
offset by increased depreciation expense of $140,000, relating to substantial
computer hardware acquisitions which were put into service in the second half of
1997.
As a percentage of net sales, general and administrative expenses increased from
16.7% in the first six months of 1997 to 21.7% in the first six months of 1998
as the substantially lower net sales more than countered the expense reductions.
The Company has instituted a plan to substantially reduce general and
administrative expenses from 1997 levels. During the last month of 1997 and
continuing in the first half of 1998, the Company has reduced the majority of
the monthly expenses which had increased in 1997. The reductions, as compared to
1997, are expected to continue for the remainder of 1998.
INTEREST EXPENSE increased from $354,000 in the first six months of 1997 to
$735,000 in the first six months of 1998. The increase is the result of higher
average borrowings to finance the higher levels of inventory carried into 1998
as compared to 1997, and to finance losses and capital expenditures occurring in
1997 and through the first half of 1998.
The EFFECTIVE INCOME TAX RATE was 7.6% for the first six months of 1998, as
compared to 33.5% for the first six months of 1997. This decline in the benefit
resulted from the recording of a valuation allowance which offsets the deferred
tax asset created by the net operating loss carryforward. In addition, the
Company has deferred tax assets of approximately $748,000. Realization of these
assets is dependent on the Company's ability return to profitability, which is
expected to occur in 1999. Realization of these tax
<PAGE>
benefits is dependent on margins returning to pre-1997 levels and management's
efforts at cost reductions. The Company believes that it is more likely than not
that it will recover these deferred tax assets in the future.
RESTRUCTURING PLANS - During the first quarter of 1998, the Company presented an
annual budget for 1998 which called for, among other items (1) a reduction of
general and administrative expenses of approximately $1,500,000, (2) a reduction
of manufacturing overhead expenses of approximately $2,000,000 and (3) a
substantial reduction in capital expenditures. The Company also continues to
work toward improvement of systems and controls over inventory, including
improvements in purchasing, forecasting, disposition of slow moving products and
pricing controls. It is expected that the changes in inventory will
substantially reduce inventory writedowns in 1999 and future years which have
grown from less than $400,000 in 1995 to almost $1,500,000 in 1997. As mentioned
above, the Company has been successful, in varying degrees, in its cost cutting
efforts.
Part of this restructuring process undertaken included the restructuring of the
Company's product lines. During the second quarter, the Company distinguished
two separate distinct lines, Dakotah Home and Dakotah Limited, which focus on
the major retailer and gift and specialty markets, respectively. As a part of
this line distinction, the Company also substantially reduced the number of
products offered, which is expected to provide product development and
manufacturing efficiencies into the second half of 1998 and forward.
The ability of the Company to succeed with its plans is dependent on an
increased sales in the second half of 1998. The Company believes that the most
promising source of such sales is within the gift, specialty and institutional
markets. During the first quarter of 1998, the Company also announced the hiring
of Michael Morton as its Vice President of Sales and Marketing. Mr. Morton is
experienced in growing sales in these types of markets. To further enhance the
Company's opportunity in these markets, in the second quarter the Company was
successful in hiring a Director of Product Development and a National Sales
Manager-Gift from a competitor of the Company.
While the Company had anticipated a decline in sales and gross margin for the
first half of 1998, the extent of those declines in the later part of the first
quarter and throughout the second quarter has significantly exceeded what was
originally anticipated by management. As a result of the declining margins and
sales in the first and second quarter of 1998, the Company determined that
additional funds, in the form of debt or equity, would be required to continue
operations through the second half of 1998 and into1999, as the Company's
current cash flows generated from operations and funds available as a result of
its borrowing capacity are insufficient to meet its working capital, projected
capital expenditures and other financing requirements for 1998 and the future.
In conjunction with these needs, the Company hired a consultant in the second
quarter of 1998 to assist in obtaining this financing.
<PAGE>
To date, the Company has not obtained the necessary debt financing nor has it
received a commitment for such financing. While the Company continues to review
various options and proposals for appropriate financing, it has further expanded
its search for funding, including exploring equity options, such as strategic
alliances or other alternatives. There is no assurance that the Company will
receive the necessary financing.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $1.1 million as of June 30, 1998 and $5.0 million as
December 31, 1997.
The net cash provided by operating activities during the first six months of
1998 was primarily used to repay borrowings under the revolving note, make
principal and interest payments on term debt obligations and for capital
expenditures, primarily for equipment and external consulting costs necessary to
complete the computer systems conversion during the second quarter.
Accounts receivable were approximately $2,385,000 as of June 30, 1998 and
$4,492,000 as of December 31, 1997. The decrease in the first six months of 1998
was due to lower sales for the second quarter of 1998 as compared to the fourth
quarter of 1997.
The allowance for doubtful accounts decreased from $326,000 at December 31, 1997
to $278,000 at June 30, 1998. The Company estimates the allowance for doubtful
accounts based on the best information available to management. The decrease
from December 31, 1997 is directly related to the overall decrease in accounts
receivable as well as liquidation in the second quarter of the Company's claim
in a bankruptcy of customer, as well as the completion of bankruptcy proceedings
for a number of smaller customers. Management believes that the allowance is
adequate to cover any additional losses which may occur.
Inventories were approximately $12,384,000 as of June 30, 1998 and $15,423,000
as of December 31, 1997. The decrease of $3 million from December 31, 1997 to
June 30, 1998 is primarily related to decreases of finished goods and raw
materials of Polarfleece(R) products as well as decreased pillow inventories.
The decreases were the results of the Company's efforts to reduce inventory
levels. However, due to continued slow sales during the first six months of
1998, the reduction was not as significant as the Company had expected. The
Company expects to continue this gradual reduction of inventory levels through
the end of 1998 and into 1999.
Accounts payable were approximately $1,358,000 as of June 30, 1998 and
$1,782,000 as of December 31, 1997. The decrease as of June 30, 1998 as compared
to year end 1997 is primarily related to reduced raw materials purchases for the
second quarter of 1998 compared to the fourth quarter of 1997. The reduction in
purchasing is the result of the Company's efforts to reduce inventories, coupled
with lower requirements due to the sales decline in the first six months of
1998. The reduction in accounts payable due to decreased purchasing was
partially offset by a longer average outstanding period for the Company's
payables, necessitated by reduced borrowing availability under the Company's
revolving line of credit throughout the quarter. This limited borrowing capacity
and the need for continued support of trade creditors through lengthened credit
terms has continued into the third quarter.
<PAGE>
The total amount available under the revolving note, which is due on demand, is
limited to the lesser of $15,000,000 or a defined borrowing base of receivables,
inventory balances, plus outstanding amounts under the term note, plus
$1,000,000. Advances under the revolving note, based on eligible receivables,
inventory balances, and the additional $1,000,000, provide for monthly interest
payments at 1%, 3% and 4%, respectively, above the financial institution's prime
rate (effective rates of 9.5%, 11.5% and 12.5%, respectively at June 30, 1998).
Advances under the term note, which is due on demand and which requires monthly
principal payments of $33,333, provide for monthly interest payments at 1% above
the financial institution's prime rate (effective rate of 9.5% at June 30,
1998). The outstanding balances on the revolving note and term note were
$9,880,599 and $1,600,004 at June 30, 1998 and $10,997,734 and $1,800,002 at
December 31, 1997.
For the six months ended June 30, 1998, the Company's capital expenditures were
$498,000. These expenditures include $455,000 for the acquisition of additional
computer hardware and software and capitalized external consulting costs
necessary for the Company's information systems conversion which occurred during
the second quarter. The remaining $43,000 was primarily used for trade show
exhibit structures and equipment. The Company does not have any additional plans
for material capital expenditures in 1998 as a result of its cost reduction
initiatives.
Upon termination of the officers' stock appreciation program in 1994, the
Company became indebted to the Company's President and a former Executive Vice
President in the aggregate amount of $1,318,000. The total outstanding
indebtedness was $263,800 as of June 30, 1998 and December 31, 1997. This
indebtedness bears interest at 12% per annum and is due on demand.
As stated above, the Company determined and presented in its release of the
results of operations for the first quarter of 1998, that additional funds, in
the form of debt or equity, would be required to continue operations through the
second half of 1998 and into 1999, as the Company's current cash flows generated
from operations and funds available as a result of its borrowing capacity are
insufficient to meet its working capital, projected capital expenditures and
other financing needs for 1998 and the future. In conjunction with these needs,
the Company hired a consultant in the second quarter of 1998 to assist in
obtaining this financing.
At this time, the Company has not obtained the necessary debt financing nor has
it received a commitment for such financing. While the Company continues to
review various options and proposals for appropriate financing, it has further
expanded it's search for funding, including exploring equity options, such as
strategic alliances or other alternatives. There is no assurance that the
Company will obtain the necessary financing.
<PAGE>
FORWARD LOOKING STATEMENTS
Forward looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that such forward looking statements involve risks and uncertainties, including,
without limitation, continued acceptance of the Company's products, cancellation
of orders, increased levels of competition for the Company, new products and
technological changes, the Company's dependence upon third party suppliers,
intellectual property rights and the Company's ability to obtain financing.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registered has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAKOTAH, INCORPORATED
August 14, 1998 By: /S/ GEORGE C. WHYTE.
----------------------------------
George C. Whyte
Chief Executive Officer
August 14, 1998 By: /S/ WILLIAM R. RETTERATH
----------------------------------
William R. Retterath
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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<PERIOD-END> JUN-30-1998
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