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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 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.
Class Shares outstanding as of August 15, 1996
- ---------------------- ----------------------------------------
Common Stock, 9,853,161
par value $.0024 per share
<PAGE>
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
-------------------
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Three and six months ended
June 30, 1996 and 1995............................................. 3
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995................................ 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995............................ 5
Consolidated Statement of Stockholders' Equity
Six months ended June 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 4. Submission of Matters to a Vote of Security Holders............ 16
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 SIX MONTHS ENDED
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
<S> <C> <C> <C> <C>
1996 1995 1996 1995
--------------- --------------- -------------- --------------
NET SALES $ 7,155,218 $ 7,619,499 $ 14,512,023 $ 16,188,441
COST OF SALES 4,817,256 4,315,203 9,279,397 9,136,741
--------------- --------------- -------------- --------------
Gross Profit 2,337,962 3,304,296 5,232,626 7,051,700
OPERATING EXPENSES 3,007,498 2,457,488 5,761,090 5,102,850
--------------- --------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS (669,536) 846,808 (528,464) 1,948,850
OTHER (INCOME) EXPENSE:
Interest expense 378,371 187,015 549,354 355,838
Other, net (2,047) (7,100) (7,144) (12,939)
--------------- --------------- -------------- --------------
Total other (income) expense 376,324 179,915 542,210 342,899
--------------- --------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (1,045,860) 666,893 (1,070,674) 1,605,951
PROVISION (BENEFIT) FOR INCOME TAXES (234,897) 275,635 (237,717) 656,668
--------------- --------------- -------------- --------------
NET INCOME (LOSS) $ (810,963) $ 391,258 $ (832,957) $ 949,283
=============== =============== ============== ==============
NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ (0.08) $ 0.04 $ (0.09) $ 0.10
=============== =============== ============== ==============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 9,788,530 9,812,030 9,788,530 9,812,030
=============== =============== ============== ==============
DIVIDENDS PAID PER SHARE $ 0.00 $ 0.00 $ 0.00 $ 0.00
=============== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
<S> <C> <C>
1996 1995
---------------- ----------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash $ 103,632 $ 447,159
Accounts receivable-trade, net of allowance for
doubtful accounts of $152,000 and $39,000
in 1996 and 1995, respectively 2,691,906 2,784,050
Inventory 9,056,419 7,903,179
Prepaid income taxes 446,571 203,559
Deferred income taxes 139,358 88,321
Other current assets 657,722 656,837
---------------- ----------------
Total current assets 13,095,608 12,113,105
---------------- ----------------
PROPERTY AND EQUIPMENT, at cost 2,617,038 2,474,056
Less-accumulated depreciation and amortization (1,133,434) (1,014,966)
---------------- ----------------
Property and equipment, net 1,483,604 1,459,090
GOODWILL and other, net of accumulated amortization of
$543,000 and $300,000 in 1996 and 1995, respectively 5,576,815 5,761,181
---------------- ----------------
$ 20,156,027 $ 19,333,376
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 1,705,654 $ 1,398,917
Accrued expenses and other liabilities 608,270 655,489
Income taxes payable - 48,300
Notes payable and current maturities of
long-term debt 9,247,378 1,296,359
---------------- ----------------
Total current liabilities 11,561,302 3,399,065
---------------- ----------------
DEFERRED INCOME TAXES 134,405 85,197
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 42,568 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 4,097,361 4,130,796
Retained earnings 4,621,088 5,454,045
Cummulative Translation Adjustments 1,839 -
Less: Unearned Shares held by ESOP, 64,631
shares in 1996 and 1995 (326,184) (326,184)
---------------- ----------------
Total stockholders' equity 8,417,752 9,282,305
---------------- ----------------
$ 20,156,027 $ 19,333,376
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (832,957) $ 949,283
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation & amortization 380,409 204,464
(Gain) loss on sales of assets (7,554) 1,585
Deferred financing costs 156,891 -
Net changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable-trade 70,662 (686,335)
Inventory (1,077,256) (451,671)
Prepaid income taxes (243,012) -
Other current assets 15,770 (242,134)
Accounts payable 306,737 (410,690)
Accrued expenses and other liabilities (47,219) (516,465)
Income taxes payable (48,300) (43,228)
Deferred income taxes (1,829) (5,522)
---------------- ----------------
Total adjustments (494,701) (2,149,996)
---------------- ----------------
Net cash used in operating activities (1,327,658) (1,200,713)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (148,494) (201,504)
Proceeds from sales of assets 7,444 3,000
Cash paid for acquisitions, net of cash acquired (300,000) (5,129,221)
Decrease in assets restricted for acquisitions - 5,040,656
Other intangible costs - (8,751)
---------------- ----------------
Net cash used in investing activities (441,050) (295,820)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 2,750,000 2,000,000
Payments on notes payable and long-term debt (1,323,223) (796,587)
Stock issuance costs (33,435) (8,818)
---------------- ---------------
Net cash provided by financing activities 1,393,342 1,194,595
---------------- ---------------
Effect of exchange rate changes on cash 1,839 _
NET INCREASE (DECREASE) IN CASH (373,527) (301,938)
CASH, beginning of period 477,159 402,253
---------------- ---------------
CASH, end of period $ 103,632 $ 100,315
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 203,806 $ 310,388
Income taxes paid during the period 57,685 705,420
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Common Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Cummulative
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 - - (33,435) - - - (33,435)
Net loss - - - (832,957) - - (832,957)
Translation Adjustment 1,839 1,839
---------- ---------- ----------- ----------- ----------- ---------- -------------
BALANCE, June 30, 1996 9,853,161 $ 23,648 $ 4,097,361 $ 4,621,088 $ 1,839 $ (326,184) $ 8,417,752
========== ========== =========== =========== =========== ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<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 June 30,
1996 and December 31, 1995, and the results of operations and cash flows for the
three and six month periods ended June 30, 1996 and 1995. The results of
operations for the three and six 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:
June 30, December 31,
1996 1995
----------- -------------
Finished goods held for sale $ 7,714,066 $ 6,736,811
Raw materials and work in process 1,342,353 1,166,368
----------- -------------
$ 9,056,419 $ 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 include a working capital
line of credit, an acquisition line of credit, and a term facility. As a result
of the loss generated in the current quarter, since June 30, 1996, the Company
has been in default under certain financial covenants and the Borrowing Base
contained in the Loan Agreement. The default on the Borrowing Base formula for
the working capital line of credit involves a portion of the formula which deals
with the testing of net income or a derivative thereof, on a rolling four
quarter basis. The 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, 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 this amendment to the Loan Agreement, NationsBank also waived the
default under the Borrowing Base and the net income test was eliminated as part
of said Borrowing Base.
During the Forbearance Period, NationsBank has allowed the Company to
continue to use its working capital line of credit. The amendment to the Loan
Agreement also 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. Prior to the end of the Forbearance Period, NationsBank will 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 Forbearance
Period, all debt owed to NationsBank as of June 30, 1996, has been reflected on
the accompanying financial statements as a current liability.
5. SUBSEQUENT EVENT
On July 28, 1996, the Company's one year commitment pursuant to a Stock
Purchase Agreement with Center Street Capital Partners, L.P. and Stratford
Capital Partners, L.P. (the "Buyers") expired according to the terms of said
document and will not be renewed. 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, par value $0.10 per share, of the Company, at a purchase price
of $100 per share.
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 Second Quarter 1996 Compared to Second 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
June 30,
1996 1995
---- ----
Net sales 100.0% 100.0%
Cost of sales 67.3 56.6
----- -----
Gross profit 32.7 43.4
Operating expenses 42.0 32.3
----- -----
Income (loss) from operations -9.3 11.1
Other (income) expense 5.3 2.4
----- -----
Income (loss) before income taxes -14.6 8.7
Provision (benefit) for income taxes -3.3 3.6
----- -----
Net income (loss) -11.3 5.1
===== =====
REVENUES
The Company's net sales decreased by 6.1% to $7,155,218 during the second
fiscal quarter ended June 30, 1996 from $7,619,499 generated in the second
quarter of 1995. The decrease in revenues was primarily due to reduced sales at
our Roberts Cushman & Company, Inc. Subsidiary ("Cushman") and reduced unit
sales to the retail craft industry. These decreases were partially offset by
increases in bulk leather sales. 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.
Historical trends have shown that the third and fourth quarters have
generally been somewhat better than the other quarters of the year. Given the
softness and conditions of the markets in which the Company does business, there
may not be a departure from this tenet, yet 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 67.3% for the second fiscal
quarter of 1996 as compared to 56.6% for the same quarter 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. The Company also recorded a $200,000 inventory reserve given these
market conditions. The change in sales mix is due to the reduced sales and
market conditions noted above.
A higher relative cost of sales percentage meant that gross profit as a
percentage of sales was lower for the quarter ended June 30, 1996 compared to
June 30, 1995. Gross profit as a percentage of sales decreased to 32.7% in 1996
from 43.4% in 1995. Total gross profit decreased 29.2% to $2,337,962 from
$3,304,296 generated in the quarter ended June 30, 1995. This decrease was due
to unit sales decreases and the change in sales mix as discussed above.
Operating expenses increased $550,010 or 22.3% to $3,007,498 during the
second fiscal quarter of 1996 from $2,457,488 during the quarter ended June 30,
1995. The increase in the dollar amount of operating expenses between the two
quarters was the net result of 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, increased advertising expense to generate
new sales and an increase in operating expenses at Cushman, some of which were
related to former labor problems. These increased operating expenses were
partially offset by lower discretionary bonuses and lower commissions. For more
information on the expired financing commitments, please see "-Capital Resources
and Liquidity" below.
OTHER (INCOME) EXPENSE
Other expenses were $376,324 for the second fiscal quarter of 1996 as
compared to $179,915 during the same quarter in 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. Excluding this write-off interest expense between the two periods is
essentially the same.
NET INCOME
Net income decreased to a net loss of $810,963 during the second fiscal
quarter of 1996 from a net gain of $391,258 during the quarter ended June 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.
10
<PAGE>
Analysis of Six Months Ended June 30, 1996
to Six Months Ended June 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:
Six Months Ended
June 30,
1996 1995
Net sales 100.0% 100.0%
Cost of sales 63.9 56.4
----- -----
Gross profit 36.1 43.6
Operating expenses 39.7 31.5
----- -----
Income (loss) from operations -3.6 12.1
Other (income) expense 3.7 2.1
----- -----
Income (loss) before income taxes -7.3 10.0
Provision (benefit) for income taxes -1.6 4.1
----- -----
Net income (loss) -5.7% 5.9%
===== =====
REVENUES
The Company's net sales decreased by 10.4% to $14,512,023 during the six
months ended June 30, 1996 from $16,188,441 generated in the same period of
1995. The decrease in revenues was primarily due to $504,247 lower sales at
Cushman and reduced sales of $1,014,427 to the retail craft industry. During the
six months ended June 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 63.9% for the six months ended
June 30, 1996 as compared to 56.4% for the same six 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. The Company also recorded a $200,000 inventory reserve given these
market conditions.
Operating expenses increased $658,240 or 12.9% to $5,761,090 during the six
months ended June 30, 1996 from $5,102,850 during the same time in 1995. The
increase in the dollar amount of operating expenses between the two six 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, increased advertising expense to generate new
sales, increased salary expense to build company infrastructure and an increase
in operating expenses at Cushman, some of which were related to the former labor
problems. These increases in operating expenses were partially offset by lower
discretionary bonuses and commissions.
OTHER (INCOME) EXPENSE
Other expenses were $542,210 for the six months ended June 30, 1996 as
compared to $342,899 during the six 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. Excluding this write-off, interest expense between the two
periods is essentially the same.
11
<PAGE>
NET INCOME
Net income decreased to a net loss of $832,957 for the six months ended
June 30, 1996 from a net gain of $949,283 during the six months ended June 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 six
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 $2,691,906 at June 30, 1996 from
$2,784,050 at December 31, 1995, reflected the decrease in the Company's sales
as well as a $113,000 net increase in the Company's allowance for doubtful
accounts. This decrease in accounts receivable was also net of 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, the increase
in the allowance for doubtful accounts 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 June 30, 1996.
Inventory increased to $9,056,419 at June 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. The inventory
balance as of June 30, 1996 was net of a $200,000 inventory reserve in
recognition of current market conditions. After reflecting the $200,000
inventory reserve, inventory turned during the first six months of 1996 at an
annual rate of 2.19 times. This inventory turnover parameter was slightly below
the first quarter amount of 2.20 times, and was relatively consistent with the
1995 and 1994 ratio 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 $148,494 and $201,504 for the six months ended June 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 have expired
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>
In addition to the Acquisition Line previously noted, the Company has
certain other financing arrangements with 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"), the NationsBank financing
arrangements also include a working capital line of credit and a term facility.
The Company presently has outstanding principal balances on its working capital
line of credit and its term facility of $6,250,000 and $3,500,000, respectively.
Since June 30, 1996, the Company has been in default under certain financial
covenants and the Borrowing Base contained in the Loan Agreement. The default on
the Borrowing Base formula for the working capital line of credit involves a
portion of the formula which deals with the testing of net income or a
derivative thereof, on a rolling four quarter basis. The 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 of 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 (the "Forbearance
Period"). In this amendment to the Loan Agreement, NationsBank also waived the
default under the Borrowing Base and the net income test was eliminated as part
of said Borrowing Base.
During the Forbearance Period, NationsBank has allowed the Company to
continue to use its working capital line of credit. As of June 30, 1996, the
Company's availability on its working capital line of credit was $776,000. As
noted above, the amendment to the Loan Agreement also 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. Prior to the end of the Forbearance
Period, NationsBank will submit a proposal to the Company relative to the
restructure of the working capital line of credit and the term facility on terms
and conditions acceptable to NationsBank in its sole and absolute 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 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-lenders and/or private equity or debt
investors/lenders.
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) even though new sales programs which were initiated
earlier in the year haven't yet been reflected in the Company's sales in a
significant manner, management continues to believe that the area of the largest
year to date sales decline, sales to craft retailers, will experience increases
for the balance of the year. Management is confident of executing an agreement
with NationsBank on or before the end of the Forbearance Period or
alternatively, of being able to find similar financing arrangements with another
institution. See also Notes to Consolidated Financial Statements and Item 3.
Defaults in Senior Securities as provided elsewhere herein.
While subject to the issues surrounding the Company's financing
arrangements, the Company's management believes that the 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. While contingent upon the Company's ability to maintain an acceptable
financing structure upon the termination of the Forbearance Period, during the
remainder of the fiscal year ending December 31, 1996, funding for the opening
of new units and the acquisition of companies in related business is expected to
be provided by operating leases, cash flow from operating activities, and
additional financings when possible through bank credit facilities as well as
debt or equity placements.
13
<PAGE>
To execute the Company's previously announced acquisition strategy, which
is not a priority given the Company's present operating results, the Company may
also utilize Common Stock to assist in the purchase transactions where
appropriate. Management can make no assurances as to whether the Company can
obtain the previously described additional financing in order to make
acquisitions, nor can there be any assurance that owners of companies acquired
by the Company in the future will accept shares of Common Stock as all or a
portion of the consideration to be paid.
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
Cushman manufacturing facility in New York, New York, the Company is party to
certain actions before the National Labor Relations Board ("NLRB"). The
following narrative describes the recent developments in these matters.
On November 14, 1995, UNITE filed unfair labor practice charges with the
NLRB (Cause No. 2-CA-28871). The charges allege that Cushman had interfered with
its employees' exercise of their rights under the National Labor Relations 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. The case
is set for trial before an administrative law judge in mid-September.
UNITE held a representation election at Cushman on August 1, 1996. The
Company won the election by a vote of 39 to 20. Although this election result
has no direct effect on the unfair labor practice case described above, no union
is, or can be, a bargaining agent for these employees for at least 12 months.
Even if the unfair labor practice case proceeds to trial, the Company has
vigorously denied any allegations of wrongdoing and will diligently prosecute
its defense. Should the Company not prevail, management believes that damages,
in the form of back pay, will not have a material adverse effect on the Company.
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 and the Borrowing Base contained in the Loan
Agreement. The Company is not in default in the payment of principal or
interest. All such payments are current. The default on the Borrowing Base
formula for the working capital line of credit involves a portion of the formula
which deals with the testing of net income or a derivative thereof, on a rolling
four quarter basis. 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 of 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 to
the Loan Agreement, NationsBank also waived the default under the Borrowing Base
and the net income test was eliminated as part of said Borrowing Base. See also
Notes to Consolidated Financial Statements and "-Capital Resources and
Liquidity" contained elsewhere herein.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 22, 1996, the Annual Meeting of the Stockholders of the Company was
held in the Citizen A & B Rooms, third floor at the Radisson Hotel, Fort Worth,
Texas to consider and act upon the following matters:
(1) To elect the following individuals to serve as directors until the
Company's 1997 Annual Meeting of Stockholders or until their successors
are duly elected and qualified:
Wray Thompson Luther A. Henderson
Ronald C. Morgan Robert M. Rough
Robin L. Morgan H. W. "Hub" Markwardt
William M. Warren
John Tittle, Jr.
(2) To ratify the 1995 Director Non-Qualified Stock Option Plan of The
Leather Factory, Inc.; and
(3) To ratify the 1995 Stock Option Plan of The Leather Factory, Inc.
The stockholders of the Company approved matter (2) above by a vote of (i)
8,137,681, or 82.6% of the total outstanding, in favor, (ii) 30,360 or .31% of
the total outstanding, against, and (iii) 3,378 abstained from voting. As far as
item (3) above, the stockholders of the Company approved this matter by a vote
of (i) 8,139,806, or 82.6% of the total outstanding, in favor, (ii) 27,519 or
.28% of the total outstanding, against, and (iii) 4,394 abstained from voting.
As to item (1) above, the following table depicts the votes cast for and
against, as well as those which abstained from voting, as to the election of the
aforementioned individuals as a director of the Company as noted above:
For Against Abstaining
--- ------- ----------
Wray Thompson 8,628,163 3,566 5,200
Ronald C. Morgan 8,628,463 3,522 5,200
Robin L. Morgan 8,628,463 3,522 5,200
William M. Warren 8,628,463 3,522 5,200
John Tittle, Jr. 8,628,463 3,522 5,200
Luther A. Henderson 8,628,463 3,522 5,200
Robert M. Rough 8,627,758 3,827 5,200
H. W. "Hub" Markwardt 8,628,463 3,522 5,200
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
None
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: August 19, 1996 By /s/ Wray Thompson
------------------
Wray Thompson
Chairman of the Board,
President and
Chief Executive Officer
Date: August 19, 1996 By /s/ John Tittle, Jr.
---------------------
John Tittle, Jr.
Chief Financial Officer,
Treasurer and Director
(Chief Financial and
Accounting Officer)
17
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
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 July 24, 1995,
in the principal amount of $10,000,000, payable to the order of
NationsBank of Texas, N.A., which matures March 31, 1997, filed as
Exhibit 4.2 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.
4.3 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 as of June 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.
19
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
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.
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.
20
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
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.
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.
21
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
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
</TABLE>
- ------------
*Filed herewith.
22
<PAGE>
EXHIBIT 4.11
<PAGE>
FORBEARANCE AGREEMENT AND
THIRD AMENDMENT TO SECOND RESTATED LOAN AGREEMENT
This Forbearance Agreement and Third Amendment to Second Restated Loan
Agreement ("Amendment") is entered into and is effective as of June 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,
and by a Second Amendment to Second Restated Loan Agreement dated as of
March 31, 1996 ("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, Borrower is in default under certain financial covenants and
the Borrowing Base contained in the Loan Agreement, and Borrower has
requested Bank to: (i) forbear exercising its legal rights arising from the
financial covenant defaults for a specified period of time; and (ii) waive
the default under the Borrowing Base by amending the Loan Agreement in
certain respects thereto, 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 it is in default of the
following financial covenants under Section 4A of the Loan Agreement
("Existing Defaults"), and Borrower is further in default of the Borrowing
Base under Section 2D:
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
1
<PAGE>
2. FORBEARANCE; BORROWINGS. The Bank agrees that from the effective
date hereof until September 30, 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. AMENDMENT TO LOAN AGREEMENT. Bank hereby waives Borrower's default
under the Borrowing Base. The net income multiple for calculating the
Borrowing Base is deleted and, the first paragraph of Section D of the Loan
Agreement is amended in its entirety to read as follows:
BORROWING BASE. The aggregate principal amount of all amounts from
time to time advanced pursuant to the terms of the Revolving Line
shall not exceed the Borrowing Base (herein so called) which will be
equal to the lesser of: (i) $10,000,000.00; or (ii) eighty percent
(80%) of Eligible Accounts Receivable, plus sixty percent (60%) of
Eligible Inventory; minus: (i) outstanding L/C's and B.A.'s; and (ii)
a $1,072,000.00 reserve ("Reserve") (the Reserve being reduced as the
outstanding balances of the 1993 Non-Qualified Incentive Stock Option
Loans made by Bank to stock owners of Borrower under the Letter
Agreement dated January 30, 1995, reduces on a one to one basis). For
purposes of the following definitions, Borrower will include
TLF-Texas, R,C & Co. and any acquired businesses.
4. LOAN RESTRUCTURE. Borrower acknowledges that Bank has no obligation
to continue to forbear exercising its rights and remedies due to the
Existing Defaults or any other default after the Forbearance Period;
however, prior to the end of the Forbearance Period, Bank will submit to
Borrower a
2
<PAGE>
proposal to restructure the Loans on terms and conditions acceptable to
Bank in its sole and absolute discretion, which Borrower may accept or
reject.
5. TERMINATION OF ACQUISITION 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.
6. 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 E(i) of the Loan Agreement will continue to be due and
payable as provided therein.
7. FORBEARANCE FEE. As additional consideration for the Bank's
forbearance of the Existing Defaults during the Forbearance Period,
Borrower will pay the Bank a fee equal to $10,000.00 simultaneously with
the execution of this Agreement.
8. FIELD INSPECTION. In accordance with the terms of the Loan
Documents, Bank will conduct a field inspection of the collateral securing
the Loans, at the Borrower's expense, not to exceed $5,000.00.
9. 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 (other than that under the Borrowing Base waived
above) 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.
10. 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.
3
<PAGE>
11. 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.
12. 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.
13. 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.
4
<PAGE>
14. 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.
15. 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.
16. 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.
17. HEADINGS. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
18. 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.
19. 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
5
<PAGE>
BORROWER:
THE LEATHER FACTORY, INC., a Delaware corporation
By: /s/ John Tittle, Jr.
---------------------------------------------
JOHN TITTLE, JR., Chief Financial Officer and
Treasurer
6
<PAGE>
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
7
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-06-1996
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