SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
DECEMBER 31, 1996 0-23604
DAKOTAH, INCORPORATED
(Exact name of registrant as specified in its charter)
SOUTH DAKOTA 46-0339860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH PARK LANE, WEBSTER, SD 57274-0120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (605) 345-4646
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes __X__ No _____
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained herein, and no disclosure will
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [___].
Aggregate market value of voting stock held by non-affiliates of
Registrant as of March 21, 1997: Approximately $6,314,000.
Number of shares of Common Stock, $.01 par value, outstanding as of
March 21, 1997: 3,499,755.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Dakotah, Incorporated ("Company" or "Dakotah") designs, manufactures
and markets textile home fashion furnishings which are both functional and
decorative. The Company's principal products are decorative pillows, chair pads,
throws (polyester fleece and cotton), footstools and table linens. The Company's
objective has been to build a strong brand image associated with fashionable
styling and high quality products. The Company markets its products (primarily
under the Dakotah(R) and Polarfleece(R)* name and various licensed names) to a
broad range of major retailers, including department stores, specialty
retailers, mass merchandisers and mail order houses.
Founded in l971 as a craft cooperative, the Company has over 570
employees. The Company's employees are referred to as "associates" in
recognition of the need for all associates to work together as a team to make
the Company successful. Initially, the Company emphasized fashionable quilted
and hand-crafted applique bedspreads and comforters. Applique, one of the oldest
handicraft forms, is a process of making a design by sewing small pieces of
fabric onto a larger base fabric. The Company utilizes creative design and
manufacturing processes to develop superior fashionable products.
During the 1980's, the Company shifted its focus from bedcoverings to
decorative pillows as it believed the decorative pillow market presented
significant opportunities for the Company to capitalize on its reputation for
fashionable styling and high quality products. In October 1994, the Company
announced its decision to discontinue the manufacture of quilted comforters and
bedspreads and concentrate on higher margin products. During the previous ten
years, demand for the Company's bedspreads and comforters had declined due to
price erosion from an increase in imports. Business in decorative accessory
products has substantially increased during the same decade. The decision to
discontinue the quilted comforters and bedspreads enabled the Company to convert
several thousand square feet of manufacturing space, plus many of its
associates, from manufacturing bedspreads and comforters to other products.
* Polarfleece(R) is a registered trademark of Malden Mills Industries for which
Dakotah has an exclusive license to use the trademark Polarfleece(R) and other
trademarks in most home furnishing's product categories.
PRODUCTS
GENERAL. The Company's principal product groups are decorative pillows,
chair pads, throws (polyester fleece and cotton), footstools, bedding and
bedding accessories, and table linens. At the end of the second quarter of 1995,
the Company began to manufacture polyester fleece throws. The Company's products
are both functional and decorative. They allow homeowners to redecorate a room
by changing the accessory items, such as decorative pillows and throws, in the
room. Many of the Company's customers own more than one set of decorative
accessory items for a room, so that they can change the room's appearance from
time to time, for example, to match the different seasons of the year.
The following table sets forth certain information regarding net sales
of these product groups during the past three years:
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ------------------------- -----------------------------
Net Sales Percent Net Sales Percent Net Sales Percent
Decorative
pillows and $20,147,683 48.5% $19,165,502 62.1% $21,892,832 72.0%
chairpads
Throws 15,748,395 37.9% 7,119,118 23.1% 3,337,687 11.0%
Other products 5,663,519 13.6% 4,599,461 14.8% 5,171,286 17.0%
----------- ------ ------------ ------ ------------ ------
TOTAL $41,559,597 100.0% $30,884,081 100.0% $30,401,805 100.0%
=========== ====== ============ ====== ============ ======
DECORATIVE PILLOWS AND CHAIRPADS. The Company offers a wide variety of
decorative pillows ranging from basic solid-colored pillows to high-fashion
embellished tapestry and velvet pillows. Decorative pillows vary in size, are
manufactured in various fabric blends and are filled with 100% polyester or a
polyester/cotton blend fiberfill. The Company offers decorative pillows in a
wide variety of styles and patterns, currently including over 500 different
designs. The Company's decorative pillows generally sell at retail prices
ranging from $9 to $70. The Company designs its pillows to meet the style
standards of its customers. The Company has used the experience gained in making
applique bedcovering products to make creative trims and embellishments for its
pillows.
The Company's chair pad product line consists of 50 different designs
for chair pads and 20 different designs for rocker sets. Rocker sets consist of
pads plus coordinated backs for the chairs. Many of the same fabrics selected by
the Company for its decorative pillows are used to make chair pads.
THROWS. The Company sells both cotton and polyester throws. The
Company's line of cotton throws consists of approximately 50 different designs
and is produced by non-affiliated manufacturers. The Polarfleece(R) line
consists of 25 different solid colors and 15 various prints or yarn-dyed
patterns. Polarfleece(R) is a non-pill polyester fleece fabric. To satisfy
certain discount customers, the Company also offers a low-pill fleece throw. The
new Dakotah(R) Luxe(TM) line of throws consists of 22 solid colors. The
Polarfleece(R) Plus(TM) line consists of 9 styles.
OTHER PRODUCTS. The Company's other products include bedcoverings,
Polarfleece(R) and Dakotah(R) Luxe(TM) blankets, table linens, footstools and
accessories. The Company's bedcoverings include a line of duvets (comforter
covers) which slip over a comforter like a pillowcase and fasten at the end,
offering consumers a quick and easy way to change bedroom decor without the
expense of replacing the comforter. The target market for the Company's duvet
covers is upscale retailers, including specialty retailers, department stores
and mail order houses. The Company's current duvet cover line includes over 25
different designs. The Company's duvet covers generally sell at retail prices
ranging from $120 to $750. The Company's table linen products consist of a
coordinated line of placemats and napkins. This line consists of 50 different
designs. The Company's line of footstools is also produced by non-affiliated
manufacturers. This footstool line includes 30 different designs.
The other products category also includes wall art, miscellaneous low
volume products and fabric sold by the yard. Many of these other products
utilize the same fabrics as are used to make decorative pillows, chair pads and
table linens or are coordinated with the designs for such products.
PRODUCT DESIGN
Design and color are key components of the Company's successful
marketing strategy. The Company's designs include traditional, contemporary,
western and novelty patterns. The Company has worked to associate the Dakotah(R)
name with products that have unique and innovative designs.
For its inaugural awards ceremony in 1988, the Home Fashion Products
Association selected George C. Whyte, a founder and the President of the
Company, as the winner of the Home-Tex-Design Award, which recognizes
individuals who have made a major contribution to the industry in home textiles
design. The Company has consistently worked to be an innovator in using fabric,
color, texture and technique, in bringing innovative and exciting designs to the
marketplace. In 1996, the Company's Polarfleece(R) throw was selected by Home
Textiles Today, a trade publication, as the product of the year in its category.
The Company employs a product development staff of eleven persons and a
product design staff of five persons who work closely with the marketing staff
to develop new designs. The Company obtains its designs from numerous sources,
including independent free-lance designers, fabric manufacturers and the
Company's associates. The Company utilizes computer assisted design to increase
its design capability and reduce costs.
The Company obtains design licenses from a number of sources, including
other home textile products producers (which allows the Company and such
producers to offer complementary goods) and independent designers. The Company
has licensed and has sold fabric for certain of its more successful designs to
manufacturers of complementary products, although net sales from this activity
have not been significant.
The Company's expenses for product development were approximately
$730,000 in 1996, $560,000 in 1995, and $450,000 in 1994. The expenditures were
for the development of new products, upgrading of existing product lines and the
creation and purchase of new designs.
LICENSED PRODUCTS
The Company's products are marketed under the Dakotah(R) name and
various licensed names including Polarfleece(R), Harley-Davidson(R), Roy
Rogers(R), and Currier & Ives(R). Beginning in 1997, Dakotah(R) will begin
selling products under the Dakotah(R) Luxe(TM) and the upscale Disney(R)
licenses, Mickey & Co.(R) and Baby Mickey and Co.(R)
* In December 1993, the Company introduced Harley-Davidson(R) pillows,
together with a line of jacquard-woven throws (small blankets) and other
accessory products.
* At the October 1994 Home Textile Market, the Company introduced its Elvis
Presley(R) line of products.
* At the April 1995 Home Textile Market, the Company introduced its
Polarfleece(R) and Campbell's Soup(R) line of products.
* At the October 1995 Home Textile Market, the Company introduced its
Polarfleece(R) collegiate licensed and outdoor furniture line of products.
* At the April 1996 Home Textile Market, the Company introduced its new line
of Polarfleece(R) blankets.
* At the October 1996 Home Textile Market, the Company introduced Dakotah(R)
Luxe(TM), the Company's new line of luxurious microfiber throws, pillows,
bedcoverings and accessories and a new line of pillows, throws and
bedcoverings with the Disney licenses, Mickey and Co.(R) and Baby Mickey
and Co(R).
SALES AND MARKETING
Virtually all of the Company's products are sold directly to the retail
trade primarily through 30 independent sales representative organizations. The
Company's showroom and primary sales office is located in New York City on Fifth
Avenue. The sales representatives who sell to the gift industry have showrooms
in Atlanta, Chicago, Denver, Dallas, San Francisco and Seattle.
The Company's primary customers are department stores, specialty
retailers, mass merchandisers and mail order houses in the United States. The
Company markets its designs and products so that conflicts do not develop
between customers in order to give the Company's customers flexibility in
setting their own marketing and pricing strategies. In 1996, the Company began
developing sales distribution in Canada and Europe.
During 1996, the Company sold to over 2,400 customers, including buyers
representing divisions of larger corporations.
The Company emphasizes quick and dependable delivery of complete
orders. The Company's on-line computer system allows customers to place orders,
and allows the Company to fill, track and bill orders. Sales representatives
assist in maintaining appropriate stocking levels, maintain store displays of
Company merchandise, assure proper presentation of Company products, replace
damaged packaging and assist with credit and account reconciliation and
collection. The Company provides point-of-sale advertising and attractive and
informative packaging to obtain consumer interest.
The Company generally introduces new products during February, April
and October in connection with the major Home Fashion Textile shows. During
these markets, buyers from all classes of the textile trade throughout the
United States come to New York City to preview the products from the home
textiles manufacturers. Most sales of successful new designs generally occur six
months or more after the product introduction as more conservative buyers follow
the lead of market innovators. Additionally, the Company participates in the
regular home fashion textile shows at each of its showrooms and the major
European home textile show, Heimextil.
During 1996, the Company and Malden Mills, Industries, the supplier and
licensor of Polarfleece(R), advertised Dakotah's Polarfleece(R) products in the
following magazines: BHG Better By Design, Country Living, House Beautiful,
Martha Stewart Living, Metropolitan Home and Southern Living.
At December 31, 1996, the Company had approximately $3.0 million of
firm orders, compared to approximately $2.7 million on December 31, 1995 and
approximately $2.1 million on December 31, 1994. On March 15, 1997, the Company
had approximately $3.8 million of firm orders as compared to approximately $3.3
million on March 15, 1996. In general, orders require shipment within six to ten
weeks. Accordingly, the Company's firm orders backlog at any time is not
necessarily indicative of the level of its future sales. The Company maintains
inventory levels sufficient to permit it to fill orders on a timely basis.
The Company and the home furnishing industry as a whole build up
finished goods inventory in the first and second calendar quarters for shipment
in the third and fourth calendar quarters. This results in a significant use of
working capital during the first and second quarters.
Although 15% of the Company's 1996 sales were made to a single
customer, the Company believes the loss of this customer would not have a
material adverse effect on the Company.
MANUFACTURING AND DISTRIBUTION
The Company's manufacturing operations consist principally of cutting
sewing, and embroidering fabric. The Company primarily utilizes two independent
contractors, one to produce all of its footstool products and one to produce its
jacquard-woven cotton throws. The Company does not have the manufacturing
capabilities to produce jacquard-woven textiles and footstools. Additionally,
the Company uses contract manufacturers to cut and sew fabric during certain
peak periods of the year.
For several years, the Company has committed significant efforts to
improve the productivity of its associates through the use of various total
quality management concepts and automation. The Company has devoted significant
resources to support its quality improvement efforts. The Company attempts to
maintain close contact with customer quality control personnel to assure the
Company's understanding of customer requirements.
RAW MATERIALS
The principal raw materials that the Company uses in manufacturing its
products are solid color, print and jacquard fabrics, solid color and print
polyester fleece fabrics from Malden Mills Industries, Inc. and fiberfill. The
Company purchases certain fabrics with the exclusive right to the designs in the
Company's markets. The Company does not import any significant portion of its
raw materials. Although the Company usually purchases raw materials from only a
limited number of suppliers, these raw materials are generally readily available
from several manufacturers, a few of which are competitors of the Company.
Purchase commitments for raw materials are generally insignificant in comparison
to the total amount of a raw material to be purchased.
During 1996, Malden Mills supplied the Company with 46% of its raw
material requirements for 1996. The Company receives a significant portion of
its annual supply of raw materials from Malden Mills and manufactures a
significant amount of finished goods Polarfleece(R) inventory during its first
and second quarters and sells to its customers in the third and fourth quarters.
As a result of this timing, the Company would have the flexibility to convert
its facilities to produce other products or procure substitute fleece supplies
in the event the delivery of supplies from Malden Mills would be substantially
interrupted. The use of a substitute fleece would require the use of a trademark
other than Polarfleece(R).
The Company acquires most of its cotton throws from Mount Vernon Mills,
Inc.
In order to provide quick response to customers' orders and the lead
times sometimes associated with the purchase of its raw materials, the Company
makes commitments for future purchases of fabrics and cotton yarns.
COMPETITION
The Company participates in a highly competitive industry. The Company
competes with a number of established designers, manufacturers, importers, and
distributors of textile home fashion furnishings, some of which have greater
financial, distribution, and marketing resources than the Company. The Company
believes the principal competitive factors affecting its business include its
ability to continue to create and develop quality products offering creative and
fashionable designs, its marketing expertise, its relationships with customers,
and its manufacturing and distribution capabilities. The Company also competes
on the basis of quality, brand names, price and service.
GOVERNMENT REGULATION
The Company is subject to federal and state laws and regulations that
require most of its products to bear product content labels containing specified
information, including their place of origin and fiber content. The Company's
operations are governed by a variety of federal, state, local, and foreign laws
and regulations relating to the environment, worker safety and health,
advertising, importing and exporting, and other matters applicable to businesses
in general. All laws and regulations are subject to change and the Company
cannot predict what effect, if any, changes in laws and regulations might have
on its business.
TRADEMARKS AND COPYRIGHTS
The Company owns various trademarks and trade names, including
Dakotah(R) ,Dakotah Luxe(TM), Beach Buddy(R), Dakotah Outdoors(R), Lustrah(R),
Thermofleece(TM) and Comfortfleece(R). The Company copyrights many of its fabric
designs. The Company regards its trademarks, trade names and copyrights as
valuable assets and seeks to protect them against infringement. There can be no
assurance, however, that any effort to protect its trademarks, trade names and
copyrights will be successful or that any such effort will not be prohibitively
costly and time consuming. The Company has been licensed to market and
manufacture products bearing trademarks owned by others, including but not
limited to, Polarfleece(R), Malden Mills(R), Mickey & Co.(R) (Disney(R)), Baby
Mickey & Co.(R) (Disney(R)), Harley-Davidson(R), Elvis Presley(R), Campbell's
Soup(R), Roy Rogers(R), and Currier & Ives(R).
EMPLOYEES
At March 15, 1997, the Company had 575 associates, of whom 508 were
full-time and 67 were part-time. None of the Company's associates is represented
by a labor union, and the Company considers its relations with its associates to
be good. Due to a shortage of labor in the northeast South Dakota area, any
significant expansion of the Company's manufacturing capabilities in the future
may be outside of this area. In addition, due to this labor shortage, the
Company manages its operating activities in order to avoid any temporary
reductions in its work force. At least 276 of the Company's associates own
directly or through their interests in the Company's profit sharing plan, shares
of the Company's Common Stock.
ITEM 2. PROPERTIES.
The following table summarizes certain information concerning the
Company's principal facilities:
APPROX. OWNED/
LOCATION PRINCIPAL USE SQ. FT. LEASED (1)
Webster, South Dakota(3) Headquarters and Manufacturing 72,000 Owned (2)
Webster, South Dakota Manufacturing and distribution 23,000 Owned (2)
Webster, South Dakota(3) Warehouse and distribution 14,000 Leased
Webster, South Dakotah Sales, Design and Administration 4,500 Owned
Webster, South Dakota Factory outlet store 8,000 Leased
Redfield, South Dakota Manufacturing and distribution 42,000 Leased
Sisseton, South Dakota Manufacturing and distribution 12,000 Owned
Veblen, South Dakota Manufacturing and distribution 20,000 Owned (2)
Platte, South Dakota Manufacturing and distribution 20,000 Leased
Milbank, South Dakota Manufacturing and distribution 10,000 Owned
New York, New York Sales office and showroom 5,300 Leased
Atlanta, Georgia Sales office and showroom 4,500 Leased
Chicago, Illinois Sales office and showroom 3,419 Leased
(1) For additional information concerning the Company's leases, see Notes F and
G to Financial Statements.
(2) These properties are being purchased by means of capital lease purchase
agreements.
(3) In the Fall of 1996, the Company began a 32,000 square foot expansion of
its main manufacturing facility. In January, 1997, the Company began to
move its manufacturing from its 23,000 square foot facility to its expanded
72,000 square foot facility. Also in January, 1997, the Company moved most
its Warehouse and Distribution activities to its expanded 72,000 square
foot facility. In March of 1997, the Company ceased leasing its 14,000
square foot facility.
The Company believes that its facilities are generally well maintained
and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of business. The Company is not currently a party
to any material litigation and is not aware of any litigation threatened against
it that could have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol DKTH. The following table sets forth for each period
indicated the high and low closing sale prices for the Company's Common Stock,
as reported by National Association of Securities Dealers Automated Quotation
System:
HIGH LOW
1995
First Quarter $3.75 $2.625
Second Quarter $3.875 $3.25
Third Quarter $4.75 $3.25
Fourth Quarter $4.75 $3.875
1996
First Quarter $4.25 $3.50
Second Quarter $4.50 $3.625
Third Quarter $5.00 $4.25
Fourth Quarter $5.00 $4.00
These quotations represent prices between dealers, and do not include
retail markups, markdowns or commissions.
The number of record holders of the Company's Common Stock on March 24,
1997 was 277. The Company estimates that an additional 1,200 shareholders own
stock held for their account at brokerage firms and other financial
institutions.
The Company has never paid a cash dividend and expects to retain future
earnings for operations and expansion of its business. The future payment of
dividends, if any, rests within the discretion of the Company's Board of
Directors and will depend, among other things, upon the Company's earnings,
capital requirements and financial condition.
There were no unregistered sales of the Company's Common Stock during
the fourth quarter of 1996.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial information for the
periods indicated. The information should be read in conjunction with the
Company's financial statements included in this report.
Years ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $41,560 $30,884 $30,402 $23,428 $18,709
Cost of goods sold 30,599 22,485 22,377 16,302 13,267
----------------------------------------------------------------------
Gross profit 10,961 8,399 8,025 7,126 5,442
Selling, general and administrative expense 9,229 7,542 6,346 5,259 4,803
----------------------------------------------------------------------
Operating profit 1,732 857 1,679 1,867 639
Other income (expense) (500) (141) (98) (149) (261)
----------------------------------------------------------------------
Earnings before income taxes and
cumulative effect of a change in
accounting principle 1,232 716 1,581 1,718 378
Income taxes 404 256 550 465 89
----------------------------------------------------------------------
Earning before cumulative effect of a
change in accounting principle 828 460 1,031 1,253 289
Cumulative effect on prior years of a
change in accounting for income taxes - - - 179 -
----------------------------------------------------------------------
Net earnings $828 $460 $1,031 $1,432 $289
======================================================================
PER SHARE AMOUNTS
Earnings before cumulative effect of
a change in accounting principle $0.24 $0.13 $0.32 $0.47 $0.12
Cumulative effect of a change in
accounting principle - - - 0.07 -
----------------------------------------------------------------------
Net earnings $0.24 $0.13 $0.32 $0.54 $0.12
----------------------------------------------------------------------
Weighted average common shares
outstanding 3,500 3,500 3,256 2,661 2,390
----------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $6,760 $7,587 $8,400 $2,969 $1,947
Total assets 22,930 18,136 14,072 11,485 8,386
Notes payable to bank 7,123 3,667 647 549 706
Long term obligations, less current
maturities 913 1,051 1,368 729 915
Redeemable common stock - - - 8,131 4,861
Stockholders' equity (deficit) 10,448 9,520 9,060 (4,229) (2,527)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
1996 marked the sixth consecutive year of sales increases for the
Company. Sales increased .2% in 1991, 19.8% in 1992, 25.2% in 1993, 29.8% in
1994, 1.6% in 1995 and 34.6% in 1996.
In December of 1993, the Company purchased an additional manufacturing
plant in Milbank, South Dakota. In September, 1995, the Company leased an
additional manufacturing plant in Platte, South Dakota to manufacture
Polarfleece(R) throws. In the Spring of 1996, the Company began to lease an
additional manufacturing plant in Redfield, South Dakota to manufacture
Polarfleece(R) throws, blankets and other bedcovering items. In the Fall of
1996, the Company began a 32,000 square foot expansion of its main manufacturing
facility in Webster, South Dakota. The move into this expansion will be
completed before the end of the first quarter of 1997 and the Company will no
longer lease the current Webster, South Dakota, warehouse and distribution
facility.
These expansions, along with the purchase of additional equipment and
the reconfiguration of the Webster, South Dakota manufacturing facilities,
should allow the Company adequate flexibility and capacity to satisfy projected
sales volume in 1997.
RESULTS OF OPERATIONS:
Statements of earnings
data as a percent of net sales:
------------------------------- Year Ended December 31,
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross profit 26.4 27.2 26.4
Selling expenses 13.2 14.1 12.7
General and administrative expenses 9.0 10.3 8.2
Operating profit 4.2 2.8 5.5
Interest expense 1.5 .8 .5
Earnings before income taxes 3.0 2.3 5.2
Net earnings 2.0 1.5 3.4
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net sales increased from $30.4 million in 1994 to $30.9 million in 1995
and to $41.6 million in 1996. The 1996 net sales increase was due primarily to
the sales growth of the Company's Polarfleece(R) line of products, pillow
products, bedcoverings and accessories, and cotton throws. Only the Company's
table linen products and footstool products did not experience growth.
The 1995 net sales increase of Polarfleece(R) products was mostly
offset by a decrease in the sales of cotton throws, the Company's decision to
cease doing business with a significant customer and the Company's decision to
cease the manufacture of quilted bedcoverings. The decision to cease doing
business with this significant customer was generally due to unsatisfactory
profit margins. Additionally, during the first and second quarters of 1995,
sales declined 17% from the same period in 1994 primarily due to a general
slowdown in the Home Fashion Textile Industry.
Gross profit margins were 26.4% in 1996, 27.2% in 1995, and 26.4% in
1994. In 1996, the gross margin was negatively affected by the start-up of the
Redfield manufacturing facility and changing product mix. The Polarfleece(R)
line of products have a higher percentage of sales related to raw materials
which reduces gross margins. Although the cost of fiberfill decreased in 1996,
substantially all of this cost savings was passed on to the Company's customers.
In 1995, the gross margin was negatively affected by the lower sales
and pricing pressure during the first seven months of the year, polyester
fiberfill cost increases, and the startup of Polarfleece(R) throw manufacturing
in Webster and Platte, South Dakota.
Selling expenses were $5.5 million in 1996, $4.3 million in 1995 and
$3.8 million in 1994. Selling expenses during 1996 increased primarily due to
the additional personnel and related expenses to support higher sales, including
the addition of a Vice President-Corporate Sales, and the expenses related to
the development of new markets and distribution channels for the Company's
products. Selling expenses were also higher because of costs directly related to
higher sales, such as commissions and shipping expenses. Selling expenses as a
percentage of net sales were 13.2% in 1996, 14.1% in 1995, and 12.7% in 1994.
Selling expenses decreased as a percentage of sales in 1996 due to increased
sales.
Selling expenses during 1995 were higher, in part, due to higher sales
commissions related to replacing the business from the former significant
customer with commissioned sales, additional expenses related to the development
of additional sales and marketing tools, expanded Trade Show participation, and
the Company's expansion of its showroom in the Atlanta Merchandise Mart.
General and administrative expenses were $3.7 million in 1996, $3.2
million in 1995, and $2.5 million in 1994. General and administrative expenses
increased in 1996 from 1995 due to increased administrative and management staff
to support higher sales, computer expenses related to the planned 1997 computer
software conversion and higher product development expenses. General and
administrative expenses, as a percent of net sales, were 9.0% in 1996, 10.3% in
1995, and 8.2% in 1994. General and administrative expenses decreased as a
percentage of sales in 1996 due to increased sales.
General and administrative expenses increased in 1995 as compared to
1994, primarily as the result of the following: $300,000 due to the addition of
senior management and other administrative personnel, $150,000 due to expenses
related to the Company's purchase and implementation of new computer,
information and communication systems, $170,000 due to increased bad debt
expense, $150,000 due to the addition of design staff and related costs, and
$80,000 due to increased professional fees. The Company accrued $464,000 in 1994
under the officers' stock appreciation program. No additional compensation
expense was accrued after 1994 relating to this program as it was terminated
upon the effectiveness of the Company's initial public stock offering in 1994.
Interest expense was $613,000 in 1996, $241,000 in 1995, and $173,000
in 1994. The increase in 1996 was due to the increased use of the Company's
revolving line of credit to finance 1996 capital expenditures and working
capital needs.
The effective income tax rate was 32.8% in 1996, 35.8% in 1995, and
34.8% in 1994. The lower rate in 1996 was primarily due to the Company's
donation of obsolete fabric and second quality product to certain charities.
LIQUIDITY AND CAPITAL RESOURCES:
The Company had cash and cash equivalents of $3,000 as of December 31,
1996, $477,000 as of December 31, 1995 and $576,000 as of December 31, 1994.
Working capital was $6.8 million as of December 31, 1996, $7.6 million
as of December 31, 1995 and $8.4 million as of December 31, 1994. The 1996
decrease in cash and cash equivalents and in working capital was primarily due
to the use of cash and cash equivalents and the Company's line of credit to
finance 1996 capital expenditures. In the first quarter of 1997, the Company
refinanced over $900,000 of the capital expenditures with low-interest loans
from the State of South Dakota and the Northeast South Dakota Energy
Conservation District.
The 1995 decrease in working capital from 1994 was due primarily to the
financing of 1995 capital expenditures with a term note obligation that is
classified as a current liability.
The net cash used in operating activities and investing activities
during 1996 was primarily financed from net borrowings under the Company's
revolving line of credit. The net cash used in operating and investing
activities are primarily related to the increase in sales and manufacturing
capacity during 1996. The net cash used in operating activities and investing
activities during 1995 was primarily financed from net borrowings under the
Company's revolving line of credit. The net cash used in operating and investing
activities are primarily related to the increase in manufacturing capacity
during 1995 and the increase in sales during the fourth quarter of 1995 as
compared to the same period of 1994.
Accounts receivable were $7,500,000 as of December 31, 1996, $6,400,000
as of December 31, 1995, and $4,800,000 as of December 31, 1994. The increase in
1996 was due to increased sales during the fourth quarter of 1996 as compared to
the same period of 1995. The increase in 1995 was due to increased sales during
the fourth quarter of 1995 as compared to the same period of 1994.
Inventories were $9,600,000 as of December 31, 1996, $7,400,000 as of
December 31, 1995, and $5,900,000 as of December 31, 1994. The increases in 1996
and 1995 were primarily due to increased raw material and finished goods
inventory of Polarfleece(R).
The Company has used and expects to continue to use its revolving line
of credit to meet its short-term working capital requirements.
During 1996, the Company renegotiated its credit facility. The new
credit facility, which expires August 1998, consists of a revolving note and a
term note. The total amount available under the revolving note, which is due on
demand, is limited to the lesser of $9 million or a defined borrowing base of
eligible accounts receivable and inventory. The term note is due on demand and
requires monthly principal payments of $20,833. Inventory advances under the
revolving note, as defined in the agreement, provide for monthly interest
payments at 2% above the bank's prime rate (effectively 10.25% at December 31,
1996). The term note and other advances under the revolving note provide for
monthly interest payments at 1.5% above the bank's prime rate (effective rates
of 9.75% and 10% at December 31, 1996 and 1995). Both notes are collateralized
by accounts receivable, inventory, equipment, and general intangibles. The
outstanding balances on the revolving note and term note were $6,415,000 and
$708,000 at December 31, 1996. The outstanding balances on the revolving note
and term note were $2,708,000 and $958,000 at December 31, 1995.
For the year ended December 31, 1996, the Company's capital
expenditures were $2,381,000. The 1996 capital expenditures include $1,891,000
to expand manufacturing capacity, upgrade existing buildings and additional
production equipment and $399,000 to upgrade the Company's computer system.
For the year ended December 31, 1995, the Company's capital
expenditures were $1,061,000. The 1995 capital expenditures include $724,000 to
expand manufacturing capacity, upgrade existing buildings, and additional
production equipment and $302,000 to upgrade the Company's computer system. For
the year ended December 31, 1994, the Company's capital expenditures were
$337,000.
The Company expects to spend an aggregate of approximately $1,000,000
in 1997 to expand capacity and to up-grade existing buildings and production
equipment. In addition, the Company expects to spend between $250,000 and
$400,000 to continue the upgrade and expansion of the Company's computer system.
The Company is pursuing long term financing for its 1997 planned capital
expenditures and for capital expenditures previously financed through its
revolving line of credit.
Upon termination of the officers' stock appreciation program, the
Company became indebted to the Company's President and a former Executive Vice
President in the aggregate amount of $1,318,000. As of December 31, 1996, the
total outstanding indebtedness was $461,000 compared to $923,000 at December 31,
1995 and $1,186,000 at December 31, 1994. This indebtedness bears interest at 6%
per annum and is payable in varying installments through January 1998.
The Company believes that cash flows generated from operations and
funds available as a result of its borrowing capacity will be adequate to meet
its short-term working capital, projected capital expenditures and other
financing needs.
FORWARD LOOKING STATEMENTS
With the exception of historical information, the matters discussed or
incorporated by reference in this Annual Report on Form 10-K are forward-looking
statements that involve risks and uncertainties including, but not limited to,
economic conditions, product demand and industry capacity, competitive products
and pricing, manufacturing efficiencies, new product development, availability
of raw materials, new plant startups, financing needs or plans, intellectual
property rights, and other risks indicated in filings with the Securities and
Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements and schedules relating to the
Company are included herein:
Financial Statements:
Report of Independent Certified Public Accountants...............................................28
Balance Sheets at December 31, 1996 and 1995.....................................................29
Statements of Earnings for years ended December 31, 1996, 1995 and 1994..........................30
Statements of Changes in Stockholders' Equity (Deficit) for years ended December 31,
1996, 1995 and 1994.........................................................................31
Statements of Cash Flows for years ended December 31, 1996, 1995 and 1994........................32
Notes to Financial Statements....................................................................33
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for years ended December 31, 1996, 1995
and 1994 ...................................................................................43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Dakotah are as follows:
Director
Name Since Age Positions With The Company
---- ----- --- --------------------------
George C. Whyte(1) 1980 47 President and Chairman of the Board of
Directors
Troy Jones, Jr. (1) 1994 36 Chief Executive Officer, Treasurer and
Director
James D. Becker(2) 1990 36 Mechanic, Director
Dorothy A. Benson(2) 1986 52 Product Development Specialist, Director
Gary L. Conradi (1,2,3) 1984 57 Vice Chairman of the Board of Directors
Michael G. Grosek(1,3) 1991 41 Director
Linda J. Laskowski(2) 1994 47 Director
Leo T. Reynolds(3) 1995 51 Director
Lee A. Schoenbeck(1,2) 1993 38 Secretary, Director
Daniel F. Harper -- 42 Vice President, Corporate Sales
Georgie Olson Harper -- 42 Vice President, National Sales
----------------------------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
GEORGE C. WHYTE is a founder of the Company and has been its Chairman
of the Board of Directors since June 1988. Mr. Whyte also served as President
from the Company's inception to June 1988 and from April 1991 to the present,
and as Chief Executive Officer from June 1988 to January 1995. He was elected to
the Board of Directors in July 1980.
TROY JONES, JR. was elected to the Board of Directors in August 1994,
elected Chief Executive Officer in January 1995 and elected Treasurer in June
1996. Mr. Jones has been President of Orion Financial Corp. of South Dakota
since July 1993. For more than six years prior to that, he was Director of
Finance in the South Dakota Governor's Office of Economic Development.
JAMES D. BECKER was elected to the Board of Directors in July 1990. He
has been a sewing machine mechanic for the Company since April 1988.
DOROTHY A. BENSON was elected to the Board of Directors in July 1986.
From July 1993 to the present, she has been a Product Development Specialist for
the Company. Ms. Benson, a Company associate since July 1983, has worked in
various other Company positions including as a Pattern Maker and Data Design
Specialist.
GARY L. CONRADI was elected to the Board of Directors in 1984 and
serves as the Vice Chairman of the Board of Directors. Since 1980, Mr. Conradi
has served as the Vice President of Corporate Services for Raven Industries,
Inc., a manufacturer of specialized plastics, electronics and apparel.
MICHAEL G. GROSEK was elected to the Board of Directors in July 1991.
Mr. Grosek has been the Mayor of the City of Webster, South Dakota since 1985.
For more than five years, he has also owned and operated Mike's Jack & Jill, a
supermarket in Webster, South Dakota.
LINDA J. LASKOWSKI was elected to the Board of Directors in August
1994. Ms. Laskowski has been with U.S. West Communications since 1987, as Vice
President and General Manager of Information Provider Market until October 1991,
as Chief Executive Officer of CLM Associates (a joint venture between U.S. West
Communications and France Telecom) from October 1991 to January 1994, as Vice
President - South Dakota from March 1993 to December, 1996, and as Vice
President of Telephony of Continental Cablevision (which was acquired by U.S.
West in 1996) since January, 1997.
LEE A. SCHOENBECK returned to the Board of Directors in December 1993,
having previously served on the Board of Directors from July 1985 through July
1991. Mr. Schoenbeck has served as Secretary of the Company since October, 1995
and served as Treasurer from October 1995 to June 1996. Mr. Schoenbeck has been
an attorney in Webster, South Dakota since 1984, and currently provides services
as outside General Counsel to the Company.
GEORGIE OLSON HARPER has been the Company's Vice President of National
Sales since February 1996 and National Sales Manager from April 1991 through
January 1996. Ms. Olson Harper, a Company associate since 1975, has worked in
various other Company positions including Contract Sales Manager and Customer
Service Manager. In February, 1996, Ms. Harper was promoted to Vice President -
National Sales.
DANIEL F. HARPER has been the Company's Vice President of Corporate
Sales since joining the Company in February 1996. For approximately 20 years
prior to joining the Company, Mr. Harper worked for HW Baker Company,
Incorporated, a distributor of textile products, most recently as a vice
president.
LEO T. REYNOLDS was elected to the Board of Directors in December 1995.
Mr. Reynolds is the President of Electronic Systems, Inc., a electronics
manufacturing company.
Pursuant to the Company's Articles of Incorporation, the Board of
Directors is divided into three classes serving staggered three-year terms
expiring at each successive annual meeting of stockholders. The officers of the
Company are appointed by the Board of Directors and hold office until their
successors are chosen and qualified.
CERTAIN FILINGS
Section 16(a) of the 1934 Act requires the Company's directors,
executive officers, and persons who own more than ten percent of the common
Stock of the Company to file with the Securities and Exchange Commission
("Commission") initial reports of beneficial ownership and reports of changes in
beneficial ownership of common shares of the Company. directors, officers, and
greater than ten percent shareholders are required by the regulations of the
Commission to furnish the Company with copies of all Section 16(a) reports they
file. To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, all
required reports were filed timely with the exception of initial statements of
beneficial ownership for Daniel Harper and Georgie Olson Harper.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for the Company's
fiscal years ended December 31, 1996, 1995, and 1994 regarding compensation
earned by or awarded to the Company's Chairman, Chief Executive Officer, and
Vice President - National Sales, the only executive officers whose total annual
salary and bonus exceeded $100,000 (the "Named Executive Officers").
ANNUAL COMPENSATION ($)
------------------------------------- LONG-TERM
COMPENSATION
NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTION ALL OTHER
POSITION YEAR SALARY BONUS(1) COMPENSATION AWARDS(#) COMPENSATION ($)
-------- ---- ------ ----- ------------ --------- ----------------
George C. Whyte 1996 145,000 29,000 -0- 100,000 -(2)
President and 1995 141,000 58,000 -0- 25,000 1,545(3)
Chairman of the 1994 136,650 -0- -0- 184,300 309,333(4)
Board
Troy Jones, Jr.(5)
Chief Executive 1996 -0- -0- 150,000 242,745 -0-
Officer 1995 -0- -0- 200,000 100,000 -0-
Georgie Olson Harper(6)
Vice President - 1996 94,100 17,500 -0- -0- -(2)
National Sales
- -----------------------
(1) Cash bonuses have been included as compensation for the year earned,
calculated in accordance with the terms of the individual's incentive
compensation plan, even though actually paid in the subsequent year.
(2) For 1996 the Company contributed a total of $59,000 for all employees to
the Company's Profit Sharing Plan. As of the date of filing this report
this contribution had not been allocated and accordingly no portion of
this contribution is included herein.
(3) Consists of the value of the cash contributions to the Company's Profit
Sharing Plan allocated to the executive officer .
(4) Includes the amount earned on stock appreciation rights granted
pursuant to deferred compensation agreements. See "Stock Appreciation
Rights Plan."
(5) All compensation for Mr. Jones' service to the Company is paid to Orion
Financial Corporation of South Dakota ("Orion"). The Company has
engaged Orion to provide such services. Mr. Jones is the President and
controlling shareholder of Orion.
(6) Ms. Harper became an executive officer of the Company on February 12,
1996.
OPTIONS GRANTED DURING FISCAL 1996
The following table provides information relating to options granted to
the Named Executive Officers during the Company's fiscal year ended December 31,
1996:
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
OPTIONS PERCENT OF TOTAL EXERCISE AT ASSUMED ANNUAL RATES
GRANTED OPTIONS GRANTED IN PRICE EXPIRATION OF STOCK PRICE
NAME (#)(1) FISCAL YEAR (#/SH) ($)(2) DATE APPRECIATION FOR OPTION
TERM
5%($)(3) 10%($)(3)
-----------------------------------------------------------------------------------------
George C. Whyte(4) ........ 100,000 25.6% $4.75 9/16/03 131,000 290,000
Troy Jones, Jr.(5)(6)...... 242,745 62.1% 3.88 12/31/00 259,737 725,808
(1) The number indicated is the number of shares of Common Stock that can be
acquired upon exercise of the option. The Company has not granted any stock
appreciation rights.
(2) Exercise prices are equal to the fair market value at the date of grant.
(3) The assumed 5% and 10% annual rates of appreciation are hypothetical rates
selected by the Securities and Exchange Commission and are not intended to,
and do not, forecast or assume actual future stock prices.
(4) The options vest annually in five equal installments beginning September
16, 1997.
(5) One third of these options is exercisable on January 1 of 1997, 1998 and
1999.
(6) These options are issued in the name of Orion.
AGGREGATED OPTION EXERCISES DURING FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to the number and
value of options held by the Named Executive Officers as of December 31, 1996.
The Company does not have any outstanding stock appreciation rights.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE YEAR-END (#) FISCAL YEAR-END ($)(2)
NAME EXERCISE (#)(1) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
($)(1)
----------------- ------------- ------------------------ -----------------------------
George C. Whyte -0- -0- 209,300 / 100,000 17,188 / -0-
Troy Jones, Jr. (3) -0- -0- 100,000 / 242,745 68,750 / 106,201
Georgie Olson Harper -0- -0- 6,000 / 34,000 4,110 / 24,540
(1) See "Stock Appreciation Right Plan" for a description of the termination of
certain stock appreciation rights.
(2) Options are "in-the-money" if the fair market value of the underlying
shares at fiscal year end is greater than the exercise price.
(3) These options are issued in the name of Orion.
1995 STOCK OPTION PLAN
The 1995 Stock Option Plan ("1995 Plan") was approved by the Board of
Directors, effective December 19, 1995 and by the shareholders on June 12, 1996.
All employees and consultants of the Company, including officers and directors,
are eligible to receive options under the 1995 Plan. The 1995 Plan authorizes
the granting of options to purchase up to 800,000 shares of Common Stock. The
1995 Plan provides both for incentive stock options specifically tailored to the
provisions of the Internal Revenue Code of 1986 and for options not qualifying
as incentive options. The 1995 Plan is administered by a committee of the Board
of Directors. The 1995 Plan generally does not specify the terms and conditions
of options to be granted under the Plan, and options issued shall be exercisable
at such times and subject to such restrictions and conditions as the committee
shall in each instance approve. The 1995 Plan further provides that upon the
occurrence of certain "acceleration events" the options will become fully
vested. An acceleration event occurs (i) when a person, or group of persons
acting together, becomes the beneficial owner of 30 percent or more of the
Company's outstanding shares; (ii) when a change in majority of the Board occurs
without the approval of at least 60% of the prior Board; or (iii) the approval
by stockholders of a sale of all or substantially all the assets or of a
liquidation or dissolution of the Company.
STOCK APPRECIATION RIGHTS PLAN
Effective January 19, 1990, the Company entered into a deferred
compensation agreement with George C. Whyte providing for the award of stock
appreciation rights ("SARs"). In general, Mr. Whyte was entitled to the
appreciation in the value of the Common Stock on the date of exercise of the
SARs over the value of the Common Stock on the date of award. The SARs were
two-thirds vested as of December 31, 1993 and would have been fully vested as of
December 31, 1994.
The Company entered into an agreement with Mr. Whyte to terminate his
deferred compensation agreements effective upon the date of the Company's public
offering which was March 23, 1994. The agreement provided that the SARs were
fully vested as of the date of the public offering and fixed the amounts earned
under the SARs based on the initial public offering price of $5.125.
As a result of the agreement fixing the amount owed pursuant to the
SARs, Mr. Whyte was issued, effective upon the date of the public offering, a
promissory note in the principal amount of $878,666. The indebtedness bears
interest at six percent per annum and is payable in varying installments through
January 1998. The termination agreement also provided for the grant of options,
with a term of five years and exercise price of $5.125 per share, to purchase
184,300 shares of Common Stock to Mr. Whyte.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with George C.
Whyte. The Agreement provides for an initial term of employment ending on
December 31, 2001, annual compensation, annual percentage increases in base
salary, and participation in bonus and benefit plans of the Company in effect
from time to time. In connection with the Agreement, Mr. Whyte was granted an
option to purchase 100,000 shares of the Company's Common Stock. The Agreement
also provides that the Company shall make available to Mr. Whyte a loan to fund
a portion of the exercise price of such options. The Agreement terminates
automatically upon the death of the employee and the Company may terminate the
agreement only for cause (as defined in the agreement). Subject to certain
conditions and exceptions, the Agreement provides that Mr. Whyte may not compete
with the Company in the United States nor solicit any of its customers or
employees for a period of one year following termination of his employment.
EMPLOYEE PROFIT SHARING PLAN
Effective January 1, 1988, the Company adopted the Dakotah,
Incorporated Employee Profit Sharing Plan (the "Plan"). In general, all
employees who are not covered by a collective bargaining agreement are eligible
to participate in the Plan after completing one year of service as defined in
the Plan. Plan benefits are 100% vested at the completion of five years of
service. Prior to the completion of five years of service there is no vesting.
The Plan also provides for 100% vesting at the normal retirement date or upon
death or disability of the participant.
Contributions to the Plan are determined each year by the Board of
Directors at its discretion, but are limited to maximum permissible amounts as
defined in the Plan. Contributions to the Plan may be made in the form of shares
of the Company's Common Stock, valued at their fair market value, or cash. The
Company may direct that contributions made in cash will be used to purchase
Company Stock in the open market. Contributions to the Plan are allocated among
eligible participants in the proportion of each participant's salary to the
total salaries of all participants for the year in which the contribution was
made, and are held in trust until each participant's retirement, disability,
death or other termination of employment. All future distributions shall be made
in Common Stock, unless the recipient elects to receive cash. The Company
administers the Plan. First American Trust is the Trustee of the Plan.
A $75,000 cash contribution was made for the year ended December 31,
1994. For 1996 and 1995, cash contributions of $59,000 and $50,000 were made
which the Company directed be used to purchase the Company's issued and
outstanding Common Stock.
DIRECTOR COMPENSATION
Effective January 1, 1995, a new director's compensation plan was
approved by the Executive Committee of the Board of Directors which provides
that each director who is not employed by the Company will receive $550 per
Board or committee meeting held in person, will receive $300 for any such
meeting held by telephone conference, and will receive an annual retainer of
either $1,500 (for executive committee members) or $1,000 (for other outside
directors). Each employee director who is not an officer will receive $150 per
Board or committee meeting. Travel expenses for directors will continue to be
reimbursed.
1996 STOCK OPTION PLAN FOR DIRECTORS
The 1996 Stock Option Plan for Directors ("Director Plan") was approved
by Board of Directors effective May 9, 1996 and by the shareholders on June 12,
1996. The Director Plan provided that effective upon approval of the Director
Plan to the shareholders that each director who is not an officer of the Company
would receive an option to purchase 4,000 shares. For purposes of the Director
Plan, the director who is also the secretary of the Company is not considered an
"officer". A person not currently a member of the Board of Directors will
receive an option to purchase 4,000 shares upon his or her initial election as a
director. On the date of each subsequent annual meeting of shareholders, each
director will receive an additional option to purchase 2,000 shares; provided
that such director has received no other option under the Director Plan during
the immediately preceding six month period. The exercise price of all options
under the Director Plan is equal to the fair market value on the grant date, and
each option will be fully vested on the grant date. If an optionee ceases to
serve as a director of the Company for any reason other than death, disability
of for cause, the option may be exercised subject to the expiration date of the
option for three months after such termination. If the director is terminated
because of death and disability the option may be exercised for up to one year
after such termination. If the director is terminated for cause, all unexercised
options shall terminate immediately. The Director Plan authorizes the granting
of options to purchase up to 100,000 shares of Common Stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number of shares of Common Stock
beneficially owned by: (i) each person or entity known by the Company to own 5%
or more of the Company's Common Stock; (ii) each director of the Company (iii)
named Executive Officer; and (iv) all executive officers and directors as a
group. All persons named in the table have sole voting and investment power with
respect to all shares of Common Stock owned unless otherwise noted. The number
of shares listed is as of March 24, 1997.
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS BENEFICIALLY OWNED SHARES
- ---------------- ------------------ ------
Dakotah Incorporated Employee Profit Sharing Plan 1,669,969 42.7%
First American Trust, Trustee
One North Park Lane
Webster, South Dakota 57274
Heartland Advisors, Inc. 368,000 9.4%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
George C. Whyte(1,2) 396,597 10.1%
One North Park Lane
Webster, South Dakota 57274
Troy Jones, Jr.(3) 180,915 4.6%
One North Park Lane
Webster, South Dakota 57274
James D. Becker(1,4) 9,409 .2%
One North Park Lane
Webster, South Dakota 57274
Dorothy A. Benson(1,5) 13,568 .3%
One North Park Lane
Webster, South Dakota 57274
Gary L. Conradi(6) 7,200 .2%
205 East Sixth
Sioux Falls, South Dakota 57102
Michael G. Grosek(7) 6,000 .2%
P.O. Box 543
Webster, South Dakota 57274
Linda J. Laskowski(8) 6,000 .2%
One North Park Lane
Webster, South Dakota 57274
Leo T. Reynolds(9) 4,000 .1%
One North Park Lane
Webster, South Dakota 57274
Lee A. Schoenbeck(10) 18,400 .5%
One North Park Lane
Webster, South Dakota 57274
Georgie Olson Harper(11) 47,548 1.2%
One North Park Lane
Webster, South Dakota 57274
All executive officers and directors as a group 672,970 17.1%
(11 persons)(1,2,3,4,5,6,7,8,9,10,11)
- --------------------
(1) Includes shares allocated to the person's or group's account in the
Employee Profit Sharing Plan.
(2) Includes 209,300 shares issuable upon exercise of outstanding options,
58,831 shares allocated to Mr. Whyte in the Employee Profit Sharing Plan,
2,233 shares owned directly by Mr. Whyte's wife and 25,488 shares allocated
to Mr. Whyte's wife in the Employee Profit Sharing Plan.
(3) Includes 180,915 shares issuable upon exercise of an outstanding option.
(4) Includes 4,500 shares issuable upon exercise of an outstanding option, and
4,832 shares allocated to Mr. Becker in the Employee Profit Sharing Plan.
(5) Includes 4,500 shares issuable upon exercise of an outstanding option, and
7,915 shares allocated to Ms. Benson in the Employee Profit Sharing Plan.
(6) Includes 6,000 shares issuable upon exercise of an outstanding option.
(7) Includes 6,000 shares issuable upon exercise of an outstanding option.
(8) Includes 5,000 shares issuable upon exercise of an outstanding option.
(9) Includes 4,000 shares issuable upon exercise of an outstanding option.
(10) Includes 6,000 shares issuable upon exercise of an outstanding option,
11,000 shares held in Mr. Schoenbeck's IRA and 600 shares held by Mr.
Schoenbeck as custodian for his children.
(11) Includes 6,000 shares issuable upon exercise of outstanding options, 38,091
shares allocated to Ms. Harper in the Employee Profit Sharing Plan and
1,000 shares owned directly by Ms. Harper's spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) 1. FINANCIAL STATEMENTS:
The following financial statements of the Company are incorporated
herein by reference as part of this report at Item 8.
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 1996 and 1995
Statements of Earnings for years ended December 31, 1996, 1995 and
1994 Statements of Changes in Stockholders' Equity (Deficit) for
years ended December 31, 1996,
1995 and 1994
Statements of Cash Flows for years ended December 31, 1996, 1995
and 1994 Notes to Financial Statements
2. FINANCIAL STATEMENTS SCHEDULES:
The following financial statement schedule of the Company is
incorporated herein by reference as part of this report at Item 8.
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1996, 1995 and 1994
3. LISTING OF EXHIBITS:
EXHIBITS DESCRIPTION PAGE
-------- ----------- ----
3.1 Articles of Incorporation (Exhibit 3.1)(1) ---
3.2 Bylaws (Exhibit 3.2)(1) ---
4.2 Form of Representative's Warrant to Purchase Common Stock ---
10.1 Amended and Restated Credit and Security Agreement dated August ---
17, 1995 with Norwest Business Credit, Inc. (Exhibit 10.1)(5)
10.2 First Amendment dated October 5, 1995 to Amended and Restated ---
Credit and Security Agreement with Norwest Business Credit, Inc.
(Exhibit 10.2)(5)
10.3 Second Amendment dated November 15, 1995 to Amended and Restated ---
Credit and Security Agreement with Norwest Business Credit, Inc.
(Exhibit 10.3)(5)
10.4 Third Amendment dated March 15, 1996 to Amended and Restated 44
Credit and Security Agreement with Norwest Business Credit, Inc.
10.5 Fourth Amendment dated June 18, 1996 to Amended and Restated 49
Credit and Security Agreement with Norwest Business Credit, Inc.
10.6 Fifth Amendment dated July 11, 1996 to Amended and Restated Credit 52
and Security Agreement with Norwest Business Credit, Inc.
10.7 Sixth Amendment dated September 11, 1996 to Amended and Restated 59
Credit and Security Agreement with Norwest Business Credit, Inc.
10.8 Seventh Amendment dated January 17, 1997 to Amended and Restated 66
Credit and Security Agreement with Norwest Business Credit, Inc.
10.9 Promissory Note dated December 31, 1995 with the State of South ---
Dakota Board of Economic Development (Exhibit 10.5)(5)
10.10 Promissory Note, Mortgage and Agreement Relating to Employment ---
dated February 17, 1994, between the Company and South Dakota
Board of Economic Development (Exhibit 10.13)(3)
10.11 Loan Agreement dated December 2, 1974, among the Small Business ---
Administration, Webster Development Corporation and Tract
Handcraft Industries Cooperative (predecessor of the Company)
(Exhibit 10.13)(1)
10.12 Loan Agreement dated September 29, 1976, among the Small Business ---
Administration, Webster Development Corporation and Tract
Handcraft Industries Cooperative (predecessor of the Company)
(Exhibit 10.14)(1)
10.13 Lease Purchase Agreement dated November 26, 1974, between Webster ---
Development Corporation and Tract Handcraft Industries Cooperative
(predecessor of the Company) (Exhibit 10.15)(1)
10.14 Lease Purchase Agreement dated September 29, 1976, between Webster ---
Development Corporation and Tract Handcraft Industries Cooperative
(predecessor of the Company) (Exhibit 10.16)(1)
10.15 Lease Purchase Agreement dated June 1, 1977, between Veblen ---
Development Corporation and the Company (Exhibit 10.17)(1)
10.16 Amended and Restated Deferred Compensation Agreement (Phantom ---
Stock) dated May 1, 1993, but effective as of January 1, 1990,
between the Company and Terry G. Sampson (Exhibit 10.18)(1)(2)
10.17 Amended and Restated Deferred Compensation Agreement dated May 1, ---
1993, but effective as of January 1, 1990, between the Company and
George C. Whyte, Jr. (Exhibit 10.19)(1)(2)
10.18 Form of Nonqualified Stock Option (Exhibit 10.20)(1) ---
10.19 Employment Agreement dated January 31, 1994, between the Company ---
and George C. Whyte (Exhibit 10.23)(1)(2)
10.20 Employment Agreement dated January 31, 1994, between the Company ---
and Terry G. Sampson (Exhibit 10.24)(1)(2)
10.21 Description of 1996 Incentive Compensation Plans(2) ---
10.22 Form of Nonstatutory Option Agreement for Directors (Exhibit ---
10.1)(4)
10.23 Nonstatutory Option Agreement with George C. Whyte dated effective ---
May 25, 1995 (Exhibit 10.2)(2)(3)(4)
10.24 Nonstatutory Option Agreement with Orion Financial Corporation of ---
South Dakota dated effective January 27, 1995 (Exhibit 10.3)(2)(4)
10.25 Form of Officer and Director Indemnification Agreement (Exhibit ---
10.26)(1)(2)
10.26 Dakotah, Incorporated Employee Profit Sharing Plan, as amended ---
through March 1995 (Exhibit 10.22)(2)(5)
10.27 Dakotah, Incorporated 1995 Stock Option Plan (Exhibit 10.1)(2)(6) ---
10.28 Dakotah, Incorporated 1996 Stock Option Plan for Directors ---
(Exhibit 10.2)(2)(6)
10.29 Dakotah, Incorporated Nonstatutory Option Agreement Under the 1995 ---
Stock Option Plan Between the Company and Orion Financial Corp.
dated effective January 1, 1996 (Exhibit 10.3)(2)(6)
10.30 Employment Agreement dated January 1, 1997, between the Company 71
and George C. Whyte(2)
23.1 Consent of Grant Thornton LLP 76
24.1 Powers of Attorney (included in Signature Page) ---
27.1 Financial Data Schedule
(1) Incorporated herein by reference to the specified exhibit to the
Registration Statement on Form SB-2, Reg. No. 33-74766-D.
(2) Indicates management contracts, compensation plans or arrangements required
to be filed as exhibits.
(3) Incorporated herein by reference to the specified exhibit to the Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994.
(4) Incorporated herein by reference to the specified exhibit in the Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1995.
(5) Incorporated herein by reference to the specified exhibit to the Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995.
(6) Incorporated herein by reference to the specified exhibit in the Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996.
(b) Registrant was not required to file a report on Form 8-K during the fourth
quarter ended December 31, 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAKOTAH, INCORPORATED
Date: March 27, 1997 /s/ Troy Jones, Jr.
--------------------
Troy Jones, Jr., Chief Executive Officer
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Troy Jones, Jr., George C. Whyte and Lee A.
Schoenbeck, and each of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any amendments to this Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George C. Whyte President and Chairman of the Board of Directors March 27, 1997
- ----------------------
George C. Whyte
/s/ Troy Jones, Jr. Chief Executive Officer, Treasurer and Director March 27, 1997
- ---------------------- (Principal Financial and Accounting Officer)
Troy Jones, Jr.
/s/ Leo T. Reynolds Director March 27, 1997
- ----------------------
Leo T. Reynolds
/s/ James D. Becker Director March 27, 1997
- ----------------------
James D. Becker
/s/ Dorothy A. Benson Director March 27, 1997
- ----------------------
Dorothy A. Benson
/s/ Gary L. Conradi Vice Chairman of Board of Directors, Director March 27, 1997
- ----------------------
Gary L. Conradi
/s/ Michael G. Grosek Director March 27, 1997
- ----------------------
Michael G. Grosek
/s/ Linda J. Laskowski Director March 27, 1997
- ----------------------
Linda J. Laskowski
/s/ Lee A. Schoenbeck Secretary, Director March 27, 1997
- ----------------------
Lee A. Schoenbeck
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Dakotah, Incorporated
We have audited the accompanying balance sheets of Dakotah,
Incorporated as of December 31, 1996 and 1995, and the related statements of
earnings, changes in stockholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Dakotah,
Incorporated as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
We have also audited Schedule II for each of the three years in
the period ended December 31, 1996. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
Minneapolis, Minnesota
February 28, 1997
DAKOTAH, INCORPORATED
BALANCE SHEETS
DECEMBER 31,
ASSETS 1996 1995
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 2,690 $ 477,330
Accounts receivable, less allowance for doubtful accounts
of $382,000 and $324,000 in 1996 and 1995 7,538,724 6,365,606
Inventories 9,555,897 7,364,035
Prepaid expenses and other 735,929 477,507
Deferred income taxes 496,000 467,000
----------- -----------
Total current assets 18,329,240 15,151,478
PROPERTY, PLANT AND EQUIPMENT - NET 3,907,030 2,209,485
OTHER ASSETS
Deferred income taxes 185,000 349,000
Other 508,690 425,869
----------- -----------
$22,929,960 $18,135,832
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to bank $ 7,123,000 $ 3,666,796
Current maturities of long-term obligations,
including $332,139 and $234,077 to related parties
in 1996 and 1995 482,835 577,152
Accounts payable 2,134,845 2,253,281
Accrued liabilities
Compensation and related benefits 925,739 654,036
Other 716,217 413,025
Income taxes payable 187,079 -
----------- -----------
Total current liabilities 11,569,715 7,564,290
LONG-TERM OBLIGATIONS, less current maturities,
including $129,162 and $572,062 to related parties
in 1996 and 1995 912,585 1,051,487
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Common stock, par value $.01, 10,000,000 shares
authorized; 3,499,755 shares issued and outstanding 34,998 34,998
Additional contributed capital 6,904,156 6,804,156
Retained earnings 3,508,506 2,680,901
----------- -----------
10,447,660 9,520,055
----------- -----------
$22,929,960 $18,135,832
=========== ===========
The accompanying notes are an integral part of these statements.
DAKOTAH, INCORPORATED
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
Net sales $ 41,559,597 $ 30,884,081 $ 30,401,805
Costs of goods sold 30,599,183 22,485,346 22,376,413
------------ ------------ ------------
Gross profit 10,960,414 8,398,735 8,025,392
Operating expenses
Selling 5,501,681 4,347,309 3,842,286
General and administrative 3,727,231 3,194,235 2,503,707
------------ ------------ ------------
9,228,912 7,541,544 6,345,993
------------ ------------ ------------
Operating profit 1,731,502 857,191 1,679,399
Other income (expense)
Interest expense (612,717) (241,285) (172,965)
Gain on sale of equipment 109,700 56,210 44,631
Other 3,120 43,923 29,839
------------ ------------ ------------
(499,897) (141,152) (98,495)
------------ ------------ ------------
Earnings before income taxes 1,231,605 716,039 1,580,904
Income taxes 404,000 256,000 550,000
------------ ------------ ------------
NET EARNINGS $ 827,605 $ 460,039 $ 1,030,904
============ ============ ============
Net earnings per share $ .24 $ .13 $ .32
============ ============ ============
Weighted average common shares outstanding 3,499,755 3,499,755 3,255,919
============ ============ ============
The accompanying notes are an integral part of these statements.
DAKOTAH, INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Obligation for Total
Common Stock Additional redeemable stockholders'
------------ contributed Retained common equity
Shares Amount capital earnings stock (deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 1994 259,630 $ 2,596 $ 279,509 $ 1,189,958 $ (5,700,720) $ (4,228,657)
Elimination of Company's
obligation to redeem common 2,240,125 22,402 2,408,078 - 5,700,720 8,131,200
stock
Issuance of common stock in
initial public offering, net 1,000,000 10,000 4,116,569 - - 4,126,569
Net earnings - - - 1,030,904 - 1,030,904
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 3,499,755 34,998 6,804,156 2,220,862 - 9,060,016
Net earnings - - - 460,039 - 460,039
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 3,499,755 34,998 6,804,156 2,680,901 - 9,520,055
Compensation to outside consultant - - 100,000 - - 100,000
Net earnings - - - 827,605 - 827,605
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 3,499,755 $ 34,998 $ 6,904,156 $ 3,508,506 $ - $ 10,447,660
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
DAKOTAH, INCORPORATED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 827,605 $ 460,039 $ 1,030,904
Adjustments to reconcile net earnings to net cash
used in operating activities
Depreciation and amortization 683,166 445,951 372,469
Gain on sale of equipment (109,700) (56,210) (44,631)
Deferred income taxes 135,000 156,000 (545,000)
Compensation to outside consultant 100,000 - -
Changes in assets and liabilities:
Accounts receivable (1,173,118) (1,546,601) (1,165,976)
Inventories (2,191,862) (1,494,989) (316,584)
Prepaid expenses and other (258,422) (225,254) (63,331)
Accounts payable (118,436) 535,993 (563,749)
Accrued liabilities 574,895 304,341 594,209
Income taxes payable 187,079 (290,847) (101,426)
----------- ----------- -----------
Net cash used in operating activities (1,343,793) (1,711,577) (803,115)
Cash flows from investing activities:
Capital expenditures (2,380,711) (1,060,640) (337,343)
Proceeds from sale of equipment 109,700 56,210 87,500
Other (82,821) (59,746) 149
----------- ----------- -----------
Net cash used in investing activities (2,353,832) (1,064,176) (249,694)
Cash flows from financing activities:
Net borrowings (payments) under notes payable 3,456,204 3,019,448 (1,797,474)
Proceeds from issuance of long-term obligations 377,425 - 100,000
Principal payments on long-term obligations (610,644) (342,049) (802,269)
Proceeds from issuance of common stock - - 4,126,569
----------- ----------- -----------
Net cash provided by financing activities 3,222,985 2,677,399 1,626,826
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (474,640) (98,354) 574,017
Cash and cash equivalents at beginning of year 477,330 575,684 1,667
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,690 $ 477,330 $ 575,684
=========== =========== ===========
The accompanying notes are an integral part of these statements.
DAKOTAH, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A - NATURE OF BUSINESS
Dakotah, Incorporated (the "Company") designs and manufactures decorative
pillows, bedroom ensembles, decorative throws, table linens and other
accessory products through its manufacturing facilities principally located
in South Dakota. The Company sells its products nationwide to department
stores, specialty retailers, mass merchandisers and mail order houses
primarily in the United States. The Company has showrooms located in New
York, Atlanta, Los Angeles, San Francisco, Denver, Seattle, Chicago and
Dallas.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the financial statements follows:
Cash and Cash Equivalents
The Company considers all highly liquid temporary investments with an
original maturity of three months or less to be cash equivalents.
Accounts Receivable
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluations of customers.
The Company maintains allowances for potential credit losses.
Inventories
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method. During 1996, 1995 and 1994, the Company
recorded charges of $821,000, $390,000 and $1,355,000 to cost of goods sold
to reduce the value of inventory to market.
Depreciation and Amortization
Depreciation and amortization are provided in amounts sufficient to relate
the cost of assets to operations over their estimated useful lives, using
straight-line and accelerated methods for financial reporting and income tax
purposes. Estimated useful lives range from 3 to 39 years for buildings and
improvements and leasehold improvements and 4 to 7 years for machinery and
equipment and office equipment, furniture and fixtures and other.
Employee Benefits
The Company acts as a self-insurer for employee medical and short-term
disability income plans. Specific stop loss coverage is provided for
catastrophic claims. Losses and claims are recorded as incurred, based upon
actual and estimated losses and claims outstanding.
Advertising
The Company expenses advertising costs as incurred. Advertising expense was
approximately $589,000, $461,000 and $262,000 during 1996, 1995 and 1994.
Stock Based Compensation
The Company's employee stock option plans are accounted for under the
intrinsic value method.
Earnings Per Share
All earnings per share amounts are based on the weighted average outstanding
common shares, and outstanding common share equivalents, if dilutive.
Revenue Recognition
The Company records a sale at the time the goods are shipped.
Redeemable Common Stock
At December 31, 1993, all shares of common stock held by the Company's profit
sharing plan (2,240,125 shares) were excluded from stockholders' equity due
to the existence of a put option exercisable by the participants of the plan
upon termination of their employment. This contingent liability was recorded
based upon the amount the Company would have been required to pay pursuant to
the terms of the profit sharing plan assuming all employment had been
terminated by the participants and all shares had been surrendered for
redemption. Upon the effectiveness of the Company's initial public offering
of common stock, the obligation of the Company to redeem these shares was
terminated and reclassified to stockholders' equity (see note H).
Supplemental Disclosures of Cash Flow Information
1996 1995 1994
------ ------ -----
Cash paid during the years ended December 31 for:
Interest $627,039 $215,146 $ 172,965
Income taxes 152,148 333,260 1,218,800
Supplemental disclosure of noncash investing and financing activities:
During 1995, the Company issued $376,838 of debt to acquire certain other
assets.
During 1994, redeemable common stock was reclassified into stockholders'
equity as the Company's obligation to redeem the shares terminated upon
effectiveness of the Company's initial public offering of common stock (notes
B and H).
During 1994, the Company issued $1,318,003 of notes payable to officers in
settlement of deferred compensation liabilities (notes F and G).
Accounting Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE C - INVENTORIES
The principal classifications of inventory and their corresponding values are
summarized as follows at December 31:
1996 1995
------ -----
Finished goods $2,165,930 $1,225,179
Work in process 1,667,023 1,019,664
Raw materials 5,722,944 5,119,192
--------- ---------
$9,555,897 $7,364,035
========= =========
NOTE D - PROPERTY, PLANT AND EQUIPMENT
The principal classifications of property, plant and equipment and their
corresponding values are summarized below at cost as of December 31:
1996 1995
------ -----
Buildings and improvements $2,334,516 $1,405,536
Leasehold improvements 123,731 123,731
Machinery and equipment 3,009,792 2,047,676
Office equipment, furniture and fixtures and other 958,758 481,816
-------- --------
6,426,797 4,058,759
Less accumulated depreciation and amortization 2,555,767 1,885,274
--------- ---------
3,871,030 2,173,485
Land 36,000 36,000
--------- ---------
$3,907,030 $2,209,485
========= =========
NOTE E - NOTES PAYABLE TO BANK
The Company has a credit facility with a bank consisting of a revolving note
and a term note which terminate in August 1998. The total amount available
under the revolving note, which is due on demand, is limited to the lesser of
$9,000,000 or a defined borrowing base of eligible accounts receivable and
inventory. The term note is due on demand and requires monthly principal
payments of $20,833. Inventory advances under the revolving note, as defined
in the agreement, provide for monthly interest payments at 2% above the
bank's prime rate (effective rate of 10.25% at December 31, 1996). The term
note and other advances under the revolving note provide for monthly interest
payments at 1.5% above the bank's prime rate (effective rate of 9.75% and 10%
at December 31, 1996 and 1995). Both notes are collateralized by accounts
receivable, inventory, equipment, and general intangibles. The outstanding
balances on the revolving note and term note, which were equal to their fair
values, were $6,414,667 and $708,333, and $2,708,463 and $958,333 at December
31, 1996 and 1995.
The current credit facility contains affirmative and negative covenants
including, among other things, provisions for minimum net earnings and net
worth requirements, limitations on capital expenditures, and compliance with
certain debt service ratios. Additionally, the Company may not incur
additional borrowings, sell certain assets, acquire other businesses or pay
cash dividends without prior written consent.
NOTE F - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
1996 1995
------ -----
Note payable to officer - due January 1998, payable in varying
semi-annual installments, including interest at 6% (see note G) $ 461,301 $ 659,000
Note payable to former officer including interest at 6% (see note G);
paid in full during 1996 - 263,603
Note payable to a finance company - due November 2000, payable in
monthly installments, including interest at 9% 337,762 371,836
Note payable to State of South Dakota - due February 2001, payable in
monthly installments, including interest at 3% with a balloon payment of
$161,215 in February 2001, collateralized by certain
equipment $ 269,260 $ -
Note payable to State of South Dakota - due February 1999, payable in
monthly installments, including interest at 3% with a balloon
payment of $80,309 in February 1999, collateralized by a building 89,767 93,116
Capital lease obligations to related parties for three lease/purchase
agreements for land and buildings, due in varying monthly payments,
including imputed interest ranging from 7.2% to 9.5% 112,104 147,139
Note payable to a bank - due January 2003, payable in monthly installments,
including interest at .5% over prime, (effective rate of 9.0% at December
31, 1996 and 1995), collateralized by certain property 80,808 90,551
Other 44,418 3,394
--------- ---------
1,395,420 1,628,639
Less current maturities 482,835 577,152
--------- ----------
$ 912,585 $1,051,487
========= ==========
Scheduled principal repayments on long-term obligations are as follows for
the years ending December 31:
1997 $ 482,835
1998 282,100
1999 238,006
2000 157,690
2001 200,526
Thereafter 34,263
-------
$1,395,420
==========
Based upon the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the carrying amount of long-term
obligations approximates fair value.
In January 1997, the Company entered into a $730,000 long-term debt agreement
with the State of South Dakota. The agreement calls for monthly payments of
$4,049 beginning in March 1997, including interest at 3%, with a balloon
payment of $590,000 in February 2002. The agreement is collateralized by
certain equipment and a mortgage on buildings leased by the Company from
related parties.
The Company paid interest to related parties on long-term obligations of
approximately $38,000, $56,000 and $78,000 during the years ended December
31, 1996, 1995 and 1994.
NOTE G - COMMITMENTS
Operating Lease Obligations
The Company leases space for its sales offices, showrooms and certain
manufacturing facilities. These leases require a base rental fee plus charges
for utilities and other costs. The Company also leases a computer system,
phone system and office equipment for its main office and plant.
The aggregate minimum rental payment obligations under noncancelable
operating leases are approximately as follows for the years ending December
31:
1997 $ 560,000
1998 345,000
1999 268,000
2000 213,000
2001 103,000
--------
$1,489,000
==========
Total rent expense for all operating leases was approximately $555,000,
$438,000 and $363,000 for the years ended December 31, 1996, 1995 and 1994.
Deferred Compensation
The Company's stock appreciation plan (the "plan") provided for deferred
compensation to be paid to certain key employees. Under the terms of the
plan, deferred compensation units ("units") were awarded to key employees at
the discretion of management. The units had an initial value equal to the
fair market value of an equivalent number of shares of the Company's common
stock on the day units were awarded. Deferred compensation paid under the
plan was defined as the excess, if any, of the aggregate fair market value of
the units awarded on the date of termination over the aggregate fair market
value of the units awarded, based on the fair market value of each unit on
the date awarded. This deferred compensation was to accrue over a five year
period.
The Company awarded 276,450 units under this plan to certain key employees
and recorded a liability for deferred compensation of $854,000 at December
31, 1993. On January 31, 1994, the Company's Board of Directors and plan
participants entered into agreements that became effective as of the
effective date of the Company's initial public offering of its common stock.
These agreements provided for the units to be fully vested as of the
effective date of the offering, fixed the amounts earned based on the public
offering price and provided for payment over three and a half years (see note
F). As a result of these agreements, the Company recorded an additional
$464,003 of compensation expense upon the effectiveness of the Company's
initial public offering of common stock in March 1994 (note I).
Licensing Arrangements
The Company has entered into various licensing arrangements which require
royalty payments ranging from 2% to 12% of net sales of each product. Certain
license agreements also require guaranteed minimum royalties, which can be
reduced through royalty payments on net sales. At December 31, 1996,
guaranteed future minimum royalty payments totaled approximately $117,000.
Royalty expense was approximately $364,000, $245,000 and $385,000 in 1996,
1995 and 1994.
NOTE H - EMPLOYEE PROFIT SHARING PLAN
The Company maintains a profit sharing plan ("Plan") for the benefit of
essentially all employees who are not covered by a collective bargaining
agreement and who have completed one year of service as defined in the Plan.
Contributions to the Plan for any year are determined by the Company's Board
of Directors at its discretion, but are limited to maximum permissible
amounts as defined in the Plan. Contributions to the Plan may be made in the
form of shares of the Company's common stock or cash. The Company administers
the Plan.
Plan participants who retire, die, or become disabled have the option either
to receive their account balance in the year following such termination or to
leave their account balance in the Plan until a later date, but no later than
age 70-1/2. Plan participants who have terminated employment for any other
reason have these same options except that they may defer distribution no
later than normal retirement age.
On December 21, 1993, the Company amended the Plan. The amendment, which
became effective after the Company completed its initial public offering of
common stock, removed the participant's ability to require the Company to
repurchase any stock distributed to the participant, established pass-through
voting to the participants, established the fair market value per share, for
most purposes, as the last published closing price of the stock and required
the Plan to make distributions in stock, unless the recipient elects to
receive cash (see note B).
At December 31, 1996 and 1995, the Plan held 1,669,969 and 1,900,310 shares
of the Company's common stock. Company contributions to the Plan were
$59,000, $50,000 and $75,000 for 1996, 1995 and 1994.
NOTE I - STOCKHOLDERS' EQUITY
Common Stock
On March 30, 1994, the Company completed its initial public offering of
1,000,000 shares of common stock for $4,126,569, net of offering costs.
Stock Options and Warrants
The Company has stock option plans for the benefit of selected officers,
employees, directors and outside consultants of the Company. A total of
1,267,300 shares of common stock are reserved for issuance under the plans.
Options under the Company's plans are generally granted at fair market value
and expire between five and seven years from the grant date.
A summary of all of the Company's stock option transactions for the years
ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
-------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding at beginning of
year 367,300 $4.41 306,450 $4.97 - $ -
Granted 390,745 4.15 163,000 3.69 306,450 4.97
Forfeited - - (102,150) 4.97 - -
------- ------- -------
Outstanding at end of year 758,045 $4.27 367,300 $4.41 306,450 $4.97
======= ======= =======
Options exercisable at end
of year 354,300 $4.49 317,300 $4.54 276,450 $5.13
======= ======= =======
Weighted average fair value of
options granted to employees
and directors during the year
$2.07 $1.34 N/A
Weighted average exercise
price of options granted
to employees and directors
during the year $4.59 $3.61 N/A
The following information applies to all stock options that are outstanding
at December 31, 1996:
Options outstanding Options exercisable
------------------- -------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise prices outstanding contractual life price exercisable price
--------------- ----------- ---------------- ----- ----------- -----
$3.50 to $5.13 758,045 4 years $4.27 354,300 $4.49
During 1994, the Company issued a warrant to purchase 100,000 shares of
common stock. The warrant is exercisable until March 1999 at $7.17 per share.
The Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), which introduced an
alternative method for recognizing compensation costs based upon the fair
value of the awards on the date they are granted. SFAS 123 allows entities to
continue to account for employee stock option plans using the intrinsic value
method, which exists under current accounting literature, provided pro forma
net earnings and net earnings per share, as if the fair value based method
had been used, are disclosed. The Company has elected to continue using the
intrinsic value based method for its employee options.
In January 1996, the Company granted options to purchase 242,745 shares of
common stock at $3.875 per share to an outside consultant. The market value
per share was $4.25 when the options were approved by the shareholders. The
options vest over three years and have a term of five years; none of the
options were exercisable at December 31, 1996. The Company was required to
apply the fair value method of accounting for these options and recorded
compensation expense of $100,000 during 1996. The fair value of the options
was estimated to be $1.71 per share using the Black Scholes options - pricing
model with the following assumptions used: zero dividend yield; expected
volatility of 30% and risk-free interest rate of 5.42%.
The fair value of each option grant to employees and directors was estimated
on the date of grant using the Black-Scholes options-pricing model with the
following weighted average assumptions used for grants in 1996 and 1995: zero
dividend yield; expected volatility of 30%; risk-free interest rates of 6.40%
and 5.98%; and expected lives of 6.62 and 5.00 years.
The Company's net earnings and net earnings per share for 1996 and 1995 would
have been reduced to the pro forma amounts indicated below had the fair value
method been used for options granted to employees and directors. These
effects may not be representative of the future effects of applying this
statement.
1996 1995
-------------------------- -------------------------
As Pro As Pro
reported forma reported forma
-------- ----- -------- -----
Net earnings $827,605 $777,605 $460,039 $424,039
Net earnings per share $.24 $.22 $.13 $.12
NOTE J - INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31:
1996 1995 1994
------ ------ -----
Current $269,000 $100,000 $1,095,000
Deferred 135,000 156,000 (545,000)
------- ------- ---------
$404,000 $256,000 $ 550,000
======= ======= ========
The tax effect of the cumulative temporary differences resulting in the
current and long-term deferred tax assets (liabilities) are as follows at
December 31:
1996 1995
------ -----
Current
Accounts receivable allowance $135,000 $115,000
Inventory write-down 104,000 141,000
Accrued compensation and related accruals 94,000 79,000
Accrued expenses 117,000 132,000
Charitable contributions carryforward 46,000 -
------- --
$496,000 $467,000
======= =======
Long-Term
Notes payable (a) $163,000 $328,000
Depreciation (13,000) 21,000
Other 35,000 -
------- --
$185,000 $349,000
======= =======
(a) This temporary difference relates to the Company's terminated stock
appreciation plan (see note G).
The following is a reconciliation of the Federal statutory income tax rate to
the effective tax rate for the years ended December 31:
1996 1995 1994
---- ---- ----
Statutory income tax rate 34.0% 34.0% 34.0%
State taxes 1.4 1.3 1.6
Charitable contribution of inventory (2.6) - -
Targeted jobs program tax credits (.2) (.9) (1.4)
Other .2 1.4 .6
---- ---- ----
32.8% 35.8% 34.8%
==== ==== ====
NOTE K - CONCENTRATIONS
The Company had sales to a single customer representing 15 percent of net
sales for the year ended December 31, 1996. Accounts receivable from two
customers, including the customer above, totaled $2,585,000 at December 31,
1996.
The Company licenses certain trademarks and tradenames and purchases a
significant portion of its raw material requirements for its fleece products
from a major supplier. Fleece product sales accounted for approximately 47%
and 20% of the Company's net sales for 1996 and 1995. Substantially all
fleece raw material used to manufacture fleece products is required to be
purchased from this supplier. If the supply from the major supplier was
interrupted, the Company believes there are alternative sources that could
supply fleece raw material. The use of a substitute fleece would require the
use of a trademark other than trademarks from the major supplier.
NOTE L - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, aggregate adjustments were made of
approximately $350,000 to increase cost of goods sold and $80,000 to decrease
operating expenses. These adjustments relate primarily to the accounting for
inventory and general and administrative expenses in the second and third
quarters.
After giving effect to these adjustments, the second quarter reflects a loss
before income taxes of $327,000, compared to the previously reported earnings
before income taxes of $73,000, and a net loss of $219,000, or $.06 net loss
per share, compared to the previously reported net earnings of $47,000, or
$.01 net earnings per share. Similarly, the third quarter reflects earnings
before income taxes of $674,000, compared to the previously reported earnings
before income taxes of $544,000, and net earnings of $451,000, or $.13 net
earnings per share, compared to the previously reported net earnings of
$348,000, or $.10 net earnings per share.
DAKOTAH, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1996
Column A Column B Column C Column D Column E
- ------------------------------------- ------------ -------------------- ---------- ---------
Balance at Charged to Charged to Balance
Description beginning of costs and other at end
----------- period expenses accounts Deductions of period
------ -------- -------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1994 $ 46,000 $ 71,000 $ - $ 7,000 (a) $110,000
Year ended December 31, 1995 110,000 230,000 - 16,000 (a) 324,000
Year ended December 31, 1996 324,000 85,000 - 27,000 (a) 382,000
(a) Write-offs, less recoveries.