UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
November 22, 1999
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-12368 75-2543540
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
3847 East Loop 820 South
Fort Worth, Texas 76119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 496-4414
Page 1 of 6 Pages
ITEM 5. Other Events.
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General
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On November 22, 1999, The Leather Factory, Inc. and subsidiaries (the "Company")
entered into a Credit and Security Agreement with Wells Fargo Business Credit,
Inc. ("Wells Fargo"), pursuant to which Wells Fargo agreed to provide a credit
facility of up to $8,650,000 in debt (the "Debt Facility"). The Debt Facility
has a three-year term and is secured by all of the assets of the Company.
Proceeds of the closing of the Debt Facility in the amount of $6,979,828 were
used to pay all amounts due and owing by the Company pursuant to the Second
Restated Loan Agreement, as amended, by and between the Company and FINOVA
Capital Corporation ("FINOVA") and the subordinated debenture by and between the
Company and The Schlinger Foundation ("Schlinger"). The Company's revolving line
of credit and term loan facilities with FINOVA in the principal amounts of
$4,721,925 and $1,171,667, respectively, were satisfied in their entirety, as
well as the subordinated debenture with Schlinger of $1,000,000. Moreover, at
closing, the Company paid $50,403 to FINOVA for accrued interest and fees on the
revolving line of credit and $10,833 to Schlinger for accrued interest on the
subordinated debenture. The Company used the remaining proceeds in the amount of
$25,000 to pay certain closing and financing costs. The principal terms and
conditions of the Debt Facility are described below.
Terms of Debt
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Loan Amounts. The Debt Facility consists of a revolving line of credit
("Revolving Credit Loan") in the maximum amount of $8,500,000 and a term loan in
the principal amount of $150,000 ("Term Loan"). Key provisions of these loans
are summarized in the table below and in the following text:
Balance at Annual Rate Principal
Facility Closing of Interest1 Payments2 Maturity
- ---------------------- ----------- ------------ ----------- --------
Revolving Credit Loan3 $ 6,829,828 Prime +1/2% At Maturity 11-30-02
Term Loan $ 150,000 Prime +1/2% $30,000/mo4 5-01-00
Fees. In addition to monthly interest, the Company will pay to Wells Fargo a
maximum administration fee of $2,000 per month, letter of credit issuance fees
calculated at an annual rate of 2.0% of the aggregate outstanding balance, and a
0.5% unused line fee on the Revolving Credit Loan. The Company has also incurred
an origination fee of $25,000 and other closing costs in the amount of $30,000
due to the closing of the Debt Facility.
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1 All accrued interest is payable monthly in arrears. Interest is computed
based on the prime rate announced from time to time by Wells Fargo Bank,
N.A.
2 The Revolving Credit Loan or the Term Loan may be prepaid in part. In the
event any or all of these loans are prepaid in full prior to November 30,
2000, a termination fee equal to 3% of the amount prepaid would be incurred
and paid to Wells Fargo as part of the prepayment. This fee is reduced to
2% and 1% if prepaid before November 30, 2001 and November 30, 2002
respectively. The Company would not incur this prepayment penalty due to
the payoff of the Term Loan at the maturity date stated herein above.
3 Total borrowings under the Revolving Credit Loan cannot exceed the lesser
of: (i) $8,500,000 less the aggregate undrawn face amount of all letters of
credit issued by the Company and (ii) the sum of a certain percentage of
trade accounts receivable plus an amount not to exceed the lesser of a
certain percentage of inventory or an inventory cap. The inventory cap is
$5,000,000 at closing and continues through January 31, 2000. The inventory
cap is adjusted to $5,300,000 for the period beginning February 1, 2000 and
ending August 31, 2000. From September 2000 until maturity, the cap is
$4,500,000. Total availability calculated under the Debt Facility as of the
date of closing is $7,114,064.
4 Monthly principal payments begin January 1, 2000.
Page 2 of 6 Pages
Covenants. The terms of the Debt Facility also contain certain covenants, such
as requiring the Company to: (i) maintain certain financial ratios; (ii) pay all
federal, state and local income and property taxes when due; (iii) provide Wells
Fargo with timely information and reports; (iv) promptly notify Wells Fargo of
the violation of any law, rule, regulation, the non-compliance of which could
materially and adversely affect the Company's business or financial condition;
and (v) limit capital expenditures to $550,000 in the aggregate for the fiscal
year ending December 31, 1999 and $500,000 for fiscal years thereafter. The
Company's financial maintenance covenants include the following:
End of Each Month Minimum Debt Service Minimum Book Minimum Net
Or Period Coverage Ratio1 Net Worth2 Income3
- -------------------------- -------------------- ---------------------------------- -----------
November 30, 1999 N/A $8,450,000 N/A
Year Ending N/A $8,500,000 $275,000
December 31, 1999
January 1, 2000 through 0.6 to 1.0 Greater of (i) $50,000 less than $(50,000)
March 30, 2000 actual Book Net Worth on
December 31, 1999 or
(ii) $8,450,000
March 31, 2000 through 0.7 to 1.0 Greater of (i) actual Book Net $0
June 29, 2000 Worth on December 31, 1999 or
(ii) $8,500,000
June 30, 2000 through 0.8 to 1.0 Greater of (i) $125,000 more than $125,000
September 29, 2000 actual Book Net Worth on
December 31, 1999 or
(ii) $8,625,000
September 30, 2000 through 1.0 to 1.0 Greater of (i) $250,000 more than $250,000
December 30, 2000 actual Book Net Worth on
December 31, 1999 or
(ii) $8,750,000
Year Ending 1.2 to 1.0 Greater of (i) $500,000 more than $500,000
December 31, 2000 actual Book Net Worth on
December 31, 1999 or
(ii) $9,000,000
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1 "Debt Service Coverage Ratio" means the ratio of (i) the sum of (A) Net
Income, (B) depreciation and amortization minus (C) Capital Expenditures to
(ii) the sum of (A) Current Maturities of Long Term Debt each determined on
a consolidated basis in accordance with GAAP.
2 "Book Net Worth" means the aggregate of the common and preferred
stockholders' equity in the Borrower, determined in accordance with GAAP
and on a consolidated basis.
3 "Net Income" means fiscal year-to-date after-tax net income from continuing
operations as determined in accordance with GAAP.
Page 3 of 6 Pages
Other covenants prohibit the Company from incurring indebtedness except as
permitted by the terms of the Debt Facility, from declaring or paying cash
dividends upon any of its stock and from entering into any new business or
engaging in any business materially different from that in which the Company is
presently engaged.
New Covenants. On or before December 31, 2000, the Company and Wells Fargo
shall agree on new financial covenant levels for periods ending after such date.
Letters of Credit. The Debt Facility provides that the Company may request
Wells Fargo, in its discretion, to arrange for letters of credit to be issued
for the benefit of the Company.
Events of Default. Events of Default include any one or more of several events,
including, but not limited to: (i) the failure by the Company to pay when due
and payable any portion of the amounts to be paid pursuant to the terms of the
Debt Facility; (ii) any material adverse change that occurs in the Company's
business or financial condition; and (iii) any representation or warranty made
or deemed to be made by the Company in any document or report made or delivered
to Wells Fargo that proves to have been incorrect in any material respect.
Other Collateral. The Company and Wells Fargo also entered into a Copyright
Security Agreement (the "Copyright Security Agreement"). The Copyright Security
Agreement created security interests on the Company's copyrights securing
payment of the Debt Facility. Upon the payment and performance in full of the
Company's obligations under the Debt Facility, the liens and security interests
shall be released.
Guarantees. Full and prompt payment of all obligations under the Debt Facility
has been personally guaranteed by Mr. Wray Thompson, Chairman of the Board,
President, and Chief Executive Officer; by Mr. Ronald C. Morgan, Executive Vice
President, Chief Operating Officer, and Director; and by Mrs. Robin L. Morgan,
Vice President Administration, Assistant Secretary, and Director. The Debt
Facility provides that the above guarantors will maintain a minimum combined
ownership of stock in the Company of fifty-one percent (51%). As of November 22,
1999, the above guarantors owned 6,174,663 shares, or sixty-two and sixty-seven
one hundredths percent (62.67%), of the Company's outstanding capital stock.
ITEM 7. Financial Statements and Exhibits.
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(a) Financial Statements
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None
(b) Pro Forma Financial Information
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None
(c) Exhibits
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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.
Page 4 of 6 Pages
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Current Report on Form 8-K to be signed on its behalf
by the undersigned hereunto duly authorized.
THE LEATHER FACTORY, INC.
BY: /s/ Wray Thompson
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Wray Thompson
Chairman of the Board, President,
Chief Executive Officer, and Chief
Accounting Officer
Date: December 15, 1999
Page 5 of 6 Pages
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description
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4.1 Credit and Security Agreement dated November 22, 1999, by
and between The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Roberts,
Cushman & Company, Inc., and Hi-Line Leather & Manufacturing
Company and Wells Fargo Business Credit, Inc.
4.2 Revolving Note (Revolving Credit Loan) dated November 22,
1999, in the principal amount of $8,500,000, payable to the
order of Wells Fargo Business Credit, Inc., which matures
November 30, 2002.
4.3 Term Note dated November 22, 1999, in the principal amount
of $150,000, payable to the order of Wells Fargo Business
Credit, Inc., which matures May 1, 2000.
4.4 Copyright Security Agreement dated November 22, 1999, by and
between The Leather Factory, Inc., a Delaware corporation,
The Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Roberts, Cushman &
Company, Inc., a New York corporation, and Hi-Line Leather &
Manufacturing Company, a California corporation, and Wells
Fargo Business Credit, Inc.
Page 6 of 6 Pages