UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3847 East Loop 820 South, Ft. Worth, Texas 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to by filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares outstanding as of
Class November 15, 1996
- -------------------------- ------------------------------
Common Stock, par value 9,853,161
$.0024 per share
<PAGE>
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 1996
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Three and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1995 . . . . . . . . . . . . . . 5
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1996. . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . .. . . . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . .. . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Default Upon Senior Securities. . . . . . . . .. . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . .. . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-22
2
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
THREE MONTHS NINE MONTHS
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
NET SALES $ 7,015,834 $ 7,580,224 $ 21,527,857 $ 23,768,665
COST OF SALES 4,238,206 4,503,675 13,517,603 13,640,416
---------------- ---------------- ---------------- ----------------
Gross Profit 2,777,628 3,076,549 8,010,254 10,128,249
OPERATING EXPENSES 2,522,552 2,561,332 8,283,642 7,664,182
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM OPERATIONS 255,076 515,217 (273,388) 2,464,067
OTHER (INCOME) EXPENSE:
Interest expense 238,163 187,457 787,517 543,295
Other, net 1,363 (18,062) (5,781) (31,001)
---------------- ---------------- ---------------- ----------------
Total other (income) expense 239,526 169,395 781,736 512,294
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 15,550 345,822 (1,055,124) 1,951,773
PROVISION (BENEFIT) FOR INCOME TAXES 1,159 141,336 (236,558) 798,004
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ 14,391 $ 204,486 $ (818,566) $ 1,153,769
================ ================ ================ ================
NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ 0.00 $ 0.02 $ (0.08) $ 0.12
================ ================ ================ ================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 9,788,530 9,836,645 9,788,530 9,820,235
================ ================ ================ ================
DIVIDENDS PAID PER SHARE $ 0.00 $ 0.00 $ 0.00 $ 0.00
================ ================ ================ ================
The accompanying notes are an intergral part of these financial statements.
3
</TABLE>
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1996 1995
------------------ -----------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash $ 218,372 $ 477,159
Accounts receivable-trade, net of allowance for
doubtful accounts of $44,000 and $39,000
in 1996 and 1995, respectively 2,694,409 2,784,050
Inventory 8,791,725 7,903,179
Prepaid income taxes 468,511 203,559
Deferred income taxes 114,431 88,321
Other current assets 535,546 656,837
------------------ -----------------
Total current assets 12,822,994 12,113,105
------------------ -----------------
PROPERTY AND EQUIPMENT, at cost 2,642,212 2,474,056
Less-accumulated depreciation and amortization (1,201,850) (1,014,966)
------------------ -----------------
Property and equipment, net 1,440,362 1,459,090
GOODWILL and other, net of accumulated amortization of
$591,000 and $300,000 in 1996 and 1995, respectively 5,527,177 5,761,181
------------------ -----------------
$ 19,790,533 $ 19,333,376
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,063,095 $ 1,398,917
Accrued expenses and other liabilities 589,156 655,489
Income taxes payable - 48,300
Notes payable and current maturities of
long-term debt 9,548,361 1,296,359
------------------ -----------------
Total current liabilities 11,200,612 3,399,065
------------------ -----------------
DEFERRED INCOME TAXES 132,577 85,197
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 30,102 6,566,809
SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK - -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,000
shares authorized, none issued or outstanding - -
Common stock, $0.0024 par value; 25,000,000 shares
authorized, 9,853,161 shares issued in 1996 and 1995 23,648 23,648
Paid-in capital 4,091,842 4,130,796
Retained earnings 4,635,479 5,454,045
Cumulative Translation Adjustments 2,457 -
Less: Unearned Shares held by ESOP, 64,631
shares in 1996 and 1995 (326,184) (326,184)
------------------ -----------------
Total stockholders' equity 8,427,242 9,282,305
------------------ -----------------
$ 19,790,533 $ 19,333,376
================== =================
The accompanying notes are an integral part of these financial statements.
4
</TABLE>
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (818,566) $ 1,153,769
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation & amortization 498,371 312,435
(Gain) loss on sales of assets (7,541) (9,094)
Deferred financing costs 156,891 -
Net changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable-trade 68,159 (151,036)
Inventory (812,562) (319,547)
Prepaid income taxes (264,952) (61,284)
Other current assets 137,946 (535,894)
Accounts payable (335,822) (284,766)
Accrued expenses and other liabilities (66,333) (360,551)
Income taxes payable (48,300) (88,176)
Deferred income taxes 21,270 (25,428)
----------------- -----------------
Total adjustments (652,873) (1,523,341)
----------------- -----------------
Net cash used in operating activities (1,471,439) (369,572)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (173,591) (349,846)
Proceeds from sales of assets 7,444 16,279
Cash paid for acquisitions, net of cash acquired (300,000) (5,130,971)
Decrease in assets restricted for acquisitions - 5,040,656
Other intangible costs - (28,389)
----------------- -----------------
Net cash used in investing activities (466,147) (452,271)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 3,300,000 2,574,904
Payments on notes payable and long-term debt (1,584,704) (1,720,049)
Stock issuance costs (38,954) (8,818)
----------------- -----------------
Net cash provided by financing activities 1,676,342 846,037
----------------- -----------------
Effect of exchange rate changes on cash 2,457 -
NET INCREASE (DECREASE) IN CASH (258,787) 24,194
CASH, beginning of period 477,159 402,253
----------------- -----------------
CASH, end of period $ 218,372 $ 426,447
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 539,829 $ 461,651
Income taxes paid during the period 57,685 1,045,539
The accompanying notes are an integral part of these financial statements.
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<S> <C> <C> <C> <C>
Common Stock Cumulative
------------------------
Number Paid-in Retained Translation Unearned
of Shares Par Value Capital Earnings Adjustments ESOP Shares Total
------------ ---------------------------------------- ------------- ------------- -------------
BALANCE, December 31, 1995 9,853,161 $ 23,648 $ 4,130,796 $ 5,454,045 $ - $ (326,184) $ 9,282,305
Stock issuance costs - - (38,954) - - - (38,954)
Net loss - - - (818,566) - - (818,566)
Translation adjustment 2,457 2,457
------------ ---------------------------------------- ------------- ------------- -------------
BALANCE, September 30, 1996 9,853,161 $ 23,648 $ 4,091,842 $ 4,635,479 $ 2,457 $ (326,184) $ 8,427,242
============ ======================================== ============= ============= =============
The accompanying notes are an intergral part of these financial statements.
6
</TABLE>
<PAGE>
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly its financial position as of September
30, 1996 and December 31, 1995, and the results of operations and cash flows for
the three and nine month periods ended September 30, 1996 and 1995. The results
of operations for the three and nine month periods are not necessarily
indicative of the results to be expected for the full fiscal year. The
consolidated financial statements should be read in conjunction with the
financial statement disclosures contained in the Company's 1995 Annual Report to
Stockholders.
2. Inventories
The components of inventory consist of the following:
September 30, December 31,
1996 1995
--------------- -------------
Finished goods held for sale $ 7,414,460 $ 6,736,811
Raw materials and work in process 1,377,265 1,166,368
-------------
------------
$ 8,791,725 $ 7,903,179
============ ===========
3. Acquisitions
On March 1, 1996, the Company acquired all of the issued and outstanding
shares of capital stock of The Leather Factory of Canada, Ltd., the Company's
Canadian distributor located in Winnipeg, Manitoba. For financial reporting
purposes, the transaction was accounted for under the purchase method, effective
March 1, 1996. Cost in excess of assets acquired (goodwill) is being amortized
over 10 years. The total purchase price was $300,000 (USD). Proforma financial
information for the Canadian acquisition is not provided, as such amounts would
be insignificant.
4. Notes Payable and Long Term Debt
As reported in the Company's 1995 Annual Report on Form 10-KSB, the Company
has certain financing arrangements with NationsBank of Texas, N.A.
("NationsBank"). Pursuant to the Second Restated Loan Agreement dated July 24,
1995 and as amended effective December 31, 1995, and March 31, 1996 (the "Loan
Agreement"), these NationsBank financing arrangements included a working capital
line of credit, an acquisition line of credit, and a term facility. As a result
of the loss generated in the second quarter of the current fiscal year, since
June 30, 1996, the Company has been in default under certain financial covenants
contained in the Loan Agreement. These financial covenants relate to the
following ratio tests:
(1) Current Assets to Current Liabilities;
(2) Total Liabilities to Tangible Net Worth;
(3) Senior Funded Debt to Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA"); and
(4) Cash Flow Ratio.
7
<PAGE>
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On August 14, 1996, effective June 30, 1996, NationsBank and the Company
entered into an amendment of the Loan Agreement, the Forbearance Agreement and
Third Amendment to Second Restated Loan Agreement (the "Third Amendment"),
whereby NationsBank agreed to forbear the exercising of their legal rights due
to the aforementioned events of default under the Loan Agreement until September
30, 1996 (the "Forbearance Period"). In the Third Amendment, NationsBank also
waived a default under the Borrowing Base and the element of the Borrowing Base
which gave rise to the default, the net income test, was eliminated as part of
said Borrowing Base. Moreover, the Third Amendment provided that since no funds
had been advanced on the acquisition line of credit, this line of credit
terminated pursuant to its terms on July 24, 1996.
On and effective as of September 30, 1996, NationsBank and the Company
entered into an amendment of the Loan Agreement, the Forbearance Agreement and
Fourth Amendment to the Second Restated Loan Agreement (the "Fourth Amendment"),
whereby NationsBank agreed to extend the Forbearance Period until December 31,
1996 (the "Extended Forbearance Period"). In the Fourth Amendment, NationsBank
and the Company agreed to decrease the amount of the working capital line of
credit from $10 million to $7.5 million. Additionally, as part of the Fourth
Amendment, the Company agreed to grant NationsBank a lien on its facility
located in Tampa, Florida.
During the Extended Forbearance Period, NationsBank has and will continue
to allow the Company to use its working capital line of credit, subject to the
reduction in the size of said line of credit as noted herein above. As of
September 30, 1996 the Company has $508,955 available for further advances under
its working capital line of credit. NationsBank has informed the Company that
prior to the end of the Extended Forbearance Period it intends to submit a
proposal to restructure the working capital line of credit and the term facility
on terms and conditions acceptable to NationsBank in its discretion. The Company
may accept or reject this proposal. Given the duration of the Extended
Forbearance Period, all debt owed to NationsBank as of September 30, 1996, has
been reflected on the accompanying financial statements as a current liability.
5. Senior Cumulative Convertible Preferred Stock
On July 28, 1996, the Company's one year commitment pursuant to Stock
Purchase Agreement with Center Street Capital Partners, L.P. and Stratford
Capital Partners, L.P. (the "Buyers") expired according to its terms. Under the
Stock Purchase Agreement dated July 28, 1995, the Buyers agreed to deliver a one
year commitment to purchase up to $10 million aggregate principal amount of
Senior Cumulative Convertible Preferred Stock (the "Preferred Stock"), par value
$0.10 per share, of the Company, at a purchase price of $100 per share.
The Preferred Stock described above was created pursuant to a Certificate
of Designation, Preferences and Rights of the Senior Cumulative Convertible
Preferred Stock Dated July 24, 1995 (the "Certificate of Designation"), which
amended the Company's Certificate of Incorporation in the state of Delaware.
Although the aforementioned one year commitment has expired, the Company's
financial statements will reflect the Preferred Stock until such time as the
Company amends its Certificate of Incorporation to revoke the Certificate of
Designation. Such revocation should occur prior to the end of the current fiscal
year.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- -------
The Leather Factory, Inc. ("the Company") is a leading one stop source for
leather, traditional leathercraft materials involving such products as
do-it-yourself kits, stamping sets, and leatherworking tools, craft-related
items including various types of leather, lace, beads, and wearable art
accessories, hardware, metal garment accessories such as belt buckles, belt
buckle designs and conchos, shoe repairing supplies and leather finishes. These
products are distributed primarily on a wholesale level and principally through
the Company's twenty-two sales/distribution units in the United States and
Canada. Moreover, the Company is a manufacturer and distributor of hat trims in
braids, leather, and woven fabrics. These hat trims are sold to hat
manufacturers and distributors.
Results of Operations
- ---------------------
Analysis of Third Quarter 1996 Compared to Third Quarter 1995
Income Statement Comparison
The following table sets forth, for the interim periods indicated, certain
items from the Company's Consolidated Statements of Income expressed as a
percentage of net sales:
Quarterly Period Ended
September 30,
1996 1995
---- ----
Net sales 100.0% 100.0%
Cost of sales 60.4 59.4
---- ----
39.6 40.6
Operating expenses 36.0 33.8
- ------------------ ---- ----
Income (loss) from operations 3.6 6.8
Other (income) expense 3.4 2.2
- ---------------------- ---- ----
Income (loss) before income taxes .2 4.6
Provision (benefit) for income taxes .0 1.9
- ------------------------------------ ---- ----
Net income (loss) .2% 2.7%
==== ====
Revenues
- --------
The Company's net sales decreased by 7.4% to $7,015,834 during the third
fiscal quarter ended September 30, 1996 from $7,580,224 generated in the third
quarter of 1995. The 7.4% decrease in revenues was primarily made up of two
pieces. Reduced sales at our Roberts Cushman & Company, Inc. Subsidiary
("Cushman") made up 3.3% and reduced unit sales to the retail craft industry
made up 3.9%. The Company's sales to the retail craft industry and its sales at
Cushman continued to be negatively impacted during the quarter by challenging
retail environments in the craft and western markets.
Given the softness and conditions of the craft and western markets, the
Company is making a concentrated effort to develop new products and sell to new
markets and expects these efforts to be reflected in fourth quarter 1996 and
first quarter 1997 sales. Long-term trends continue to be difficult to determine
at this point. No one customer makes up ten percent (10%) or more of the
Company's sales.
9
<PAGE>
Costs, Gross Profit, and Expenses
- ---------------------------------
Cost of sales as a percentage of revenue was 60.4% for the third fiscal
quarter of 1996 as compared to 59.4% for the same quarter in 1995. A determined
effort by Company management to increase manufacturing productivity and thus to
reduce the cost of sales as a percent of revenue in the third quarter started to
show some results as we moved to within one percent of the 1995 third quarter
even though we continue to operate in a very competitive market environment.
Gross profit as a percentage of sales in the third fiscal quarter was 39.6%
in 1996 compared to 40.6% in 1995. Total gross profit decreased 9.7% to
$2,777,628 from $3,076,549 generated in the quarter ended September 30, 1995.
The maintenance of the gross profit percentage within one percent of 1995 with a
7.4% reduction in sales was primarily the result of management's efforts as
discussed above.
Operating expenses decreased $38,780 or 1.5% to $2,522,552 during the third
fiscal quarter of 1996 from $2,561,332 during the quarter ended September 30,
1995. The decrease in the dollar amount of operating expenses between the two
quarters was primarily the result of management's efforts to reduce labor costs
so that they are more in line with current sales levels.
Other (Income) Expense
- ----------------------
Other expenses were $239,526 for the third fiscal quarter of 1996 as
compared to $169,395 during the same quarter in 1995. This increase was
primarily due to higher interest expenses and a reduction in the discounts taken
for early invoice payment.
Net Income
- ----------
Net income was $14,391 during the third fiscal quarter of 1996 compared
to $204,486 during the quarter ended September 30, 1995. Management was
encouraged that efforts discussed above in cost of sales and operating costs
resulted in a net profit when faced with a 7.4% decrease in sales.
10
<PAGE>
Analysis of Nine Months Ended September 30, 1996
to Nine Months Ended September 30, 1995
Income Statement Comparison
The following table sets forth, for the interim periods indicated, certain
items from the Company's Consolidated Statements of Income expressed as a
percentage of net sales:
Nine Months Ended
September 30,
1996 1995
---- ----
Net sales 100.0% 100.0%
Cost of sales 62.8 57.4
----- ----
Gross profit 37.2 42.6
Operating expenses 38.5 32.2
----- ----
Income (loss) from operations -1.3 10.4
Other (income) expense 3.6 2.2
---- -----
Income (loss) before income taxes -4.9 8.2
Provision (benefit) for income taxes -1.1 3.3
---- -----
Net income (loss) -3.8% 4.9%
==== ====
Revenues
- --------
The Company's net sales decreased by 9.4% to $21,527,857 during the nine
months ended September 30, 1996 from $23,768,665 generated in the same period of
1995. The 9.4% decrease in revenues was primarily made up two pieces. Reduced
sales at Cushman made up 3.2% and reduced unit sales to the retail craft
industry made up 5.5%. During the nine months ended September 30, 1996, the
Company's sales continued to be impacted by the softness in the craft and
western markets.
Costs, Gross Profit, and Expenses
- ---------------------------------
Cost of sales as a percentage of revenue was 62.8% for the nine months
ended September 30, 1996 as compared to 57.4% for the same nine months in 1995.
The difference in the relative cost of sales percentage was principally
attributable to a change in sales mix and price competition in a very
competitive market environment.
Operating expenses increased $619,460 or 8.1% to $8,283,642 during the nine
months ended September 30, 1996 from $7,664,182 during the same time in 1995.
The increase in the dollar amount of operating expenses between the two nine
month periods was due to various factors, including an increase in bad debt
expense of $120,665 because of a significant customer (3% of 1995 net sales)
declaring Chapter 11 bankruptcy, and also, expenses associated with two new
locations, write-off of certain financing costs for acquisition financing
commitments which expired in July 1996, write down of certain purchased goodwill
due to an impairment of said goodwill and an increase in operating expenses at
Cushman, some of which were related to previous labor problems.
Other (Income) Expense
- ----------------------
Other expenses were $781,736 for the nine months ended September 30, 1996
as compared to $512,294 during the nine months ended in June of 1995. This
increase was primarily due to the write-off of the commitment and facility fees
attributable to the acquisition financing commitments which expired in July
1996, as noted above, and an increase in interest expense.
11
<PAGE>
Net Income
- ----------
Net income decreased to a net loss of $818,566 for the nine months ended
September 30, 1996 from a net gain of $1,153,769 during the nine months ended
September 30, 1995. The size of this decrease in net income between the two
quarters is due to the factors noted above regarding sales, gross profit,
operating expenses and other (income) expense.
Capital Resources and Liquidity
- -------------------------------
The primary sources of liquidity and capital resources during the first
nine months of 1996 were borrowings on the Company's credit facility with
NationsBank of Texas, N.A. ("NationsBank") and operating leases.
The decrease in accounts receivable to $2,694,409 at September 30, 1996
from $2,784,050 at December 31, 1995, reflected the decrease in the Company's
sales as well as an adjustment to accounts receivable of $21,482 due to the
acquisition of The Leather Factory of Canada, Ltd. ("TLF Canada"). The
acquisition of the outstanding stock of TLF Canada was consummated on March 1,
1996. With the decreased sales and the adjustment to accounts receivable, the
number of day's receivables remained relatively constant, increasing from 32
days at December 31, 1995 to 34 days at September 30, 1996.
Inventory increased to $8,791,725 at September 30, 1996 from $7,903,179 as
of December 31, 1995. This increase involved the inventory purchased in the TLF
Canada acquisition in the amount of $75,984, additional inventory acquired by
the TLF Canada location after the purchase date noted above, items purchased to
open the new unit in Charlotte, North Carolina, increased inventory levels in
the Fort Worth manufacturing location and the central warehouse for the
anticipated orders from large volume customers due to previously arranged and
contractually committed sales programs, and higher than usual inventory
quantities of certain types of leather bought in order to avoid projected
increases in hide prices resulting from world-wide market forces. Inventory
turned during the first nine months of 1996 at an annual rate of 2.16 times,
compared to the 1995 and 1994 ratios of 2.32 times.
Pursuant to the provisions of Financial Accounting Standards No. 95,
"Statement of Cash Flows," the amounts of accounts receivable and inventory
purchased in the TLF Canada transaction were not reflected in the net changes in
assets and liabilities shown on the attached Consolidated Statements of Cash
Flows.
The uses of cash beyond inventory, accounts receivable, and debt payments
involved the cash portion of the consideration paid to acquire the stock of TLF
Canada, and the making of capital expenditures. Cash used for capital
expenditures totaled $173,591 and $349,846 for the nine months ended September
30, 1996 and 1995, respectively. These capital expenditures involved various
equipment and furniture and fixtures additions associated with the Company's
expansion.
On July 28, 1995, the Company entered into a Stock Purchase Agreement with
Center Street Capital Partners, L.P., a Delaware limited partnership, and
Stratford Capital Partners, L.P., a Texas limited partnership (the "Buyers"),
pursuant to which the Buyers agreed to deliver a one year commitment to purchase
up to $10 million aggregate principal amount of Senior Cumulative Convertible
Preferred Stock, par value $0.10 per share (the "Preferred Stock"), of the
Company, at a purchase price of $100 per share. The Company also obtained a one
year commitment from NationsBank to provide a $10 million acquisition line of
credit ("Acquisition Line"). The Preferred Stock and the Acquisition Line
comprised the Acquisition Facility. The one year commitments provided by the
Buyers and NationsBank in connection with the Acquisition Facility expired
during the third quarter of 1996 pursuant to the terms of the respective
governing documents. No amounts were drawn by the Company on the Acquisition
Facility prior to its expiration.
12
<PAGE>
The current NationsBank financing arrangements, which include a working
capital line of credit and a term facility, are governed by the Second Restated
Loan Agreement dated July 24, 1995 and as amended effective December 31, 1995
and March 31, 1996 and as amended as noted herein below (the "Loan Agreement").
The Company presently has outstanding principal balances on its working capital
line of credit and its term facility of $6,250,000 and $3,250,000, respectively.
Since June 30, 1996, the Company has been in default under certain financial
covenants contained in the Loan Agreement. These financial covenants relate to
the following ratio tests:
(1) Current Assets to Current Liabilities;
(2) Total Liabilities to Tangible Net Worth;
(3) Senior Funded Debt to Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA"); and
(4) Cash Flow Ratio.
On August 14, 1996, effective June 30, 1996, NationsBank and the Company
entered into an amendment to the Loan Agreement, the Forbearance Agreement and
Third Amendment to Second Restated Loan Agreement (the "Third Amendment"),
whereby NationsBank agreed to forbear the exercising of their legal rights due
to the aforementioned events of default under the Loan Agreement until September
30, 1996 (the "Forbearance Period"). In the Third Amendment, NationsBank also
waived a default under the Borrowing Base and the element of the Borrowing Base
which gave rise to the default, the net income test, was eliminated as part of
said Borrowing Base. Moreover, the Third Amendment provided that since no funds
had been advanced on the Acquisition Line, this line of credit terminated
pursuant to its terms on July 24, 1996.
On and effective as of September 30, 1996, NationsBank and the Company
entered into an amendment to the Loan Agreement, the Forbearance Agreement and
Fourth Amendment to the Second Restated Loan Agreement (the "Fourth Amendment"),
whereby NationsBank agreed to extend the Forbearance Period until December 31,
1996 (the "Extended Forbearance Period"). In the Fourth Amendment, NationsBank
and the Company agreed to decrease the amount of the working capital line of
credit from $10 million to $7.5 million. Additionally, as part of the Fourth
Amendment, the Company agreed to grant NationsBank a lien on its facility
located in Tampa, Florida.
During the Extended Forbearance Period, NationsBank has and will continue
to allow the Company to use its working capital line of credit, subject to the
reduction in the size of said line of credit as noted herein above. As of
September 30, 1996 the Company has $508,955 available for further advances under
its working capital line of credit. NationsBank has informed the Company that
prior to the end of the Extended Forbearance Period it intends to submit a
proposal to restructure the working capital line of credit and the term facility
on terms and conditions acceptable to NationsBank in its discretion. The Company
may accept or reject this proposal. In the event that the Company and
NationsBank cannot come to mutually agreeable terms on the restructure of the
Company's indebtedness, at the end of the Extended Forbearance Period,
NationsBank may exercise its legal rights under the Loan Agreement, including
the demand for immediate payment of all outstanding balances and foreclose on
the Company's assets securing the NationsBank loans if payment is not made. In
this event, if the Company cannot obtain alternative financing, the Company
could be forced to consider other strategies, including reorganization under
federal bankruptcy protection. These alternative financing sources could include
not only commercial banks, but also asset-based lenders and/or private equity or
debt investors/lenders, or a combination thereof.
Notwithstanding the Company's continuing default under the Loan Agreement,
management believes that such strategies will not be necessary in that: (i) the
Company has not missed or been late on a principal or interest payment and has
no reason to believe that there will be any problems with principal and interest
payments in the future; (ii) the Company is only moderately leveraged on a debt
to equity basis; and (iii) new sales programs that were initiated earlier in the
year are beginning to be reflected in the Company's sales and management
believes increases will be experienced for the balance of the year. Management
is confident of executing an agreement with NationsBank on or before the end of
the Extended Forbearance Period or alternatively, of being able to find similar
financing arrangements from other source(s). See also Notes to Consolidated
Financial Statements and Item 3. Defaults in Senior Securities as provided
elsewhere herein.
13
<PAGE>
While subject to the issues surrounding the Company's financing
arrangements, the Company's management believes that current sources of
liquidity and capital resources will be sufficient to fund current operations
and internal growth, including the opening or adding of new sales/distribution
units.
Cautionary Statement
- --------------------
The disclosures under "-Results of Operations" and "-Capital Resources and
Liquidity" and in the Notes to Consolidated Financial Statements as provided
elsewhere herein contain forward-looking statements. There are certain important
factors which could cause results to differ materially than those anticipated by
some of the forward-looking statements. Some of the important factors which
could cause actual results to differ materially from those in the
forward-looking statements include, among other things, changes from anticipated
levels of sales, whether due to future national or regional economic and
competitive conditions, including, but not limited to, retail craft buying
patterns, and possible negative trends in the craft and western retail markets,
customer acceptance of existing and new products, or otherwise, pricing
pressures due to competitive industry conditions, increases in prices for
leather, which is a world-wide commodity, which for some reason, may not be
passed on to the customers of the Company's products, change in tax rates,
change in interest rates, change in the commercial banking environment, problems
with the importation of the products which the Company buys in 14 countries
around the world, including, but not limited to, transportation problems or
changes in the political climate of the countries involved, including the
maintenance by said countries of Most Favored Nation status with the United
States of America, and other uncertainties, all of which are difficult to
predict and many of which are beyond the control of the Company.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported by the Company, in connection with the labor strike
by the Union of Needletrades, Industrial and Textile Employees ("UNITE") at the
Company's Cushman facility in New York, New York, the Company was a party to
certain actions before the National Labor Relations Board ("NLRB"). On November
14, 1995, UNITE filed unfair labor practice charges with the NLRB (Cause No.
2-CA-28871). The charges alleged that Cushman had interfered with its employees'
exercise of their rights under the National Labor Relations Act (the "Labor
Act") by threatening loss of job, relocating the factory to Texas and
interrogating employees about their union activity. Following investigation, the
NLRB's New York Regional Office issued a complaint on the issues raised by
UNITE.
On September 6, 1996, Cushman and UNITE entered into a Settlement Agreement
approved by the NLRB, to completely settle and resolve the issues noted above
without the need for a trial. While not admitting that Cushman committed a
violation of the Labor Act or that the employees engaged in an unfair labor
practice strike, Cushman did agree to post a notice in English and Spanish
informing employees of their rights pursuant to the Labor Act and Cushman's
agreement to not: (i) interrogate employees relative to union activities, (ii)
threaten employees with the relocation of the business if they support UNITE or
any other labor organization, (iii) warn or advise employees that their
continued employment is conditioned upon their abandonment of their support for
UNITE or any other labor organization, and (iv) interfere with, restrain or
coerce employees in the exercise of the rights guaranteed them by the Labor Act.
Item 3. Defaults Upon Senior Securities
Since June 30, 1996, the Company has been in default under financing
arrangements with NationsBank. These events of default involve noncompliance
with certain financial covenants. The Company is not in default in the payment
of principal or interest. All such payments are current. Pursuant to the terms
of the Loan Agreement, the Company is in default of the following financial
covenants:
(1) Current Assets to Current Liabilities;
(2) Total Liabilities to Tangible Net Worth;
(3) Senior Funded Debt to EBITDA; and
(4) Cash Flow Ratio.
On August 14, 1996, effective June 30, 1996, NationsBank and the Company
entered into an amendment to the Loan Agreement, whereby NationsBank agreed to
forbear the exercising of their legal rights due to the aforementioned events of
default under the Loan Agreement until September 30, 1996. In this amendment,
NationsBank also waived a default under the Borrowing Base and the element of
the Borrowing Base which gave rise to the default, the net income test, was
eliminated as part of said Borrowing Base.
On and effective as of September 30, 1996, NationsBank and the Company
entered into another amendment to the Loan Agreement, whereby NationsBank agreed
to extend its forbearance until December 31, 1996. In this amendment,
NationsBank and the Company agreed to decrease the amount of the working capital
line of credit from $10 million to $7.5 million. Additionally, as part of this
amendment, the Company agreed to grant NationsBank a lien on its facility
located in Tampa, Florida. See also Notes to Consolidated Financial Statements
and "-Capital Resources and Liquidity" contained elsewhere herein.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
A list of exhibits required to be filed as part of this report is
set forth in the Exhibit Index, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
--------------------
During the quarter ended September 30, 1996 the Company filed a Current
Report on Form 8-K dated August 26, 1996 to disclose, pursuant to Item
4, a change in the Company's independent accountant. No financial
statements were filed.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: November 13, 1996 By /s/ Wray Thompson
------------------
Wray Thompson
Chairman of the Board,
President and
Chief Executive Officer
Date: November 13, 1996 By /s/ Fred N. Howell
-------------------
Fred N. Howell
Chief Financial Officer,
Treasurer and Director
(Chief Financial and
Accounting Officer)
17
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Sequentially
Number Description
- ------ -----------
Numbered Page
- -------------
3.1 Certificate of Incorporation of The Leather Factory, Inc., filed
as Exhibit 3.1 to the Registration Statement on Form SB-2 of The
Leather Factory, Inc. (Commission File No. 33-81132) filed with
the Securities and Exchange Commission on July 5, 1994, and
incorporated by reference herein.
3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the
Registration Statement on Form SB-2 of The Leather Factory, Inc.
(Commission File No. 33-81132) filed with the Securities and
Exchange Commission on July 5, 1994, and incorporated by
reference herein.
3.3 Amendment to Certificate of Incorporation of The Leather Factory,
Inc. -- Certificate of Designation, Preferences and Rights of the
Senior Cumulative Convertible Preferred Stock Dated July 24,
1995, filed as Exhibit 3.3 to the Quarterly Report on Form 10-QSB
of The Leather Factory, Inc. (Commission File No. 1-12368) filed
with the Securities and Exchange Commission on August 10, 1995,
and incorporated by reference herein.
4.1 Second Restated Loan Agreement dated July 24, 1995, by and
between The Leather Factory, Inc., a Delaware corporation, and
NationsBank of Texas, N.A., filed as Exhibit 4.1 to the Quarterly
Report on Form 10-QSB of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange
Commission on August 10, 1995, and incorporated by reference
herein.
*4.2 Promissory Note (Working Capital Line of Credit) dated September
30, 1996, in the principal amount of $7,500,000, payable to the
order of NationsBank of Texas, N.A., which matures March 31,
1997.
4.3 Promissory Note (Acquisition Line) dated July 24, 1995, in the
principal amount of $10,000,000, payable to the order of
NationsBank of Texas, N.A., which matures August 1, 2000, filed
as Exhibit 4.3 to the Quarterly Report on Form 10-QSB of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with
the Securities and Exchange Commission on August 10, 1995, and
incorporated by reference herein.
4.4 Promissory Note dated December 28, 1994 in the principal amount
of $5,000,000, payable to the order of NationsBank of Texas,
N.A., which matures December 28, 1999, filed as Exhibit No. 4.5
to the 1994 Annual Report on Form 10-KSB of The Leather Factory,
Inc. (Commission File No. 1-12368) filed with the Securities and
Exchange Commission on March 27, 1995, and incorporated herein by
reference.
4.5 Stock Purchase Agreement dated as of July 28, 1995, by and
between Center Street Capital Partners, L.P., a Delaware Limited
Partnership, Stratford Capital Partners, L.P., a Texas Limited
Partnership, and The Leather Factory, Inc., a Delaware
Corporation, filed as Exhibit 4.5 to the Quarterly Report on Form
10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on August 10,
1995, and incorporated by reference herein.
18
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Sequentially
Number Description
- ------ -----------
Numbered Page
- --------------
4.6 Commitment Agreement dated July 28, 1995, by and among The
Leather Factory, Inc., a Delaware Corporation, Center Street
Capital Partners, L.P., a Delaware Limited Partnership, and
Stratford Capital Partners, L.P., a Texas Limited Partnership,
filed as Exhibit 4.6 to the Quarterly Report on Form 10-QSB of
The Leather Factory, Inc. (Commission File No. 1-12368) filed
with the Securities and Exchange Commission on August 10, 1995,
and incorporated by reference herein.
4.7 Registration Rights Agreement dated July 28, 1995, by and between
Center Street Capital Partners, L.P., a Delaware Limited
Partnership, Stratford Capital Partners, L.P., a Texas Limited
Partnership, and The Leather Factory, Inc., a Delaware
Corporation, filed as Exhibit 4.7 to the Quarterly Report on Form
10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on August 10,
1995, and incorporated by reference herein.
4.8 Shareholders Agreement dated July 28, 1995, by and between Wray
Thompson, an individual and resident of the State of Texas, Sally
A. Thompson, an individual and resident of the State of Texas,
Ronald C. Morgan, an individual and resident of the State of
Texas, Robin L. Morgan, an individual and resident of the State
of Texas, Center Street Capital Partners, L.P., a Delaware
Limited Partnership, Stratford Capital Partners, L.P., a Texas
Limited Partnership, and The Leather Factory, Inc., a Delaware
Corporation, filed as Exhibit 4.8 to the Quarterly Report on Form
10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on August 10,
1995, and incorporated by reference herein.
4.9 First Amendment to Second Restated Loan Agreement effective as of
December 31, 1995, by and between The Leather Factory, Inc., a
Delaware Corporation, and NationsBank of Texas, N.A., filed as
Exhibit No. 4.9 to the 1995 Annual Report on Form 10-KSB of The
Leather Factory, Inc. (Commission File No. 1-12368), filed with
the Securities and Exchange Commission on March 28, 1996, and
incorporated herein by reference.
4.10 Second Amendment to Second Restated Loan Agreement effective as
of March 31, 1996, by and between The Leather Factory, Inc., a
Delaware Corporation, and NationsBank of Texas, N.A., filed as
Exhibit No. 4.10 to the Quarterly Report on Form 10-Q of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with
the Securities and Exchange Commission on May 20, 1996, and
incorporated by reference herein.
4.11 Forbearance Agreement and Third Amendment to Second Restated Loan
Agreement effective as of June 30, 1996, by and between The
Leather Factory, Inc., a Delaware Corporation, and NationsBank of
Texas, N.A., filed as Exhibit No. 4.11 to the Quarterly Report on
Form 10-Q of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
August 19, 1996, and incorporated by reference herein.
19
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Sequentially
Number Description
- ------ -----------
Numbered Page
- --------------
*4.12 Forbearance Agreement and Fourth Amendment to Second Restated Loan
Agreement effective as of September 30, 1996, by and between The
Leather Factory, Inc., a Delaware Corporation, and NationsBank of
Texas, N.A.
10.1 Stock Exchange Agreement dated July 9, 1993, by and among The Leather
Factory, Inc., a Texas corporation, National Transfer & Register
Corp., a Colorado corporation, J. Wray Thompson, Sr., Ronald C.
Morgan, Robin L. Morgan and The Leather Factory, Inc. Employees' Stock
Ownership Plan & Trust, filed as Exhibit No. 10.1 to the Registration
Statement on Form 10-SB of The Leather Factory, Inc. (Commission File
No. 0-22128), including any amendments thereto, filed with the
Securities and Exchange Commission on July 22, 1993, and incorporated
herein by reference.
10.2 Stock Exchange Agreement dated July 10, 1993, by and between National
Transfer & Register Corp., a Colorado corporation and Vicki Byrd,
filed as Exhibit No. 10.2 to the Registration Statement on Form 10-SB
of The Leather Factory, Inc. (Commission File No. 0-22128), including
any amendments thereto, filed with the Securities and Exchange
Commission on July 22, 1993, and incorporated herein by reference.
10.3 Stock Purchase Agreement dated as of June 30, 1993, by and between The
Leather Factory, Inc., a Texas corporation and Steve Lindley, filed as
Exhibit No. 10.3 to the Registration Statement on Form 10-SB of The
Leather Factory, Inc. (Commission File No. 0-22128), including any
amendments thereto, filed with the Securities and Exchange Commission
on July 22, 1993, and incorporated herein by reference.
10.4 Amendment to Stock Purchase Agreement executed September 20, 1993, to
be effective June 30, 1993, by and between The Leather Factory, Inc.,
a Texas corporation and Steve Lindley, filed as Exhibit No. 19.1 to
the 1993 Annual Report on Form 10-KSB of The Leather Factory, Inc.
(Commission File No. 1-12368), filed with the Securities and Exchange
Commission on March 30, 1994, and incorporated herein by reference.
10.5 Stock Purchase Agreement dated as of June 30, 1993, by and
between The Leather Factory, Inc., a Texas corporation and Kevin F.
White and Durham Hefta, filed as Exhibit No. 10.4 to the Registration
Statement on Form 10-SB of The Leather Factory, Inc. (Commission File
No. 0-22128), including any amendments thereto, filed with the
Securities and Exchange Commission on July 22, 1993, and incorporated
herein by reference.
10.6 Stock Purchase Agreement dated as of June 30, 1993, by and between The
Leather Factory, Inc., a Texas corporation and James Durr, filed as
Exhibit No. 10.5 to the Registration Statement on Form 10-SB of The
Leather Factory, Inc. (Commission File No. 0-22128), including any
amendments thereto, filed with the Securities and Exchange Commission
on July 22, 1993, and incorporated herein by reference.
20
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Sequentially
Number Description
- ------ -----------
Numbered Page
- -------- ----
10.7 The Leather Factory, Inc. 1993 Non-Qualified Incentive Stock Option
Plan, filed as Exhibit No. 10.6 to the 1993 Annual Report on Form
10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on March 30, 1994,
and incorporated herein by reference.
10.8 Acquisition Agreement dated as of January 10, 1994, by and between The
Leather Factory, Inc., a Colorado corporation and Hi-Line Leather &
Manufacturing Company, filed as Exhibit No. 2.1 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on January 10, 1994,
and incorporated herein by reference.
10.9 Asset Purchase Agreement dated as of April 15, 1994, by and among The
Leather Factory, Inc., a Colorado corporation, The Leather Warehouse
Company, a Michigan corporation, Daniel W. Holbert, Linda S. McCleary,
Richard J. Hill, and the Richard J. Hill Trust, filed as Exhibit No.
2.1 to the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on April 15, 1994, and incorporated herein by reference.
10.10 Acquisition Agreement by and among The Leather Factory, Inc. and
David Lieberman, Individually and as the Shareholder of Roberts,
Cushman & Company, Inc., related to the acquisition of the issued and
outstanding capital stock of Roberts, Cushman & Company, Inc., filed
as Exhibit No. 2.1 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on January 9, 1995, and incorporated herein by
reference.
10.11 The Leather Factory, Inc. Employees' Stock Ownership Plan and Trust
(Restated), dated February 22, 1994, effective as of October 1, 1993,
filed as Exhibit No. 4.1 to the Registration Statement on Form S-8 of
The Leather Factory, Inc. (Commission File No. 33-81214), including
any amendments thereto, filed with the Securities and Exchange
Commission on July 5, 1994, and incorporated herein by reference.
10.12 Amendment No. 1 to The Leather Factory, Inc. Employees' Stock
Ownership Plan and Trust (Restated as of October 1, 1993), dated
October 5, 1994 to be effective December 28, 1990, filed as Exhibit
No. 10.12 to the 1994 Annual Report on Form 10-KSB of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on March 27, 1995, and incorporated herein by
reference.
10.13 Participation Agreement in The Leather Factory, Inc. Employees' Stock
Ownership Plan and Trust (Restated as of October 1, 1993), dated
February 28, 1995 to be effective January 2, 1995, filed as Exhibit
No. 10.13 to the 1994 Annual Report on Form 10-KSB of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on March 27, 1995, and incorporated herein by
reference.
21
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Sequentially
Number Description
- ------ -----------
Numbered Page
- --------------
10.14 Indemnification Agreement dated October 17, 1994, by and among The
Leather Factory, Inc., a Delaware corporation, Securities Transfer
Corporation, a Texas corporation, and Halter Capital Corporation, a
Texas corporation, filed as Exhibit No. 10.14 to the 1994 Annual
Report on Form 10-KSB of The Leather Factory, Inc. (Commission File
No. 1-12368) filed with the Securities and Exchange Commission on
March 27, 1995, and incorporated herein by reference.
10.15 Guaranty, as amended, dated July 24, 1995, by and between NationsBank
of Texas, N. A., The Leather Factory, Inc., Wray Thompson, Ronald
Morgan, and Robin Morgan, filed as Exhibit No. 10.15 to the Quarterly
Report on Form 10-QSB of The Leather Factory, Inc. (Commission File
No. 1-12368) filed with the Securities and Exchange Commission on
November 9, 1995, and incorporated herein by reference.
10.16 The Leather Factory, Inc. 1995 Director Non-Qualified Stock Option
Plan and Stock Option Agreement, effective as of September 26, 1995,
subject to approval by the Company's stockholders at the 1996 Annual
Meeting of Stockholders, filed as Exhibit No. 10.16 to the Quarterly
Report on Form 10-QSB of The Leather Factory, Inc. (Commission File
No. 1-12368) filed with the Securities and Exchange Commission on
November 9, 1995, and incorporated herein by reference.
10.17 The Leather Factory, Inc. 1995 Stock Option Plan and Stock Option
Agreements, effective as of September 26, 1995, subject to approval by
the Company's stockholders at the 1996 Annual Meeting of Stockholders,
filed as Exhibit No. 10.17 to the Quarterly Report on Form 10-QSB of
The Leather Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on November 9, 1995, and
incorporated herein by reference.
13.1 The Leather Factory, Inc. 1995 Annual Report to Stockholders, filed as
Exhibit No. 13.1 to the 1995 Annual Report on Form 10-KSB of The
Leather Factory, Inc. (Commission File No. 1-12368), filed with the
Securities and Exchange Commission on March 28, 1996. Such report,
except to the extent incorporated by reference into the Annual Report
on Form 10-KSB, was furnished for the information of the Securities
and Exchange Commission only and was not deemed filed as a part of the
aforementioned Annual Report on Form 10-KSB.
22.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the 1995
Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission
File No. 1-12368), filed with the Securities and Exchange Commission
on March 28, 1996, and incorporated herein by reference.
*27.1 Financial Data Schedule
- ------------
*Filed herewith.
22
<PAGE>
EXHIBIT 4.2
<PAGE>
NATIONSBANK
NATIONSBANK OF TEXAS, N.A.
Promissory
Note (Revolving Feature)
- --------------------------------------------------------------------------------
Date: September 30, 1996
Amount: $7,500,000.00
For Value Received, the undersigned ("Borrower") unconditionally (and jointly
and severally, if more than one) promise(s) to pay to the order of NATIONSBANK
OF TEXAS, N.A. ("Bank"), Fort Worth Banking Center, without setoff, at its
offices at 500 West Seventh Street, Fort Worth, Texas 76102, or at such other
place as may be designated by Bank, the principal amount of SEVEN MILLION FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($7,500,000.00), or so much thereof as may
be advanced from time to time in immediately available funds, together with
interest computed daily on the outstanding principal balance hereunder, at an
annual interest rate, and in accordance with the payment schedule, indicated
below.
Rate
The interest to be paid by Borrower and collected by Bank on each advance under
this Note ("Advance") shall be at one of the rates as selected by Borrower set
forth in the Second Restated Loan Agreement of even date herewith, between
Borrower, Bank and others, which is incorporated herein by reference, as it may
be amended or restated from time to time ("Loan Agreement").
Notwithstanding any other provision contained in this Note, Bank does not intend
to charge and Borrower shall not be required to pay any amount of interest or
other fees or charges that is in excess of the maximum permitted by applicable
law. Borrower agrees that during the full term hereof, the maximum lawful
interest rate for this Note as determined under Texas law shall be the indicated
rate ceiling as specified in Article 5069-1.04 of the V.A.T.S. Further, to the
extent that any other lawful rate ceiling exceeds the rate ceiling so
determined, then the higher rate ceiling shall apply. Any payment in excess of
such maximum shall be refunded to Borrower or credited against principal, at the
option of Bank.
Accrual Method
Interest at the Rate set forth above, unless otherwise indicated, will be
calculated on the basis of the 365/360 method, which computes a daily amount of
interest for a hypothetical year of three hundred sixty (360) days, then
multiplies such amount by the actual number of days elapsed in an interest
calculation period.
Rate Change Date
Any Rate based on a fluctuating index or base rate will change, unless otherwise
provided, each time and as of the date that the index or base rate changes.
In the event any index is discontinued, Bank shall substitute an index
determined by Bank to be comparable, in its sole discretion.
Payment Schedule
All payments received hereunder shall be applied first to the payment of any
expense or charges payable hereunder under the Loan Agreement or under any other
documents executed in connection with or referenced in the Loan Agreement ("Loan
Documents"), then to interest due and payable, then to principal due and owing,
then as a prepayment of the Prime Rate Option Advances, and then as a prepayment
of Libor Rate Option Advances, or in such other order as Bank shall determine at
its option.
<PAGE>
Interest on Advances subject to a Prime Rate Option shall be payable monthly on
the first day of each month during the term of the Note, and interest on
Advances subject to a Libor Rate Option made after the date hereof shall be
payable at the end of each applicable Interest Period, but in no event less than
quarterly. Any payments, including prepayments of principal, received after
11:00 a.m., Fort Worth, Texas time, shall be deemed received on the following
day. The outstanding principal balance of this Note, plus all accrued but unpaid
interest, shall be due and payable in full on March 31, 1997. All payments made,
other than prepayments of principal, shall be credited first, to accrued
interest, second to principal due and owing, third, as a prepayment of Prime
Rate Option Advances, fourth, as a prepayment of Libor Rate Option Advances.
If any governmental agency, court, central bank or comparable authority shall
impose any taxation, required level of reserves (except reserve requirements for
certificates of deposit), deposits, insurance or capital, or similar
requirements against assets, deposits or credit extended by Bank or shall impose
on Bank (or its eurodollar lending officer) or the eurodollar market any other
condition affecting Advances, and the result of the foregoing is to increase the
cost of Bank making or maintaining Advances or reduce any sums received or
receivable by Bank under this Note by a material amount as determined by Bank in
its sole discretion, then Borrower shall reimburse Bank for such increased costs
or reduced sums upon demand. Nothing herein will be construed to require
Borrower to pay any interest, fees, costs or charges greater than the Default
Rate.
Revolving Feature
Borrower may borrow, repay and reborrow hereunder at any time, up to a maximum
aggregate amount outstanding at any one time equal to the principal amount of
this Note; provided, however, that Borrower is not in default under any
provision of this Note, any Loan Document or any other obligation of Borrower to
Bank, and provided that the borrowings hereunder do not exceed any borrowing
base or other limitations on borrowings by Borrower. Bank shall have no
liability for its refusal to advance funds based upon its determination that any
conditions of such further advances have not been met. Bank records of the
amounts borrowed from time to time shall be conclusive proof thereof.
Borrower represents to Bank that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by, all terms
and conditions of this Note, including the Additional Terms and Conditions set
forth below.
Additional Terms and Conditions
1. Waivers, Consents and Covenants. Borrower, any endorser or guarantor
hereof or any other party hereto (collectively "Obligors") and each of them
jointly and severally: (a) waive presentment, demand, notice of demand, notice
of intent to accelerate, and notice of acceleration of maturity, protest, notice
of protest, notice of nonpayment, notice of dishonor and any other notice
required to be given under the law to any of Obligors, in connection with the
delivery, acceptance, performance, default or enforcement of this Note, of any
endorsement or guaranty of this Note or of any Loan Documents; (b) consent to
any and all delays, extensions, renewals or other modifications of this Note or
the Loan Documents, or waivers of any term hereof or of the Loan Documents, or
releases or discharge by Bank of any of Obligors or release, substitution or
exchange of any security for the payment hereof or the failure to act on the
part of Bank or any indulgence shown by Bank, from time to time and in one or
more instances (without notice to or further assent from any of Obligors) and
agree that no such action, failure to act or failure to exercise any right or
remedy on the part of Bank shall in any way affect or impair the obligations of
any Obligors or be construed as a waiver by Bank of or otherwise affect, any of
Bank's rights under this Note, under any endorsement or guaranty of this Note or
under any of the Loan Documents; and (c) agree to pay, on demand, all costs and
expenses of collection of this Note or of any endorsement or guaranty hereof
and/or the enforcement of Bank's rights with respect to, or the administration,
supervision, preservation, protection of or realization upon, any property
securing payment hereof, including, without limitation, reasonable attorney's
fees, including fees related to any trial, arbitration, bankruptcy, appeal or
other proceeding, in the amount of ten percent (10%) of the principal amount of
this Note, or such greater amount as may be determined reasonable by any court.
<PAGE>
2. Indemnification. Obligors agree to promptly pay, indemnify and hold Bank
harmless from all state and federal taxes of any kind and other liabilities with
respect to or resulting from advances made pursuant to this Note. If this Note
has a revolving feature and is secured by a mortgage, Obligors expressly consent
to the deduction of any applicable taxes from each taxable advance extended by
Bank.
3. Prepayments. Prepayments may be made in whole or in part at any time on any
loan for which the Rate is based on the Prime Rate. All prepayments of principal
shall be applied in the inverse order of maturity, or in such other order as
Bank shall determine in its sole discretion. No prepayment of any other loan
shall be permitted without the prior written consent of Bank. Notwithstanding
such prohibition, if there is a prepayment of any such loan, whether by consent
of Bank, or because of acceleration or otherwise, Borrower shall, within fifteen
(15) days of any request by Bank, pay to Bank any loss or expense which Bank may
incur or sustain as a result of such prepayment. For the purposes of calculating
the amounts owed only, it shall be assumed that Bank actually funded or
committed to fund the loan through the purchase of an underlying deposit in an
amount and for a term comparable to the loan, and such determination by Bank
shall be conclusive, absent a manifest error in computation.
4. Events of Default. The following are events of default hereunder: (a) the
failure to pay or perform any obligation, liability or indebtedness of any
Obligor to Bank, or to any affiliate of Bank, whether under this Note or any
other agreement, note or instrument now or hereafter existing, as and when due
(whether upon demand, at maturity or by acceleration); (b) the failure to pay or
perform any other obligation, liability or indebtedness of any of Obligors
whether to Bank or some other party, the security for which constitutes an
encumbrance on the security for this Note; (c) death of any Obligor (if an
individual), or a proceeding being filed or commenced against any Obligor for
dissolution or liquidation, or any Obligor voluntarily or involuntarily
terminating or dissolving or being terminated or dissolved; (d) insolvency of
business failure of the appointment of a custodian, trustee, liquidator or
receiver for or for any of the property of or an assignment for the benefit of
creditors by, or the filing of a petition under bankruptcy, insolvency or
debtor's relief law or for any adjustment of indebtedness, composition or
extension by or against any Obligor; (e) any lien or additional security
interest being placed upon any of the property which is security for this Note;
(f) acquisition at any time or from time to time of title to the whole of or any
part of the property which is security for this Note by any person, partnership,
corporation or other entity; (g) Bank determining that any representation or
warranty made by any Obligor in any Loan Documents or otherwise to Bank is, or
was, untrue or materially misleading; (h) failure of any Obligor to timely
deliver such financial statements, including tax returns, and other statements
of condition or other information as Bank shall request from time to time; (i)
any default under any Loan Documents; (j) entry of a judgment against any
Obligor which Bank deems to be of a material nature, in Bank's sole discretion;
(k) the seizure or forfeiture of, or the issuance of any writ of possession,
garnishment or attachment, or any turnover order for any property of any
Obligor; (l) Bank reasonably deeming itself insecure for any reason; (m) the
determination by Bank that a material adverse change has occurred in the
financial condition of any Obligor; or (n) the failure to comply with any law or
regulation regulating the operation of Borrower's business.
5. Remedies Upon Default. Whenever there is a default under this Note: (a) the
entire balance outstanding and all other obligations of Obligor to Bank (however
acquired or evidenced) shall, at the option of Bank, become immediately due and
payable; and/or (b) to the extent permitted by law, the Rate of interest on the
unpaid principal shall, at the option of the Bank, be increased at Bank's
discretion up to the maximum rate allowed by law, or if none, twenty-five
percent (25%) per annum (the "Default Rate"). The provisions herein for a
Default Rate or a delinquency charge shall not be deemed to extend the time for
any payment hereunder or to constitute a "grace period" giving the Obligors a
right to cure any default. At Bank's option, any accrued and unpaid interest,
fees or charges may, for purposes of computing and accruing interest on a daily
basis after the due date of the Note or any installment thereof be deemed to be
a part of the principal balance, and interest shall accrue on a daily compounded
basis after such date at the rate provided in this Note until the entire
outstanding balance of principal and interest is paid in full. Bank is hereby
authorized at any time to setoff and charge against any deposit accounts of any
Obligor, as well as any other property of such party at or under the control of
Bank, without notice or demand, any and all obligations due hereunder.
6. Non-Waiver. The failure at any time of Bank to exercise any of its options or
any other rights hereunder shall not constitute a waiver thereof nor shall it be
a bar to the exercise of any of its options or rights at a later date. All
rights and remedies of Bank shall be cumulative and may be pursued singularly,
<PAGE>
successively or together, at the option of Bank. The acceptance by Bank of any
partial payment shall not constitute a waiver of any default or of any of Bank's
rights under this Note. No waiver of any of its rights hereunder, and no
modification or amendment of this Note, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; and each
such waiver, if any, shall apply only with respect to the specific instance
involved, and shall in no way impair the rights of Bank or the obligations of
Obligor to Bank in any other respect at any other time.
7. Applicable Law. This Note is delivered in and shall be construed under the
internal laws and judicial decisions of the State of Texas, and the laws of the
United States as the same may be applicable.
8. Partial Invalidity. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or the validity of any other
provision herein, and the invalidity or unenforceability of any provision of
this Note or of the Loan Documents to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to other
persons or circumstances.
9. Jurisdiction and Venue. In any litigation in connection with or to enforce
this Note or any endorsement or guaranty of this Note or any Loan Documents,
Obligors and each of them, irrevocably consent to and confer personal
jurisdiction on the courts of the State of Texas or the United States courts
located within the State of Texas, and expressly waive any objections as to
venue in any such courts, and agree that service of process may be made on
Obligors by mailing a copy of the summons and complaint by registered or
certified mail, return receipt requested, to their respective addresses. Nothing
contained herein shall, however, prevent Bank from bringing any action or
exercising any rights within any other state or jurisdiction or from obtaining
personal jurisdiction by any other means available by applicable law.
10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO,
INCLUDING, BUT NOT LIMITED TO, THOSE ARISING OUT OF OR RELATING TO THIS NOTE OR
ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM
AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH
THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW),
THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES
OR JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL
RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES
SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION. ANY PARTY TO THE NOTE MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS NOTE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
(A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF BORROWER'S
DOMICILE AT THE TIME OF THIS NOTE'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO
WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM
ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL
SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN NINETY (90) DAYS OF THE
DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF
CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN ADDITIONAL
SIXTY (60) DAYS.
(B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO: (I) LIMIT
THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE
AND ANY WAIVERS CONTAINED IN THIS NOTE; OR (II) BE A WAIVER BY THE BANK OF THE
PROTECTION AFFORDED TO IT BY 12 U.S.C. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE
LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP
REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY
REAL OF PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL
OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF
POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF
HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR
ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION
PROCEEDING BROUGHT PURSUANT TO THIS NOTE. NEITHER THE EXERCISE OR SELF HELP
REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR
PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY
PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
<PAGE>
11. Binding Effect. This Note shall be binding upon and inure to the benefit of
Borrower, Obligors and Bank and their respective successor, assigns, heirs and
personal representatives, provided, however, that no obligations of the Borrower
or the Obligor hereunder can be assigned without prior written consent of Bank.
12. Renewal. This Note is a decrease, modification and replacement, without
extinguishment, of a Promissory Note dated July 24, 1995, in the face amount of
$10,000,000.00, executed by Borrower and payable to the order of Bank.
13. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER
DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
Borrower:
THE LEATHER FACTORY, INC., a Delaware corporation
By: /s/ John Tittle, Jr.__________________________________
JOHN TITTLE, JR., Chief Financial Officer and Treasurer
<PAGE>
EXHIBIT 4.12
<PAGE>
FORBEARANCE AGREEMENT AND
-------------------------
FOURTH AMENDMENT TO SECOND RESTATED LOAN AGREEMENT
--------------------------------------------------
This Forbearance Agreement and Fourth Amendment to Second Restated Loan
Agreement ("Amendment") is entered into and is effective as of September 30,
1996, by and among NATIONSBANK OF TEXAS, N.A. ("Bank"), THE LEATHER FACTORY,
INC., a Delaware corporation ("Borrower"), and THE LEATHER FACTORY, INC., a
Texas corporation, and ROBERTS, CUSHMAN & COMPANY, INC., a New York corporation
(together hereinafter referred to as "Guarantors"). This Amendment amends a
Second Restated Loan Agreement dated as of July 24, 1995, by and among Bank,
Borrower and Guarantors, as amended by a First Amendment to Second Restated Loan
Agreement dated as of December 31, 1995, by a Second Amendment to Second
Restated Loan Agreement dated as of March 31, 1996, and by a Forbearance
Agreement and Third Amendment to Second Restated Loan Agreement ("Forbearance
Agreement") dated as of June 30, 1996 (together hereinafter referred to as the
"Loan Agreement"), and for purposes of this Amendment, the capitalized terms
used herein shall have the same meaning as assigned to them in the Loan
Agreement, except as otherwise provided herein. WHEREAS, pursuant to the terms
of the Forbearance Agreement, the Bank agreed to forbear through September 30,
1996 exercising its legal rights arising from the Existing Defaults defined
therein; and WHEREAS, the Existing Defaults are continuing and Borrower has
requested Bank to extend its forbearance in exercising its legal rights arising
from the Existing Defaults for a specified period of time, and Bank has agreed
to the same subject to the terms and conditions hereinafter set forth; NOW,
THEREFORE, for and in consideration of the premises and the mutual covenants and
agreements hereinafter set forth, Borrower, Bank and Guarantors hereby agree as
follows:
1. Defaults. Borrower acknowledges that the Existing Defaults are
-----------
continuing since June 30, 1996 as follows:
Actual Required
(i) Assets/Current Liabilities 1.13 2.0
(ii) Total Liabilities/
Tangible Net Worth 4.13 2.75
(iii) EBITDA Ratio 11.82 2.50
(iv) Cash Flow Ratio 0.01 1.50
<PAGE>
2. Forbearance; Borrowings.
------------------------
The Bank agrees that from the effective date hereof until December 31, 1996
("Forbearance Period"), it will not make demand or institute legal proceedings
to enforce collection of the Loans and Borrower may continue to borrow, repay
and borrow again under the Revolving Line; provided, however, Bank's forbearance
in exercising these rights and remedies and Borrower's right to continue to
borrow under the Revolving Line will be conditioned upon there being: (i) no
change in the financial covenant ratios set forth above so as to cause further
and more severe noncompliance therewith; and (ii) no other default under the
Loan Documents, and in the event any such default occurs, this Agreement will
become null and void and the Bank may exercise any and all rights and remedies
available at law or in equity and Borrower's right to borrow under the Revolving
Line will cease. At the end of the Forbearance Period, the Bank's forbearance of
the Existing Defaults will cease, and Borrower will be subject to compliance
with the financial covenant ratios set forth in Section 4A of the Loan
Agreement, as well as all other terms and provisions of the Loan Documents. Bank
may exercise any and all of its rights and remedies available at law or in
equity, including terminating Borrower's right to borrow under the Revolving
Line, if after the Forbearance Period any default, including continuation of the
Existing Defaults, exists under the Loan Documents.
3. Reduction in Revolving Line;
-----------------------------
Amendment to Loan Agreement. Notwithstanding anything contained in the Loan
Documents to the contrary, the maximum principal amount which may be outstanding
under the Revolving Line from time to time will be $7,500,000.00. The Loan
Agreement is hereby amended as follows:
(a) The first sentence in Paragraph 2A is amended to read in its entirety as
follows:
The Bank hereby agrees to make (or has made) a loan or loans to Borrower in
the aggregate principal amount of $23,500,000.00 being: (i) the Revolving
Line of Credit in the amount of $7,500,000.00 ("Revolving Line"), renewing
and increasing the $6,000,000.00 Revolving Line of Credit provided under
the Prior Loan Agreement under which Borrower may from time to time borrow,
repay and reborrow funds for working capital, letters of credit and
banker's acceptances; (ii) an advising line of credit and term loan
facility up to $10,000,000.00 ("Acquisition Line") to provide funds for
acquisitions; and (iii) a term loan in the original amount of $5,000,000.00
for the purchase of the outstanding stock of R,C & Co. ("R,C & Co. Loan").
<PAGE>
(b) The $10,000,000.00 limit set forth in the first clause (i) of the
first paragraph in Section 2D and Line 1 of the Borrowing Base
Certificate is reduced to $7,500,000.00.
(c) Subparagraphs 4B(v) and (vi) are amended in their entirety to read as
follows:
(v) Furnish to the Bank monthly inventory lists of the inventory of
Borrower within thirty (30) days of the end of each such accounting
period.
(vi) Furnish to Bank monthly accounts receivable agings, to include a
listing of accounts receivable, within thirty (30) days of the end of
each such accounting period.
Borrower has executed and delivered to Bank a Promissory Note of even date
herewith, in the face amount of $7,500,000.00, decreasing, modifying and
replacing, without extinguishment, a Promissory Note dated July 24, 1995,
executed by Borrower, in the face amount of $10,000,000.00, covering the
Revolving Line. Borrower and Bank acknowledge that no borrowings were requested
or advances made under the Acquisition Line during the required Funding Period,
and; consequently, the Acquisition Line terminated as of July 24, 1996, and Bank
has no obligation to renew or extend the Acquisition Line.
4. Additional Collateral.
---------------------
As a condition to Bank's agreement to forbear exercising its legal rights and
remedies arising from the Existing Defaults, Borrower hereby agrees that on or
before October 30, 1996, it will grant the Bank a first lien on its facility
located in Tampa, Florida ("Tampa Property") by executing and causing to be
recorded a first lien deed of trust in form and subject only to encumbrances
satisfactory to the Bank. Borrower contemplates selling the Tampa Property, and
Bank will release its deed of trust lien upon payment of the net proceeds from
the sale to reduce the R,C & Co. Loan.
5. Continuation of Usage Fee.
----------------------------
Borrower acknowledges that notwithstanding the restriction on further borrowings
under the Revolving Line while a default exists under the Loan Documents, the
one-quarter of one percent (0.25%) usage fee on the unused portion of the
Revolving Line under Paragraph 2E(i) of the Loan Agreement will continue to be
due and payable as provided therein.
6. No Waiver.
The Bank's forbearance of the Existing Defaults will not be construed as a
waiver of the Existing Defaults or a waiver of any other default now existing or
hereafter arising under the Loan Documents, or a waiver of any rights, remedies
or recourses available to Bank or an election of remedies resulting from any
default under the Loan Documents.
<PAGE>
7. Ratification.
-------------
The terms and provisions set forth in this Amendment shall modify and supersede
all inconsistent terms and provisions set forth in the Loan Agreement and the
other Loan Documents, and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Loan Agreement and the other Loan
Documents are ratified and confirmed and shall continue in full force and
effect. The Loan Agreement and the other Loan Documents, as amended hereby,
shall continue to be legal, valid, binding and enforceable in accordance with
their respective terms.
8. Representations and Warranties.
---------------------------------
Borrower and Guarantors hereby represent and warrant to the Bank that: (a) the
execution, delivery and performance of this Amendment and any and all other Loan
Documents executed and/or delivered in connection herewith have been authorized
by all requisite corporate action on the part of Borrower and will not violate
the Certificate and/or Articles of Incorporation or Bylaws of Borrower; (b) the
officers executing this Amendment on behalf of Borrower have been authorized by
the Board of Directors to execute this Amendment and any and all other Loan
Documents to be executed and/or delivered in connection herewith; (c) the
representations and warranties contained in the Loan Agreement, as amended
hereby, and the other Loan Documents are true and correct on and as of the date
hereof as though made on and as of each such date; (d) except for the Existing
Defaults, no default under the Loan Agreement, as amended hereby, has occurred
and is continuing; (e) except for the Existing Defaults, Borrower and Guarantors
are in full compliance with all covenants and agreements contained in the Loan
Agreement and the other Loan Documents, as amended hereby; and (f) Borrower has
not amended its Certificate and/or Articles of Incorporation or its Bylaws since
the date of the Loan Agreement.
9. Survival of Representations and Warranties.
----------------------------------------------
All representations and warranties made in the Loan Agreement or any other Loan
Documents, including, without limitation, any document furnished in connection
with this Amendment, shall survive the execution and delivery of this Amendment
and the other Loan Documents, and no investigation by the Bank or any closing
shall affect the representations and warranties or the right of the Bank to rely
upon them.
10. Reference to Loan Agreement.
-----------------------------
The Loan Agreement and each of the other Loan Documents, and any and all other
agreements, documents or instruments now or hereafter executed and delivered
pursuant to the terms hereof or pursuant to the terms of the Loan Agreement, as
amended hereby, are hereby amended so that any reference to the Loan Agreement
and such other Loan Documents to the Loan Agreement shall mean a reference to
the Loan Agreement as amended hereby.
<PAGE>
11. Severability.
------------
Any provision of this Amendment held by a court of competent jurisdiction to be
invalid or unenforceable shall not impair or invalidate the remainder of this
Amendment and the effect thereof shall be confined to the provision so held to
be invalid or unenforceable.
12. Successors and Assigns.
------------------------
This Amendment is binding upon and shall inure to the benefit of the Bank,
Borrower and Guarantors, and their respective heirs, executors, successors and
assigns, except that Borrower and Guarantors may not assign or transfer any of
its rights or obligations hereunder without the prior written consent of the
Bank.
13. Counterparts.
-------------
This Amendment may be executed in one or more counterparts, each of which when
so executed shall be deemed to be an original, but all of which when taken
together shall constitute one and the same instrument.
14. Headings.
---------
The headings, captions and arrangements used in this Amendment are for
convenience only and shall not affect the interpretation of this Amendment.
15. Governing Law.
--------------
This Amendment and the rights and obligations of the parties hereunder shall be
governed by and interpreted in accordance with the laws of Texas and applicable
United States federal law, and is performable by Borrower and Guarantors in the
county or city of Bank's address set out in the Loan Agreement, and they
expressly waive any objection as to venue in such location.
16. NO FURTHER AGREEMENTS.
-----------------------
THIS WRITTEN AGREEMENT, AND THE OTHER LOAN DOCUMENTS SPECIFICALLY REFERENCED
HEREIN, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES HERETO. BANK:
NATIONSBANK OF TEXAS, N.A.
By:__/s/ Denise Karnei______________________
DENISE KARNEI, Vice President
<PAGE>
BORROWER:
THE LEATHER FACTORY, INC., a Delaware corporation
By:__/s/ John Tittle, Jr.______________________
JOHN TITTLE, JR., Chief Financial Officer and
Treasurer
GUARANTORS:
THE LEATHER FACTORY, INC., a Texas corporation
By:__/s/ John Tittle, Jr.______________________
JOHN TITTLE, JR., Chief Financial Officer and
Treasurer
ROBERTS, CUSHMAN & COMPANY, INC., a New York
corporation
By:__/s/ John Tittle, Jr.______________________
JOHN TITTLE, JR., Chief Financial Officer and
Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 218,372
<SECURITIES> 0
<RECEIVABLES> 2,694,409
<ALLOWANCES> 44,000
<INVENTORY> 8,791,725
<CURRENT-ASSETS> 12,822,994
<PP&E> 2,642,212
<DEPRECIATION> 1,201,850
<TOTAL-ASSETS> 19,790,533
<CURRENT-LIABILITIES> 11,200,612
<BONDS> 0
0
0
<COMMON> 23,648
<OTHER-SE> 8,403,594
<TOTAL-LIABILITY-AND-EQUITY> 19,790,533
<SALES> 21,527,857
<TOTAL-REVENUES> 21,527,857
<CGS> 13,517,603
<TOTAL-COSTS> 13,517,603
<OTHER-EXPENSES> 8,283,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787,517
<INCOME-PRETAX> (1,055,124)
<INCOME-TAX> (236,558)
<INCOME-CONTINUING> (818,566)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (818,566)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
