Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3847 East Loop 820 South, Ft. Worth, Texas 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by 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.
Class Shares outstanding as of May 15, 1998
- ---------------------------------------- -------------------------------------
Common Stock, par value $.0024 per share 9,853,161
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997................................. 3
Consolidated Statements of Loss
Three months ended March 31, 1998 and 1997 .......................... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997 ............................. 5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Three months ended March 31, 1998 and 1997 ............................. 6
Notes to Consolidated Financial Statements ............................. 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..........................9-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 14
SIGNATURES .............................................................. 15
EXHIBIT INDEX ...........................................................16-17
2
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
------------- -------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash $ 13,963 $ 70,496
Cash restricted for payment on revolving credit facility 355,751 319,133
Accounts receivable-trade, net of allowance for
doubtful accounts of $40,000 and $28,000
in 1998 and 1997, respectively 1,844,189 1,865,276
Inventory 7,032,041 7,279,702
Prepaid income taxes 307,766 285,970
Deferred income taxes 111,759 109,411
Other current assets 494,839 385,199
------------ ------------
Total current assets 10,160,308 10,315,187
------------ ------------
PROPERTY AND EQUIPMENT, at cost 2,561,861 2,534,839
Less-accumulated depreciation and amortization (1,583,161) (1,505,098)
------------ ------------
Property and equipment, net 978,700 1,029,741
GOODWILL and other, net of accumulated amortization of
$934,000 and $878,000 in 1998 and 1997, respectively 5,589,606 5,679,621
------------ ------------
$ 16,728,614 $ 17,024,549
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,084,750 $ 942,046
Accrued expenses and other liabilities 373,571 559,776
Notes payable and current maturities of
long-term debt 4,574,285 4,650,742
------------ ------------
Total current liabilities 6,032,606 6,152,564
------------ ------------
DEFERRED INCOME TAXES 127,477 136,611
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 2,502,658 2,602,728
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,000
shares authorized, none issued or outstanding -- --
Common stock, $0.0024 par value; 25,000,000 shares
authorized, 9,853,161 shares issued in 1998 and 1997 23,648 23,648
Paid-in capital 4,106,994 4,119,915
Less: Notes receivable - secured by common stock (238,482) (257,617)
Unearned shares held by ESOP, 51,420 and 54,262
shares in 1998 and 1997, respectively (259,510) (273,851)
Retained earnings 4,446,041 4,534,569
Accumulated other comprehensive income (12,818) (14,018)
------------ ------------
Total stockholders' equity 8,065,873 8,132,646
------------ ------------
$ 16,728,614 $ 17,024,549
============ ============
The accompanying notes are an integral part of these financial statements.
3
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF LOSS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
----------- ------------
NET SALES $ 5,710,832 $ 6,459,892
COST OF SALES 3,296,138 3,896,081
----------- -----------
Gross Profit 2,414,694 2,563,811
OPERATING EXPENSES 2,299,894 2,397,342
----------- -----------
INCOME FROM OPERATIONS 114,800 166,469
OTHER (INCOME) EXPENSE:
Interest expense 240,645 201,338
Other, net (7,761) (844)
----------- -----------
Total other (income) expense 232,884 200,494
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (118,084) (34,025)
PROVISION (BENEFIT) FOR INCOME TAXES (29,556) 2,160
----------- -----------
NET INCOME (LOSS) $ (88,528) $ (36,185)
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE $ (0.01) $ --
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution $ (0.01) $ --
=========== ===========
DIVIDENDS PAID PER COMMON SHARE $ -- $ --
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (88,528) $ (36,185)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation & amortization 133,991 125,954
Deferred financing costs 53,038 --
Deferred income taxes (12,217) (13,134)
Other 1,961 (1,623)
Net changes in operating assets and liabilities:
Accounts receivable-trade, net 21,087 (245,292)
Inventory 247,661 403,892
Income taxes (21,796) 16,709
Other current assets (109,640) 37,911
Accounts payable 142,704 260,957
Accrued expenses and other liabilities (186,205) (143,207)
----------- -----------
Total adjustments 270,584 442,167
----------- -----------
Net cash provided by operating activities 182,056 405,982
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (26,926) (98,804)
Other intangible costs -- (26,685)
----------- -----------
Net cash used in investing activities (26,926) (125,489)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 5,768,265 271,204
Payments on notes payable and long-term debt (5,885,292) (712,825)
Increase in cash restricted for payment on revolving credit facility (36,618) --
Payments received on notes secured by common stock 19,135 --
Deferred financing costs (77,153) --
----------- -----------
Net cash used in financing activities (211,663) (441,621)
----------- -----------
NET INCREASE (DECREASE) IN CASH (56,533) (161,128)
CASH, beginning of period 70,496 488,192
----------- -----------
CASH, end of period $ 13,963 $ 327,064
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 190,304 $ 198,303
Income taxes paid during the period, net of refunds 4,457 --
The accompanying notes are an integral part of these financial statements.
5
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Notes
Common Stock Receivable Accumulated
------------------- ---------- Other Total Compre-
Number Par Paid-in - Secured by Unearned Retained Comprehensive Stockholder's hensive
of Value Capital Common Stock ESOP Shares Earnings Income Equity Income
Shares (Loss)
--------- --------- ----------- ------------- ------------ ----------- ------------- ------------ ---------
BALANCE, December 31,
1996 9,853,161 $23,648 $4,130,796 $ (269,305) $ (326,184) $4,464,277 $ (295) $8,022,937
Net loss - - - - - (36,185) - (36,185) $(36,185)
Foreign currency
translation adjustment - - - - - - (3,779) (3,779) (3,779)
--------- --------- ----------- ------------ ----------- ----------- -------- ---------- --------
BALANCE, March 31, 1997 9,853,161 $23,648 $4,130,796 $ (269,305) $ (326,184) $4,428,092 $ (4,074) $ 7,982,973
========= ======= ========== =========== ========== =========== ======== ===========
---------
Comprehensive income (loss) for the three months ended March 31, 1997 $(39,964)
=========
BALANCE, December 31,
1997 9,853,161 $23,648 $4,119,915 $ (257,617) $ (273,851) $4,534,569 $ (14,018) 8,132,646
Payments received on
notes secured by
common stock
- - - 19,135 - - - 19,135
Allocation of
suspended ESOP shares
committed to be
released - - (12,921) - 14,341 - - 1,420
Net loss - - - - - (88,528) - (88,528) $(88,528)
Foreign currency
translation adjustment,
net of tax of $735 - - - - - - 1,200 1,200 1,200
--------- --------- ----------- ---------- ----------- ----------- -------- ----------
BALANCE, March 31,
1998 9,853,161 $23,648 $4,106,994 $ (238,482) $(259,510) $4,446,041 $(12,818) $8,065,873
========= ========= =========== ========== ========= ========== ======== ==========
---------
Comprehensive income (loss) for the three months ended March 31, 1998 $ (87,328)
=========
The accompanying notes are an integral part of these financial statements.
6
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly its financial position as of March 31,
1998 and December 31, 1997, and the results of operations and cash flows for the
three month periods ended March 31, 1998 and 1997. The results of operations for
the three month period are not necessarily indicative of the results to be
expected for the full fiscal year. The consolidated financial statements should
be read in conjunction with the financial statements and disclosures contained
in the Company's 1997 Annual Report on Form 10-K ("Annual Report").
2. INVENTORY
The components of inventory consist of the following:
March 31, December 31,
1998 1997
--------------- ---------------
Finished goods held for sale $ 5,744,464 $ 5,833,002
Raw materials and work in process 1,287,577 1,446,700
=============== ===============
$ 7,032,041 $ 7,279,702
=============== ===============
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended March 31,
1998 1997
----------------- ----------------
Numerator:
Net loss $ (88,528) $ (36,185)
Numerator for basic and diluted ----------------- ----------------
earnings per share (88,528) (36,185)
Denominator:
Denominator for basic and diluted
earnings per share -- weighted-average shares 9,799,404 9,788,530
Basic earnings per share $ (0.01) $ -
================= ================
Diluted earnings per share $ (0.01) $ -
================= ================
Unexercised employee and director stock options to purchase 585,000 and 516,000
shares of common stock as of March 31, 1998 and 1997, respectively, were not
included in the computations of diluted EPS because the options' exercise prices
were greater than or equal to the average market price of the common stock
during the respective periods.
Warrants (see note 9 to consolidated financial statements in the Annual Report)
to acquire 100,000 shares of common stock were not included in the computations
of diluted EPS because the exercise price was greater than the average market
price of the common stock during the quarter ended March 31, 1998.
The 13% convertible debt (see note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted earnings per share
because the interest cost (net of tax) per assumed converted share was more than
basic earnings per share and, therefore, the effect would be antidilutive.
7
4. IMPACT OF NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 130, Reporting Comprehensive Income. SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's net
income or stockholders' equity. Statement 130 requires items of other
comprehensive income such as unrealized gains or losses on available-for-sale
securities, foreign currency translation adjustments, and minimum pension
liability adjustments to be included in comprehensive income. The Company's
foreign currency translation adjustments which previously were reported
separately in stockholders' equity have been included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
131 establishes annual and interim reporting requirements for an enterprise's
operating segments and related disclosures about its products and services,
geographical areas in which it operates and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997, and therefore, the
Company will adopt the new requirements retroactively in 1998 if applicable. The
Company operates in one broad industry and historically has not identified
separate segments of its business. Management has not completed its review of
Statement 131, but does not anticipate that the adoption of this statement will
have a significant effect on the Company's disclosures.
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
- -------
The Leather Factory, Inc. (the "Company") is the premier distributor of
leather and leathercraft products to over 40,000 customers ranging from the
individual hobbyist to large retail chains. Customer groups served include:
wholesale distributors, tack and saddle shops, shoe-findings customers,
institutions, prisons and prisoners, dealer stores, western stores, craft stores
and craft store chains, hat manufacturers and distributors, other large volume
purchasers, manufacturers, and retailers. The Company's products are distributed
primarily through twenty-two sales/distribution units in the United States and
Canada or through its subsidiary, Roberts, Cushman & Company, Inc. ("Cushman"),
in New York. Cushman manufactures and distributes; hat trims in braids, leather,
and woven fabrics; small finished leather goods, such as, cigar cases, picture
frames, wallets and other accessories.
Results of Operations
- ---------------------
Income Statement Comparison
The following table sets forth, for the interim periods indicated,
certain items from the Company's Consolidated Statements of Loss expressed as a
percentage of net sales:
Quarterly Period Ended
March 31,
1998 1997
---------- ----------
Net sales 100.0% 100.0%
Cost of sales 57.7 60.3
------ -----
Gross profit 42.3 39.7
Operating expenses 40.3 37.1
------ -----
Income from operations 2.0 2.6
Interest expense, net 4.1 3.1
------ -----
Loss before income taxes (2.1) (0.5)
(Benefit) provision for income taxes (0.5) 0.0
------ -----
Net loss (1.6)% (.5)%
====== =====
Revenues
Net sales decreased 11.6% to $5,710,832 during the quarter ended March
31, 1998 from $6,459,892 generated in the first quarter last year. Decreased
unit sales directly to and through manufacturers and distributors to the retail
craft and western markets account for approximately 40% and 37%, respectively of
the decline. Negative trends have persisted since mid 1995 in these markets
generally because of weak overall industry conditions. It appears the rate of
decline in sales of western-related products has slowed and may be stabilizing
yet long term trends are difficult to predict at this point.
9
The remaining decline in sales is a result of strategic merchandising
decisions implemented by the Company. Prices were selectively raised where
appropriate or various low margin products are being eliminated from the
Company's line entirely. These merchandising decisions account for approximately
$176,000 of the decline in sales but have had a positive impact on cash flows
and operating results.
The sales of the Company are not seasonal and the quarter to quarter
comparisons over the past year reflect rather uniform declines of ten percent on
average. When adjusted for the planned reductions mentioned above, the first
quarter decline in sales due to continued negative external forces was
approximately 8.9%. The Company is working diligently to reverse these negative
trends through emphasizing its growing markets and introduction of new products.
The first quarter reduction in the adjusted decline rate was achieved
through modest gains in the Company's export sales, finished leather goods
sales, and sales to the saddle and tack industry. During the second quarter, the
Company is implementing a new export financing program to encourage continued
growth in its export sales, has introduced new saddle and tack hardware that
sold out its first week in stock, is planning the opening of its 23rd
sales/distribution unit in Portland this fall, and is preparing for the first
national sales meeting of the Company's managers from around the country held in
over two years. Management believes the Company can gradually offset the
declines in the craft and western markets through these programs such that sales
should be flat by the end of 1998 in spite of these conditions and is poised to
take full advantage of opportunities if and when conditions improve in these
markets.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 57.7% for the first
quarter of 1998 as compared to 60.3% for the same quarter in 1997. This 2.6%
reduction resulted from the Company's strategic efforts to selectively increase
prices and eliminate low margin products as discussed above.
The lower relative cost of sales percentage meant that gross profit as
a percentage of sales improved to 42.3% for the three months ended March 31,
1998 as compared to only 39.7% for the same period in 1997. The Company's
strategic goals include emphasis on improving gross margins so when sales are
off 11.6% as the Company's were during the first quarter, gross profit declines
by only a fraction of that amount. This was the case for 1998's first quarter as
gross profit dollars decreased $149,117 compared to 1997's first quarter or only
5.8%.
Operating expenses decreased $97,448 or 4.1% to $2,299,894 during the
first quarter of 1998 from $2,397,342 during the quarter ended March 31, 1997.
The decrease in the dollar amount of operating expenses between the two quarters
resulted primarily from lower freight cost, a decrease in bad debt write-offs
due to tighten credit policies, and a reduction in non-recurring professional
fees with regard to the search for financing sources in 1997.
Additional reductions in payroll related expense were made during the
first quarter, but these savings were reinvested in redesigning the Company's
sales strategy that should pay a return in the remainder of the year. This
strategy included reorganizing the management of our sales/distribution units
into geographical regions, delaying the 1998 catalog until we had time to listen
to our customers, and putting our key people on the road to personally visit
customers. Each region of the country is now headed by a senior manager who has
extensive knowledge of our products and the leathercraft industry. These region
managers are on the road a substantial amount of time, working with our field
managers in order to be more attentive to our customer's needs.
10
Other (Income) Expense
Other expenses increased $32,390 or 16.2% to $232,884 for the first
quarter of 1998 from $200,494 during the same quarter in 1997. This increase was
primarily due to higher interest expense resulting from the amortization of
deferred financing costs offset somewhat by lower actual interest expense. The
lower actual interest expense resulted from reduced levels of indebtedness but
was partly mitigated by a higher effective interest rate from that available to
the Company during the first quarter of 1997.
Net Loss
The net loss of the Company increased $52,343 to a net loss of $88,528
during the first quarter compared to a net loss of $36,185 for the quarter a
year ago. The increased loss resulted from the factors noted above regarding
sales, gross profit, operating and other expenses.
Capital Resources and Liquidity
- -------------------------------
The primary sources of liquidity and capital resources during the first
quarter of 1998 were funds provided by operating activities in the amount of
$182,056 and borrowings on the Company's revolving credit facility with FINOVA
Capital Corporation ("FINOVA").
With the decline in sales, the Company is reducing its investment in
accounts receivable and inventory which along with non-cash expenses for
depreciation, amortization and deferred financing cost continued to give rise to
significant operating cash flows despite the essentially flat operating results
for the quarter ended March 31, 1998. Accounts receivable decreased to
$1,844,189 and inventory decreased to $7,032,041 at March 31, 1998 from
$1,865,276 and $7,279,702, respectively, at December 31, 1997. The sum of the
cash flows from these reductions and all non-cash expenses included in the net
loss for the quarter totaled $445,521.
Inventory turned at an annual rate of only 1.84 times during the first
quarter of 1998, which is below the 1997 first quarter rate of 2.07 times and
the ratio of 1.98 times for all of 1997. This decrease in the turn rate
indicates that further reductions in inventory are needed as of March 31, 1998
for the current level of sales. The implementation of new information systems in
the Company's Fort Worth location is providing useful information that will
assist in monitoring of inventory levels for the rest of 1998. This same system
is currently being installed in the San Antonio location and is scheduled to be
installed in all of the Company's sales/distribution units by the end of the
year.
The revolving credit facility with FINOVA is based upon the level of
the Company's accounts receivable and inventory. At March 31, 1998 and December
31, 1997, the Company had additional availability on the revolving credit
facility of approximately $468,500 and $377,000, respectively. As the Company's
sales and operations expand requiring larger investments in accounts receivable
and inventory, the Company could have almost $3,000,000 in additional funds
available under the revolving credit facility.
11
As discussed in the Company's previously filed, 1997 Annual Report on
Form 10-K, the FINOVA loan and security agreement dated November 21, 1997
contains certain financial covenants which include a requirement to maintain: 1)
a certain level of earnings before interest, taxes, depreciation and
amortization ("EBITDA"); 2) a senior debt service coverage ratio; and 3) a total
debt service coverage ratio. The start date for measuring these covenants was
originally, January 1, 1998, with the first quarterly measurement period ending
on March 31, 1998.
The Company's strategic objectives have developed slower than
projected, and therefore, EBITDA in January and February were below the target
amounts. Under the EBITDA based formulas, the Company did not meet the required
ratios in January or February despite strong actual operating cash flows. The
Company did meet the ratios in March, but not for the quarterly measurement
period then ended. The Company would have significantly exceeded the required
ratios if actual operating cash flows plus interest and taxes had been used
instead of EBITDA for the starting point of the calculations.
Prior to the March 31 measurement date, the Company requested that
FINOVA delay the measurement start date until March 1, 1998 and amend the
required EBITDA thresholds for 1998 to account for the January and February
shortfalls. FINOVA agreed to the Company's request. The Company and FINOVA
entered into an Amendment to the Loan and Security Agreement dated, May 13,
1998, effective as of March 31, 1998. The amendment deletes the original start
date, first quarterly measurement period, and the original EBITDA requirements
for 1998. These were replaced as follows:
Start Date: March 1, 1998
First Quarterly
Measurement Date: June 30, 1998
EBITDA Requirement for
the first six months of 1998: $500,000
the second six months of 1998: $740,000
The AMENDMENT TO LOAN AND SECURITY AGREEMENT dated, May 13, 1998, is
----------------------------------------
filed as Exhibit 4.15 to this Form 10-Q.
The largest uses of cash beyond debt payments in the first quarter of
1998 were for the payment of deferred financing costs related to the FINOVA
transaction closed on November 21, 1997 and capital expenditures. The deferred
financing cost paid during the quarter totaled $77,153, and cash used for
capital expenditures totaled $26,926. The capital expenditures principally
relate to the new computer system installed in Fort Worth, and the warehouse
fixtures purchased in the move of the Company's Tampa, Florida
sales/distribution unit.
The Company believes that the current sources of liquidity and capital
resources will be sufficient to fund current operations and the opening of new
sales/distribution units. In 1998, the funding for the opening of new units is
expected to be provided by operating leases, cash flows from operating
activities, and the Company's Revolving Credit Loan with FINOVA. In addition,
the Company anticipates funding for completion of the computer installation in
the remaining locations to be provided by capital leases.
12
Cautionary Statement
- --------------------
The disclosures under "-Results of Operations"; "-Capital Resources and
Liquidity"; and in the Notes to Consolidated Financial Statements as provided
elsewhere herein contain forward-looking statements and projections of
management. There are certain important factors which could cause results to
differ materially than those anticipated by some of the forward-looking
statements. Some of the important factors which could cause actual results to
differ materially from those in the forward-looking statements include, among
other things: changes from anticipated levels of sales, whether due to future
national or regional economic and competitive conditions, including, but not
limited to, retail craft buying patterns, possible negative trends in the craft
and western retail markets, customer acceptance or not of existing and new
products, and pricing pressures due to competitive industry conditions.
Additional factors that may result in different actual results include:
increased prices for leather, which is a world-wide commodity, that can not be
passed on to customers for some reason, change in tax rates, change in interest
rates, change in the commercial banking environment, problems with the
importation of the products which the Company buys in 14 countries around the
world, including, but not limited to, transportation problems or changes in the
political climate of the countries involved, including the maintenance by said
countries of Most Favored Nation status with the United States of America, and
other uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company.
13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
A list of exhibits required to be filed as part of this report is set
forth in the Exhibit Index which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K
-------------------
On February 6, 1998, the Company filed a Current Report on Form 8-K of
The Leather Factory, Inc. (Commission file No. 1-12368) to report the
refinancing of all of its indebtedness owed to Nationsbank of Texas, N.A. on a
long-term basis with new lenders on November 21, 1997. The report discloses the
terms and conditions of its New Senior Debt Facility with FINOVA Capital
Corporation and its New Subordinated Debenture to the Schlinger Foundation .
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: May 15, 1998 /s/ Wray Thompson
-----------------
Wray Thompson
Chairman of the Board, President,
and Chief Executive Officer
Date: May 15, 1998 /s/ Anthony C. Morton
---------------------
Anthony C. Morton
Chief Financial Officer,
Treasurer and Director
(Chief Accounting Officer)
15
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of The Leather Factory, Inc.,
filed as Exhibit 3.1 to the Registration Statement on Form
SB-2 of The Leather Factory, Inc. (Commission File No.
33-81132) filed with the Securities and Exchange Commission on
July 5, 1994, and incorporated by reference herein.
3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to
the Registration Statement on Form SB-2 of The Leather
Factory, Inc. (Commission File No. 33-81132) filed with the
Securities and Exchange Commission on July 5, 1994, and
incorporated by reference herein.
4.1 Sixth Amendment to Second Restated Loan Agreement effective as
of April 30, 1997, by and between The Leather Factory, Inc., a
Delaware Corporation, and NationsBank of Texas, N.A., filed as
Exhibit 4.14 to the Quarterly Report on Form 10-Q of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with
the Securities and Exchange Commission on May 15, 1997, and
incorporated by reference herein.
4.2 Forbearance Agreement effective as of August 31, 1997, by and
between The Leather Factory, Inc., a Delaware Corporation, and
NationsBank of Texas, N.A., filed as Exhibit 4.15 to the
Quarterly Report on Form 10-Q of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and
Exchange Commission on November 14, 1997, and incorporated by
reference herein.
4.3 Loan and Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation, filed as Exhibit 4.1 to the Current
Report on Form 8-K of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference
herein.
4.4 Revolving Note (Revolving Credit Loan) dated November 21,
1997, in the principal amount of $7,000,000, payable to the
order of FINOVA Capital Corporation, which matures December 1,
1999 filed as Exhibit 4.2 to the Current Report on Form 8-K of
The Leather Factory, Inc. (Commission File No. 1-12368) filed
with the Securities and Exchange Commission on February 6,
1998, and incorporated by reference herein.
4.5 Term Loan A Note (Term Loan A) dated November 21, 1997, in the
principal amount of $400,000, payable to the order of FINOVA
Capital Corporation, which matures December 1, 1999 filed as
Exhibit 4.3 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on February 6, 1998, and
incorporated by reference herein.
4.6 Term Loan B Note (Term Loan B) dated November 21, 1997, in the
principal amount of $236,000, payable to the order of FINOVA
Capital Corporation, which matures December 1, 1999 filed as
Exhibit 4.4 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on February 6, 1998, and
incorporated by reference herein.
4.7 Term Loan C Note (Term Loan C) dated November 21, 1997, in the
principal amount of $1,500,000, payable to the order of FINOVA
Capital Corporation, which matures December 1, 1999 filed as
Exhibit 4.5 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on February 6, 1998, and
incorporated by reference herein. .
4.8 Subordination Agreement dated November 21, 1997, by and
between FINOVA Capital Corporation, The Schlinger
Foundation, The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Hi-Line
Leather & Manufacturing Company, a California corporation,
and Roberts, Cushman & Company, Inc., a New York corporation
filed as Exhibit 4.6 to the Current Report on Form 8-K of
The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(CONTINUED)
Exhibit
Number Description
------- -----------
4.9 Pledge Agreement dated November 21, 1997, by and between
Ronald C. Morgan and Robin L. Morgan and FINOVA Capital
Corporation filed as Exhibit 4.7 to the Current Report on Form
8-K of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on February
6, 1998, and incorporated by reference herein.
4.10 Patent Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.8 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
4.11 Trademark Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.9 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
4.12 Copyright Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.10 to the Current
Report on Form 8-K of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference
herein.
4.13 Promissory Note (Subordinated Debenture) dated November 14,
1997, in the principal amount of $1,000,000, payable to the
order of The Schlinger Foundation, which matures December 1,
1999 filed as Exhibit 4.11 to the Current Report on Form 8-K
of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on February
6, 1998, and incorporated by reference herein.
4.14 Pledge and Security Agreement dated November 14, 1997, by and
between The Schlinger Foundation and J. Wray Thompson, Sr.
filed as Exhibit 4.12 to the Current Report on Form 8-K of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with
the Securities and Exchange Commission on February 6, 1998,
and incorporated by reference herein.
*4.15 Amendment to Loan and Security Agreement dated May 13, 1998,
by and between The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Hi-Line
Leather & Manufacturing Company, a California corporation,
Roberts, Cushman & Company, Inc., a New York corporation,
and FINOVA Capital Corporation effective as of March 31,1998.
21.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the
1995 Annual Report on Form 10-KSB of The Leather Factory, Inc.
(Commission File No. 1-12368), filed with the Securities and
Exchange Commission on March 28, 1996, and incorporated herein
by reference.
*27.1 Financial Data Schedule
------------
*Filed herewith.
17
EXHIBIT 4.15
AMENDMENT TO LOAN AND SECURITY AGREEMENT
---------------------------------------
This AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated
as of May 13, 1998, is among THE LEATHER FACTORY, INC., a Delaware corporation,
THE LEATHER FACTORY, INC., a Texas corporation, THE LEATHER FACTORY, INC., an
Arizona corporation, HI-LINE LEATHER & MANUFACTURING COMPANY, a California
corporation and ROBERTS, CUSHMAN & COMPANY, INC., a New York corporation
(hereinafter referred to individually as "Borrower" and collectively as
"Borrowers"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA").
R E C I T A L S
---------------
A. Borrowers and FINOVA are parties to a certain Loan and Security
Agreement dated as of November 21, 1997, as amended (the "Loan Agreement").
B. Borrowers and FINOVA desire to amend the Loan Agreement to make
certain changes in the covenants and to correct certain matters, all as set
forth below.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and subject to the terms and conditions hereof, Borrowers and FINOVA
agree as follows:
1. Definitions. All capitalized terms used but not elsewhere defined
herein shall have the respective meanings ascribed to such terms in the Loan
Agreement, as amended by this Amendment.
2. Amendments to Loan Agreement. Section 6.1.13 (Financial Covenants)
of the Schedule to the Loan Agreement is hereby amended as set forth below:
(a) EBITDA is hereby deleted in its entirety and the
following is substituted in lieu thereof:
EBITDA. Borrower shall maintain Earnings Before
Interest, Taxes, Depreciation and Amortization of not less
than (i) Five Hundred Thousand and No/100 Dollars ($500,000)
for the first six month period of the first Loan Year, (ii)
Seven Hundred Forty Thousand and No/100 Dollars ($740,000) for
the second six month period of the first Loan Year, (iii) Nine
Hundred Thousand and No/100 Dollars ($900,000) for the first
six month period of each Loan Year thereafter and (iv) One
Million Fifty Thousand and No/100 Dollars ($1,050,000) for the
second six month period of each Loan Year thereafter.
(b) Senior Debt Service Coverage Ratio is hereby deleted in
its entirety and the following is substituted in lieu thereof:
Senior Debt Service Coverage Ratio. As of the last
day of each calendar quarter ended March 31, June 30,
September 30 or December 31 commencing with the calendar
quarter ended June 30, 1998, Borrower's Operating Cash
Flow/Actual for the consecutive 12-month period ending as of
such last day must be at least 1.35 times the amount necessary
to meet Borrower's Senior Contractual Debt Service for such
12-month period; provided however, that, with respect to the
calculations set forth herein for the period from March 1,
1998 through December 31, 1998, Borrower's Operating Cash
Flow/Actual and Senior Contractual Debt Service shall be
determined beginning as of March 1, 1998 (the "Start Date")*
and be measured as follows: (x) the time period from the Start
Date through June 30, 1998, shall be for such amounts for such
period, (y) the time period from the Start Date through
September 30, 1998, shall be for such amounts for such period,
and (z) the time period from the Start Date through December
31, 1998, shall be for such amounts for such period; and,
provided further, that all such determinations shall be made
on a consolidated basis.
(c) Total Debt Service Coverage Ratio is hereby deleted in its
entirety and the following is substituted in lieu thereof:
Total Debt Service Coverage Ratio. As of the last day
of each calendar quarter ended March 31, June 30, September 30
or December 31 commencing with the calendar quarter ended June
30, 1998, Borrower's Operating Cash Flow/Actual for the
consecutive 12-month period ending as of such last day must be
at least 1.10 times the amount necessary to meet Borrower's
Total Contractual Debt Service for such 12-month period;
provided however, that, with respect to the calculations set
forth herein for the period from March 1, 1998, through
December 31, 1998, Borrower's Operating Cash Flow/Actual and
Total Contractual Debt Service shall be determined beginning
as of the Start Date and be measured as follows: (x) the time
period from the Start Date through June 30, 1998, shall be for
such amounts for such period, (y) the time period from the
Start Date through September 30, 1998, shall be for such
amounts for such period and (z) the time period from the Start
Date through December 31, 1998, shall be for such amounts for
such period; and, provided further, that all such
determinations shall be made on a consolidated basis.
3. Conditions to Effectiveness. The effectiveness of this Amendment
shall be subject to the satisfaction of all of the following conditions in a
manner, form and substance satisfactory to FINOVA:
(a) Representations and Warranties. All of the representations
and warranties of Borrowers set forth in the Loan Documents shall be
true and correct in all material respects.
(b) Approvals. The approval and/or consent shall have been
obtained from all persons whose approval or consent is necessary or
required to enable Borrowers to enter into this Amendment and the
documents delivered in connection herewith and therewith and to perform
its obligations hereunder and thereunder;
(c) Material Adverse Change. No event shall have occurred
since December 31, 1997 which has had or reasonably could be expected
to have a material adverse effect.
- ------------------------------
* NOTE: The definition of Start Date should be modified to correspond with
the relevant fiscal quarter in which the closing occurs.
2
(d) Performance; No Default. Each Borrower shall have
performed and complied with all agreements and conditions contained in
the Loan Documents to be performed by or complied with by such Borrower
prior to the date hereof, and no Event of Default then shall exist.
(e) Proceedings and Documents. All corporate and other
proceedings in connection with the execution and delivery of this
Amendment by Borrowers shall be satisfactory to FINOVA, and FINOVA
shall have received all such counterpart originals or certified or
other copies of evidence of such as FINOVA may request.
(f) Payment of Fees and Expenses. Borrowers shall have paid
all fees and expenses of FINOVA incurred in connection with this
Amendment, including, without limitation, (i) attorneys' fees and
expenses and (ii) $3,000 amendment fee.
4. References. From and after the Effective Date, all references in the
Loan Agreement to (i) the "Loan and Security Agreement" shall be deemed to refer
to the Loan Agreement as amended hereby and (ii) a term defined in the Loan
Agreement shall be deemed to refer to such deferred term as amended by this
Amendment.
5. Representations and Warranties.
(a) Each Borrower hereby confirms to FINOVA that the
representations and warranties set forth in Section 5 of the Loan
Agreement, as amended by this Amendment, are true and correct in all
material respects as of the date hereof, and shall be deemed to be
remade as of the date hereof.
(b) Each Borrower represents and warrants to FINOVA that:
(i) such Borrower has full power and authority to
execute and deliver this Amendment and to perform such
Borrower's obligations hereunder,
(ii) upon the execution and delivery hereof, this
Amendment will be valid, binding and enforceable upon such
Borrower in accordance with its terms,
(iii) the execution and delivery of this Amendment
does not and will not contravene, conflict with, violate or
constitute a default under (A) the Loan Agreement, (B) any
Loan Document, (C) any applicable law, rule, regulation,
judgment, decree or order or any agreement, indenture or
instrument to which such Borrower is a party or is bound or
which is binding upon or applicable to all or any portion of
such Borrower's property,
(iv) no Event of Default exists,
(v) such Borrower's property is free and clear of all
Liens other than Permitted Liens,
(vi) such Borrower has no Indebtedness except (A)
such Borrower's Obligations and (B) Subordinated Debt,
(vii) all balance sheets, all statements of
operations and of changes in financial position, and other
financial data which have been or shall hereafter be furnished
to FINOVA for the purposes of or in connection with this
Amendment have been and will be prepared in accordance with
GAAP consistently applied throughout the periods involved and
do and will present fairly the financial condition of the
entities involved as of the dates thereof and the results of
their operations for the periods covered thereby, and
3
(viii) no material litigation (including, without
limitation, derivative actions), arbitrations, governmental
investigation or proceeding or inquiry shall, on the date
hereof, be pending which was not previously disclosed in
writing to FINOVA and no material adverse development shall
have occurred in any litigation (including, without
limitation, derivative actions), arbitration, government
investigations, or proceeding or inquiry previously disclosed
to FINOVA in writing.
6. Costs and Expenses. Borrowers agree to reimburse FINOVA for all fees
and expenses incurred in the preparation, negotiation and execution of this
Amendment, including, without limitation, the reasonable fees and expenses of
counsel for FINOVA.
7. No Further Amendments; Ratification of Liability. Except as amended
hereby, the Loan Agreement and each of the other Loan Documents shall remain in
full force and effect in accordance with their respective terms. Each Borrower
hereby ratifies and confirms its liabilities, obligations and agreements under
the Loan Agreement and the other Loan Documents, all as amended by this
Amendment, and the Liens created thereby, and acknowledges that (i) it has no
defenses, claims or set-offs to the enforcement by FINOVA of such liabilities,
obligations and agreements, (ii) FINOVA has fully performed all obligations to
Borrowers which it may have had or has on and as of the date hereof and (iii)
other than as specifically set forth herein, FINOVA does not waive, diminish or
limit any term or condition contained in the Loan Agreement or the other Loan
Documents. FINOVA's agreement to the terms of this Amendment shall not be deemed
to establish or create a custom or course of dealing among FINOVA and Borrowers.
8. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.
9. Further Assurances. Each Borrower covenants and agrees that it will
at any time and from time to time do, execute, acknowledge and deliver, or will
cause to be done, executed, acknowledged and delivered, all such further acts,
documents and instruments as reasonably may be required by FINOVA in order to
effectuate fully the intent of this Amendment.
10. Governing Law. This Amendment, including without limitation
enforcement of the obligations, shall be interpreted in accordance with the
internal laws (and not the conflict of laws rules) of the State of Arizona
governing contracts to be performed entirely within such state.
11. Severability. If any term or provision of this Amendment or the
application thereof to any party or circumstance shall be held to be invalid,
illegal or unenforceable in any respect by a court of competent jurisdiction,
the validity, legality and enforceability of the remaining terms and provisions
of this Amendment shall not in any way be affected or impaired thereby, and the
affected term or provision shall be modified to the minimum extent permitted by
law so as most fully to achieve the intention of this Amendment.
12. Captions. The captions in this Amendment are inserted for
convenience of reference only and in no way define, describe or limit the scope
or intent of this Amendment or any of the provisions hereof.
13. Successors. This Amendment shall be binding upon each Borrower and
FINOVA and their respective representatives, successors and assigns, and shall
inure to the sole benefit of each Borrower and FINOVA and their respective
representatives, successors and assigns.
14. Effective Date. Upon execution by each of the parties hereto, the
amendments herein shall be deemed to take effect as of March 31, 1998.
[remainder of this page intentionally left blank]
4
IN WITNESS WHEREOF, this Amendment has been executed and delivered by
each of the parties hereto by a duly authorized officer of each such party on
the date first set forth above.
THE LEATHER FACTORY, INC., a Delaware corporation, THE
LEATHER FACTORY, INC., a Texas corporation, THE LEATHER
FACTORY, INC., an Arizona corporation, HI-LINE LEATHER &
MANUFACTURING COMPANY, a California corporation, and ROBERTS
CUSHMAN & COMPANY, INC., a New York corporation
By: /s/Anthony C. Morton
-----------------------------------------
Name: Anthony C. Morton
Title: Chief Financial Officer & Treasurer
FINOVA CAPITAL CORPORATION, a Delaware corporation
By: /s/Kenneth Sepp
-----------------------------------------
Name: Kenneth Sepp
Title: V.P.
EXHIBIT 27.1