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:
September 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 (I.R.S. Employer
of incorporation) 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 by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. 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 September 30, 1998
Common Stock, 9,989,548
$.01 par value
As of September 30, 1998, there was no public market for the Company's common
stock.
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Condensed Statements of Operations..................3-4
Consolidated Condensed Balance Sheets..............................5
Consolidated Condensed Statements of Cash Flows..................6-7
Notes to Consolidated Condensed Financial Statements...............8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations............16
PART II - OTHER INFORMATION AND SIGNATURES
Item 6 Exhibits and Reports on Form 8-K.....................................26
Signatures....................................................................27
2
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Amounts in Thousands, Except Share and Per Share Data)
Reorganized
Company Predecessor Company
-------------------- ----------------------------------------
July 20 to July 1 to 3 Months Ended
September 30, July 19, September 30,
1998 1998 1997
------------ ------------------ --------------
Net sales $41,425 $7,225 $70,158
Cost of sales 39,903 11,636 65,364
------------ ----------- ------------
Gross profit 1,522 (4,411) 4,794
Selling, general and administrative expenses 5,145 4,847 5,780
Restructuring expense - - 7,000
Amortization of intangible assets 461 27 987
------------ ----------- ------------
Loss from operations (4,084) (9,285) (8,973)
Other (income) expense - - 162
Interest expense 1,224 159 4,826
Reorganization expenses - 650 -
Fresh start adjustments (net of tax) - (29,264) -
------------ ----------- ------------
Income/(loss) before taxes and extraordinary
gain (5,308) 19,170 (13,961)
Income tax provision (benefit) (1,892) (83) 91
------------ ----------- ------------
Income/(loss) before extraordinary gain (3,416) 19,253 (14,052)
Extraordinary gain (net of tax) - 82,309 -
------------ ----------- ------------
Net income/(loss) $(3,416) $101,562 $(14,052)
============ =========== ============
Per share:
Income/(loss) per share before extraordinary
gain $(0.34) $192,530 $(140,520)
Extraordinary gain (net of tax) - 823,090 -
------------ ------------- ------------
Net income/(loss) per share
(Basic and Diluted) $(0.34) $1,015,620 $(140,520)
============ ============ =============
Shares outstanding - Basic 9,989,548 100 100
============ =========== ============
Shares outstanding - Diluted 10,000,000 100 100
============ =========== ============
The accompanying notes are an integral part of these statements.
3
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Amounts in Thousands, Except Share and Per Share Data)
Reorganized
Company Predecessor Company
------------------- ------------------------------------
July 20 to January 1 to 9 Months Ended
September 30, July 19, September 30,
1998 1998 1997
--------------- ------------ -------------
Net sales $41,425 $135,131 $242,365
Cost of sales 39,903 131,984 226,955
--------------- ------------ ------------
Gross profit 1,522 3,147 15,410
Selling, general and administrative expenses 5,145 15,423 17,480
Restructuring expense - 3,260 7,000
Amortization of intangible assets 461 345 2,950
--------------- ------------ ------------
Loss from operations (4,084) (15,881) (12,020)
Other (income) expense - 529 162
Interest expense 1,224 8,647 14,208
Reorganization expenses - 6,608 -
Fresh start adjustments (net of tax) - (29,264) -
--------------- ------------ ------------
Loss before taxes and extraordinary gain (5,308) (2,401) (26,390)
Income tax provision (benefit) (1,892) 32 (2,383)
--------------- ------------ ------------
Loss before extraordinary gain (3,416) (2,433) (24,007)
Extraordinary gain (net of tax) - 82,309 -
--------------- ------------ ------------
Net income/(loss) $(3,416) $79,876 $(24,007)
=============== ============ ============
Per share:
Loss per share before extraordinary gain $(0.34) $(24,330) $(240,070)
Extraordinary gain (net of tax) - 823,090 -
--------------- ------------ ------------
Net income/(loss) per share
(Basic and Diluted) $(0.34) $798,760 $(240,070)
=============== ============ ============
Shares outstanding - Basic 9,989,548 100 100
=============== ============ ============
Shares outstanding - Diluted 10,000,000 100 100
=============== ============ ============
The accompanying notes are an integral part of these statements.
4
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
Reorganized Predecessor
Company Company
---------------- ----------------
As of As of
September 30, December 31,
Current Assets: 1998 1997
---------------- ----------------
Cash $222 $1,054
Accounts receivable, less allowances of $4,102 and $2,892 30,679 32,336
Inventories 39,876 43,330
Prepaid expenses and other 839 822
---------------- ----------------
Total current assets 71,616 77,542
Property, plant and equipment, net 29,834 42,380
Reorganization value in excess of identifiable assets 29,463 -
Other 1,343 6,280
---------------- ----------------
Total assets $132,256 $126,202
================ ================
Liabilities:
Current Liabilities:
Current maturities of long-term debt $522 $130,144
Revolving credit facility 42,154 37,932
Payable to bank 1,861 1,778
Accounts payable 9,536 7,335
Accrued liabilities 16,331 18,438
---------------- ----------------
Total current liabilities 70,404 195,627
Deferred taxes 4,740 -
Other long-term liabilities 8,614 8,843
Stockholder's Equity:
Reorganized Company:
Common Stock, voting, $.01 par value - 40,000,000 shares
authorized, 9,989,548 shares issued 100 -
Additional paid-in-capital 51,750 -
Other aggregate comprehensive income 64 -
Accumulated deficit (3,416) -
Predecessor Company:
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
Additional paid-in-capital - 92,344
Other aggregate comprehensive income - ( 95)
Accumulated deficit - (170,518)
---------------- ----------------
Total stockholder's equity 48,498 (78,268)
---------------- ----------------
Total liabilities and stockholder's equity $132,256 $126,202
================ ================
The accompanying notes are an integral part of these statements.
5
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
Reorganized
Company Predecessor Company
---------------- -------------------------------------
July 20 to January 1 to For the Nine Months Ended
September 30, July 19, September 30,
1998 1998 1997
--------------- ------------------ -----------------
Cash Flows from Operating Activities:
Net income (loss) $(3,416) $79,876 $(24,007)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 1,727 4,808 8,476
Noncash extraordinary gain - (82,309) -
Noncash fresh start adjustment - (29,264) -
Noncash interest expense 170 1,819 731
Noncash loss on fixed asset disposal 17 487 -
Deferred income taxes (1,885) - (815)
Noncash restructuring expense - 2,650 7,000
Noncash reorganization items - 3,148 -
Change in assets and liabilities:
Accounts receivable (1,269) 2,926 (13,140)
Inventories 3,431 5,441 17,970
Prepaid expenses and other (521) 504 2,441
Accounts payable 1,797 404 (584)
Accrued liabilities 866 7,095 (7,789)
Other long-term liabilities (100) (948) (2,783)
--------------- ------------------ -----------------
Net cash provided (used) by operating activities 817 (3,363) (12,500)
--------------- ------------------ -----------------
Cash Flows from Investing Activities
Capital expenditures (851) (2,143) (2,232)
Proceeds from sales of fixed assets 81 163 424
Purchase of software license - - (838)
--------------- ------------------ -----------------
Net cash used in investing activities (770) (1,980) (2,646)
--------------- ------------------ -----------------
Cash Flows from Financing Activities:
Payments of revolving credit facility (39,057) (128,953) (107,506)
Borrowings under revolving credit facility 38,470 133,762 121,563
Net change in payable to bank 77 6 (1,362)
--------------- ------------------ -----------------
Net cash provided (used) by financing activities (510) 4,815 12,695
--------------- ------------------ -----------------
Effect of Exchange Rate Changes on Cash 64 95 -
--------------- ------------------ -----------------
Net decrease in cash (399) (433) (2,451)
Cash, beginning of period 621 1,054 2,894
--------------- ------------------ -----------------
Cash, end of period $222 $621 $443
=============== ================== =================
6
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
Reorganized
Company Predecessor Company
--------------- ---------------------------------
July 20 to January 1 to For the Nine Months Ended
September 30, July 19, September 30,
1998 1998
1997
--------------- --------------- --------------
Supplemental cash flow disclosures:
Interest paid $1,073 $2,258 $8,941
Income taxes paid (net of refunds) $(7) $46 $17
The accompanying notes are an integral part of these statements.
7
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
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"). Results of
operations for the interim periods presented are not necessarily
indicative of the results of operations of the full fiscal year.
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; however, due to the Company's
reorganization (see Note 2) and the fresh start financial reporting
related thereto (see Note 3), the unaudited condensed consolidated
financial statements for the reorganized Company (the "Reorganized
Company") for the period beginning July 20, 1998 are not comparable to
those of the pre-reorganization Company (the "Predecessor Company") for
the periods prior to July 20, 1998. The captions of the accompanying
consolidated condensed financial statements distinguish between the
Reorganized Company and the Predecessor Company.
(2) Bankruptcy Proceedings:
On May 11, 1998 the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Eastern District of
Wisconsin (the "Bankruptcy Court"), pursuant to a prenegotiated Plan of
Reorganization (the "Plan").
On July 7, 1998, the Bankruptcy Court entered an order confirming the
Plan, which became effective on July 20, 1998. During the period from
the petition date until the effective date, the business and affairs of
the Company were conducted as debtor-in-possession subject to the
supervision and orders of the Bankruptcy Court.
On the effective date, the Company's 10 1/4% Senior Notes due 2003 (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.
8
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cont'd)
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Bankruptcy Proceedings (continued):
Upon consummation of the Plan, an extraordinary gain (net of tax) of
$82,309 on debt discharge was recognized, and consisted of the
following:
Carrying value of 10 1/4% Senior Notes due 2003 $129,495
Accrued interest on Notes prior to the petition date 10,068
----------
Total principal and interest on the Senior Notes 139,563
Estimated fair value of common stock issued for Notes 50,294
----------
Extraordinary gain $89,269
Tax provision 6,960
==========
Net extraordinary gain $82,309
==========
Reorganization items included in the Consolidated Condensed Statements
of Operations consist of the following:
July 1 to Nine Months Ended
July 19, 1998 September 30, 1998
---------------- ------------------------
Legal and professional fees $650 $3,460
Write-off of capitalized debt issuance costs pertaining to
the Notes - 3,148
============= ===========
$650 $6,608
============= ===========
9
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cont'd)
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Financial Reporting Relating to Reorganization Proceedings:
The Company has accounted for the reorganization by using the
principles of fresh start reporting, as required by the AICPA Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code". Under the principles of fresh start
reporting, total assets were recorded at their assumed reorganization
value, with the reorganization value allocated to identifiable tangible
and intangible assets on the basis of their estimated fair value, and
liabilities were adjusted to the present values of amounts to be paid
where appropriate.
The total reorganization value of the Company was determined in
consideration of several factors and by reliance on various valuation
methods, including discounted cash flow and market multiples of
revenues and EBITDA. The factors considered included but were not
limited to the following:
1. Forecasted operating and cash flow results
2. The discounted estimated residual value at the end of the forecast
period based on the a multiple of EBITDA for the last year of the
projected results
3. Competition and general economic considerations
4. Projected sales
5. Discount rates associated with risk
There can be no assurance that forecasted amounts used to value the
Company will reflect the actual financial results of the Company during
the periods in question.
As a result of the implementation of fresh start reporting, the
financial statements of the Reorganized Company after consummation of
the Plan are not comparable to the financial statements of the
Predecessor Company for prior periods.
10
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cont'd)
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Financial Reporting Relating to Reorganization Proceedings (continued):
The effects of the Plan and the implementation of fresh start reporting
on the Consolidated Condensed Balance Sheet as of July 19, 1998 were as
follows:
July 19, 1998
Predecessor Reorganized
Company Reorganization Fresh Start Company
Current Assets: Balance Sheet Adjustments Adjustments Balance Sheet
--------------- ---------------- -------------- ----------------
Cash $621 $ - $ - $621
Accounts receivable 29,410 - - 29,410
Inventories 37,889 - 5,418 (e) 43,307
Prepaid expenses and other 318 - - 318
--------------- ---------------- -------------- ----------------
Total current assets 68,238 - 5,418 73,656
Property, plant and equipment, net 36,760 - (6,300) (e) 30,460
Reorganization in excess of
Identifiable assets - - 29,811 (f) 29,811
Other 1,459 - - 1,459
--------------- ---------------- -------------- ----------------
Total assets $106,457 $ - $28,929 $135,386
=============== ================ ============== ================
Liabilities
Current Liabilities:
Current maturities of long-term debt $130,059 $(129,495) (a) $ - $564
Revolving credit facility 42,741 - - 42,741
Payable to bank 1,784 - - 1,784
Accounts payable 7,739 - - 7,739
Accrued liabilities 25,533 (10,068) (a) - 15,465
--------------- ---------------- -------------- ----------------
Total current liabilities 207,856 (139,563) - 68,293
Deferred Taxes - 6,960 (b) (335) (e) 6,625
Other long-term liabilities 8,618 - - 8,618
Stockholder's Equity:
Preferred Stock - - - -
Common Stock 1 - 99 (f) 100
Additional paid-in-capital 92,342 50,294 (c) (90,886) (f) 51,750
Other aggregate comprehensive income (145) - 145 (f) -
Accumulated deficit (202,215) 82,309 (d) 119,906 (f) -
--------------- ---------------- -------------- ----------------
Total stockholder's equity (110,017) 132,603 29,264 51,850
--------------- ---------------- -------------- ----------------
Total liabilities and stockholder's equity $106,457 $ - $28,929 $135,386
=============== ================ ============== ================
11
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cont'd)
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Financial Reporting Relating to Reorganization Proceedings (continued):
Explanation of the adjustment columns of the balance sheet are as
follows:
(a) Reflect the extinguishment of the 10 1/4% Senior Notes due
2003 plus accrued interest.
(b) Establishment of deferred tax liabilities related to the
extinguishment of debt.
(c) Reflect equity of reorganized Company exchanged for debt.
(d) Reflect the extraordinary gain resulting from the
extinguishment of debt.
(e) Adjust assets to fair value including tax effects.
(f) Reflect the elimination of stockholders' equity of the
Predecessor Company and establish the reorganization value in
excess of identifiable assets.
(4) Reorganization Value in Excess of Identifiable Assets:
The Company recorded its assets at their fair value on the effective
date. The remaining reorganization value that could not be allocated to specific
tangible or identified intangible assets was recorded as reorganization value in
excess of identifiable assets. The estimated life of this intangible asset is
twenty years and will be amortized using the straight line method.
Reorganization value in excess of identifiable assets is made up of the
following:
September 30, July 20,
1998 1998
------------------ ---------------
Cost $29,811 $29,811
Accumulated amortization 348 -
--- -------
Net book value $29,463 $29,811
======= =======
12
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cont'd)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(5) Net Income/Loss Per Share (Basic and Diluted):
Net income/loss per share was 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. As of September 30, 1998, an aggregate of
9,989,548 shares of common stock had been issued to the former Note holders and
pre-bankruptcy equity holders of the Predecessor Company, and 10,445 shares
remained to be issued to former Note holders pending the surrender of their Note
certificates.
(6) Inventories:
Inventories consist of the following:
Reorganized Predecessor
Company Company
------------------ ---------------
September 30, December 31,
1998 1997
------------------ ---------------
At lower of cost, using the first-in,
first-out (FIFO)
cost method or market:
Raw materials and supplies $6,583 $14,150
Work in process 16,430 17,322
Finished goods 16,863 17,975
------ ------
Total FIFO inventories 39,876 49,447
Difference between FIFO and LIFO cost
of inventories - (6,117)
--------- -------
Total LIFO inventories $39,876 $43,330
======= =======
The Company values its inventories using the Last-In First-Out (LIFO) method.
However, as a result of restating inventories at their fair value in connection
with the reorganization on July 19, 1998, there is no significant difference
between LIFO and FIFO at September 30, 1998.
13
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cont'd)
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
(7) Revolving Credit Agreement:
On July 20, 1998 the Company replaced its $70 million
debtor-in-possession revolving credit facility (the "DIP Credit Facility") with
a new $70 million post-bankruptcy credit facility (the "Credit Facility"). The
DIP Credit Facility had, in turn, replaced the Company's $55 million
pre-bankruptcy revolving credit facility (the "Pre-Bankruptcy Credit Facility")
on May 12, 1998. The Credit Facility was provided by the same group of lenders,
led by BankAmerica Business Credit, that provided both the Pre-Bankruptcy Credit
Facility and the DIP Credit Facility. The Pre-Bankruptcy Credit Facility was put
in place in January 1998, and was structured to accommodate the subsequent
Credit Facility and DIP Credit Facility. 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 Credit Facility is based on the Company's accounts
receivable and inventory balances after certain exclusions. After taking into
account letters of credit of approximately $0.8 million, the available capacity
under the Credit Facility on September 30, 1998 was approximately $3.5 million.
(8) 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 Milwaukee plants. Both operations were 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 of 1998 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.
14
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (cont'd)
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
(8) Restructuring (continued):
During the third quarter of 1997, the Company approved a plan to sell
two of its operations: Caldwell Moser Leather Co. and Berlin Leather. Both
operations were part of the Company's Footwear and Specialty Leather Group. The
Company recorded a pretax charge of $7.0 million to reduce the book value of the
long-lived assets (property, plant, equipment and goodwill) of these operations
to their estimated aggregated fair market value less costs to sell. The assets
and sales of these two operations did not represent a material portion of the
Company's total assets or sales. The Company was not successful in selling
either of these operations. As a result, Caldwell Moser was taken off the market
in January, 1998 and continues to serve as one of the Company's ongoing
operations. The Berlin operations were closed during the third quarter of 1998.
(9) 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." This
standard requires additional disclosure in the consolidated financial statements
and the Company is currently assessing the impact of this statement.
15
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 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, including the following:
o decreased consumer demand for products that contain the Company's
leather;
o increases or decreases in the cost of cattle hides;
o the level of consumer confidence and general economic conditions,
which can effect demand in certain of the Company's markets; and
o the ability of the Company to obtain and maintain sources of
liquidity and working capital sufficient to operate its business.
The foregoing review of important factors is not exhaustive, and should
be read in conjunction with other cautionary statements that are included in
this filing. The forward-looking statements made herein are only made as of the
date of this report and the Company is not obligated to publicly update
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 in the
United States Bankruptcy Court for the Eastern District of Wisconsin (the
"Bankruptcy Court"), pursuant to a prenegotiated Plan of Reorganization (the
"Plan").
On July 7, 1998, the Bankruptcy Court entered an order confirming the
Plan, which became effective on July 20, 1998. During the period from the
petition date until the effective date, the business and affairs of the Company
were conducted as debtor-in-possession subject to the supervision and orders of
the Bankruptcy Court.
16
On the effective date, the Company's 10 1/4% Senior Notes due 2003 (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.
In July 1997, the Company retained Houlihan, Lokey, Howard and Zukin
("Houlihan Lokey") as financial advisor to provide advice with respect to
restructuring the Company's capital structure. In connection with the provision
of such services, Houlihan Lokey submitted a claim for approximately $1.9
million in the bankruptcy proceedings. The informal Note Holders Committee
objected to the allowance of the Houlihan Lokey claim. The bankruptcy court has
scheduled a hearing on the disputed claim for December 1998. The Company will be
obligated to pay any amount up to $1.9 million that the bankruptcy court
ultimately allows with respect to the claim. No assurance can be given as to
whether, when and in what amount, if any, the disputed claim will ultimately be
allowed.
Results of Operations - Three and Nine Month Periods
Ended September 30, 1998
The following discussion covers the three month and nine month periods ended
September 30, 1998. It does not distinguish between Reorganized Company and
Predecessor Company operations during such periods management does not believe
because separate discussions are meaningful in terms of operating results or
comparisons to the prior year.
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 Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ -------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit (5.9) 6.8 2.6 6.4
Income (loss) from operations (27.5) (12.8) (11.3) (5.0)
Net income/(loss) 201.7% (20.0)% 43.3% (10.0)%
17
Results of Operations
General. The Company generated net income of $98.1 million during the
third quarter of 1998, bringing net income for the first nine months of the year
to $76.5 million. All of these earnings, however, were attributable to unusual
gains recorded as a result of the cancellation of debt associated with the Notes
($82.3 million, net), and fresh start accounting associated with the Company's
emergence from bankruptcy proceedings ($29.3 million). Details of these items
are as follows:
Extraordinary gain on discharge of debt:
Principal and interest on debt extinguished $139.6
97% of estimated fair value of common stock 50.3
------------
Pre-tax extraordinary gain 89.3
Income tax provision 7.0
============
Net extraordinary gain $82.3
============
Reorganization and fresh start adjustments other than extinguishment of
debt:
Adjust inventories to fair value $ 5.4
Adjust property, plant & equipment to fair value (6.3)
Establish excess reorganization value 29.8
Deferred tax adjustments 0.4
============
Net fresh start gain $29.3
============
The Company was also adversely impacted during the third quarter of
1998 by the strike that shut down General Motors' North American Operations
during June and July, 1998. As a result of lost revenues, lower absorption of
fixed overhead, and difficulties encountered in first ramping down then
restarting automotive manufacturing operations, the Company estimates that it
incurred losses exceeding $1 million as a result of the strike.
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 Nine Months Ended
September 30, September 30,
1998 1997 % Change 1998 1997 % Change
------------- ------------- ------------- ------------ ----------- ------------
Furniture Group $17.0 $14.9 14% $57.3 $52.1 10%
Automotive Group 6.0 12.8 (53) 25.1 39.1 (36)
Footwear &Specialty
LeatherGroup 25.7 42.2 (39) 94.2 148.1 (36)
------------ ------------
------------ -----------
Continuing Sales 48.7 69.9 (30) 176.6 239.3 (26)
Discontinued Operations - 0.3 (100) - 3.1 (100)
============ ============ ============ ===========
Total Sales $48.7 $70.2 (31)% $176.6 $242.4 (27)%
============ ============ ============ ===========
18
The Company's net sales in the third quarter of 1998 were $48.7
million, a decrease of $21.5 million or 31% from the same period one year ago.
Year-to-date sales were $176.6 million and $242.4 million for the nine month
period in 1998 and 1997, respectively. Year-to-date sales decreased $65.8
million or 27%.
Furniture Group. Furniture Group sales during the third quarter were
$17.0 million, an increase of $2.1 million or 14% from the third quarter of
1997. Year-to-date sales were $57.3 million, an increase of $5.2 million or 10%
as compared to 1997. 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 1998.
USL, meanwhile, has substantially increased the number of new products it has
introduced at each of the last three semi-annual furniture markets, which has,
in turn enabled the Furniture Group to recover a portion of the market share
that it had lost over the last few years.
Automotive Group. Automotive Group third quarter sales were $6.0
million or $6.8 million lower than the prior year quarter. Year-to-date sales
decreased $14.0 million from the prior year to $25.1 million. These decreases
are attributable to (1) the General Motors strike which reduced shipments over
80% in July, (2) a more current orders backlog, and (3) the termination during
the Spring of 1997 of a high-volume contract. 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.
Footwear and Specialty Leather Group. Footwear and Specialty Leather
Group sales were $25.7 million during the third quarter of 1998, a decrease of
$16.5 million or 39% from the third quarter of 1997. Year-to-date sales were
$94.2 million, a decrease of $53.9 million or 36% from the comparable 1997
period. Management believes 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 was 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 recently introduced.
19
Gross Profit. Gross profit for the third quarter of 1998 was a loss of
$2.9 million, a decrease of $7.7 million from the third quarter of 1997. Gross
profit decreased primarily due to charges taken in the third quarter relating to
estimated future losses on certain existing automotive contracts with pricing
below that which the Company projects it can earn a profit ($2.2 million),
charges to increase certain insurance reserves, provisions for customer claims
and allowances, plant underutilization caused by the substantially lower volume
in the Footwear and Specialty Leather Group, and the impact of the General
Motors strike on the Automotive Group. Lower hide costs favorably affected gross
profit, partially offsetting these unfavorable variances. Year-to-date gross
profit was $4.7 million, a decrease of $10.7 million from the comparable prior
year period, due primarily to the reasons discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the third quarter of 1998 were $4.2 million
higher than the same period of 1997, and year-to-date were $3.1 million higher
than 1997. The principal reasons for these increases was a $2.6 million
provision for bad debt taken in the third quarter of 1998, primarily related to
a former automotive customer that has since been sold, and provisions to
increase insurance reserves not related to manufacturing expenses.
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
third quarter of 1998 were a $(11.1) million compared to a $(1.0) million in the
third quarter of 1997. Year-to-date FIFO EBITDA was $(10.8) million in 1998
compared to $1.6 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). During the third quarter of 1997, the Company approved a plan to sell
two of its operations: Caldwell Moser Leather Co. and Berlin Leather. Both
operations were part of the Company's Footwear and Specialty Leather Group. The
Company recorded a pretax charge of $7.0 million to reduce the book value of the
long-lived assets (property, plant, equipment and goodwill) of these operations
to their estimated aggregate fair market value less costs to sell. The Company
took Caldwell Moser off the market in January and closed the Berlin operations
in the third quarter. The assets and sales of these two operations did not
represent a material portion of the Company's total assets or sales. The Company
was not successful in selling either of these operations. As a result, Caldwell
Moser was taken off the market in January, 1998 and continues to serve as one of
the Company's ongoing operations. The Berlin operations were closed during the
third quarter of 1998.
20
Amortization of Intangible Assets. Amortization of intangible assets
was $0.8 million in the first nine months of 1998 compared to $2.9 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 partially offset by amortization of
the Company's excess reorganization value begun in the third quarter of 1998.
Interest Expense. Interest expense decreased $4.3 million during the
first nine months of 1998 from the same period in 1997. During the third quarter
of 1998, interest expense decreased $3.4 million compared to 1997. The principal
reason for these decreases is because the Company's discontinuance of accruing
interest on the Notes upon filing its bankruptcy petition on May 11, 1998. The
decrease was partially offset by the write-off of certain deferred financing
expenses in connection with the formation of the Company's pre-bankruptcy credit
facility in the first quarter of 1998.
Reorganization Expenses. The Company incurred reorganization expenses
of $6.6 million during the first nine months of 1998 related to its bankruptcy
reorganization. The reorganization expenses were made up of $3.5 million in
professional fees and a $3.1 million write-off of capitalized costs relating to
the issuance of the Notes.
Fresh Start Adjustments. As part of the Company's emergence from
bankruptcy, fresh start adjustments of $29.3 million were recorded in the third
quarter of 1998 as previously described in this section.
Income/Loss before Taxes & Extraordinary Gain. The Company recorded a
net income before taxes and extraordinary gain of $13.9 million in the third
quarter of 1998 compared to a net loss of $14.0 in the third quarter of 1997.
Year to date the Company recorded a net loss before taxes and extraordinary gain
of $7.7, an decrease of $18.7 million over the net loss recorded in the same
period of 1997.
Income Tax Provision/Benefit. . In accordance with SFAS No. 109,
"Accounting for Income Taxes", the Company recorded a tax benefit of $1.9
million in the third quarter of 1998 relating to losses subsequent to the
emergence date compared to a provision of $0.1 recorded in the third quarter of
1997. The Company recorded a benefit of $1.9 million in the first nine months of
1998 compared to recording a tax benefit of $2.4 million in 1997. From the
second quarter of 1997 to the emergence from bankruptcy, the Company stopped
recording benefit on net operating losses.
Income/Loss before Extraordinary Gain. The Company recorded net income
before extraordinary gain of $15.8 million in the third quarter of 1998 compared
to a net loss of $14.0 in the third quarter of 1997. Year to date the Company
recorded a net loss before extraordinary gain of $5.8, an decrease of $18.2
million over over the net loss recorded in the same period of 1997.
21
Extraordinary Gain. The Company recorded an extraordinary gain of $82.3
million in the third quarter of 1998 on the extinguishment of the Company's 10
1/4% Senior Notes due 2003, and the resulting creation of deferred tax
liabilities.
Net Income/Loss. Due to the factors previously discussed, the Company
had net income of $98.1 million in the third quarter of 1998, compared to a net
loss of $14.1 million during the third quarter of 1997. For the nine month
period ended September 30, 1998, net income was $76.5 million compared to a net
loss of $24.0 for the same period in 1997.
Liquidity and Capital Resources. The Company used $2.5 million of cash
for operations during the first nine months of 1998, compared with $12.5 million
during the same period of 1997. The principal reasons for the change in cash
flow were the non-payment of $13.3 million of interest due on the Notes in
January and July, 1998 and a smaller increase in accounts receivable in 1998
compared to 1997 due to lower sales volumes in 1998. Accounts receivable
decreased by $1.6 million during the first nine months of 1998 compared with a
$13.1 million increase during the same period of 1997. Days sales outstanding in
accounts receivable as of September 30, 1998 were 56 days, compared to 61 days
as of September 30, 1997. Inventories decreased approximately $8.9 million
during the first nine months of 1998 excluding the $5.4 million fresh start
inventory adjustment. The decrease was due to increased inventory turnover and
improved product quality.
Capital expenditures totaled $3.0 million during the first nine months
of 1998. This represents a increase of approximately $0.8 million from the same
period in 1997. The increased expenditures are a result of increased systems
expenditures and the replacement of machinery and equipment. Capital
expenditures in 1997 and 1998 year to date were constrained below historical
levels due to the Company's bankruptcy and reorganization proceedings.
On September 30, 1998, the Company's aggregate indebtedness was $42.2
million, consisting soley of amounts borrowed under the Credit Facility. The
Credit Facility is a $70 million facility secured by essentially all the assets
of the Company. Loan availability under the Credit Facility is based on the
Company's accounts receivable and inventory balances after certain exclusions.
Availability under the Credit Facility as of September 30, 1998 was
approximately $3.5 million, and generally fluctuates between $1 million to $4
million.
22
The $1.9 million claim submitted by Houlihan Lokey in the bankruptcy
proceeding for the unpaid portion of its advisory fees was objected to by the
informal Note Holders Committee and has not been paid. The bankruptcy court has
scheduled a hearing on the disputed claim for December 1998. The Company will be
obligated to pay any amount up to $1.9 million that the bankruptcy court
ultimately allows with respect to the claim. No assurance can be given as to
whether, when and in what amount, if any, the disputed claim will ultimately be
allowed.
At the time the Company entered into its pre-bankruptcy credit facility
in January 1998, it anticipated that it would subsequently obtain an ancillary
line of credit secured by its machinery and equipment (the "M/E 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 Line of Credit or the Canadian Credit Facility as of the date
hereof, although the Company continues to evaluate financing alternatives
involving its machinery, equipment, real property and Canadian operations.
Additionally, the Company anticipates that certain existing financial covenants
contained in the Credit Facility for December 31, 1998 require modification. The
Company and its lenders have begun preliminary discussions with respect to such
modification. No assurance can be given that the Company will obtain additional
financing, or successfully modify the financial covenants contained in the
Credit Facility or that the Company's cash flow and borrowings under the
existing Revolving Credit Facility will be sufficient to meet all of its future
liquidity requirements without such financing.
Year 2000 Compliance
Within the Company, its suppliers and its customers, there are
computer-based systems and instruments which utilize logic that was written
using two digits rather than four to define the applicable year. Such logic
could misinterpret dates beginning on January 1, 2000 as being 100 years
earlier, and cause significant data processing and accumulation errors as a
result. Such errors could, in turn, have material adverse effects on the
operations of the Company as well as those customers and suppliers with whom it
does business. The inability of computers and equipment containing computer
logic to properly recognize years beginning on or after January 1, 2000 is
referred to as "Year 2000 Noncompliance."
In 1995, the Company began an overall upgrade of its computer systems.
In 1996, the Company expanded certain aspects of this systems upgrade into a
Year 2000 compliance program. This program is designed to identify internal
systems and programs (including computer-based equipment and instrumentation)
which could pose a Year 2000 Noncompliance risk, analyze the potential impact of
noncompliance, and develop and implement remediation plans to correct any
noncompliance found. The program is also designed to identify Year 2000
Noncompliance risks among the systems utilized by the Company's key suppliers,
service providers, customers and others with whom it has a business relationship
("Key Third Parties"). Through surveys and interviews, the Company expects to
identify those Key Third Parties whose noncompliance could have a significant
adverse impact on the Company's operations, and enable it to design contingency
plans to mitigate such adverse impacts.
23
The Company has substantially completed the identification phase of its
internal assessment program. Certain systems were found to be Year 2000
noncompliant. Measures to remedy such noncompliant systems has begun, and are
expected to be substantially completed at most of the Company's facilities by
March 31, 1999, and fully completed at all facilities by the third quarter of
1999. The analysis and remediation of the Company's shop floor intrumentation
and equipment is also expected to be completed by the third quarter of 1999.
The Company has begun the initial process of
identifying Key Third Parties who pose a risk of Year 2000
Noncompliance. It expects to complete this identification
phase by March 31, 1999. Thereafter, the Company expects to
analyze the information received from such Key Third Parties,
and identify those likely to be noncompliant and with
potentially significant impact on the Company by June 30,
1999. Contingency plans for such risks will be developed and
implemented during the second half of 1999.
It is not known at this time the extent to which Key Third Parties have
addressed Year 2000 Noncompliance, either internally or among their own
suppliers, service providers, customers and others with whom they have a
business relationship. The failure by one or more Key Third Parties to
effectively remediate Year 2000 Noncompliance could have a material adverse
effect on USL, including causing products in process to be damaged or destroyed,
or causing customer orders to become substantially delayed or cancelled.
Utilities providers and single-source chemicals suppliers represent the Key
Third Parties which pose the greatest potential risk of such manufacturing
disruptions. Year 2000 Noncompliance by banks or financial service providers
could also have a material adverse effect on USL by causing it to be unable to
meet its obligations and continue operations.
The Company has not yet formulated specific contingency plans in the
event of Year 2000 Noncompliance by Key Third Parties. Such plans, however,
could conceivably include stockpiling critical manufacturing supplies,
manufacturing certain customer orders ahead of schedule, and building certain
inventories, depending on the nature and degree of risk determined in connection
with its analysis of Key Third Parties' surveys. In the case of potential
utility services disruption, contingency plans will probably include a planned
shutdown of all manufacturing operations prior to January 1, 2000. In the case
of banks and other financial services providers, contingency plans may include
prepaying certain obligations. Other contingency plans may be developed and
implemented based on the risk assessed, the potential impact and duration of
possible effects and the cost of such plans.
24
It is estimated that the costs incurred, or to be incurred in 1998 and
1999 to remediate internal Year 2000 Noncompliance, and assess Key Third
Parties' Year 2000 Noncompliance will be approximately $2.5 million, of which
approximately $1.6 million has been spent through September 30, 1998. Such
costs, however, do not include the cost of implementing contingency plans for
Key Third Parties' noncompliance, which could be significant.
The Year 2000 compliance program with respect to the Company's
Automotive Group was audited in August, 1998 by the Automotive Industry Action
Group, an independent evaluator of automotive suppliers organized by General
Motors Corporation, Ford Motor Company and Chrysler Corporation, and given a
rating of "low risk" with respect to Year 2000 Noncompliance.
25
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Amended Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code dated June 12, 1998 [Incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated July 7, 1998].
3.1 Restated Articles of Incorporation of the Company
[Incorporated by reference to Exhibit (1) to the Company's
Registration Statement on Form 8-A dated July 20, 1998].
3.2 Bylaws of the Company [Incorporated by reference to Exhibit
(2) to the Company's Registration Statement on Form 8-A dated
July 20, 1998].
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 [Incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998].
4.2 Registration Rights Agreement dated as of July 20, 1998 by and
among United States Leather, Inc. and the parties set forth on
the signature page thereto.
27.1 Financial Data Schedule of the Predecessor Company for the
period from January 1, 1998 through July 19, 1998 (EDGAR
version only)
27.2 Financial Data Schedule of the Reorganized Company for the
period from July 20, 1998 through September 30, 1998 (EDGAR
version only)
(b) Reports on Form 8-K:
(i) The Company filed a Current Report on 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.
26
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: November 12, 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)
UNITED STATES LEATHER, INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended
September 30, 1998
Exhibit Index
Exhibit No. Description
2.1 Amended Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code dated June 12, 1998 [Incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated July 7, 1998].
3.1 Restated Articles of Incorporation of the Company
[Incorporated by reference to Exhibit (1) to the Company's
Registration Statement on Form 8-A dated July 20, 1998].
3.2 Bylaws of the Company [Incorporated by reference to Exhibit
(2) to the Company's Registration Statement on Form 8-A dated
July 20, 1998].
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 [Incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998].
4.2 Registration Rights Agreement dated as of July 20, 1998 by and
among United States Leather, Inc. and the parties set forth on
the signature page thereto.
27.1 Financial Data Schedule of the Predecessor Company for the
period from January 1, 1998 through July 19, 1998 (EDGAR
version only)
27.2 Financial Data Schedule of the Reorganized Company for the
period from July 20, 1998 through September 30, 1998 (EDGAR
version only)