<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended:
June 30, 1996
-------------
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: 33-64142
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.)
1110 N. Old World Third Street, #400, Milwaukee, WI 53203
--------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-1040
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Shares Outstanding
Class at June 30, 1996
-------------- ------------------
Common Stock, 100
$.01 par value
As of June 30, 1996, there was no public market for the Company's common
stock.
<PAGE>
UNITED STATES LEATHER, INC.
---------------------------
INDEX
-----
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements (Unaudited)
Consolidated Condensed Statements of Operations............................................. 3
Consolidated Condensed Balance Sheets....................................................... 4
Consolidated Condensed Statements of Cash Flows............................................. 5
Notes to Consolidated Condensed Financial Statements........................................ 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 9
PART II - OTHER INFORMATION AND SIGNATURES
Item 6 Exhibits and Reports on Form 8-K............................................................... 21
Signatures............................................................................................ 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM I - Financial Statements
- -----------------------------
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
3 Months Ended June 30, 6 Months Ended June 30,
------------------------ -------------------------
1996 1995 1996 1995
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 81,010 $ 93,658 $ 160,082 $ 197,478
Cost of sales 77,715 80,088 145,421 167,872
-------------------------------------------------------
Gross profit 3,295 13,570 14,661 29,606
Selling, general and administrative expenses 6,156 6,261 12,265 12,401
Restructuring expenses 2,468 - 2,468 -
Amortization of intangible assets 1,245 794 2,160 1,588
-------------------------------------------------------
Income (loss) from operations (6,574) 6,515 (2,232) 15,617
Interest expense 4,295 4,513 8,613 9,009
Other (income) expense 159 - 159 -
-------------------------------------------------------
Income (loss) before taxes and extraordinary item (11,028) 2,002 (11,004) 6,608
Income tax provision (credit) (3,732) 1,038 (3,406) 3,090
-------------------------------------------------------
Net income (loss) before extraordinary item (7,296) 964 (7,598) 3,518
Extraordinary item, net of tax - - - 417
-------------------------------------------------------
Net income (loss) $ (7,296) $ 964 $ (7,598) $ 3,935
=======================================================
Per Common Share Data:
Net income (loss) before extraordinary item $ (72,960) $ 9,640 $ (75,980) $ 35,180
Extraordinary item - - - 4,170
-------------------------------------------------------
Net income (loss) per Common Share $ (72,960) $ 9,640 $ (75,980) $ 39,350
=======================================================
Weighted average Common Shares outstanding 100 100 100 100
=======================================================
</TABLE>
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1996 1995
----------- ---------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash $ 1,971 $ 4,614
Accounts receivable, less allowances of $4,974 and $3,924 44,330 44,603
Inventories 62,295 73,886
Prepaid expenses and other 1,882 1,441
Refundable income tax 3,340 572
-----------------------------------
Total current assets 113,818 125,116
Property, plant and equipment, net 47,445 48,124
Goodwill, net of amortization of $23,648 and $22,115 102,955 104,868
Other 7,366 7,886
-----------------------------------
Total assets $ 271,584 $ 285,994
===================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 762 $ 175
Revolving credit facility 23,326 26,610
Payable to bank 3,327 5,025
Accounts payable 8,260 10,367
Accrued liabilities 13,972 13,003
Income taxes payable - 312
Deferred income taxes 4,699 4,699
-----------------------------------
Total current liabilities 54,346 60,191
Long-term debt, less current maturities 130,104 130,145
Deferred income taxes 7,423 7,423
Other long-term liabilities 6,114 6,970
Stockholder's Equity:
Preferred Stock, $.01 par value - 5,000,000 shares authorized,
no shares issued - -
Common Shares:
Common Stock, voting, $.01 par value - 35,000,000
shares authorized, 100 shares issued 1 1
Additional paid-in-capital 92,344 92,344
Cumulative translation adjustment (212) (192)
Accumulated deficit (18,536) (10,888)
-----------------------------------
Total stockholder's equity 73,597 81,265
-----------------------------------
Total liabilities and stockholder's equity $ 271,584 $ 285,994
===================================
</TABLE>
4
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
---------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $ (7,598) $ 3,935
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation and amortization 5,856 4,850
Extraordinary item - (417)
Noncash interest expense 720 731
Change in assets and liabilities,
net of effect of acquisition:
Accounts receivable 273 (2,898)
Inventories 11,591 (825)
Prepaid expenses and other (427) 563
Accounts payable (2,107) (2,098)
Accrued liabilities 969 (2,628)
Income taxes payable (3,080) 313
Other long-term liabilities (300) (1,059)
------------------------------
Net cash provided by operating
activities 5,897 467
------------------------------
Cash Flows from Investing Activities
Capital expenditures (3,040) (4,899)
Acquisition of A.R. Clarke & Co.,
Limited - (4,848)
Purchase of software license (387) -
------------------------------
Net cash used in investing activities (3,427) (9,747)
------------------------------
Cash Flows from Financing Activities:
Payments of revolving credit facility (45,412) (37,695)
Borrowings under revolving credit
facility 42,128 49,701
Net change in payable to bank (1,698) (717)
Purchase of senior notes - (3,280)
Payment of long-term debt (61) (94)
Payment of common stock dividend (50) (1,173)
------------------------------
Net cash provided (used) by financing
activities (5,093) 6,742
------------------------------
Effect of Exchange Rate Changes on Cash (20) (111)
------------------------------
Net increase in cash (2,643) (2,649)
Cash, beginning of period 4,614 4,216
------------------------------
Cash, end of period $ 1,971 $ 1,567
==============================
Supplemental cash flow disclosures:
Interest paid $ 7,996 $ 8,465
Income taxes paid $ 865 $ 3,784
</TABLE>
5
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION:
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all required disclosures have
been presented and all necessary adjustments (consisting only of normal
recurring adjustments) have been included to fairly present the results of
operations, financial position and cash flows of United States Leather, Inc.
(the "Company"). These consolidated condensed financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
(2) NET INCOME PER COMMON SHARE:
Net income per Common Share is calculated by dividing net income available for
Common Shares by the weighted average of Common Shares outstanding during the
period.
<TABLE>
<CAPTION>
<S> <C> <C>
(3) INVENTORIES:
Inventories consist of the following: June 30, December 31,
1996 1995
At lower of cost, using the first-in, first-out (FIFO) ------- ------------
cost method or market:
Raw materials and supplies $15,014 $18,367
Work in process 24,951 32,549
Finished goods 26,626 29,716
------- -------
Total FIFO inventories 66,591 80,632
Difference between FIFO and LIFO cost
of inventories (5,096) (6,746)
------- -------
Total LIFO inventories $62,295 $73,886
======= =======
</TABLE>
6
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONT'D)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(4) REPURCHASE OF SENIOR NOTES
The Company repurchased Senior Notes with a face value of $4.0 million during
the first quarter of 1995, resulting in an extraordinary gain of approximately
$0.4 million, net of tax. The Company may repurchase additional Senior Notes
through privately negotiated open market purchases, to the extent it deems it
advantageous to do so.
(5) PURCHASE OF A.R. CLARKE & CO., LIMITED
On January 30, 1995, the Company purchased substantially all of the non-cash
assets of A.R. Clarke & Co., Limited of Toronto, Canada for approximately $4.9
million, plus the assumption of certain liabilities approximating $0.8 million.
This acquisition was accounted for under the purchase method of accounting.
There was not a material amount of goodwill arising out of the acquisition. The
purchase was financed through borrowings under the Revolving Credit Facility,
which was amended and restated in the first quarter of 1995 to accommodate the
acquisition.
(6) 1996 HOLDINGS RECAPITALIZATION
On April 9, 1996, a series of transactions were completed with the consent of
the Company which resulted in a change in the ultimate ownership of the Company
from U.S. Leather Holdings, Inc. ("Holdings") to Leather U.S., Inc. (the "New
Holding Company"). Holdings had been in default under its senior debentures (the
"Holdings Debentures") due to the noncompliance by Holdings of a financial
covenant contained in the Holdings Debentures as of December 31, 1995.
The holders of the Holdings Debentures foreclosed, with Holdings consent, on
their security which was the stock of Holdings' direct subsidiary, United States
Leather Holdings, Inc. ("Sub-Holdings"), the immediate parent of the Company.
Such foreclosure resulted in the satisfaction and cancellation of the Holdings
Debentures. The covenant default, and the subsequent consensual foreclosure, did
not constitute a default or a change in control under the terms of the Company's
existing public or bank debt.
Such foreclosure resulted in the elimination of any ownership in the Company by
Bear Stearns Acquisition Corp. VII, the majority shareholder of Holdings, and
vested complete ultimate share ownership in the Company in affiliates of The
Equitable Life Assurance Society of the United States ("Equitable"), among
others. The nominees of Bear Stearns Acquisition Corp. VII have resigned from
the Board of Directors of the Company and have been replaced by nominees of the
New Holding Company.
7
<PAGE>
(7) JUNE, 1996 RESTRUCTURING
On June 24, 1996, the Company announced a series of business decisions designed
to improve operating trends and to focus on core businesses and markets. These
decisions included:
(a) The discontinuance of the USL Trading Division and the German furniture
branch.
(b) A downsizing of its salaried workforce by the elimination of approximately
55 salaried positions.
(c) Accelerated disposition of certain inventories, primarily finished leather.
The Company recorded nonrecurring expenses of $9.4 million in the second quarter
of 1996 to recognize the cost of the above initiatives. The nonrecurring charges
included $6.6 million as an inventory reserve, which was included in cost of
sales, $2.1 million of severance expense and $0.4 million for the closing of the
German furniture branch, both of which were shown as restructuring expenses, and
$0.3 million of amortization related to the write-off of goodwill. The Company
expects, although there can be no assurance, that annual pretax savings
resulting from these actions will exceed $4 million excluding the intangible
benefits resulting from the refocusing of management.
8
<PAGE>
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain consolidated income statement data of the
Company as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 95.9 85.5 90.8 85.0
----- ----- ----- -----
Gross Profit 4.1 14.5 9.2 15.0
Selling, general & administrative 7.6 6.7 7.7 6.3
Restructuring expense 3.1 - 1.5 -
Amortization of intangible assets 1.5 0.8 1.4 0.8
----- ----- ----- -----
Income from operations (8.1) 7.0 (1.4) 7.9
Other (income) expense 0.2 - 0.1 -
Interest expense 5.3 4.9 5.4 4.6
----- ----- ----- -----
Income (loss) before taxes
and extraordinary item (13.6) 2.1 (6.9) 3.3
Income tax provision (4.6) 1.1 (2.2) 1.5
----- ----- ----- -----
Net income (loss) before
extraordinary item (9.0) 1.0 (4.7) 1.8
Extraordinary item, net of tax - - - 0.2
----- ----- ----- -----
Net Income (Loss) (9.0)% 1.0% (4.7)% 2.0%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS - THREE MONTH PERIOD
ENDED JUNE 30, 1996
The following table sets forth net sales and gross profit for each of the
Company's operating divisions and gross profit as a percentage of net sales for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
June 30, 1996 June 30, 1995
------------------------- ------------------------
Net Net Gross
Sales Profit % Sales Profit %
----- ------- ------ ----- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Lackawanna $29.8 $(1.8) (6.0)% $33.5 $ 3.6 10.7%
Pfister & Vogel 25.5 2.8 11.0 29.2 5.0 17.1
Gebhardt 18.0 1.6 8.9 19.8 4.1 20.7
A.R. Clarke 4.2 0.6 14.3 5.3 0.7 13.2
USL Trading 3.5 0.1 2.9 5.9 0.2 3.4
----- ----- ----- ----- ----- ----
Total $81.0 $ 3.3 4.1% $93.7 $13.6 14.5%
</TABLE>
9
<PAGE>
The previous table includes the recording of a $6.6 million nonrecurring
inventory reserve in June, 1996. Excluding the nonrecurring inventory charge of
$6.6 million, the table would be as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
June 30, 1996 June 30, 1995
------------------------ ------------------------
Net Gross Net Gross
Sales Profit % Sales Profit %
----- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Lackawanna $29.8 $2.3 7.7% $33.5 $ 3.6 10.7%
Pfister & Vogel 25.5 4.4 17.3 29.2 5.0 17.1
Gebhardt 18.0 2.5 13.9 19.8 4.1 20.7
A.R. Clarke 4.2 0.6 14.3 5.3 0.7 13.2
USL Trading 3.5 0.1 2.9 5.9 0.2 3.4
----- ---- ---- ----- ----- ----
Total $81.0 $9.9 12.2% $93.7 $13.6 14.5%
</TABLE>
NET SALES
- ---------
The Company had second quarter 1996 sales of $81.0 million which was flat to the
average of the last three quarters. As compared to the same period in 1995,
however, second quarter sales decreased by $12.7 million or 13.6%. Finished
leather sales decreased from $81.4 million in the second quarter of 1995 to
$71.9 million in the second quarter of 1996, a decrease of $9.5 million or
11.7%. This reduction was principally the result of a 9% reduction in the square
footage of finished leather sales and lower selling prices. While the square
footage of finished leather sold in the second quarter of 1996 was less than the
same period last year, the square footage of finished leather sold in the second
quarter of 1996 was flat as compared to the first quarter of 1996 and increased
1% and 5% as compared to the fourth quarter and third quarter of 1995,
respectively. The lower selling prices were partially the result of lower hide
costs in the second quarter of 1996 as compared to the second quarter of 1995.
By-product and other sales decreased to $9.1 million in the second quarter of
1996 from $12.3 million in the second quarter of 1995, principally due to the
discontinuance of the USL Trading Division as well as reduced by-product selling
prices and volumes. Sales of finished leather accounted for 88.7% of the
Company's net sales in the second quarter of 1996 as compared to 86.9% in the
second quarter of 1995 due to the decline of USL Trading Division sales.
Lackawanna had a net sales decrease of $3.7 million, or 11.0%, to $29.8 million
in the second quarter of 1996 as compared to $33.5 million in the second quarter
of 1995, due to reduced finished leather sales. Finished leather sales decreased
by $3.8 million, or 12.5%, to $26.7 million in the second quarter of 1996 as
compared to the same period last year, as reduced sales to the U.S. furniture
industry, principally in foreign resale products, and reduced sales to the
European furniture industry were partially offset by increased finished leather
sales to the automotive industry. The Company has announced that it is
discontinuing the German furniture branch and, as a result, expects sales to the
European market will continue at reduced levels going forward. Overall, the
square footage of finished leather declined by 11%. Lackawanna's domestic
backlog has increased recently and U.S. production levels are being adjusted
upward accordingly in the third quarter.
Pfister & Vogel had a net sales decrease of $3.7 million, or 12.7%, to $25.5
million in the second quarter of 1996 as compared to $29.2 million in the second
quarter of 1995. Finished leather sales decreased by $2.4 million in the second
quarter of 1996 as compared to the same period last year, due
10
<PAGE>
to a 5% reduction in unit sales and lower average selling prices. The selling
price decline is partially due to lower hide costs as compared to the same
period last year. By-product sales declined by $1.3 million due to lower split
selling prices and volumes.
Gebhardt had a net sales decrease of $1.8 million, or 9.1%, to $18.0 million, in
the second quarter of 1996 as compared to $19.8 million in the second quarter of
1995, due principally to decreased sales of its finished splits products and its
contract manufacturing services. Gebhardt's finished leather backlog has
increased and production levels have been adjusted upward accordingly in the
third quarter.
A.R. Clarke had net sales of $4.2 million during the second quarter of 1996 as
compared to $5.3 million during the second quarter of 1995 reflecting weak
demand in the Canadian footwear market.
The USL Trading division recorded net sales of $3.5 million in the second
quarter of 1996, a decrease of $2.4 million versus the same over a year ago.
The Company has discontinued this operation, and is finishing out the order
backlog during the third quarter of 1996.
NONRECURRING EXPENSES INCURRED IN THE SECOND QUARTER OF 1996
- ------------------------------------------------------------
On June 24, 1996, the Company announced a series of business decisions resulting
from an evaluation of the business that was initiated immediately after the
April 9, 1996 change in control. These decisions were designed to improve
operating trends and to focus on core businesses and markets. These decisions
included:
. The discontinuation of the USL Trading Division, the German furniture
branch and other miscellaneous noncore product segments, thereby refocusing
management and capital on the Company's core finished leather business.
. The downsizing of its salaried workforce by eliminating approximately 55
salaried positions, thereby realigning its salaried workforce to recent
volume levels as well as funding personnel additions designed to improve
quality and product development.
. The accelerated disposition of certain inventories, primarily finished
leather, thereby reducing working capital, storage and facility costs,
accelerating the movement of product in declining product segments, colors
or lines, minimizing future quality issues and focusing sales and
operations on current and future customer and operating requirements.
. The closing of its corporate headquarters, thereby moving from leased to
owned facilities.
The Company recorded nonrecurring expenses of $9.4 million in the second quarter
of 1996 to recognize the cost of the above initiatives. The nonrecurring charges
included $6.6 million as an inventory reserve, which was included in cost of
sales, $2.1 million of severance expense and $0.4 million for the closing of the
German furniture branch, both of which were shown as restructuring expenses, and
$0.3 million of amortization related to the write-off of goodwill. The Company
expects, although there can be no assurance, that annual pretax savings
resulting from these actions will exceed $4 million excluding the intangible
benefits resulting from the refocusing of management.
11
<PAGE>
GROSS PROFIT
- ------------
While sales in the second quarter of 1996 dropped by 13.6% as compared to the
same period last year, cost of sales, excluding the nonrecurring $6.6 million
inventory reserve, declined by only 11.2%. As a result, excluding the inventory
reserve, gross profit for the second quarter of 1996 was $9.9 million, a
reduction of $3.7 million or 27.2% as compared to the same period last year. The
decrease was principally the result of reduced square footage of finished
leather sold, increased unit conversion costs and reduced selling prices,
partially offset by reduced cattlehide prices. The reduced sales and production
volumes contributed to the increased unit manufacturing costs. As a percentage
of sales, excluding the nonrecurring inventory adjustment, gross profits dropped
from 14.5% in the second quarter of 1995 to 12.2% in the second quarter of 1996.
Including the nonrecurring inventory reserve, the Company had a gross profit of
$3.3 million in the second quarter of 1996. The Company recorded a $0.8 million
LIFO revaluation credit to operations in the second quarter of 1996 as compared
to a $1.1 million LIFO revaluation credit during the same period last year.
While the average price of domestic hide purchase commitments made during the
second quarter of 1996 was approximately 15% lower that the average price of
such commitments made during the second quarter of 1995, hide prices did begin
to trend upward during the second quarter of 1996 (as compared to downward trend
during the second quarter of last year). The upward hide price trend has
continued into the third quarter.
Excluding the nonrecurring inventory reserve of $4.1 million, Lackawanna's gross
profits decreased by $1.3 million, or 36.1% in the second quarter of 1996 as
compared to the second quarter of 1995 due to reduced sales volume, losses
associated with the German branch and increased manufacturing costs, partially
offset by reduced hide prices. As a percentage of sales, Lackawanna's gross
profit margin declined from 10.7% in the second quarter of 1995 to 7.7% in the
second quarter of 1996, when the nonrecurring inventory adjustment is excluded.
Excluding the nonrecurring inventory reserve of $1.6 million, Pfister & Vogel's
gross profit decreased by $0.6 million, or 12.0%, while its gross profit margin
improved from 17.1% in the second quarter of 1995 to 17.3% in the second quarter
of 1996. The decline in gross profit was primarily the result of lower finished
leather sales prices and unit shipments. Excluding the nonrecurring inventory
reserve of $0.9 million, Gebhardt's gross profit decreased from $4.1 million in
the second quarter of 1995 to $2.5 million in the second quarter of 1996, a
decrease of 39.0%. This decrease was partially the result of lower sales and
higher unit manufacturing costs. Gebhardt's gross profit margin decreased from
20.7% in the second quarter of 1995 to 13.9% in the second quarter of 1996. A.R.
Clarke contributed $0.6 million to the second quarter 1996 United States Leather
gross profits on slightly lower gross profit margin.
The increased unit manufacturing costs at the various United States Leather,
Inc. divisions in the second quarter of 1996 as compared to the same period last
year were, in part, the result of the reduction in the square footage of
finished leather produced. These increased unit manufacturing costs were
partially addressed by the reduction in salaried positions. The Company is
increasing weekly production rates in the third quarter.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses were $6.2 million in the second
quarter of 1996 as compared to $6.3 million in the second quarter of 1995, a
decrease of $0.1 million or 1.7%. The decrease was primarily the result of
reduced compensation and sales commission expenses, partially offset by a $0.5
million increase in bad debt expense principally related to two specific USL
Trading Division customers. The Company has announced the discontinuation of the
USL Trading Division.
RESTRUCTURING EXPENSE
- ---------------------
The Company incurred nonrecurring restructuring expenses of $2.5 million in the
second quarter of 1996 comprised of $2.1 million severance expense associated
with the elimination of approximately 55 salaried positions and $0.4 million
resulting from the closing of the German furniture branch.
AMORTIZATION OF INTANGIBLE ASSETS
- ---------------------------------
Amortization of intangible assets in the second quarter of 1996 was $1.2 million
as compared to $0.8 million in the second quarter of 1995. The increase was
principally due to the write-off of $0.3 million of goodwill that the Company
determined had no continuing value.
INTEREST EXPENSE
- ----------------
Interest expense during the second quarter of 1996 was $4.3 million as compared
to $4.5 million in the second quarter of 1995, a decrease of $0.2 million. The
decrease was principally due to reduced average borrowings resulting from
working capital reductions, primarily reduced inventory levels.
OTHER (INCOME) EXPENSE
- ----------------------
The Company incurred $0.2 million of fees associated with the April 9, 1996
change in control.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
- -----------------------------------------------
The Company had a loss before taxes and extraordinary gain of $11.0 million in
the second quarter of 1996 as compared to income of $2.0 million in the second
quarter of 1995, a reduction of $13.0 million. This decrease was principally the
result of the recording of nonrecurring expenses of $9.4 million as well as
lower sales volume and lower gross profits. Excluding the nonrecurring expenses,
the Company had a loss before taxes and extraordinary gain of $1.6 million in
the second quarter of 1996.
INCOME TAX PROVISION (CREDIT)
- -----------------------------
The Company's tax credit was $3.7 million for the second quarter of 1996 as
compared to a $1.0 million provision for the second quarter of 1995, a reduction
of $4.7 million. After adjusting income before provision for income taxes for
nondeductible amortization of goodwill, the effective tax rate was 38% in 1996
as compared to 37% in 1995.
13
<PAGE>
NET INCOME
- ----------
The Company had a net loss of $7.3 million in the second quarter of 1996 as
compared to net income of $1.0 million during the second quarter of 1995. The
nonrecurring expenses reduced net income by $5.8 million; the remainder of the
decrease was principally the result of reduced sales and reduced gross profits.
14
<PAGE>
RESULTS OF OPERATIONS - SIX MONTH PERIOD
ENDED JUNE 30, 1996
The following table sets forth net sales and gross profit, and gross profit as a
percentage of net sales, for each of the Company's operating divisions for the
periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------
June 30, 1996 June 30, 1995
--------------------- --------------------
Net Gross Net Gross
Sales Profit % Sales Profit %
------ ------ ----- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Lackawanna $ 62.6 $ 2.7 4.3% $ 76.5 $ 9.8 12.8%
Pfister & Vogel 48.3 6.6 13.7 59.8 10.4 17.4
Gebhardt 33.7 3.8 11.3 40.1 7.8 19.5
A.R. Clarke 8.5 1.2 14.1 9.6 1.3 13.5
USL Trading 7.0 0.4 5.7 11.5 0.3 2.6
------ ----- ---- ------ ----- ----
Total $160.1 $14.7 9.2% $197.5 $29.6 15.0%
</TABLE>
The above table includes the recording of a $6.6 million nonrecurring inventory
reserve in June, 1996. Excluding the nonrecurring inventory charge of $6.6
million, the table would be as follows:
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------------
June 30, 1996 June 30, 1995
---------------------- --------------------
Net Gross Net Gross
Sales Profit % Sales Profit %
------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Lackawanna $ 62.6 $ 6.8 10.9% $ 76.5 $ 9.8 12.8%
Pfister & Vogel 48.3 8.2 17.0 59.8 10.4 17.4
Gebhardt 33.7 4.7 13.9 40.1 7.8 19.5
A.R. Clarke 8.5 1.2 14.1 9.6 1.3 13.5
USL Trading 7.0 0.4 5.7 11.5 0.3 2.6
------ ----- ---- ------ ----- ----
Total $160.1 $21.3 13.3% $197.5 $29.6 15.0%
</TABLE>
NET SALES
- ---------
The Company had first half 1996 sales of $160.1 million as compared to $197.5
million in the first half of 1995, a decrease of $37.4 million or $18.9%.
Finished leather sales decreased from $173.1 million in the first six months of
1995 to $143.6 million in the first six months of 1996, a decrease of $29.5
million or 17.0%. The decrease in finished leather sold was principally the
result of a 14% decrease in square footage of finished leather sold, as well as
lower average selling prices. The selling price decline is partially due to
reduced hide costs in the first half of 1996 as compared to the first half of
1995. The overall square footage of finished leathers sold declined 14% as
compared to the first half of 1995 but increased 3% as compared to the second
half of 1995. By-product and other sales decreased to $16.5 million in the first
half of 1996 from $24.3 million in the first half of 1995,
15
<PAGE>
principally due to reduced sales at the USL Trading Division (a discontinued
operation) as well as reduced by-product selling prices and volumes. Sales of
finished leather accounted for 89.7% of the Company's net sales in the first
half of 1996 as compared to 87.7% in the first half of 1995.
Lackawanna had a net sales decrease of $13.9 million, or 18.2%, to $62.6 million
in the first half of 1996 as compared to $76.5 million in the first half of
1995. The decrease was principally the result of lower domestic and imported
furniture leather sales, partially offset by increased automotive leather sales.
Finished leather sales decreased $13.4 million, or 18.8%, to $57.6 million in
the first six months of 1996 as compared to the same period last year,
principally as a result of decreased finished leather sales to the U.S.
furniture industry and to the European furniture industry. The Company has
announced the discontinuation of the German furniture branch. Overall, the
square footage of finished leather sold decreased by 18%.
Pfister & Vogel had first half 1996 sales of $48.3 million as compared to $59.8
million in the first half of 1995, a decrease of $11.5 million, or 19.2%.
Overall, finished leather sales declined by $8.4 million, or 15.4%, to $46.3
million in the first half of 1996 as compared to the same period last year, due
primarily to a 10% decrease in square footage sold, as well as lower selling
prices. The lower selling prices are partially the result of reduced hide
prices. Management believes that the sales decline was principally the result of
continued sluggishness at retail, as well as excess inventories at some of its
customers, particularly early in the year. By-product sales were $3.0 million
below a year ago due to lower split selling prices and volumes.
Gebhardt had a net sales decrease of $6.4 million, or 16.0%, from $40.1 million
in the first half of 1995 to $33.7 million in the first half of 1996. The sales
decrease was primarily due to an 11% reduction in square footage, but also
results from lower selling prices, especially in its finished split business
segment, as well as reduced demand for its contract manufacturing services.
A.R. Clarke had net sales of $8.5 million in the first six months of 1996 as
compared to $9.6 million during the first half of 1995, a decrease of $1.1
million, or 11.5%, reflecting continued weak demand in the Canadian footwear
market (note: A.R. Clarke was acquired as of January 30, 1995).
The USL Trading Division recorded net sales of $6.9 million in the first half of
1996, a decrease of $4.6 million versus the same period a year ago. The Company
has discontinued this operation and is completing its backlog commitments.
GROSS PROFIT
- ------------
Excluding the $6.6 million inventory reserve, gross profit in the first six
months of 1996 was $21.3 million as compared to $29.6 million in the first six
months of 1995, a decrease of $8.3 million, or 28.0%. The decrease was
principally the result of an 14% reduction in the square footage of finished
leather sold, increased unit conversion costs and reduced selling prices,
partially offset by reduced cattlehide prices. The reduced sales and production
volumes contributed to the increased unit conversion costs. Average selling
prices declined, partially due to reduced hide prices and partially due to
weaker demand and competitive market pressures. As a percentage of sales,
excluding the nonrecurring inventory adjustment, gross profits dropped from
15.0% in the first half of 1995 to 13.3% in the first half of 1996. Including
the nonrecurring inventory reserve, the Company had a gross profit of $14.7
million in the first half of 1996. The Company recorded a $1.7 million LIFO
revaluation credit to operations in the first half of 1996 as compared to a $0.5
million LIFO revaluation
16
<PAGE>
credit during the same period last year. While the average price of domestic
hide purchase commitments made during the first half of 1996 was approximately
20% lower than the average price of these commitments made during the first half
of 1995, hide prices did start to trend up towards the end of the first half of
1996. The upward price trend has continued into the third quarter of 1996.
Excluding the nonrecurring inventory reserve of $4.1 million, Lackawanna's gross
profit decreased by $3.0 million, or 30.6%, in the first half of 1996 as
compared to the first half of 1995. The decrease reflects lower sales volumes,
losses associated with the German branch and higher unit conversion costs,
partially offset by reduced hide prices. Excluding the inventory reserve,
Lackawanna's gross profit margin declined from 12.8% in the first six months of
1995 to 10.9% in the first six months of 1996. Excluding the nonrecurring
inventory reserve of $1.6 million, Pfister & Vogel's gross profit decreased by
$2.2 million, or 21.2%, and its gross margin decreased from 17.4% of net sales
in the first six months of 1995 to 17.0% of net sales in the first six months of
1996. This decline at Pfister & Vogel was principally the result of the 10% drop
in the square footage of finished leather sold, reduced selling prices and
higher unit conversion costs, partially offset by lower hide prices. Excluding
the nonrecurring inventory reserve of $0.9 million, Gebhardt's gross profit
decreased by $3.1 million during the first six months of 1996 as compared to the
same period last year, and its gross margin decreased from 19.5% in the first
six months of 1995 to 13.9% in the first six months of 1996. The decline was
principally due to an 11% decline in square footage of finished leather sold and
increased unit conversion costs. A.R. Clarke contributed $1.2 million to the
first half of 1996 United States Leather gross profits as compared to $1.3
million last year due to reduced sales as gross margins increased from 13.5%
last year to 14.1% in the first half of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses were $12.3 million in the first six
months of 1996 as compared to $12.4 million in the first six months of 1995, a
decrease of $0.1 million. The decrease was principally the result of reduced
compensation, sales commissions and general cost controls, partially offset by
increased bad debt expense. The increased bad debt expense is principally
related to two specific USL Trading Division customers. The Company has
announced the discontinuation of the USL Trading Division.
INTEREST (LOSS) EXPENSE
- -----------------------
Interest expense in the first half of 1996 was $8.6 million as compared to $9.0
million in the first half of 1995, an decrease of $0.4 million. The decrease was
principally the result of reduced average borrowings driven by reductions in
inventory levels.
INCOME (LOSS) BEFORE TAXES AND EXTRAORDINARY ITEM
- -------------------------------------------------
The Company had a loss before taxes and extraordinary item of $11.0 million in
the first six months of 1996, as compared to income of $6.6 million in the first
six months of 1995, a decrease of $17.6 million. This decrease was principally
the result of the recording of one-time expenses of $9.4 million as well as
lower sales volume and lower gross profits.
17
<PAGE>
INCOME TAX PROVISION (CREDIT)
- -----------------------------
The Company's tax credit was $3.4 million for the first half of 1996 as compared
to a provision of $3.1 million for the first half of 1995, a decrease of $6.5
million. After adjusting income before provision for income taxes for non-
deductible amortization of goodwill, the effective tax rate was 38% during the
first half of 1996 and 1995, respectively.
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
- -------------------------------------------
Due to the factors described above, the Company had net loss before
extraordinary gain of $7.6 million in the first six months of 1996 as compared
to $3.5 million of net income in the first months of 1995.
EXTRAORDINARY GAIN
- ------------------
The Company had an extraordinary gain of $0.4 million in the first six months of
1995 related to the repurchase of its 10.25% senior notes due 2003 having a face
value of $4.0 million.
NET INCOME (LOSS)
- -----------------
The Company had a net loss of $7.6 million in the first half of 1996 as compared
to net income of $3.9 million in the first half of 1995, a decrease of $11.5
million. The nonrecurring expenses reduced net income by $5.8 million; the
remainder of the decrease was principally the result of reduced sales and gross
profits.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first six months of 1996 and the first six months of 1995, the
Company's operations generated earnings before interest, taxes, depreciation and
amortization of $3.5 million ($12.6 million excluding the nonrecurring expenses)
and $20.4 million, respectively, and its interest expense was $8.6 million and
$9.0 million, respectively.
Net cash provided by operations was $5.9 million during the first six months of
1996 as compared to $0.5 million during the same period in 1995. The increase in
net cash provided by operations of $5.4 million was, among other factors,
principally the result of a decrease in inventory during the first six months of
1996 as compared to a modest inventory increase during 1995.
Capital expenditures totaled $3.0 million in the first six months of 1996, a
decrease of $1.9 million as compared to the same period in 1995. This difference
is primarily attributable to timing of purchases of production equipment during
the first six months of 1996.
The Company repurchased Senior Notes with a face value of $4.0 million during
the first quarter of 1995, resulting in an extraordinary gain of approximately
$0.4 million, net of tax. The Company may repurchase additional Senior Notes
through privately negotiated open market purchases, to the extent it deems it
advantageous to do so.
18
<PAGE>
On January 30, 1995, the Company purchased substantially all of the non-cash
assets of A.R. Clarke & Co., Limited of Toronto, Canada for approximately $4.9
million in cash, plus the assumption of certain liabilities approximating $0.8
million. This acquisition was accounted for under the purchase method of
accounting. A preliminary allocation of the purchase price indicated that there
was not a material amount of goodwill arising out of the acquisition. The
purchase was financed through borrowings under the Revolving Credit Facility,
which was amended and restated in the first quarter of 1995 to accommodate the
acquisition.
In accordance with the Debenture Exchange Agreement between Holdings and the
holders of the Holdings Debentures, the Company made no payments of cash
dividends on its common stock during the first half of 1996, other than for
reimbursement of fifty thousand dollars of expenses as permitted under the
Revolving Credit Agreement, compared to $1.2 million paid during the same period
in 1995. Since the Debentures and the related Debenture Exchange Agreement were
extinguished on April 9, 1996, and as a result of the 1996 Holdings
recapitalization, the Company has no obligation to pay further dividends on its
common stock.
At June 30, 1996, the Company's outstanding indebtedness was $154.2 million,
comprised primarily of $130 million principal amount of Senior Notes and
borrowings under the Revolving Credit Facility. The notes mature in July, 2003,
at which time $130 million becomes due. The Revolving Credit Facility is a $65
million facility maturing in 1997. At June 30, 1996, the Company had
approximately $39.9 million available under the Revolving Credit Facility, after
deducting outstanding borrowings and letters of credit issued thereunder.
Effective June 28, 1996, the Revolving Credit Facility waived the need for the
Company to be in compliance with the following financial covenants for the
fiscal quarter ending June 30, 1996: the interest expense coverage ratio, the
fixed charge coverage ratio, the minimum consolidated net worth, and the maximum
leverage ratio. Without this waiver, the Company would have been in violation of
these covenants. As a result of this waiver, the Company is in compliance with
the Revolving Credit Facility as of June 30, 1996 although it is highly likely
that additional modifications will be required going forward. The Company is
currently in discussions with the bank group relative to additional
modifications to the Revolving Credit Facility. Although no assurance can be
given, the Company believes it will be able to obtain the necessary
modifications if it is required to do so. The Company believes that its cash
flow provided from operations and borrowings available under the Revolving
Credit Facility will be sufficient to meet its working capital needs,
anticipated capital expenditures and acquisitions, and debt service requirements
over the next twelve months.
1996 HOLDINGS RECAPITALIZATION
- ------------------------------
On April 9, 1996, a series of transactions were completed with the consent of
the Company which resulted in a change in the ultimate ownership of the Company
from U.S. Leather Holdings, Inc. ("Holdings") to Leather U.S., Inc. (the "New
Holding Company"). Holdings had been in default under its senior debentures (the
"Holdings Debentures") due to the noncompliance by Holdings of a financial
covenant contained in the Holdings Debentures as of December 31, 1995.
19
<PAGE>
The holders of the Holdings Debentures foreclosed, with Holdings consent, on
their security which was the stock of Holdings' direct subsidiary, United States
Leather Holdings, Inc. ("Sub-Holdings"), the immediate parent of the Company.
Such foreclosure resulted in the satisfaction and cancellation of the Holdings
Debentures. The convenient default, and the subsequent consensual foreclosure,
did not constitute a default or a change in control under the terms of the
Company's existing public or bank debt.
Such foreclosure resulted in the elimination of any ownership in the Company by
Bear Stearns Acquisition Corp. VII, the majority shareholder of Holdings, and
vested complete ultimate share ownership in the Company in affiliates of The
Equitable Life Assurance Society of the United States ("Equitable"), among
others. The nominees of Bear Stearns Acquisition Corp. VII have resigned from
the Board of Directors of the Company and have been replaced by nominees of the
New Holding Company.
OTHER MATTERS
- -------------
A new 42 month Labor Agreement was negotiated covering approximately 420 Pfister
& Vogel employees, effective May 19, 1996, with an expiration of November 15,
1999. The Agreement does have an economic reopener for wages and benefits only
in November, 1996.
Certain statements in the Company's Management Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking
information. The Company's forward-looking statements are predominantly based on
its interpretation of what it considers key variables impacting those
statements. These forward-looking statements include, but may not be limited to,
hide pricing, backlogs, production rates and expected savings from the Company's
restructuring. The Company cautions investors that any forward-looking
statements by the Company are not guarantees of future performance and that
actual results may differ materially from those in the forward-looking
statements due to a variety of factors.
20
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits:
---------
4.11 Waiver to the Second Amended and Restated Security Agreement, dated as
of June 28, 1996, between the Company, The First National Bank of
Chicago and the other financial institutions party thereto.
(b) Reports on Form 8-K: NONE
--------------------------
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.
United States Leather, Inc.
-------------------------------------------------
(Registrant)
Date: August 12, 1996 / s / Robert A. Hale
-------------------------------------------------
Robert A. Hale
Chief Financial Officer
(Signing on behalf of the Registrant
and as Chief Financial Officer)
21
<PAGE>
EXHIBIT 4.11
WAIVER
DATED AS OF JUNE 28, 1996
TO
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of February 17, 1995
THIS WAIVER ("Waiver") is entered into as of June 28, 1996 by and among
UNITED STATES LEATHER, INC., A.R. CLARKE LIMITED (each being sometimes
hereinafter referred to individually as a "Borrower" and collectively as the
"Borrowers"), the financial institutions party to the "Credit Agreement"
referred to below (the "Lenders"), and The First National Bank of Chicago, in
its capacity as the contractual representative for itself and the Lenders (the
"Agent"). Capitalized terms used in this Waiver which are not otherwise defined
herein, shall have the meanings given such terms in the Credit Agreement.
WITNESSETH:
-----------
WHEREAS, the Borrowers, the Lenders and the Agent are parties to that
certain Second Amended and Restated Credit Agreement dated as of February 17,
1995, as amended by Amendment No. 1 thereto dated as of July 1, 1995 and
Amendment No. 2 thereto dated as of December 31, 1995, among the Borrowers, the
Lenders and the Agent (as the same may be further amended, restated,
supplemented or otherwise modified from time to time, the "Credit Agreement");
WHEREAS, the Borrowers have failed to comply with certain of the
requirements set forth in the Credit Agreement;
WHEREAS, the Borrowers have requested that the Lenders and the Agent waive
compliance by the Borrowers with various requirements contained in the Credit
Agreement on the terms and conditions set forth herein;
WHEREAS, the Agent and the Lenders have agreed to enter into this Waiver on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Borrowers, the
Lenders and the Agent hereby agree as follows.
<PAGE>
1. Waivers to the Credit Agreement. Effective as of the date hereof and
subject to the satisfaction of the conditions precedent set forth in Section 2
below the Lenders hereby agree to waive the Borrowers' compliance with the
requirements contained in Sections 6.4(B), (C), (E), and (F) for the fiscal
quarter ending June 30, 1996.
2. Conditions of Effectiveness of this Waiver. This Waiver shall become
effective and be deemed effective as of the date hereof, if, and only if the
Agent shall have received each of the following:
(a) duly executed originals of this Waiver from the Borrowers and the
Required Lenders;
(B) a reaffirmation from United States Leather Holdings, Inc. in the
form attached hereto as Exhibit A; and
(C) such other documents, instruments and agreements as the Agents
may reasonably request.
3. Representations and Warranties of the Borrowers.
3.1 Upon the effectiveness of this Waiver, each of the Borrowers
hereby reaffirms all covenants, representations and warranties made in the
Credit Agreement and the other Loan Documents to the extent the same are not
waived hereby and agrees that all such covenants, representations and warranties
shall be deemed to have been re-made as of the effective date of this Waiver and
that, as of the effective date of this Waiver and after giving effect hereto, no
Unmatured Default or Default has occurred and is continuing.
3.2 Each of the Borrowers hereby represents and warrants that this
Waiver and the Credit Agreement, as previously executed and amended and as
amended hereby constitute legal, valid and binding obligations of such Borrower
and are enforceable against such Borrower in accordance with their terms.
4. Reference to the Effect on the Credit Agreement.
4.1 Upon the effectiveness of this Waiver, on and after the date
hereof, each reference in the Credit Agreement to "this Credit Agreement",
"hereunder", "herein" or words of like import shall mean and be a reference to
the Credit Agreement, as amended by Amendment No. 1 dated as of July 1, 1995 and
Amendment No. 2 dated as of December 31, 1995 and as modified hereby.
4.2 Except as specifically waived herein, the Credit Agreement, as
amended by Amendment No. 1 dated as of July 1, 1995 and Amendment No. 2 dated as
of December 31, 1995 and as modified
-2-
<PAGE>
hereby, and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and effect, and
are hereby ratified and confirmed.
4.3 The execution, delivery and effectiveness of this Waiver shall not,
except as expressly provided herein, operate as a waiver of any right, power or
remedy of any Lender, nor constitute a waiver of any provision of the Credit
Agreement, or any other documents, instruments and agreements executed and/or
delivered in connection therewith.
5. Headings. Section headings in this Waiver are included herein for
convenience of reference only and shall not constitute a part of this Waiver for
any other purpose.
6. Counterparts. This Waiver may be executed by one or more of the
parties to this Waiver on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Entire Agreement. This Waiver, taken together with the Credit
Agreement and all of the other Loan Documents, embodies the entire agreement and
understanding of the parties hereto and supersedes all prior agreements and
understandings, written and oral, relating to the subject matter hereof.
8. Governing Law. This Waiver shall be governed by and construed in
accordance with the internal laws (without regard to the conflict of laws
provisions) of the State of Illinois.
9. No Strict Construction. The parties hereto have participated jointly
in the negotiation and drafting of this Waiver. In the event an ambiguity or
question of intent or interpretation arises, this Waiver shall be construed as
if drafted jointly by the parties hereto and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
provisions of this Waiver.
* * * * Remainder of This Page Intentionally Blank * * * *
-3-
<PAGE>
IN WITNESS WHEREOF, this Waiver has been duly executed as of the day and
year first above written.
UNITED STATES LEATHER, INC.
By:
-------------------------------
Title:
-------------------------
A.R. CLARKE LIMITED
By:
-------------------------------
Title:
-------------------------
THE FIRST NATIONAL BANK OF
CHICAGO, Individually and as
Agent
By:
-------------------------------
Title:
-------------------------
<PAGE>
LENDERS:
THE FIRST NATIONAL BANK
OF CHICAGO
By:
-------------------------------
Title:
------------------------
LASALLE NATIONAL BANK
By:
------------------------------
Title:
-------------------------
NATIONAL BANK OF CANADA
By:
------------------------------
Title:
------------------------
NATIONAL BANK OF CANADA
By:
------------------------------
Title:
------------------------
CAISSE NATIONALE DE CREDIT
AGRICOLE
By:
------------------------------
Title:
------------------------
MITSUI LEASING (U.S.A.) INC.
By:
------------------------------
Title:
------------------------
<PAGE>
EXHIBIT A
TO
WAIVER DATED AS OF JUNE 28, 1995
TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
Form of Holdings Reaffirmation
------------------------------
Attached
<PAGE>
REAFFIRMATION
-------------
The undersigned hereby acknowledges receipt of a copy of the Waiver No. 1
to the Second Amended and Restated Credit Agreement dated as of February 17,
1995, as amended by that certain Amendment No. 1 dated as of July 1, 1995 and
that certain Amendment No. 2 dated as of December 31, 1995, by and among United
States Leather, Inc., A.R. Clarke Limited, the Lenders and the Agent (as so
amended and modified, the "Credit Agreement") which Waiver is dated as of June
28, 1996 (the "Waiver"). Capitalized terms used in this Reaffirmation not
defined herein shall have the meanings given to them in the Credit Agreement.
Without in any way establishing a course of dealing by the Agent or any Lender,
the undersigned reaffirms the terms and conditions of the Second Amended and
Restated Stock Pledge Agreement dated as of February 17, 1995 executed by it and
acknowledges and agrees that such agreement and each and every other loan
Document executed by the undersigned in connection with the Credit Agreement
remain in full force and effect and are hereby ratified, reaffirmed and
confirmed. All references to the Credit Agreement contained in the above-
referenced documents shall be a reference to the Credit Agreement as so modified
by Amendment No. 1 dated as of July 1, 1995, Amendment No. 2 dated as of
December 31, 1995 and this Waiver and as the same may from time to time
hereafter be amended, modified or restated.
UNITED STATES LEATHER, INC.
By:
-----------------------------
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,971
<SECURITIES> 0
<RECEIVABLES> 49,304
<ALLOWANCES> (4,974)
<INVENTORY> 62,295
<CURRENT-ASSETS> 113,818
<PP&E> 81,577
<DEPRECIATION> (34,132)
<TOTAL-ASSETS> 271,584
<CURRENT-LIABILITIES> 54,346
<BONDS> 130,104
<COMMON> 1
0
0
<OTHER-SE> 73,596
<TOTAL-LIABILITY-AND-EQUITY> 271,584
<SALES> 160,082
<TOTAL-REVENUES> 160,082
<CGS> 145,421
<TOTAL-COSTS> 145,421
<OTHER-EXPENSES> 15,988
<LOSS-PROVISION> 905
<INTEREST-EXPENSE> 8,613
<INCOME-PRETAX> (11,004)
<INCOME-TAX> (3,406)
<INCOME-CONTINUING> (7,598)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,598)
<EPS-PRIMARY> (75,980)
<EPS-DILUTED> 0
</TABLE>
