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, 1997
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.)
1403 West Bruce Street, Milwaukee, WI 53204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 383-6030
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Class at June 30, 1997
Common Stock, 100
$.01 par value
As of June 30, 1997, there was no public market for the Company's
common stock.
<PAGE>
UNITED STATES LEATHER, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Condensed Statements of Operations . . . . 3
Consolidated Condensed Balance Sheets . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows . . . 5-6
Notes to Consolidated Condensed Financial Statements . . 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 10
PART II - OTHER INFORMATION AND SIGNATURES
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
3 Months Ended 6 Months Ended
June 30, June 30,
1997 1996 1997 1996
Net sales $ 88,828 $ 81,010 $ 172,207 $ 160,082
Cost of sales 81,672 77,715 161,591 145,421
------- ------- ------- -------
Gross profit 7,156 3,295 10,616 14,661
Selling, general and
administrative
expenses 5,634 6,156 11,700 12,265
Restructuring expense - 2,468 - 2,468
Amortization of
intangible assets 1,081 1,245 1,963 2,160
------- -------- ------- -------
Income (loss) from
operations 441 (6,574) (3,047) (2,232)
Other (income) expense 187 159 187 159
Interest expense 4,698 4,295 9,195 8,613
------- ------- ------- -------
Loss before taxes (4,444) (11,028) (12,429) (11,004)
Income tax benefit - (3,732) (2,474) (3,406)
------- -------- -------- -------
Net loss $ (4,444) $ (7,296) $ (9,955) $ (7,598)
======= ======== ======== =======
Net loss per share $ (44,440) $ (72,960) $ (99,550) $ (75,980)
======= ======== ======== =======
Weighted average
shares outstanding 100 100 100 100
======= ======== ======== =======
The accompanying notes are an integral part of these statements.
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
As of As of
June 30, December 31,
1997 1996
Current Assets:
Cash $ 496 $ 2,894
Accounts receivable, less allowances of
$2,098 and $2,892 49,340 35,819
Inventories 55,655 64,749
Prepaid expenses and other 1,699 1,228
Refundable income tax 1,771 2,700
-------- -------
Total current assets 108,961 107,390
Property, plant and equipment, net 44,868 47,601
Goodwill, net of amortization of
$27,196 and $25,612 99,787 101,371
Other 8,633 8,460
------- -------
Total assets $ 262,249 $ 264,822
======= =======
Current Liabilities:
Current maturities of long-term debt $ 208 $ 210
Revolving credit facility 49,428 31,795
Payable to bank 4,843 5,358
Accounts payable 5,805 7,898
Accrued liabilities 13,283 17,457
-------- --------
Total current liabilities 73,567 62,718
Long-term debt, less current maturities 130,039 130,047
Deferred income taxes - 794
Other long-term liabilities 7,522 10,190
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 (109) (112)
Accumulated deficit (41,115) (31,160)
------- -------
Total stockholder's equity 51,121 61,073
------- -------
Total liabilities and stockholder's equity $ 262,249 $ 264,822
======= =======
The accompanying notes are an integral part of these statements.
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
For the six months ended
June 30,
1997 1996
Cash Flows from Operating Activities:
Net loss $ (9,955) $ (7,598)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,607 5,856
Noncash interest expense 484 720
Deferred income taxes (2,454) -
Change in assets and liabilities:
Accounts receivable (13,521) 273
Inventories 9,094 11,591
Prepaid expenses and other (1,021) (427)
Accounts payable (2,093) (2,107)
Accrued liabilities (4,069) 969
Income taxes payable - (3,080)
Other long-term liabilities 26 (300)
-------- --------
Net cash (used ) provided by operating
activities (18,503) 5,897
-------- --------
Cash Flows from Investing Activities
Capital expenditures (1,507) (3,040)
Proceeds from sales of fixed assets 424 -
Purchase of software license (534) (387)
-------- --------
Net cash used in investing activities (1,617) (3,427)
-------- --------
Cash Flows from Financing Activities:
Payments of revolving credit facility (59,406) (45,412)
Borrowings under revolving credit facility 77,039 42,128
Net change in payable to bank (515) (1,698)
Payment of long-term debt - (61)
Payment of common stock dividend - (50)
-------- --------
Net cash provided (used) by financing
activities 17,118 (5,093)
-------- --------
Effect of Exchange Rate Changes on Cash 3 (20)
-------- --------
Net decrease in cash (2,398) (2,643)
Cash, beginning of period 2,894 4,614
-------- --------
Cash, end of period $ 496 $ 1,971
======== ========
Supplemental cash flow disclosures:
Interest paid $ 8,941 $ 7,996
Income taxes paid $ 17 $ 865
The accompanying notes are in integral part of these statements.
<PAGE>
UNITED STATES LEATHER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
(Unaudited)
(1) Basis of Presentation:
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
required disclosures have been presented and all necessary adjustments
(consisting only of normal recurring adjustments) have been included to
fairly present the results of operations, financial position and cash
flows of United States Leather, Inc. (the "Company"). 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, 1996. Except as stated herein, significant accounting policies have
not changed materially from those set forth in said annual report.
(2) Net Loss Per Share:
Net loss per share is calculated by dividing the loss, by the weighted
average number of the Company's shares of Common Stock $.01 par value,
outstanding during the period.
(3) Inventories:
Inventories consist of the following:
June 30, December 31,
1997 1996
At lower of cost, using the first-in,
first-out (FIFO) cost method or market:
Raw materials and supplies $13,012 $18,556
Work in process 28,695 29,655
Finished goods 22,769 25,253
------ ------
Total FIFO inventories 64,476 73,464
Difference between FIFO and LIFO cost
of inventories (8,821) (8,715)
------ ------
Total LIFO inventories $55,655 $64,749
====== ======
(4) Revolving Credit Agreement:
In July 1997 the New Revolving Credit Facility was amended to (a) modify
FIFO EBITDA related covenants for the monthly periods July through
December 1997, (b) initially reduce then gradually increase availability
reserves over the balance of 1997, (c) limit availability pertaining to
certain work-in-process inventories, and (d) modify certain reporting
timetables.
The maximum and average outstanding borrowings and the weighted average
interest rates were calculated on daily borrowings outstanding. Letters
of credit of $4,871 as of June 28, 1997, reduced available capacity under
revolving credit facilities to $8,000 as of June 28, 1997.
(5) 1996 Restructuring:
During 1996, the Company began a series of initiatives to strengthen the
Company's financial position and return it to profitability. Among these
initiatives were (1) the reorganization of the management of the Company,
which included the elimination of division presidents and a general
reduction of salaried workforce, (2) comprehensive reviews of the
Company's products and inventories, (3) closing two operations which had
not been profitable and were not strategically critical to the Company,
(4) replacing critical talent which had been lost in prior years, and (5)
vacating the Company's corporate offices and moving such offices into one
of the Company's operating facilities. During 1996, the Company continued
efforts to grow the business of its Automotive Group. The Company
recorded a series of charges during 1996 pertaining to these initiatives
which management believes were unusual or non-recurring items. Such
charges during the second quarter of 1996 aggregated $9.4 million,
consisting of increased cost of goods sold of $ 6.6 million, a charge for
restructuring expenses of $2.5 million and increased amortization of
goodwill of $0.3 million. In addition, the Company incurred operating
losses during the first half of 1996 aggregating $0.7 million in
connection with the activities of USL Trading Operation and German
operations prior to their being discontinued.
<PAGE>
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain matters discussed herein are "forward-looking statements" intended
to qualify for the safe harbors from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe
the Company's future plans, objectives or goals are forward-looking
statements. Such forward-looking statements are subject to certain risks
and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from
those currently anticipated. Readers are urged to consider these factors
carefully in evaluating the forward-looking statements and are cautioned
not to place undue reliance on such forward-looking statements. The
forward-looking statements made herein are only made as of the date of
this report and the Company undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or
circumstances.
Selected Financial Data
The following table sets forth certain consolidated income statement data
of the Company as a percentage of net sales for the periods indicated.
Percentage of Net Sales
Three Months Six Months Ended
Ended
June 30, June 30,
1997 1996 1997 1996
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 91.9 95.9 93.8 90.8
------ ------ ------ -------
Gross profit 8.1 4.1 6.2 9.2
Selling, general &
administrative 6.3 7.6 6.8 7.7
Restructuring
expenses - 3.1 - 1.5
Amortization of
intangible assets 1.2 1.5 1.2 1.4
------ ------- ------- -------
Income (loss) from
operations 0.6 (8.1) (1.8) (1.4)
Other (income)
expense 0.2 0.2 0.1 0.1
Interest expense 5.4 5.3 5.3 5.4
------ ------ ------- -------
Loss before taxes (5.0) (13.6) (7.2) (6.9)
Income tax benefit - (4.6) (1.4) (2.2)
------ ------ ------- -------
Net loss (5.0) % (9.0) % (5.8) % (4.7) %
====== ====== ======= =======
<PAGE>
Results of Operations - Six Month Period
Ended June 30, 1997
Sales
The Company's finished leather operations are divided into three principal
lines of business. The following chart summarizes the Company's sales by
line of business:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 % Change 1997 1996 % Change
<S> <C> <C> <C> <C> <C> <C>
Furniture Group $19.3 $24.0 (19.6)% $40.0 $51.5 (22.3)%
Automotive Group 11.4 4.1 178.0 26.3 7.8 237.2
Footwear & Specialty
Leather Group 58.1 47.8 21.5 105.9 90.6 16.9
----- ----- ----- -----
Continuing Sales 88.8 75.9 17.0 172.2 149.9 14.9
Discontinued Operations - 5.1 100.0 - 10.2 100.0
----- ------ ----- -----
Total Sales $88.8 $81.0 9.6% $172.2 $160.1 7.6%
===== ====== ===== =====
</TABLE>
During the second quarter of 1996, the Company announced the
discontinuation of its USL Trading Division and the German operations of
its Furniture Group. Sales for these two operations during the second
quarter and the first six months of 1996, prior to their discontinuance,
were $5.1 million and $10.2 million respectively.
Results of Operations
General. The Company experienced a loss of $4.4 million in the
second quarter of 1997, compared with a loss of $7.3 million during the
same period in the prior year. For the six month year-to-date period, the
Company recorded a loss of $10.0 million versus a loss of $7.6 million the
prior year. Excluding the effects of non-recurring items recorded in 1996
(see Note 5 to Consolidated Financial Statements), net loss for the second
quarter and first six months of 1997 increased by $6.5 million and $11.7
million, respectively, compared to the same periods of 1996. The effect
of significantly higher cattlehide costs continued to be the principal
reason for these increased losses. Hide cost increases incurred during
these periods could not be recovered through increased finished leather
selling prices.
Net Sales. The Company's net sales in the second quarter of 1997
were $88.8 million, an increase of $7.8 million or 9.7% from the same
period one year ago. Sales from continuing operations increased $12.9
million or 17.0%. Year-to-date sales were $172.2 million, an increase of
$12.1 million or 7.6% over the prior year six month period. Year-to-date,
sales from continuing operations increased $22.3 million, or 14.9%. Sales
of by-products, principally splits and wet blues, and products tanned on a
contract basis for other tanneries, principally deerhides, were partially
responsible for these increases. Square footage of finished leather
shipped increased 12.5% for the quarter, and 7.5% year-to-date. The
remainder of the increase was attributable to price and mix, the latter
due principally to the higher pricing, on a square footage shipped basis,
associated with Automotive cut sets.
Furniture Group. Furniture Group sales during the second quarter
were $19.3 million, a decrease of $4.7 million or 19.6% from the second
quarter of 1996. Year-to-date sales were $40.0 million, a decline of
$11.5 million or 22.3% from the prior year period. Contributing to the
decline was a downturn in retail furniture sales, market share loss in
many of the Group's product lines because of lower-priced foreign
competition and the lingering effects of the delivery and product quality
problems experienced in the second half of 1996.
Automotive Group. Automotive Group sales more than doubled from the
comparable periods in 1996. Second quarter sales were $11.4 million or
$7.3 million higher than the prior year quarter. Year-to date sales were
$26.3 million or $18.5 million higher than the prior year period. The
increase is largely attributable to the volume in the Group's cut-to-
pattern business.
Footwear and Specialty Leather Group. Footwear and Specialty Leather
Group sales were $58.1 million during the second quarter of 1997, an
increase of $10.3 million or 21.5% from the second quarter of 1996. Year-
to-date sales were $105.9 million, an increase of $15.3 million, or 16.9%
over the comparable 1996 period. Square feet of finished leather shipped
increased 16.4% for the quarter, and 10.8% year-to-date. Strong demand for
the water-proof family of products, and increased finished split sales
were the principal drivers of the increased sales.
Gross Profit. Gross profit for the second quarter of 1997 was $7.2
million, an increase of $3.9 million or 118% from the second quarter of
1996. Year-to-date gross profit was $10.6 million, a decrease of $4.1
million or 28% from the comparable prior year period. Excluding the
effects of non-recurring charges recorded during the second quarter of
1996, gross profits declined $2.7 million and $10.7 million, respectively,
during the second quarter and first six months of 1997.
Excluding the effects of restructuring charges, gross margins were
8.1% and 12.2% for the three months ended June 30, 1997 and 1996,
respectively, and the gross margins for the six months ended June 30, 1997
and 1996 were 6.2% and 13.3%, respectively. Several factors negatively
impacted gross margins for the second quarter and the first half of 1997,
including cattlehide prices, which were significantly higher than in the
same periods of the prior year, and lingering inefficiencies in the
Automotive Group's cut-to-pattern plant. Further influencing gross
margins was the slow-down in the Furniture Group during the period, and
slowness in mid-fashion men's footwear during the second quarter of 1997.
The lower volume in these areas resulted in higher conversion costs at the
facilities manufacturing these products. Domestic cattlehide prices for
the second quarter of 1997 were approximately 11% higher than the second
quarter of 1996. For the year, cattlehide prices have increased
approximately 25% over the same period in 1996. As a result of these
increases in cattlehide prices, the cost of hides purchased during the
first six months of 1997 was approximately $12 million higher than the
same period a year earlier. Although cattlehide prices have declined
significantly since March 1997, these increased hide prices will continue
to adversely impact gross margin into the third quarter of 1997. Purchase
commitments made during June 1997 were at prices approximately 25% below
first quarter's high points. The Company recorded a $0.1 million LIFO
revaluation charge to operations during the first half of 1997, compared
with a $1.7 million credit in the first half of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the first six months of 1997 were $0.6
million lower than the same period of 1996, with the majority of this
decrease occurring in the second quarter of 1997. The principal reasons
were lower staffing and sales commission expenses.
Earnings before Interest, Taxes, Depreciation and Amortization.
Earnings before interest, taxes, depreciation and amortization (and
provisions for LIFO revaluations) ("FIFO EBITDA") during the second
quarter of 1997 was $3.1 million compared to $4.8 million of income,
excluding effects of restructuring in the second quarter of 1996. For the
six month period, FIFO EBITDA was $2.6 million for 1997 compared to $11.0
million for 1996, excluding the effects of restructuring. FIFO EBITDA,
which is the principal earnings measure in the New Revolving Credit
Facility, is not determined pursuant to generally accepted accounting
principles ("GAAP"), and should not be considered in isolation or as an
alternative to GAAP-derived measurements
Amortization of Intangible Assets. Amortization of intangible assets
was $2.0 million in the first six months of 1997 compared to $2.2 million
in the same period of 1996.
Interest Expense. Interest expense increased $0.6 million during the
first half of 1997 over the same period in 1996. $0.4 million of the
increase occurred in the second quarter of 1997. The increase was due to
higher outstanding borrowings during that period. The higher borrowings
were required to fund greater working capital requirements caused by
higher cattlehide prices and sales volume growth.
Loss Before Income Taxes. The Company incurred a loss before taxes
of $4.4 million in the second quarter of 1997, a reduction of $6.6 million
from a $11.0 million loss before taxes in the second quarter of 1996. The
year to date loss before taxes for 1997 was $12.4 million, an increase of
$1.4 million from the same period of 1996. This increase was principally
the result of lower gross profits as previously discussed.
Income Tax Benefit. In accordance with SFAS No. 109, "Accounting for
Income Taxes", which stipulates that tax benefits should not be recorded
if a company's operating losses are reasonably expected to exceed two
years' duration, the Company recorded no tax benefit for the second
quarter of 1997 compared to a benefit of $3.7 million recorded during the
same period of 1996. The income tax benefit for the first six months of
1997 was $2.5 million verses $3.4 in the same period of 1996. After
adjusting income before income taxes for nondeductible amortization of
goodwill, the effective tax rate was 23.6% during the first six months of
1997, compared to 38.5% for the same period in 1996.
Net Loss. Due to the factors previously discussed, the Company had a
net loss of $4.4 million in the second quarter of 1997, compared to a net
loss of $7.3 million during the second quarter of 1996. For the six month
period ended June 1997, the net loss was $10.0 million compared to a net
loss of $7.6 million for the same period in 1996.
Liquidity and Capital Resources. The Company used $18.5 million of
cash for operations during the first half of 1997, compared with $5.9
million of cash provided by operations during the first half of 1996. The
principal reasons for change in cash flow were (1) a $13.8 million
comparative increase in accounts receivable, (2) a $5.7 million increase
in net operating losses and (3) a $5.0 million comparative decrease in
accounts payable and accrued liabilities. Accounts receivable increased
by $13.5 million during the first half of 1997 principally because of
increased sales volume. Sales during November and December of 1996 were
impacted by holiday-driven customer and factory shutdowns which, in turn,
generated lower accounts receivable balances as of December 31, 1996.
During the first half of 1997, sales volumes returned to more normal
historical levels, resulting in a rebuilding of such receivable balances
during the period. Increased sales volume in the Company's Automotive
Group also contributed to the increase. Days sales outstanding in
accounts receivable as of June 28, 1997 were 51 compared with 40 days as
of June 30, 1996. LIFO inventories decreased approximately $9.1 million
during the first half of 1997. The decrease was due principally to better
asset management and improved quality.
Capital expenditures totaled $1.5 million during the first half of
1997. This represents a decrease of approximately $1.5 million from the
same period in 1996.
On June 28, 1997, the Company's aggregate indebtedness was $185.2
million. This consisted of $135.8 million of principal and accrued
interest on its 10-1/4% Senior Notes Due 2003 and $49.4 due under the New
Revolving Credit Facility. The New Revolving Credit Facility is an $80
million facility, maturing on October 31, 2001. Borrowing availability is
based on accounts receivable and inventory balances, less certain
exclusions, less amounts already borrowed under the facility and letters
of credit issued thereunder. Availability as of June 28, 1997 was $8.0
million.
On July 31, 1997 the Company made a $6.9 million semi-annual interest
payment on its 10-1/4 Senior Notes Due 2003. This increased the Company's
borrowings under the New Revolving Credit Facility to approximately $46.0
million and lowered the Company's availability under this facility to
approximately $5.0 million.
The Company incurred a substantial loss in 1996 and continued to
incur losses during the first half of 1997. Although management has
implemented measures which it believes will eventually improve the
financial performance of the Company, there can be no assurances that such
measures will be sufficient to permit the Company to reverse recent trends
and meet all of its obligations going forward. In March and again in July
1997, the New Revolving Credit Facility was amended to, among other
things, change FIFO EBITDA covenants for 1997. Management believes that
the Company will be in compliance with these amended covenants and that it
will have sufficient liquidity to conduct its operations. However, there
can be no assurance that the Company's operations will generate sufficient
cash flow, considered together with the amounts available under the New
Revolving Credit Agreement, to meet all of the Company's future liquidity
requirements. The Company is in the process of evaluating long term
financing and capital structure alternatives.
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
4.5 Amendment No. 3 dated as of July 30, 1997, to Restated Revolving
Credit Agreement dated as of December 20, 1996, among United
States Leather, Inc., A.R. Clarke Limited, the First Bank of
Boston and the other banks which are parties thereto.
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K: NONE
<PAGE>
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.
Date: August 8, 1997 By / s / Kinzie L Weimer
Kinzie L Weimer
Senior Vice President and Chief Financial Officer
(Signing on behalf of the Registrant
and as Chief Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
4.5 Amendment No. 3 dated as of July 30, 1997, to Restated Revolving
Credit Agreement dated as of December 20, 1996, among United
States Leather, Inc., A.R. Clarke Limited, the First Bank of
Boston and the other banks which are parties thereto.
27 Financial Data Schedule (EDGAR version only)
AMENDMENT NO. 3 TO RESTATED REVOLVING CREDIT AGREEMENT
This Amendment No. 3 to Restated Revolving Credit Agreement (the
"Third Amendment"), made as of this 30th day of July, 1997, among the
undersigned, amends that certain Restated Revolving Credit Agreement,
dated as of December 20, 1996, as amended previously by Amendments dated
February 14, 1997 and as of March 28, 1997 (as amended thereby and hereby,
the "Agreement"), among the Borrowers, the Agent, individually and as
agent for itself and each of the other Banks, and the Banks (as such terms
are defined in the Agreement).
Reference is made to the following facts:
A. The Borrowers, the Agent and the Banks have entered into the
Agreement pursuant to which the Banks have, on the terms and subject to
the conditions stated therein, made loans to the U.S. Borrower;
B. The Borrowers requested that the Agreement be amended to modify,
among other provisions, the financial covenants therein to avoid the
occurrence of an Event of Default; and
C. The Agent and the Banks have agreed to make the modifications
requested by the Borrowers solely in accordance with the terms and
conditions of this Third Amendment.
NOW, THEREFORE, in consideration of the premises and of good and
valuable consideration, the receipt and sufficiency of which are hereby
severally acknowledged, the parties hereto agree as follows:
Section 1. Definitions. All capitalized terms used herein which are
defined in the Agreement shall have the meanings herein as therein, except
as otherwise specifically provided herein.
Section 2. Amendments to the Loan Documents. From and after the
date hereof, the Agreement is hereby amended as follows:
2.1 The definitions in Section 1.1 of the Agreement are hereby
amended to provide as follows:
2.1.1 The definition of Availability is hereby amended to
provide in its entirety as follows:
"Availability. The sum of the U.S. Borrowing
Base, less the "Availability Reserve" (as defined
below), minus the Canadian Deficiency. For the
periods described below, the Availability Reserve
shall equal the amount set forth below:
Period Availability Reserve
July 30, 1997 through August $4,000,000
30, 1997
August 31, 1997 through $6,000,000 ($5,000,000 if so
September 15, 1997 determined by the Agent in
its unrestricted discretion)
September 16, 1997 through $6,000,000
September 29, 1997
September 30, 1997 through $6,500,000
October 30, 1997
October 31, 1997 through $7,000,000
November 27, 1997
November 28, 1997 through $7,500,000
December 30, 1997
December 31, 1997 and $8,000,000
thereafter"
2.1.2 Section 1.1 of the Agreement is hereby amended by the
addition of the following definition:
"Availability Reserve. See the definition of
Availability."
2.1.3 The definition of Borrowing Base is hereby amended to
provide in its entirety as follows:
"Borrowing Base. In relation to the Borrowers as at any
particular date, and subject to any adjustment required to
comply with the last sentence of this definition, an amount
equal to the lesser of (i) the aggregate Revolving Credit
Commitments as in effect on such date, and (ii) the sum, as
determined by the Agent, as at such date, of (A) an amount equal
to 55% of the Net Security Value of Base Inventory, plus 55% of
Eligible Documentary Letters of Credit and (B) 85% of the Net
Outstanding Amount of Base Accounts as at such date; provided
that the Agent, subject to the consent of the Majority Banks or
all of the Banks as required by Section 9.8 hereof, in the
reasonable, good faith exercise of its discretion and based upon
a determination that a material change in the Collateral has
occurred, reserves the right to increase or decrease the
foregoing percentages. In no event shall (1) the amount
pursuant to clause (ii)(A) of this definition exceed
$45,000,000, or (2) the portion of such amount pursuant to such
clause (ii)(A) attributable to the Net Security Value of Base
Inventory constituting work-in-process other than wet blues
exceed 50% of the aggregate of such amount pursuant to such
clause (ii)(A).
2.1.4. In order to eliminate the Gebhardt Reserve from the
Agreement, the Agreement is amended by the deletion in its entirety of the
definition of the "Gebhardt Reserve" and the first four lines of the
definition of "Net Outstanding Amount of Base Accounts" are hereby amended
to read as follows:
"Net Outstanding Amount of Base Accounts. The net amount
of Base Accounts outstanding after eliminating from the
aggregate amount of outstanding Base Accounts any Account
which:"
2.2 Section 2.7 of the Agreement is hereby amended by (i) the
deletion of the amount $1,000,000 in clause (z) of Subsection 2.7(b) and
the replacement of such amount with $500,000; (ii) the deletion in its
entirety of clause (X) of such Subsection 2.7(b); and (iii) the insertion
of the phrase "(minus the aggregate sum of all sales of assets excluded
pursuant to clause (z) of this Subsection 2.7(b))" immediately following
the amount $5,000,000 in both places such amount appears in Subsection
2.7(b).
2.3 Clause (f) of Section 5.1 of the Agreement is hereby amended by
the addition at the end thereof of the following sentence:
"In addition to, and not in limitation of, the foregoing, the
Borrower shall also deliver Covenant Compliance Certificates for
each quarter ending on December 31 by no later than January 25
of the following calendar year."
2.4 Subparagraph (iii) of Section 6.6.(a) of the Agreement is hereby
amended to provide in its entirety as follows:
"(iii) sales of assets not in the ordinary course of
business in an aggregate amount, measured on a cumulative basis
until the Maturity Date or earlier termination of this
Agreement, not to exceed the lesser of (A) 10% of the value of
the Borrower's FIFO Tangible Assets, or (B) $500,000;"
2.5 The portion of the table in Section 6.9 regarding the period
from July 1, 1997 through December 31, 1997 is hereby amended to provide
as follows:
Maximum Usual
Allowance Permitted
"Period Amount in Minimum EBITDA
July 1, 1997 through ($600,000) $0*
July 31, 1997
August 1, 1997 through $1,500,000 $0*
August 31, 1997
September 1, 1997 through $1,600,000 $0*
September 30, 1997
October 1, 1997 through $2,300,000 $0*
October 31, 1997
November 1, 1997 through $1,400,000 $0*
November 30, 1997
December 1, 1997 through $1,000,000 $0*"
December 31, 1997
2.6 Section 6.15 of the Agreement is hereby amended to provide in
its entirety as follows:
"6.15 Borrowing Base. None of the Borrowers shall cause or
permit the aggregate principal amount of all Revolving Loans and
the aggregate face amount of all Letters of Credit outstanding
at any time to exceed the difference of the Borrowing Base at
such time, minus the Availability Reserve."
2.7 The address for the Borrowers in Section 9.1 of the Agreement is
hereby amended to provide as follows:
"United States Leather, Inc.
1403 West Bruce Street
Milwaukee, WI 53204
Attention: Kinzie L. Weimer, Chief Financial Officer
Telecopy: 414-389-5192;"
and the "attention" line in the address of the Agent is hereby amended to
provide as follows:
"Attention: Howard C. Bailey, Director, Mail Stop 01-09-06."
2.8 Clause (ix) of Section 9.8(d) is hereby amended to read in its
entirety as follows:
"(ix) change the definition of Availability' or Availability
Reserve' hereunder."
2.9 Exhibit G is hereby amended to read in its entirety as set forth
in Exhibit G attached hereto.
Section 3. Conditions precedent to this Amendment. The agreements
of the Agent and the Banks set forth in this Third Amendment are subject
to the satisfaction of the following conditions precedent:
3.1 At the time of the execution of the Third Amendment, there shall
exist no Defaults or Events of Default under the terms of the Agreement,
as amended hereby, the Loan Documents and the Ancillary Documents;
3.2 The U.S. Borrower shall have reimbursed the Agent for all of the
reasonable fees and disbursements of Goulston & Storrs, counsel to the
Agent, which shall have been incurred by the Agent prior to or in
connection with the preparation, negotiation, execution and delivery of
this Third Amendment and the consummation of the transactions contemplated
herein;
3.3 Since the date of the commencement of the Agent's most recent
commercial finance examination, there shall have been no changes in the
assets, liabilities, financial condition, business, income, operations or
prospects of any of the Borrowers, the effect of which have had or will
have, in the aggregate, a material adverse effect on the assets,
properties, business, prospects, income, operations or financial condition
of the Borrowers;
3.4 This Third Amendment shall have been duly and properly
authorized, executed and delivered to the Agent, and shall be in full
force and effect; and
3.5 The U.S. Borrowers shall have paid to the Agent, for the benefit
of the Agent and the U.S. Banks in accordance with their respective U.S.
Commitment Percentages immediately prior to the execution and delivery
hereof, a non-refundable restructuring fee of $150,000.
Section 4. Representations and Warranties. In order to induce the
Agent and the Banks to enter into this Third Amendment, the Borrowers,
jointly and severally, represent and warrant to the Agent and each Bank
that:
4.1 Each of the Borrowers (a) is a corporation duly organized,
validly existing and in good standing under the laws of the state or
Province in which it is organized as listed on Exhibit D to the Agreement,
(b) has all requisite corporate power to own its property and conduct its
business as now conducted and as presently contemplated, and (c) is duly
qualified and in good standing as a foreign corporation and is duly
authorized to do business in each jurisdiction listed in Exhibit D to the
Agreement;
4.2 The execution, delivery and performance of this Third Amendment
and the transactions contemplated hereby are within the corporate power
and authority of each Borrower and have been authorized by all necessary
corporate proceedings, and do not (a) require any consent or approval of
any creditors, trustees for creditors or shareholders of any of the
Borrowers, including, without limitation, the Indenture Trustee or any
other party pursuant to the terms of the Indenture Agreement, (b)
contravene any provision of the charter documents or by-laws of any of the
Borrowers or any law, rule or regulation applicable to any of the
Borrowers, (c) contravene any provision of, or constitute an event of
default or events that, but for the requirement that time elapse or notice
be given, or both, would constitute an event of default, under, any other
agreement, instrument, order or undertaking binding on any of the
Borrowers, including, without limitation, the Indenture Agreement, or (d)
result in or require the imposition of any Encumbrance on any of the
properties, assets or rights of any of the Borrowers other than Permitted
Encumbrances; and
4.3 Each of the representations, warranties, covenants and negative
covenants set forth in the Agreement, as amended hereby, and the other
Loan Documents is true and correct on the date hereof in all material
respects, and no event has occurred and no condition exists which
constitutes a Default or Event of Default under the Agreement, as amended
hereby, or any other Loan Documents or any Ancillary Document.
Section 5. Indemnification. The Borrowers shall absolutely and
unconditionally indemnify and hold harmless the Agent and each of the
Banks against any and all claims, demands, suits, actions, causes of
action, damages, losses, settlement payments, obligations, costs, expenses
and all other liabilities whatsoever which shall at any time or times be
incurred or sustained by the Agent or any of the Banks, or by any of their
shareholders, directors, officers, employees, representatives,
subsidiaries, affiliates or agents (other than as a result of the gross
negligence or willful misconduct of the Agent or any of the Banks or such
officers, directors, shareholders, employees or agents thereof) on account
of, or in relation to, or in any way in connection with, any of the
arrangements or transactions contemplated by, associated with or ancillary
to either this Third Amendment, the Agreement or any of the other Loan
Documents or any of the Ancillary Documents, whether or not all or any of
the transactions contemplated by, associated with, or ancillary to this
Third Amendment, the Agreement, any of such Loan Documents or any of such
Ancillary Documents, are ultimately consummated (other than those costs or
expenses incurred by the Banks other than the Agent in connection with the
syndication, and by the Agent and the Banks in the day-to-day
administration of the transactions contemplated by the Agreement, as
amended hereby, and the other Loan Documents).
Section 6. Miscellaneous.
6.1 As of the date hereof, and after giving effect to the
consummation of any transactions contemplated by this Third Amendment, the
Borrowers acknowledge that each has performed, satisfied, or complied with
all covenants and conditions to be performed, satisfied or complied with
by it under the Agreement, as amended hereby. The Borrowers hereby
covenant and agree that, after giving effect to the consummation of the
transactions contemplated hereby, the Borrowers will continue to perform,
satisfy or comply with all covenants and conditions to be performed,
satisfied or complied with by each of them under the Agreement, as amended
hereby.
6.2 The obligations of the Borrowers (i) to repay to the Agent and
the Banks all of the unpaid principal of each of the Revolving Loans made
or to be made in the future pursuant to the Agreement, as amended hereby,
(ii) to pay to the Agent all of the unpaid interest accrued or to accrue
thereon, (iii) to pay to the Agent and the Banks all of the other
Obligations of the Borrowers, are and will continue to be entitled to all
of the benefits and to all of the security created or contemplated by the
Agreement, as amended hereby, and the other Loan Documents.
6.3 Except as otherwise expressly provided in this Third Amendment,
all of the terms, conditions and provisions of the Agreement and each of
the other Loan Documents remain unaltered and are in full force and
effect. The Agreement and this Third Amendment shall be read and
construed as one Agreement.
6.4 This Third Amendment may be executed in any number of
counterparts, but all such counterparts shall together constitute but one
and the same instrument. In making proof of this Third Amendment, it
shall not be necessary to produce or account for more than one counterpart
thereof signed by each of the parties hereto.
6.5 All of the Obligations undertaken hereunder by the Borrowers are
hereby undertaken by each of them jointly and severally.
6.6 The captions and headings of the various sections and
subsections of this Third Amendment are provided for convenience only and
shall not be construed to modify the meaning of such sections or
subsections.
6.7 The invalidity or unenforceability of any one or more phrases,
clauses or sections of this Third Amendment under particular circumstances
shall not affect the validity or enforceability thereof or of the
Agreement, as amended hereby, under other circumstances, or the validity
or the enforceability of the remaining portions of this Third Amendment or
the Agreement, as amended hereby.
6.8 This Third Amendment shall be deemed to be a contract under seal
and shall be construed in accordance with and governed by the laws of the
Commonwealth of Massachusetts (without giving effect to any conflicts of
law provisions contained therein).
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment under seal as of the day first above-written by the respective
officers hereunto duly authorized.
UNITED STATES LEATHER, INC.,
as a Borrower
By: /s/
Title:
A. R. CLARKE LIMITED, as a Borrower, and
Guarantor of United States Leather, Inc's
Obligations
By: /s/
Title:
BANKBOSTON, N.A. (f/k/a The First National
Bank of Boston), as the Agent
By: /s/
Title:
(Signatures continued next page)
BANKBOSTON, N.A. (f/k/a The First National
Bank of Boston), as a Bank
By:/s/
Title:
HELLER FINANCIAL, INC., as a Bank
By:/s/
Title:
THE CHASE MANHATTAN BANK, as a Bank
By: /s/
Title:
BTM CAPITAL CORPORATION, as a Bank
By: /s/
Title:
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
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1
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