SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended:
June 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from: ____ to _____
Commission file number: 0-24645
United States Leather, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin 13-3503310
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
1403 West Bruce Street, Milwaukee, WI 53204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 383-6030
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares Outstanding
Class at June 30, 1998
Common Stock, 100
$.01 par value
As of June 30, 1998, there was no public market for the Company's common
stock.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Condensed Statements of Operations . . . 3
Consolidated Condensed Balance Sheets . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows . . . 5-6
Notes to Consolidated Condensed Financial Statements. 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations. . 12
PART II - OTHER INFORMATION AND SIGNATURES
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 21
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
3 Months Ended 6 Months Ended
June 30, June 30,
1998 1997 1998 1997
Net sales $ 62,894 $88,828 $127,906 $172,207
Cost of sales 59,046 81,672 120,348 161,591
--------- -------- --------- --------
Gross profit 3,848 7,156 7,558 10,616
Selling, general and
administrative expenses 5,310 5,634 10,576 11,700
Restructuring expense 3,260 - 3,260 -
Amortization of intangible assets 146 1,081 318 1,963
--------- -------- --------- --------
Income (loss) from operations (4,868) 441 (6,596) (3,047)
Other (income) expense 529 187 529 187
Interest expense (contractual
interest for 1998 - $4,567 and
$10,502, respectively) 2,553 4,698 8,488 9,195
--------- -------- --------- --------
Loss before taxes and
reorganization expense (7,950) (4,444) (15,613) (12,429)
Reorganization expenses 5,864 - 5,958 -
--------- -------- --------- --------
Loss before taxes (13,814) (4,444) (21,571) (12,429)
Income tax provision (benefit) 68 - 115 (2,474)
--------- -------- --------- --------
Net loss (13,882) (4,444) (21,686) (9,955)
========= ======== ========= ========
Net loss per share (Basic and
Diluted) $(138,820) $(44,440) $(216,860) $(99,550)
========= ======== ========= ========
Weighted average shares
outstanding (Basic and Diluted) 100 100 100 100
========= ======== ========= ========
The accompanying notes are an integral part of these statements.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
As of As of
June 30, December 31,
Current Assets: 1998 1997
Cash $564 $1,054
Accounts receivable, less allowances 38,304 32,336
of $2,057 and $2,892
Inventories 37,412 43,330
Prepaid expenses and other 582 822
--------- --------
Total current assets 76,862 77,542
Property, plant and equipment, net 37,078 42,380
Other 1,093 6,280
--------- --------
Total assets $115,033 $126,202
========= ========
Liabilities Not Subject to Compromise
(1998 only):
Current Liabilities:
Current maturities of long-term debt $574 $130,144
Revolving credit facility 46,075 37,932
Payable to bank 2,153 1,778
Accounts payable 6,976 7,335
Accrued liabilities 9,212 18,438
--------- --------
Total current liabilities 64,990 195,627
Liabilities subject to compromise
(1998 only) 141,401 -
Other long-term liabilities 8,616 8,843
Stockholder's Equity:
Preferred Stock, $.01 par value -
5,000,000 shares authorized,
no shares issued - -
Common Shares:
Common Stock, voting, $.01 par
value - 35,000,000 shares
authorized, 100 shares issued 1 1
Additional paid-in-capital 92,344 92,344
Other aggregate comprehensive income (115) ( 95)
Accumulated deficit (192,204) (170,518)
--------- --------
Total stockholder's equity (99,974) (78,268)
--------- --------
Total liabilities and
stockholder's equity $115,033 $126,202
========= ========
The accompanying notes are an integral part of these statements.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
For the six months
June 30,
1998 1997
Cash Flows from Operating Activities:
Net loss $(21,686) $(9,955)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,353 5,607
Noncash interest expense 1,789 484
Noncash loss on fixed asset disposal 487 -
Deferred income taxes - (2,454)
Noncash restructuring expense 2,650 -
Noncash reorganization items 3,148 -
Change in assets and liabilities
including items subject to compromise:
Accounts receivable (5,968) (13,521)
Inventories 5,918 9,094
Prepaid expenses and other 91 (1,021)
Accounts payable (359) (2,093)
Accrued liabilities 2,687 (4,069)
Other long-term liabilities (228) 26
------- -------
Net cash used by operating activities (7,118) (18,503)
------- -------
Cash Flows from Investing Activities
Capital expenditures (2,008) (1,507)
Proceeds from sales of fixed assets 138 424
Purchase of software license - (534)
------- -------
Net cash used in investing activities (1,870) (1,617)
------- -------
Cash Flows from Financing Activities:
Payments of revolving credit facility (116,158) (59,406)
Borrowings under revolving credit 124,301 77,039
facility
Net change in payable to bank 375 (515)
------- -------
Net cash provided by financing activities 8,518 17,118
------- -------
Effect of Exchange Rate Changes on Cash (20) 3
------- -------
Net increase (decrease) in cash (490) (2,398)
Cash, beginning of period 1,054 2,894
------- -------
Cash, end of period $564 $496
======= =======
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
For the six months
June 30,
1998 1997
Supplemental cash flow disclosures:
Interest paid $2,133 $8,941
Income taxes paid (net of refunds) $46 $17
The accompanying notes are an integral part of these statements.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
(1) Basis of Presentation:
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission. In the opinion of management,
all required disclosures have been presented and all necessary adjustments
(consisting only of normal recurring adjustments) have been included to
fairly present the results of operations, financial position and cash
flows of United States Leather, Inc. (the "Company"). These consolidated
condensed financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
The Company's consolidated condensed financial statements for
the period subsequent to May 11, 1998 have been prepared in accordance
with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly,
expenses resulting from the reorganization of the Company are recorded as
incurred and reported separately as reorganization items in the
accompanying Consolidated Condensed Statements of Operations. Interest
expense on the Company's $130 million of 10 1/4% Senior Notes due 2003
(the "Notes") ceased accruing as of May 11, 1998 (the "Petition Date").
In addition, liabilities subject to compromise under the bankruptcy
proceedings have been segregated from other liabilities in the
Consolidated Condensed Balance Sheet at June 30, 1998.
Liabilities Subject to Compromise as of June 30, 1998 comprised the
following:
10 1/4% Senior Notes due 2003 $129,489
Accrued interest on Notes prior to the Petition Date 10,068
Accrued professional fees 1,844
--------
$141,401
========
Reorganization items included in the Consolidated Condensed
Statements of Operations consist of the following:
3 Months Ended 6 Months Ended
June 30, June 30,
1998 1997 1998 1997
Legal and professional fees $ 2,716 $ - $ 2,810 $ -
Write-off of capitalized debt
issuance costs pertaining
to the Notes 3,148 - 3,148 -
------- ------ ------- ------
$ 5,864 $ - $ 5,958 $ -
======= ====== ======= ======
(2) Net Loss Per Share (Basic and Diluted):
Net loss per share is calculated by dividing the loss by the weighted
average number of the Company's shares of Common Stock, $.01 par value,
outstanding during the period.
(3) Comprehensive Income:
In the first quarter of 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." The Company's Comprehensive Income
consists solely of foreign translation adjustments.
The accumulated Other Comprehensive Income balances are
summarized as follows:
Foreign Currency
Translation
Balance at December 31, 1997 $(95)
Change during six months
ended June 30, 1998 (20)
-----
Balance at June 30, 1998 $(115)
=====
(4) Inventories:
Inventories consist of the following:
June 30, December 31,
1998 1997
At lower of cost, using the first-
in, first-out (FIFO)
cost method or market:
Raw materials and supplies $7,635 $14,150
Work in process 16,252 17,322
Finished goods 18,943 17,975
------ ------
Total FIFO inventories 42,830 49,447
Difference between FIFO and LIFO
cost of inventories (5,418) (6,117)
------- -------
Total LIFO inventories $37,412 $43,330
======= =======
(5) Revolving Credit Agreement:
On May 12, 1998 the Company replaced its $55 million pre-
bankruptcy revolving credit facility (the "Pre-Bankruptcy Credit
Facility") with a new $70 million debtor-in-possession revolving credit
facility (the "DIP Credit Facility") in order to continue its operations
during the bankruptcy proceedings. The DIP Credit Facility was provided
by the same group of lenders, led by BankAmerica Business Credit, that
provided the Pre-Bankruptcy Credit Facility. The Pre-Bankruptcy Credit
Facility was put in place in January 1998, and was structured to
accommodate the subsequent DIP Credit Facility. The DIP Credit Facility
was subsequently replaced by a $70 million post-bankruptcy credit facility
(the "Credit Facility") on July 20, 1998. The Credit Facility and DIP
Credit Facility have substantially the same terms and conditions. Loans
under the Credit Facility bear interest at a rate equal to prime plus
1.00% or LIBOR plus 2.50%. The Company pays a 0.375% commitment fee on
the unused portion of the Credit Facility. The terms of the agreement
covering the Credit Facility require the Company to, among other things,
beginning at the end of 1998 maintain a minimum ratio of FIFO earnings
before interest expense, income tax expense, depreciation expense,
amortization expense and unusual or non-recurring expenses ("FIFO EBITDA")
to fixed charges and a minimum tangible net worth. The agreement also
includes restrictions related to capital expenditures and further
indebtedness. Loan availability under the DIP Credit Facility was, and
under the Credit Facility is, based on the Company's accounts receivable
and inventory balances after certain exclusions. After taking into
account letters of credit of $1,531, the available capacity under the DIP
Facility on June 30, 1998 was $3,759.
(6) Bankruptcy Proceedings:
On May 11, 1998 the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Chapter 11 Petition") in the United States Bankruptcy Court for the
Eastern District of Wisconsin (the "Bankruptcy Court"), Case No. 98-24997,
and also filed a prenegotiated Plan of Reorganization (the "Plan")
pursuant to which, among other things, the Notes would be converted into
shares representing 97% of the Company's common stock, with the Company's
pre-petition shareholders receiving the remaining 3% of the Company's
common stock, both subject to dilution upon implementation of a management
incentive plan. Pursuant to a solicitation ending on May 6, 1998, the
Plan received the approval of holders of approximately $102 million
aggregate principal amount of the Notes, representing approximately 88% of
the holders who voted pursuant to the solicitation, and all of the
Company's pre-petition stockholders. The Company is managing its business
as a debtor-in-possession subject to the supervision and control of the
Bankruptcy Court.
On July 7, 1998, the Bankruptcy Court entered an order
confirming the Plan. The Plan became effective on July 20, 1998 (the
"Effective Date"), and as of such date the Notes were converted into the
right to receive approximately 9,700,000 shares or 97% of the Company's
common stock, and the stock of the pre-petition shareholders of the
Company was converted into the right to receive 300,000 shares or 3% of
the Company's common stock.
(7) Restructuring:
During the second quarter of 1998, the Company announced plans
to close its operations in Berlin, Wisconsin and to consolidate its
Milwaukee Operations by closing one of its plants there. Both operations
are part of the Company's Footwear and Specialty Leather Group. The
Company recorded a pre-tax charge of $3.3 million in the second quarter to
(i) reduce the book value of the long-lived assets (property, plant and
equipment) of these operations to their estimated fair market value less
costs to sell ($2.7 million) and (ii) provide for other costs related to
this restructuring ($0.6 million). The assets of these operations do not
represent a material portion of the Company's total assets.
(8) Pending Adoption of Accounting Announcement:
Effective December 31, 1998, the Company will adopt SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information,"
and SFAS No. 132, "Employers' Disclosure about Pensions and Other Post-
retirement Benefits." Both standards require additional disclosure in the
consolidated financial statements.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain matters discussed herein are "forward-looking
statements" within the meaning of section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as Company "believes,"
"anticipates," "expects" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals
are forward-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties which are described in close
proximity to such statements and which could cause actual results to
differ materially from those currently anticipated. Readers are urged to
consider these factors carefully in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-
looking statements. The forward-looking statements made herein are only
made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Recent Development; Bankruptcy Proceedings
On May 11, 1998 the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Chapter 11 Petition") in the United States Bankruptcy Court for the
Eastern District of Wisconsin (the "Bankruptcy Court"), Case No. 98-24997,
and also filed a prenegotiated Plan of Reorganization (the "Plan")
pursuant to which, among other things, the Notes would be converted into
shares representing 97% of the Company's common stock, with the Company's
pre-petition shareholders receiving the remaining 3% of the Company's
common stock, both subject to dilution upon implementation of a management
incentive plan. Pursuant to a solicitation ending on May 6, 1998, the
Plan received the approval of holders of approximately $102 million
aggregate principal amount of the Notes, representing approximately 88% of
the holders who voted pursuant to the solicitation, and all of the
Company's pre-petition stockholders. The Company is managing its business
as a debtor-in-possession subject to the supervision and control of the
Bankruptcy Court.
On July 7, 1998, the Bankruptcy Court entered an order
confirming the Plan. The Plan became effective on July 20, 1998 (the
"Effective Date"), and as of such date the Notes were converted into the
right to receive approximately 9,700,000 shares or 97% of the Company's
common stock, and the stock of the pre-petition shareholders of the
Company was converted into the right to receive 300,000 shares or 3% of
the Company's common stock.
Selected Financial Data
The following table sets forth certain consolidated income
statement data of the Company as a percentage of net sales for the periods
indicated.
Percentage of Net Sales
Three Months Six Months Ended
Ended
June 30, June 30,
1998 1997 1998 1997
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 93.9 91.9 94.1 93.8
------ ---- ----- ----
Gross profit 6.1 8.1 5.9 6.2
Selling, general & administrative 8.4 6.3 8.3 6.8
Restructuring expenses 5.2 - 2.5 -
Amortization of
intangible assets 0.2 1.2 0.2 1.2
------ ---- ----- ----
Income (loss) from operations (7.7) 0.6 (5.1) (1.8)
Other (income) expense 0.8 0.2 0.4 0.1
Interest expense 4.1 5.4 6.6 5.3
------ ---- ----- ----
Loss before taxes and
reorganization expenses (12.6) (5.0) (12.1) (7.2)
Reorganization expenses 9.3 - 4.7 -
------ ---- ----- ----
Loss before taxes (21.9) (5.0) (16.8) (7.2)
Income tax benefit 0.1 - 0.1 (1.4)
------ ---- ----- ----
Net loss (22.0) (5.0%) (16.9)% (5.8)%
====== ==== ===== ====
Results of Operations - Six Month Period
Ended June 30, 1998
Sales
The Company's finished leather operations are divided into three
principal markets. The following chart summarizes the Company's sales by
product line:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 %Change 1998 1997 %Change
Furniture Group $21.2 $16.5 28% $40.3 $37.2 8%
Automotive Group 7.6 12.6 (40) 19.1 26.3 (27)
Footwear & Specialty
Leather Group 34.1 58.2 (41) 68.5 105.9 (35)
----- ----- ------ ------
Continuing Sales 62.9 87.3 (28) 127.9 169.4 (24)
Discontinued Operations - 1.5 (100) - 2.8 (100)
----- ----- ------ ------
Total Sales $62.9 $88.8 (29%) $127.9 $172.2 (26)%
===== ===== ====== ======
During the third quarter of 1997, the Company discontinued the
manufacture and sale of food-quality collagen from its facilities in
Omaha, Nebraska. Prior to discontinuation, collagen sales were $1.5
million during the second quarter of 1997 and $2.8 million year to date
through June 30, 1997.
Results of Operations
General. The Company experienced a loss of $13.9 million in the
second quarter of 1998, compared with a loss of $4.4 million during the
same period in the prior year. For the six month year to date period, the
Company recorded a loss of $21.7 million in 1998 compared to $10.0 million
the prior year. The principal reasons for the increased loss was (1) a
$3.3 million restructuring charge in the second quarter of 1998 to write
down the book value of long-lived assets caused by plant closures; (2)
reorganization expenses of $6.0 million primarily incurred in the second
quarter of 1998 related to the bankruptcy reorganization; (3) the
Company's decision in the second quarter of 1997 to discontinue recording
tax benefits on operating losses; and (4) the write-off of deferred
financing expenses related to the revolving credit facility that was
replaced in the first quarter of 1998. Such increases were partially
offset by a reduction of $1.7 million in the amortization of intangibles
due to writing-off the Company's goodwill in 1997 and lower interest
expense of $0.7 million due to the Company discontinuing the accrual of
interest on the Notes upon the filing of the Chapter 11 Petition on May
11, 1998.
Excluding the non-recurring restructuring expenses described in
the previous paragraph, and the amortization of intangible assets, the
Company incurred a loss from ongoing operations during the first six
months of 1998 aggregating $3.0 million. This represents a $1.9 million
increase from the $1.1 million loss incurred during the same period one
year ago, again excluding non-recurring items. Contributing most
significantly to these increased losses was the reduction in Footwear and
Specialty Leather Group sales volume caused by a weak retail market and
uncertainties concerning USL's ability to complete its financial
restructuring. This weakened demand more than offset the benefits of
lower hide costs during the first six months of 1998 compared to the
earlier prices.
Net Sales. The Company's net sales in the second quarter of
1998 were $62.9 million, a decrease of $25.9 million or 29% from the same
period one year ago. Sales from continuing operations decreased $24.4
million or 28%. Year-to-date sales were $127.9 million and $172.2 million
for the six month period in 1998 and 1997, respectively. Year-to-date
sales from continuing operations decreased $41.5 million or 24%. The
year-to-date decrease was principally due to a weak retail market in the
Footwear and Specialty Leather Group and lower volumes in the Automotive
Group.
Furniture Group. Furniture Group sales during the second
quarter were $21.2 million, an increase of $4.7 million or 28% from the
second quarter of 1997. Year-to-date sales were $40.3 million, an
increase of $3.1 million or 8%. Contributing to the increase were an
improved demand for finished leather at the retail level and increased
market share. After declining for much of 1997, the demand for
upholstery leather has increased during the first half of 1998. USL,
meanwhile, has substantially increased the number of new products it has
introduced at each of the last three semi-annual furniture markets. The
success of many of these new products has enabled USL's Furniture Group to
recover a portion of the market share that it had lost over the last few
years.
Automotive Group. Automotive Group second quarter sales were
$7.6 million or $5.0 million lower than the prior year quarter. Year-to-
date sales decreased $7.2 million from the prior year to $19.1 million.
The decrease is primarily attributable to contract terminations that
occurred in the second quarter of 1997, a more current backlog, and to a
lesser extent the adverse impact of the General Motors strike which began
in June 1998. Also contributing to the lower Automotive sales were hide-
based price reductions passed along to customers in accordance with
contract terms, and inventory reductions undertaken by customers in
response to USL's improved delivery performance.
As a result of the General Motors strike, the Company suspended
a substantial portion of its Automotive Group operations and laid-off
approximately 75% of its Automotive Group hourly employees in July 1998.
Although the strike was settled on July 28, 1998, the Company cannot
currently predict what effect, if any, the strike and subsequent partial
suspension of the Company's Automotive Group operations will have on the
Company's future operating results.
Footwear and Specialty Leather Group. Footwear and Specialty
Leather Group sales were $34.1 million during the second quarter of 1998,
a decrease of $24.1 million or 41% from the second quarter of 1997. Year-
to-date sales were $68.5 million, a decrease of $37.4 million over the
comparable 1997 period. The principal reasons for lower footwear sales
were (1) substantially weaker retail markets caused by excessive
inventories and the negative effects of the Asian economic downturn, (2)
market share lost to competition, which management believes is caused to a
significant extent by uncertainties surrounding the Company's ability to
reach agreement with its noteholders and restructure its debt, and (3) the
pass-through of lower hide costs in the form of reduced selling prices.
Although the Company does not anticipate substantial near-term improvement
in the condition of the retail footwear market, it does expect to derive
benefit from the successful completion of its debt restructuring and
emergence from bankruptcy, and from the new products which the Group has
introduced.
Gross Profit. Gross profit for the second quarter of 1998 was
$3.8 million, a decrease of $3.3 million or 46% from the second quarter of
1997. Year-to-date gross profit was $7.6 million, a decrease of $3.0
million from the comparable prior year period. Gross profit declined in
the second quarter primarily because of plant underutilization caused by
the reduced volume in the Footwear and Specialty Leather Group and
continued unfavorable and unprofitable mix of contracts served by the
Automotive cut-to-pattern plant. Lower hide costs favorably affected
gross profit, partially offsetting part of these unfavorable variances.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses during the second quarter of 1998 were $0.3
million lower than the same period of 1997, and year-to-date were $1.1
million lower than 1997. The principal reasons for this decrease was
lower staffing, reduced sales commission expense due to lower sales volume
and a reduction in professional fees paid.
Earnings before Interest, Taxes, Depreciation and Amortization.
Earnings before interest, taxes, depreciation and amortization (and
provisions for LIFO revaluations and non-recurring charges) ("FIFO
EBITDA") during the second quarter of 1998 were a $0.4 million compared to
a $3.0 million in the second quarter of 1997. Year-to-date FIFO EBITDA was
$0.3 million in 1998 compared to $2.6 million in 1997. FIFO EBITDA is not
determined pursuant to generally accepted accounting principles ("GAAP"),
and should not be considered in isolation or as an alternative to GAAP-
derived measurements.
Restructuring Expenses. During the second quarter of 1998, the
Company announced plans to close its operations in Berlin, Wisconsin and
to consolidate its Milwaukee Operations by closing one of its plants
there. Both operations are part of the Company's Footwear and Specialty
Leather Group. The Company recorded a pre-tax charge of $3.3 million in
the second quarter to (i) reduce the book value of the long-lived assets
(property, plant and equipment) of these operations to their estimated
fair market value less costs to sell ($2.7 million) and (ii) provide for
other costs related to this restructuring ($0.6 million). The assets of
these operations do not represent a material portion of the Company's
total assets.
Amortization of Intangible Assets. Amortization of intangible
assets was $0.3 million in the first six months of 1998 compared to $2.0
million in the same period of 1997. The decrease was due to the Company's
write off all of its goodwill in the fourth quarter of 1997.
Interest Expense. Interest expense decreased $0.7 million
during the first six months of 1998 over the same period in 1997. During
the second quarter of 1998, interest expense decreased $2.1 million
compared to 1997. The principal reason for this decrease between years is
because the Company discontinued accruing interest on the Notes upon
filing the Chapter 11 Petition on May 11, 1998. The decrease was offset by
the write-off of the deferred financing expenses related to the revolving
credit facility in the first quarter of 1998.
Loss Before Income Taxes and Reorganization Expenses. The
Company incurred a loss before taxes and reorganization expenses of $8.0
million in the second quarter of 1998, an increase of $3.6 million from a
$4.4 million loss before taxes incurred in the second quarter of 1997.
The year-to-date loss before taxes for 1998 was $15.6 million, an increase
of $3.2 million from the same period of 1997.
Reorganization Expenses. The Company incurred reorganization
expenses of $6.0 million during the first six months of 1998 related to
the bankruptcy reorganization. The reorganization expenses were made up
of $2.9 million in professional fees and a $3.1 million write-off of
capitalized costs relating to the issuance of the Notes.
Loss Before Income Taxes. The Company had a loss before taxes
of $13.8 million in the second quarter of 1998, an increase of $9.4
million compared to the $4.4 million loss in the same period in 1997.
Year-to-date the Company had a loss of $21.6 million and $12.4 million in
1998 and 1997, respectively.
Income Tax Benefit. In accordance with SFAS No. 109,
"Accounting for Income Taxes", the Company recorded no tax benefit for the
first six months of 1998 compared to a benefit of $2.5 million recorded
during the same period of 1997.
Net Loss. Due to the factors previously discussed, the Company
had a net loss of $13.9 million in the second quarter of 1998, compared to
a net loss of $4.4 million during the second quarter of 1997. For the six
month period ended June 30, 1998, the net loss was $21.7 million compared
to a net loss of $10.0 for the same period in 1997.
Liquidity and Capital Resources. After the filing of the
Chapter 11 Petition on May 11, 1998, the Company managed its business as a
debtor-in-possession subject to the control and supervision of the
Bankruptcy Court. Substantially all of the Company's assets were pledged
to secure the Pre-Bankruptcy Credit Facility, and therefore the Company
was required to obtain Bankruptcy Court authorization to use these assets,
including cash collateral. With the approval of the Bankruptcy Court the
Company replaced the Pre-Bankruptcy Credit Facility with the DIP Credit
Facility on May 12, 1998.
The Company used $7.1 million of cash for operations during the
first half of 1998, compared with $18.5 million during the same period of
1997. The principal reasons for the change in cash flow were the non-
payment in January 1998 of $6.7 million of interest due on the Notes and a
smaller increase in accounts receivable in 1998 compared to 1997 due to
lower sales volumes in 1998. Accounts receivable increased by $6.0
million during the first half of 1998 compared with a $13.5 million
increase during the same period of 1997. Days sales outstanding in
accounts receivable as of June 30, 1998 were 61 days, compared to 53 days
as of June 30, 1997. LIFO inventories decreased approximately $5.9
million during the first half of 1998. The decrease was due principally
to better asset management and improved quality.
Capital expenditures totaled $2.0 million during the first half
of 1998. This represents a increase of approximately $0.5 million from
the same period in 1997.
On June 30, 1998, the Company's aggregate indebtedness was
$185.7 million. This consisted of $139.6 million of principal and accrued
interest on the Notes and $46.1 million due under the DIP Credit Facility.
The DIP Credit Facility was, and the Credit Facility is, a $70 million
facility secured by essentially all the assets of the Company. Loan
availability under both facilities is based on the Company's accounts
receivable and inventory balances after certain exclusions. Availability
under the DIP Credit Facility as of June 30, 1998 increased to $3.8
million, but availability under the Credit Facility has since
returned to the $1 million to $3 million range which the Company has
experienced in recent months.
At the time the Company entered into the Pre-Bankruptcy Credit
Facility in January 1998, it anticipated that it would subsequently obtain
an ancillary line of credit secured by its machinery, equipment and real
property (the "M/E/R Line of Credit") as part of such credit facility, and
also anticipated that it would obtain a separate credit facility for its
Canadian operations (the "Canadian Credit Facility"). However, subsequent
events have not allowed the Company to arrange for either the M/E/R Line
of Credit or the Canadian Credit Facility as of the date hereof, although
the Company is in the process of evaluating various financing alternatives
involving its machinery, equipment, real property and Canadian operations.
No assurance can be given that the Company will obtain such financing, or
that the Company's cash flow and borrowings under the existing
Credit Facility will be sufficient to meet all of its future liquidity
requirements without such financing.
Year 2000 Compliance
Certain of the Company's computer based systems utilize older
programs that were written using two digits rather than four to define the
applicable year. As a result, such older programs could misinterpret a
date using "00" as the year 1900 rather than the year 2000 (so called
"Year 2000 noncompliance"). The Company expects the analysis and
remediation of its business systems affected by potential Year 2000
noncompliance to be completed by December 31, 1998. The analysis and
remediation of its manufacturing shop floor systems is expected to be
completed by March 31, 1999. The Company utilizes internal and external
resources to identify, remediate and test its business systems for Year
2000 noncompliance. It is estimated that the costs incurred, or to be
incurred, in 1998 and 1999 to remediate Year 2000 noncompliance will be
approximately $2 million. Year 2000 noncompliance remediation is part of
an overall business informations systems upgrade begun in 1995 and
expected to be completed in the second quarter of 1999. The cost of these
projects is included in the Company's 1998 budget and 1999 forecast.
The Company is in the initial phase of communicating with
suppliers, service providers, customers and other entities with which it
has a business relationship regarding their potential Year 2000
noncompliance. It is not known, at this time, the extent to which these
outside parties have addressed Year 2000 noncompliance issues. There can
be no assurance that failure by one or more of these parties to
effectively remediate Year 2000 noncompliance will not have a material
adverse effect on USL.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Revolving Credit Agreement dated as of July 20, 1998
among United States Leather, Inc., A.R. Clarke
Limited, BankAmerica Business Credit, Inc. and the
other banks which are parties thereto from time to
time.
27 Financial Data Schedule (EDGAR Version only)
(b) Reports on Form 8-K:
(i) The Company filed a Form 8-K dated July 7, 1998 with
respect to the confirmation of the Company's Plan for
Reorganization, as amended, and the Company's emergence from
bankruptcy.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998
UNITED STATES LEATHER, INC.
By / s / Kinzie L Weimer
Kinzie L Weimer
Senior Vice President and Chief
Financial Officer
(Signing on behalf of the Registrant
and as Chief Financial Officer)