UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period ________
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
3847 East Loop 820 South
Fort Worth, Texas 76119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 496-4414
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.0024 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $2,456,922 at March 3, 1997. At that date there
were 9,853,161 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on May 22, 1997 are incorporated by reference in Part III of this
report.
<PAGE>
PART I
Item I. Description of Business
General
The Leather Factory, Inc. ("TLF" or the "Company") is an international
wholesale distributor of a broad product line which includes leather,
leatherworking tools, buckles and other belt supplies, shoe care and repair
supplies, leather dyes and finishes, adornments for belts, bags, and garments,
saddle and tack hardware, and do-it-yourself kits. The Company, through its
subsidiary, Roberts, Cushman & Company, Inc. ("Cushman"), in New York, New York,
produces hat trims, the decorative piece of material that adorns the outside of
a hat, small finished leather goods and accessories. The Company frequently
introduces new products either through its own manufacturing capability or
through purchasing from vendors. One indication of the Company's expertise in
the area of product development is the substantial number of copyrighted designs
which the Company owns. These designs have been incorporated throughout the
Company's product line as a means of increasing its competitive advantage.
The Company's customer base is comprised of over 40,000 customers including
retailers, wholesalers, assemblers, distributors, and other manufacturers
dispersed geographically throughout the world. Most of the Company's customers
are wholesalers; less than five percent of the Company's sales are retail.
The Company manufactures some of its own products, but also purchases
products from other manufacturers and distributors in fourteen countries. The
Company has light manufacturing facilities in Fort Worth, Texas, where it
produces items such as suede lace, garment fringe, leathercraft and
craft-related kits, and in New York, New York, where, through its Cushman
subsidiary, it produces hat trims and small finished leather goods.
The Company distributes its products through 21 sales/distribution units
located in seventeen states and one located in Canada plus its manufacturing
facility and show room in New York. The geographic location of its
sales/distribution units is selected based on the location of its customers, so
that delivery time to customers is minimized. A two-day maximum delivery time is
the Company's goal. In addition to offering its customers rapid delivery, the
Company also offers a "one-stop shopping" concept for both leather and
leathercraft materials.
Due to current financial restraints, the Company has deferred expansion and
acquisition plans until long-term financing arrangements have been completed and
profitability has been restored to existing operations. Opening one or two units
in 1997 and 1998 or acquiring companies that complement existing operations
would currently be expected to be financed internally.
The Company is the successor to certain entities that were parties to a
series of transactions including a merger in July 1993 which involved The
Leather Factory, Inc., a Texas corporation ("TLF-Texas"), and National Transfer
& Register Corp. ("National"), a Colorado corporation, which had no operations
and whose capital stock had no active trading market prior to the merger. The
surviving entity changed its name to The Leather Factory, Inc. and its business
became that conducted by TLF-Texas.
The Company was incorporated under the laws of the State of Colorado in
1984 and reincorporated under the laws of the State of Delaware in June 1994.
The Company's principal offices are located at 3847 East Loop 820 South, Fort
Worth, Texas 76119 and its phone number is 817/496-4414.
2
<PAGE>
Corporate History
Transactions with National. National was incorporated under the laws of
---------------------------
Colorado in 1984 and conducted business as a stock transfer agency from January
1985 to April 1993. In April of 1993, substantially all of National's assets,
consisting of miscellaneous office equipment, were sold to STCOT, Inc., a Texas
corporation and an affiliate of National, for $25,000 and the assumption of
substantially all of the liabilities of National. National thereupon terminated
its activities as a stock transfer agency and conducted no substantive
operations. In June of 1993, the principal officers and directors of TLF-Texas,
Wray Thompson, Ronald C. Morgan and Robin L. Morgan, acquired shares of National
Common Stock and were elected to National's Board of Directors. In July of 1993,
pursuant to a reverse merger agreement among National, TLF-Texas, and the
shareholders of TLF-Texas, National acquired all of the outstanding Common Stock
of TLF-Texas in exchange for 7,805,478 newly issued shares of National Common
Stock. In connection with this transaction, National effected a 1 for 24 reverse
stock split. The name of National was changed to "The Leather Factory, Inc.",
and National's business became that conducted by TLF-Texas. Any reference to
"Company" herein includes, where applicable, the activities of TLF-Texas after
the acquisition of TLF-Texas by National.
History of TLF-Texas. TLF-Texas was initially incorporated under the laws
--------------------
of Texas in 1980 with the name Midas Leathercraft Tool Company ("Midas").
Originally, the business of Midas involved the distribution of certain
leathercraft tools. After the reverse merger transaction with National, the
Company in June of 1994 reincorporated in Delaware. As part of its strategy to
develop a multi-location chain of wholesale units the Company has made numerous
acquisitions since its incorporation, including the purchase of six wholesale
units from Brown Group, Inc., a major footwear retailer. The Company has also
acquired several businesses located throughout the United States that distribute
shoe-related supplies to the shoe repair and shoe store industry. In addition,
the Company purchased Cushman in 1995, a leading producer of hat trims. In March
of 1996, the Company acquired all of the issued and outstanding capital stock of
its Canadian distributor, The Leather Factory of Canada.
Strategy
The Leather Factory Concept. The business strategy employed by the Company
---------------------------
was conceived by the founders of TLF-Texas, Wray Thompson and Ronald C. Morgan.
Elements of this concept include the physical location and type of space rented
for the Company's wholesale units, the configuration of the units, the number of
items comprising the merchandise line, the utilization of direct mail, including
the use of an annual full-line catalog, and the application of rapid delivery to
customers. The Company plans to continue growing by adding new
sales/distribution units and acquiring operating companies in complementary
businesses in order to provide a variety of diverse, but related merchandise to
a wider range of customers.
The concept used in the Company's sales/distribution units combines the
economies of scale of warehouse locations with the marketing efficiencies that
can be achieved through direct mail. Walk-in traffic and mail order customers
are served in the same location. The type of premises utilized for the unit
locations is generally light industrial office/warehouse space in proximity to a
major freeway or with relatively easy access thereto. This kind of location
typically provides lower rental expense compared to other more retail-type
locations. The type and amount of space also accommodates the arranging or
configuring of the unit in a visually appealing manner so that customers can
walk by and touch merchandise such as the various sizes, styles, and grades of
leather sold, which can also consume a great deal of space. This also allows the
Company to stock and display a sufficiently broad line to offer one-stop
shopping. As a common practice in the industry, the Company maintains higher
inventory levels of certain imported items to assure itself of a continuous
allotment due to the length of time required for delivery of such items.
The Company's sales/distribution units are staffed by experienced managers
who are primarily compensated based upon the operating profit of their location.
Sales of these units are generated by the selling efforts of the location
personnel themselves, participation by the Company at trade shows, the use of
sales representative organizations and the aggressive use of direct mail
advertising. In addition to generating mail order business, the purpose of the
Company's direct mail program is to stimulate sales for the sales/distribution
units. The Company utilizes an internally developed and maintained mailing list
which allows for very targeted mailing to its various customer groups. As for
the utilization of direct mail and rapid delivery, the Company locates units in
order to get merchandise in the customers' hands as soon as possible, with the
added benefit of lower freight cost.
3
<PAGE>
The Company attempts to maintain the number of stock-keeping units
("SKU's") in the primary Leather Factory line of merchandise at the optimum
number of items necessary to balance the maintaining of the proper stock to
minimize stock-out situations with the carrying costs involved with such an
inventory level. The number of SKU's has grown over the years due to the
introduction of new products and now approximates 2,800 items. In addition,
while not part of The Leather Factory concept, the product line sold to shoe
repair shops and shoe stores increases the number in the Company's overall
product line to approximately 6,000 SKU's.
Expansion and Acquisition Strategy. Due to current financial restraints,
-----------------------------------
the Company has deferred expansion and acquisition plans until long-term
financing arrangements have been completed and profitability has been restored
to existing operations. Opening one or two units in 1997 and 1998 or acquiring
companies that complement existing operations would currently be expected to be
financed internally.
Acquisition Financing Facility. 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.
Inventory Management Strategies. The Company has signed an agreement with
--------------------------------
BHD Information Systems for the installation of a networked computer system. The
lease agreement includes hardware, software, installation, and training. The
software consists of a pre-packaged system and will require minimal
customization. The system will provide the Company with a point-of-sale system,
a perpetual inventory system, and an accounts receivable system. The addition of
a point-of-sale system in conjunction with the comprehensive report writer will
provide immediate sales information regarding the buyer, the seller and the
product. This will allow management to improve productivity, identify fast or
slow moving products and target customers to be contacted. The perpetual
inventory system should reduce cost of sales and improve inventory turnover
rates through better inventory management. The Company will be able to determine
product availability (or expected availability if the product is not on-hand) at
all twenty-two locations at any time. The Company believes that this should
improve customer service and permit a reduction in inventory.
Products/Customers
The Company's core business consists of manufacturing, importing and
distributing leather, traditional leathercraft materials (do-it-yourself kits,
stamping sets, and leatherworking tools), craft-related items (leather lace,
beads, and wearable art accessories), hardware, metal garment accessories (belt
buckles, belt buckle designs, and conchos), fancy hat trims in braids, leather,
and woven fabrics, shoe care and repair supplies, leather finishes, and small
finished leather goods. The Company's manufacturing operations are in Fort
Worth, Texas and New York, New York at Cushman. The products manufactured in
Fort Worth generally involve cutting leather into various shapes and patterns
using metal dies ("clicking"), fabrication, assembly, and packaging/repackaging
tasks. The manufacturing operation in Fort Worth makes items primarily for
wholesale distribution using the Company's sales/distribution units or for
drop-shipment directly to customers through the central warehouse. The Cushman
facility manufactures hat trims and small finished leather goods. Hat trims are
sold to hat manufacturers and distributors directly. Small finished leather
goods are sold to various distributors and retailers through attendance at trade
shows and the use of sales representatives.
4
<PAGE>
The customer groups served include wholesale distributors, tack and saddle
shops, shoe-findings customers, institutions, prisons and prisoners, dealer
stores, western stores, craft stores and craft store chains, hat manufacturers
and distributors, other large volume purchasers, manufacturers, and retailers.
No single customer's sales comprise more than 10% of the Company's total sales.
Competition
The Company competes in four highly fragmented markets which include
leathercraft, leather accessories, retail craft, and shoe findings. Management
believes that the Company encounters competition in connection with certain
product lines and in certain areas from different companies, but has no direct
competition affecting the entire product line. The Company is larger than most
of its direct competitors. The fragmented nature of these markets is the primary
reason for the lack of broad-based competition and is the driving force behind
management's consolidation strategy.
The Company competes on price, availability of merchandise, and speed of
delivery. The size of the Company relative to most of its competitors creates
competitive advantage in its ability to stock a full range of products as well
as in buying merchandise. The Company believes it has a competitive advantage on
price in most product lines because it purchases in bulk and has an
international network of suppliers that can provide quality merchandise at lower
costs. Most of the Company's competitors do not have the multiple sources of
supply and cannot purchase sufficient quantities to compete along a broad range
of products. In fact, some of the Company's competitors are also customers,
relying on the Company as a supplier.
Suppliers
The Company currently purchases merchandise and raw materials from
approximately 200 vendors dispersed throughout the United States as well as in
fourteen foreign countries. In fiscal year 1996, the Company's ten largest
vendors accounted for approximately 52% of its total purchases. Management
believes that its relationships with suppliers are strong and does not
anticipate any material changes in these supplier relationships in the future.
Due to the number of alternative sources of supply, the loss of any or all of
these principal suppliers would not have a material impact on the operations of
the Company.
Patents and Copyrights
The Company presently owns 118 copyrights covering 210 registered works
with two works pending, six trademarks covering six names, and two patents
covering three products. Registered trademarks include a federal trade name
registration on The Leather Factory. The trademarks expire at various times
starting in 2002 and ending in 2006, but can be renewed indefinitely. Most
copyrights granted or pending are on metal products, such as conchos, belt
buckles, etc., and instruction books. The expiration period for the copyrights
begins in 2062 and ends in 2070. The Company has patents on two belt buckles and
certain leather-working equipment known as the "Speedy Embosser." The patents
expire in 2011. Management considers these intangibles to be valuable assets and
defends them as necessary.
Compliance With Environmental Laws
Compliance by the Company with federal, state and local environmental
protection laws has not had, and is not expected to have, a material effect upon
capital expenditures, earnings or the competitive position of the Company.
5
<PAGE>
Employees
As of December 31, 1996, the Company employed 226 people, with 219 on a
full time basis. The Company is not a party to any collective bargaining
agreement. Eligible employees participate in The Leather Factory, Inc.
Employees' Stock Ownership Plan and Trust ("ESOP"). As of December 31, 1996, 165
employees and former employees were participants in or beneficiaries of the
ESOP. The Company has the option of contributing up to 15% of eligible
employees' compensation into the ESOP. The percentage contributions for 1996,
1995 and 1994 were .8%, .8% and 3% respectively. These contributions are used to
purchase shares of Common Stock.
In late October 1995, representatives of Union Local 62-32 of the Union of
Needletrades, Industrial, and Textile Employees ("UNITE") requested that the
Company's wholly owned subsidiary, Cushman, recognize UNITE as the sole and
exclusive employee bargaining representative. The Company responded by declining
to recognize UNITE unless a secret ballot election was held by the employees of
Cushman. On October 31, 1995, the employees of Cushman went on strike in New
York City for the purpose of securing representation. Virtually all of the 50
hourly employees of Cushman refused to cross the picket line. The Company filed
charges with the National Labor Relations Board ("NLRB") alleging that picket
line misconduct and violence was inspired by UNITE.
The strike lasted from October 31, 1995 to April 1, 1996, at which time
UNITE notified the Company that it would cease all organizing actions so long as
an unconditional return to work was made to all employees who had refused to
cross the picket line. On August 1, 1996, a secret ballot election was held and
the union was defeated.
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 National Labor Relations Act (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.
Except for any residual affects due to attempts by UNITE to organize
employees of Cushman as described above, management believes that relations with
employees are good.
6
<PAGE>
Item 2. Description of Property
The Company leases all its premises except for the Tampa, Florida location.
This property consists of a 13,287 square foot office/warehouse building located
on a 16,550 square foot site and is approximately 26 years old and in average
condition. As of December 31, 1996, the Tampa property was pledged as collateral
under the Company's loan agreement with NationsBank, Texas, NA that matures
April 30,1997.
Detailed below are the lease terms for the Company's remaining locations.
The general character of each location is light industrial office/warehouse
space, except for the New York City premises which is standard light industrial
loft space in a multi-story building. The Company believes that all of its
properties, both leased and owned, are adequately covered by insurance.
<TABLE>
<CAPTION>
<S> <C>
Location Name Total Space (Sq. Ft.) Minimum Annual Rent * Lease Expiration
- ------------- --------------------- ------------------- ----------------
Chattanooga, TN 9,040 $ 40,704 May 1999
Denver, CO 12,000 39,000 October 1999
Harrisburg, PA 6,850 36,180 March 2002
Fort Worth, TX 71,000 259,383 March 1998
Fresno, CA 5,600 41,663 March 2002
Des Moines, IA 4,000 30,718 April 1999
Phoenix, AZ 4,500 25,994 March 2001
Springfield, MO 6,000 20,400 July 1998
Spokane, WA 5,400 20,400 February 1999
Albuquerque, NM 5,000 27,600 October 1998
Salt Lake City, UT 4,000 25,584 September 1999
Baldwin Park, CA 7,800 51,231 March 2000
San Antonio, TX 5,600 40,320 October 2001
Columbus, OH 6,000 37,468 October 2000
El Paso, TX 9,600 43,104 July 1998
Oakland, CA 8,000 57,304 December 2003
Grand Rapids, MI 8,000 33,484 March 1999
Wichita, KS 14,000 33,600 May 1999
New York, NY 12,000 94,080 December 1997
New Orleans, LA 5,130 21,600 August 2000
Charlotte, NC 6,202 24,188 March 2001
Winnipeg, Canada 5,712 26,000 ** November 1997
--------- ------------
Totals 221,434 $ 1,030,005
========= ============
</TABLE>
* Represents the average minimum annual rent over the balance of the
unexpired lease term.
** As converted into U.S. dollars.
The Company's Fort Worth location includes the Fort Worth
sales/distribution unit, the Company's central warehouse, the light
manufacturing facility, and the sales and administrative/executive offices. The
Company also leases a 624 square foot showroom in the Denver Merchandise Mart
for $10,707 per year. This lease will expire in October 1998.
7
<PAGE>
Item 3. Legal Proceedings
The Company, as successor-in-interest to National, has been a defendant in
a lawsuit brought in July 1994 by Gary A. Bedini and John C. Bedini (the
"Plaintiffs") in the United States District Court for the District of Colorado.
Additional defendants are Securities Transfer Corporation, a Texas corporation
("STC"), and Steven Jay Olson, individually, and as President and Director of
National, now known as The Leather Factory, Inc. The Plaintiffs alleged that in
1992, pursuant to SEC Rule 144(k), they sought to transfer approximately 1.5
million shares of their Common Stock in Gamma Electronic Systems, Inc., and that
the transfer agent, National, improperly refused. The Plaintiffs sought
compensatory damages in the amount of $2.1 million as well as punitive damages.
The Company is contractually indemnified from and against all losses that may
arise out of this cause of action, including attorneys' fees, by STC and/or
related entities.
This action was tried in July 1995. Upon the conclusion of the trial, the
judge found in favor of one plaintiff, Gary Bedini, and against the defendants
in the amount of $50,468, and similarly for the other plaintiff, John Bedini,
and against the defendants in the amount of $68,548. The written judgment of the
court (the "Judgment"), which reflected the aforementioned rulings by the trial
judge, was entered on September 7, 1995. This Judgment also included pre
judgment interest of $16,159 for Gary Bedini and $21,947 for John Bedini. Post
judgment interest continues to accrue from the date of the Judgment, pursuant to
federal law.
According to the terms of its contractual indemnification obligations, STC
has defended this litigation at its expense. On September 21, 1995, STC filed
Defendants' Motion to Alter or Amend Judgment (the "Motion"). The Plaintiffs
filed a response to this Motion on October 4, 1995, and said Motion remains
pending. In addition to the Motion, STC has made a settlement offer. STC has
informed the Company if the case does not settle, and the Motion is denied, then
STC intends to appeal the Judgment and to post either a supersedeas bond or cash
to avoid collection of the Judgment while the appeal is pending. As of January
1997, no action has been taken by the trial judge relative to the Motion.
Pursuant to the Indemnification Agreement between STC and the Company dated
October 17, 1994, the Company believes it will not suffer any loss due to the
action described here and above.
The Company has litigation in the ordinary course of its business. Other
than described above, the Company is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended December 31, 1996.
8
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The shares of the Company are traded on the American Stock Exchange using
the symbol TLF. The high and low prices for each calendar quarter during the
last two fiscal years are as follows:
Quarter Ended High Low
1995
----
March 31, 1995 4.3750 3.5000
June 30, 1995 4.0000 3.2500
September 30, 1995 4.6250 2.7500
December 31, 1995 3.1250 2.2500
1996
----
March 31, 1996 2.6875 1.7500
June 30, 1996 2.1250 1.7500
September 30, 1996 1.9375 1.4375
December 31, 1996 1.4375 .8125
- ----------
There were approximately 555 stockholders of record on March 6, 1997.
There have been no cash dividends paid on the shares of the Company and
currently dividends are restricted by certain debt agreements. The Board of
Directors has historically followed a policy of reinvesting the earnings of the
Company in the expansion of its business. Such policy is subject to change based
on current industry and market conditions, as well as other factors beyond the
control of the Company.
Item 6. Selected Financial Data
The selected financial data presented below are derived from and should be
read in conjunction with the Company's Consolidated Financial Statements and
related notes. This information should also be read in conjunction with Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Data in prior years has not been restated to reflect acquisitions
that occurred in subsequent years.
9
<PAGE>
Years Ended December 31
- -----------------------
Income Statement Data
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
NET SALES $28,253,632 $31,447,849 $28,081,272 $24,371,082 $18,450,134
COST OF SALES 17,689,973 18,446,378 15,870,603 13,555,345 10,581,469
---------- ---------- ---------- ---------- ----------
Gross profit 10,563,659 13,001,471 12,210,669 10,815,737 7,868,665
OPERATING EXPENSES 10,869,359 10,363,159 9,573,495 8,631,600 6,574,631
---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (305,700) 2,638,312 2,637,174 2,184,137 1,294,034
OTHER (INCOME) EXPENSE: 1,000,604 678,264 142,830 149,955 147,476
---------- ---------- ---------- ---------- ----------
INCOME (LOSS)
BEFORE INCOME TAXES (1,306,304) 1,960,048 2,494,344 2,034,182 1,146,558
INCOME TAX PROVISION
(BENEFIT) (316,536) 786,744 990,197 875,362 * 439,502
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) (989,768) 1,173,304 1,504,147 1,158,820 * 707,056
========== ========== ========== ========== ==========
INCOME (LOSS) PER SHARE (0.10) 0.12 0.15 0.13 * 0.09
========== ========== ========== ========== ==========
COMMON EQUIVALENT
SHARES OUTSTANDING 9,788,530 9,789,468 9,783,387 8,801,422 8,222,130
========== ========== ========== ========== ==========
Balance Sheet Data
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ------------ ----------
TOTAL ASSETS $18,264,547 $19,333,376 $18,468,806 $ 9,555,881 $ 6,120,735
---------- ---------- ---------- ------------ ----------
NOTES PAYABLE AND
CURRENT MATURITIES
OF LONG TERM DEBT 8,549,366 1,296,359 194,311 216,572 216,593
---------- ---------- ---------- ------------ ----------
NOTES PAYABLE AND
LONG-TERM DEBT, NET
OF CURRENT MATURITIES 17,378 6,566,809 7,325,432 1,189,856 1,656,792
---------- ---------- ---------- ------------ ----------
STOCKHOLDERS' EQUITY 8,022,937 9,282,305 8,217,781 5,502,452 1,737,774
========== ========== ========== ============ ==========
</TABLE>
* Includes charge of $98,772 or $0.01 per share reflecting cumulative effect
on prior years of a change in accounting method for income taxes (SFAS
109).
10
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
General
The Leather Factory, Inc. ("TLF" or the "Company") is an international
wholesale distributor of a broad product line which includes leather,
leatherworking tools, buckles and other belt supplies, shoe care and repair
supplies, leather dyes and finishes, adornments for belts, bags, and garments,
saddle and tack hardware, and do-it-yourself kits. The Company, through its
subsidiary, Roberts, Cushman & Company, Inc. ("Cushman"), in New York, New York,
produces hat trims, the decorative piece of material that adorns the outside of
a hat, and small finished leather goods. The Company frequently introduces new
products either through its own manufacturing capability or through purchasing
from vendors. One indication of the Company's expertise in the area of product
development is the substantial number of copyrighted designs which the Company
owns. These designs have been incorporated throughout the Company's product
line, including hat trims, as a means of increasing its competitive advantage.
Results of Operations
Income Statement Comparison
The following table sets forth, for the fiscal years indicated, certain items
from the Company's Consolidated Statements of Income expressed as a percentage
of net sales:
1996 1995 1994
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of sales 62.6 58.7 56.5
----- ----- -----
Gross profit 37.4 41.3 43.5
Operating expenses 38.5 33.0 34.1
----- ----- -----
Income (loss) from operations (1.1) 8.3 9.4
Other (income) expense, net 3.5 2.1 0.5
----- ----- -----
Income (loss) before
income taxes (4.6) 6.2 8.9
Provision (benefit) for income tax (1.1) 2.5 3.5
----- ----- -----
Net income (3.5)% 3.7% 5.4%
===== ===== =====
Analysis of 1996 Compared to 1995
---------------------------------
Revenues
The Company's net sales decreased by 10.2% to $28,253,632 during 1996 from
$31,447,849 in 1995. The 10.2% decrease in revenues was primarily comprised of
two pieces. Reduced sales to the retail craft industry comprised of 7.7% and
reduced sales at Cushman comprised of 2.7%. The Company's sales to the retail
craft industry and its sales at Cushman during 1996 were negatively impacted by
challenging retail environments in the craft and western markets.
11
<PAGE>
The Company is making a concentrated effort to develop new products and
sell to new markets due to the softness of sales and difficult conditions
experienced by customers in the craft and western markets. For example, Cushman
has introduced a line of exotic leather and western accessories that has
generated interest from national mail order companies and retail chains. In
addition, the Company has become a national sponsor of the Boy Scouts of America
with seventeen new products that are included in the official Boy Scout Catalog.
While long term trends continue to be difficult to determine, management
believes that those markets have stabilized although this may not be reflected
in overall sales until the second half of 1997.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 62.6% for 1996 as compared to
58.7% for 1995. The difference in the relative cost of sales percentage was
principally attributable to a change in sales mix, price competition in a very
competitive market environment and direct labor costs associated with the labor
dispute at Cushman.
Operating expenses increased $506,200 or 4.9% to $10,869,359 during 1996
from $10,363,159 during 1995. The increase in operating expenses between the two
periods was due to various factors, including (i) an increase in bad debt
expense of $120,665 because of a significant customer (3% of 1995 net sales)
declaring Chapter 11 bankruptcy, (ii) expenses associated with two new
locations, (iii) write down of certain purchased goodwill due to its impairment,
(iv) increased advertising expense to generate new sales and (v) an increase in
operating expenses at Cushman, some of which were related to previous labor
problems. These increases in operating expenses were partially offset by lower
discretionary bonuses and commissions. Management is continuing a determined
effort to reduce the cost of sales as a percent of revenue and expects margins
to improve in 1997 and return to more historical patterns.
Other (Income) Expense
Other expenses were $1,000,604 for 1996 as compared to $678,264 during
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, and an increase in interest expense due to an increase in
the outstanding balance on the working capital line of credit.
12
<PAGE>
Provision (Benefit) for Income Taxes
The benefit for income taxes was 24% of the loss before income taxes in
1996, as compared to a provision for income taxes of 40% of income before taxes
in 1995. This difference is primarily a result of an increase in the
amortization of non-deductible goodwill.
Net Income
- ----------
The Company incurred a net loss of $989,768 for 1996 as compared to
reporting net income of $1,173,304 during 1995. The loss was primarily due to
the factors noted above regarding sales, cost of goods sold, operating expenses
and other (income) expense.
Analysis of 1995 Compared to 1994
---------------------------------
Revenues
The Company's net sales increased by 12.0% to $31,447,849 during the fiscal
year ended December 31, 1995 from $28,081,272 in 1994, which was below
management's expectations as stated in the Company's 1994 Annual Report to
Stockholders. These results can be attributed to a decrease in consumer spending
at the retail level in each of the markets in which the Company's customers
participate. Early in the year, management believed that the positive trend in
sales experienced in late 1994 and the first quarter of 1995 would continue. The
remaining three quarters of the year, however, proved this indication of
increased sales to be temporary in nature. Sales in the fourth quarter of 1995,
outside of Cushman, were down 15.5% from the same quarter in 1994. Absent
Cushman, TLF sales were down 4.2% for the fiscal 1995 year.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of sales was 58.7% for the fiscal year ended
December 31, 1995 as compared to 56.5% for the same period in 1994. The
difference in the relative cost of sales percentage was principally attributable
to a change in sales mix due to the softness described above, the competitive
nature of the market, the fact that Cushman operates on a somewhat lower gross
margin than TLF, and higher prevailing leather prices, which were not or could
not be passed along to customers.
A higher relative cost of sales percentage meant that gross profit as a
percentage of sales was lower for the fiscal year ended December 31, 1995
compared to fiscal 1994. Gross profit as a percentage of sales decreased 2.2
percentage points to 41.3% in 1995 from 43.5% in 1994. In spite of a relative
decrease in the gross profit percentage, due to the increase in sales for 1995,
total gross profit increased 6.5%, increasing to $13,001,471 from $12,210,669 in
the previous fiscal year.
13
<PAGE>
Operating expenses increased $789,664 or 8.2% to $10,363,159 during the
fiscal year ended December 31, 1995 from $9,573,495 during 1994. The increase in
operating expenses between the years was the net result of an increase in
operating expenses at Cushman, as well as certain other costs incurred by the
Company in order to expand its infrastructure and promote its business, and a
decrease in expenses such as discretionary bonuses and ESOP contributions. As a
percentage of sales, operating expenses decreased to 33.0% in 1995 from 34.1% in
1994, primarily as a result of the decreased expenses mentioned above as well as
economies of scale achieved through the Company's planned growth.
Provision for Income Taxes
The provision for income taxes remained relatively constant in 1995 as
compared to 1994 at approximately 40% of income before taxes in both years.
Other (Income) Expense
Other expenses were $678,264 for the fiscal year ended December 31, 1995
compared to $142,830 during the same period in 1994. The difference between the
two fiscal years involved increased interest expense. This increase was
primarily due to the fact that the Company had a greater amount of bank
indebtedness outstanding for the 1995 fiscal year compared to 1994 as a result
of the amount of debt associated with the acquisition and operation of Cushman.
Net Income
Net income decreased 22% to $1,173,304 for the fiscal year ended December
31, 1995 from $1,504,147 during the fiscal year ended December 31, 1994. The
decrease was due to the following factors: the decline in gross profit margins,
an increase in interest expense, and increases in operating expenses while the
effective income tax rate remained relatively constant.
Capital Resources and Liquidity
The primary sources of liquidity and capital resources during 1996 were
borrowings on the Company's credit facility with NationsBank of Texas, N.A.
("NationsBank").
Background of Agreement with Bank. The 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 as amended (the "Loan
Agreement"). The Company presently has outstanding principal balances on its
working capital line of credit and its term facility of $5,500,000 and
$3,000,000, respectively. From June 30, 1996 through December 31, 1996, the
Company had been in default under certain financial covenants contained in the
Loan Agreement. These financial covenants related 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.
14
<PAGE>
On August 14, 1996, effective June 30, 1996, NationsBank and the Company
entered into an amendment to the Loan Agreement pursuant to which 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"). 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 September 30, 1996, NationsBank and the Company entered into another
amendment to the Loan Agreement whereby NationsBank agreed to extend the
Forbearance Period until December 31, 1996 (the "Extended Forbearance Period").
NationsBank and the Company also agreed to decrease the amount of the working
capital line of credit from $10 million to $7.5 million. Additionally the
Company agreed to grant NationsBank a lien on its facility located in Tampa,
Florida.
The Company remained in default under the financial covenants described
above.
Current Agreement. As of December 31, 1996, NationsBank and the Company
------------------
entered into the Fifth Amendment to the Second Restated Loan Agreement (the
"Fifth Amendment") whereby NationsBank and the Company agreed to modify the Loan
Agreement. In the Fifth Amendment the Company agreed to employ Price Waterhouse
to assist in obtaining alternative financing of the obligations to NationsBank.
The Company and Nations Bank also agreed:
1. To decrease the amount of the working capital line of credit from $7.5
million to $6.5 million;
2. To modify the maturity date of the working capital line of credit note
to April 30, 1997;
3. To modify the maturity date of the Roberts Cushman & Company note to
April 30, 1997.
4. The financial covenants under which the Company was in default
previously were eliminated or modified.
15
<PAGE>
A copy of the complete agreement is filed herewith as exhibit 4.13 and
additional information regarding capital resources and liquidity can be found in
the "Notes to Consolidated Financial Statements" section of this report.
Management remains confident that the restructuring of our financing
arrangements on a favorable, long term basis will be accomplished. However, in
the event alternative financing cannot be arranged, the Company would enter
negotiations with NationsBank to restructure the existing loans. If neither of
these strategies were successful, the Company could experience a material
adverse impact.
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.
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 and projections of
management. 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.
Item 8. Financial Statements and Supplementary Data
Financial Statements and Financial Statement Schedules are filed as a part
of this report. See page 14, Index to Consolidated Financial Statements.
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
Disclosure
A. Change in Accountants - 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.
B. Disagreements with Accountants - None
16
<PAGE>
THE LEATHER FACTORY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Consolidated Balance Sheets at December 31, 1996 and 1995 ......................................................... 15
Consolidated Statements of Income For the Years Ended December 31, 1996, 1995 and 1994 ............................ 16
Consolidated Statements of Cash Flow For the Years Ended December 31, 1996, 1995 and 1994 ......................... 17
Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1996, 1995 and 1994 .............. 18
Notes to Consolidated Financial Statements ........................................................................ 19 - 27
Consolidated Financial Statement Schedules for the year ended December 31, 1996:
II -- Allowance for Doubtful Accounts.......................................................................... 28
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the consolidated
financial statements and notes thereto.
Reports of Independent Auditors . ................................................................................. 29 - 30
</TABLE>
17
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
-------------- ---------------
ASSETS
CURRENT ASSETS:
Cash $ 488,192 $ 477,159
Accounts receivable-trade, net of allowance for
doubtful accounts of $54,000 and $39,000
in 1996 and 1995, respectively 1,947,698 2,784,050
Inventory 7,737,320 7,903,179
Prepaid income taxes 538,458 203,559
Deferred income taxes 126,955 88,321
Other current assets 542,809 656,837
-------------- ---------------
Total current assets 11,381,432 12,113,105
-------------- ---------------
PROPERTY AND EQUIPMENT, at cost 2,672,253 2,474,056
Less: accumulated depreciation and amortization (1,273,609) (1,014,966)
-------------- ---------------
Property and equipment, net 1,398,644 1,459,090
GOODWILL and other, net of accumulated amortization of
$660,000 and $300,000 in 1996 and 1995, respectively 5,484,471 5,761,181
-------------- ---------------
$ 18,264,547 $ 19,333,376
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 940,549 $ 1,398,917
Accrued expenses and other liabilities 597,007 655,489
Income taxes payable - 48,300
Notes payable and current maturities of
long-term debt 8,549,366 1,296,359
-------------- ---------------
Total current liabilities 10,086,922 3,399,065
-------------- ---------------
DEFERRED INCOME TAXES 137,310 85,197
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 17,378 6,566,809
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 4,130,796 4,130,796
Retained earnings 4,464,277 5,454,045
Less: Notes receivable - secured by common stock (269,305) -
Cumulative translation adjustments (295) -
Less: Unearned shares held by ESOP, 64,631
shares in 1996 and 1995 (326,184) (326,184)
-------------- ---------------
Total stockholders' equity 8,022,937 9,282,305
-------------- ---------------
$ 18,264,547 $ 19,333,376
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995 1994
--------------- --------------- -------------
NET SALES $ 28,253,632 $ 31,447,849 $ 28,081,272
COST OF SALES 17,689,973 18,446,378 15,870,603
--------------- --------------- ---------------
Gross profit 10,563,659 13,001,471 12,210,669
OPERATING EXPENSES 10,869,359 10,363,159 9,573,495
--------------- ---------------- ----------------
INCOME (LOSS) FROM OPERATIONS (305,700) 2,638,312 2,637,174
OTHER (INCOME) EXPENSE:
Interest expense 1,007,544 718,066 142,037
Other, net (6,940) (39,802) 793
--------------- ---------------- ----------------
Total other (income) expense 1,000,604 678,264 142,830
--------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (1,306,304) 1,960,048 2,494,344
PROVISION (BENEFIT) FOR INCOME TAXES (316,536) 786,744 990,197
--------------- ---------------- ----------------
NET INCOME (LOSS) $ (989,768) $ 1,173,304 $ 1,504,147
=============== ================ ================
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ (0.10) $ 0.12 $ 0.15
============== ================ ================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 9,788,530 9,789,468 9,783,387
============== ================ ================
DIVIDENDS PAID PER SHARE $ - $ - $ -
============== ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (989,768) $ 1,173,304 $ 1,504,147
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation & amortization 638,450 424,135 249,616
(Gain) loss on sales of assets (7,541) (9,524) 2,778
Common stock issued for services - - 240,833
Deferred financing costs 156,891 - -
Deferred income taxes 13,479 (9,257) (27,562)
Other 785 - -
Net changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable-trade, net 814,870 (104,118) (728,346)
Inventory 241,843 328,316 (1,754,306)
Income taxes (383,199) (243,435) 320,253
Other current assets 130,683 (326,759) (119,157)
Accounts payable (458,368) (104,939) 302,190
Accrued expenses and other liabilities (58,482) (400,868) (361,203)
------------ ------------- -------------
Total adjustments 1,089,411 (446,449) (1,874,904)
------------ ------------- -------------
Net cash provided by (used in) operating activities 99,643 726,855 (370,757)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (208,537) (513,483) (308,115)
Proceeds from sales of assets 10,444 17,746 6,000
Cash paid for acquisitions, net of cash acquired (300,000) (5,232,389) (572,713)
(Increase) decrease in assets restricted for acquisitions - 5,040,656 (5,040,656)
Other intangible costs (24,788) (42,234) (39,436)
------------ ------------- -------------
Net cash used in investing activities (522,881) (729,704) (5,954,920)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 3,300,000 2,574,904 6,362,196
Payments on notes payable and long-term debt (2,596,424) (2,231,478) (533,411)
Proceeds from issuance of common stock - - 611,000
Purchase of notes receivable - secured by common stock (269,305) - -
Securities acquisition loan to ESOP - (99,962) (226,222)
Deferred financing and stock issuance costs - (165,709) (26,254)
------------ ------------- -------------
Net cash provided by financing activities 434,271 77,755 6,187,309
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH 11,033 74,906 (138,368)
CASH, beginning of period 477,159 402,253 540,621
------------ ------------- --------------
CASH, end of period $ 488,192 $ 477,159 $ 402,253
============ ============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 793,373 $ 763,848 $ 133,116
Income taxes paid during the period, net of refunds 55,445 1,066,111 700,935
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Common Stock
-------------------- Notes receivable Cumulative
Number Paid-in Retained - secured by Translation Unearned
of Shares Par Value Capital Earnings common stock Adjustments ESOP Shares Total
--------- --------- ------------ ----------- ------------ ----------- ----------- ----------
BALANCE,December 31,
1993 9,577,756 $ 22,987 $ 2,702,871 $ 2,776,594 $ - $ - $ - $ 5,502,452
Shares issued for
cash 40,000 96 199,904 - - - - 200,000
Shares issued in
acquisitions 98,405 236 537,294 - - - - 537,530
Shares issued for
cash - employee
stock options
exercised 137,000 329 410,671 - - - - 411,000
Compensation expense
- employee stock
options - - 240,833 - - - - 240,833
Tax effect of excess
deduction
over book expense
- exercise
of employee stock
options - - 74,295 - - - - 74,295
American Stock
Exchange additional
listing fee - - (4,500) - - - - (4,500)
Stock issuance costs - - (21,754) - - - - (21,754)
Securities acquisition
loan to ESOP - - - - - - (226,222) (226,222)
Net income - - - 1,504,147 - - - 1,504,147
--------- --------- ----------- ----------- ---------- ----------- ------------- -----------
BALANCE, December
31, 1994 9,853,161 23,648 4,139,614 4,280,741 - - (226,222) 8,217,781
Stock issuance
costs - - (8,818) - - - - (8,818)
Securities acquisition
loan to ESOP - - - - - - (99,962) (99,962)
Net income - - - 1,173,304 - - - 1,173,304
--------- --------- ----------- ----------- ---------- ----------- ------------- ----------
BALANCE, December
31, 1995 9,853,161 23,648 4,130,796 5,454,045 - - (326,184) 9,282,305
Notes receivable
- secured by
common stock - - - - (269,305) - - (269,305)
Translation
adjustment - - - - - (295) - (295)
Net loss - - - (989,768) - - - (989,768)
--------- --------- ----------- ----------- ---------- - ---------- ------------ -----------
BALANCE, December
31, 1996 9,853,161 $ 23,648 $ 4,130,796 $ 4,464,277 $ (269,305) $ (295) $ (326,184) $ 8,022,937
========= ========= ============ =========== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND NATURE OF OPERATIONS
The Leather Factory, Inc. and subsidiaries (the "Company") operations include
the manufacture, distribution, importation, and exportation of leather,
leatherworking tools, buckles and other belt supplies, shoe care and repair
supplies, leather dyes and finishes, adornments for belts, bags, and garments,
saddle and tack hardware, and do-it-yourself kits. The Company through its
subsidiary, Roberts, Cushman & Company, Inc., is also a manufacturer and
distributor of hat trims and small finished leather goods such as cigar cases,
picture frames, wallets, and western accessories. As of December 31, 1996, the
Company had 22 sales/distribution units in 17 states and Canada, including
Arizona, California, Colorado, Florida, Iowa, Kansas, Louisiana, Michigan,
Missouri, New Mexico, North Carolina, Ohio, Pennsylvania, Tennessee, Texas,
Utah, Washington, and Winnipeg. The Company also has light manufacturing
facilities In Fort Worth, Texas and New York, New York. In 1996, the Company
expanded its sales/distribution units by acquiring its Canadian distributor
located in Winnipeg, and opening a new unit in Charlotte, North Carolina.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to the current year presentation.
Inventory
The Company's inventory is valued at the lower of first-in, first-out cost or
market and consists of the following at December 31:
1996 1995
---------- ----------
Finished goods held for sale $ 6,516,517 $ 6,736,811
Raw materials and work in process 1,220,803 1,166,368
----------- -----------
$ 7,737,320 $ 7,903,179
=========== ===========
Restricted Assets
Restricted assets consist primarily of cash borrowed for an acquisition which
was consummated on January 2, 1995. Please see Note 9 below.
22
<PAGE>
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense when incurred. The cost of assets retired or sold
and the related amounts of accumulated depreciation are removed from the
accounts, and any gain or loss is included in the statement of income.
Depreciation is determined using the straight-line method over the estimated
useful lives as follows:
Building 30 years
Leasehold improvements 5-7 years
Equipment 5-10 years
Furniture and fixtures 5-7 years
Automobiles 5 years
Depreciation expense was $277,994; $224,364; and 175,348 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Goodwill
Goodwill resulting from business purchases accounted for using the purchase
method of accounting is being amortized on a straight-line basis over estimated
useful lives ranging from ten to forty years.
Acquisitions to date have not involved any significant long-lived assets other
than goodwill. Accordingly, the Company evaluates such goodwill for impairment
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 17, "Intangible Assets." During 1996, the Company determined that the
goodwill associated with the acquisition of Hi-Line Leather and Manufacturing
Co., Inc. in 1994 was impaired, and should be reduced by fifty percent or
approximately $142,000. This conclusion was reached due to the fact that the
customer base acquired in the purchase transaction has declined substantially,
and the operating results of the location since the acquisition have not met
expectations. However, the unit is providing marginal positive cash flow and
business conditions could improve; therefore, management believes the remaining
goodwill is recoverable and the amortization period remains appropriate.
Amortization expense of $360,456 in 1996; $199,771 in 1995; and $74,268 in 1994
was recorded in operating expenses including the above write-down.
Advertising Costs
With the exception of catalog costs, advertising cost are expensed as incurred.
Catalog costs are capitalized and expensed over the estimated useful life of the
particular catalog in question, which is typically twelve months. Such
capitalized costs are included in other current assets and totaled $203,755 and
$266,875 at December 31, 1996 and 1995, respectively. Total advertising expense
was $1,089,716 in 1996; $976,126 in 1995; and $797,758 in 1994.
23
<PAGE>
Revenue Recognition
Sales are recorded when goods are shipped to customers.
Income Taxes
Deferred income taxes result from temporary differences in the basis of assets
and liabilities reported for financial statement and income tax purposes.
Earnings Per Share
Earnings per share is based on the weighted average number of shares of common
stock and common stock equivalents outstanding during each period. Common stock
equivalents are determined for stock options using the treasury stock method,
under which the number of shares outstanding reflects the assumed repurchase of
shares of the Company's common stock with the proceeds from the assumed exercise
of outstanding stock options. Unearned shares held by the Employees' Stock
Ownership Plan are deemed not to be outstanding for earnings per share
calculations.
Accounting Estimates
The consolidated financial statements include estimates and assumptions made by
management that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Long-Lived Assets
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires that long-lived assets and certain identifiable intangible assets be
reviewed for impairment whenever events indicate that the carrying amount of an
asset may not be recoverable. The Company has determined that as of December 31,
1996, it has no long-lived assets that meet the impairment criteria of SFAS No.
121.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), issued in October 1995, establishes financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted by SFAS 123, the Company has elected to continue to use Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"("APB
25") and related Interpretations, in accounting for its stock option plans.
24
<PAGE>
3. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 1996 and 1995, notes payable and long-term debt consisted of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
--------- ----------
Loan Agreement with NationsBank of Texas, N. A. - collateralized by inventory,
trade accounts receivable, equipment, fixtures and real estate; payable as
follows:
Promissory Note (Term Loan) dated December 28, 1994 in the principal amount of
$5,000,000 - $250,000 principal due quarterly with monthly interest payments at
prime plus 1.5% (9.75% at December 31, 1996);
matures April 30, 1997 $3,000,000 $4,250,000
Promissory Note (Working Capital Line of Credit)originally dated July 24, 1995
in the maximum principal amount of $6,500,000 with Revolving features as more
fully escribed below-interest due monthly at prime plus 1.5 % (9.75% at December
31, 1996); matures April 30, 1997 5,500,000 3,500,000
Unsecured note payable created in connection with the acquisition of the assets
of The Leather Warehouse discussed in Note 9 below - $4,419 payments of
principal and interest due monthly at prime (8.25% at December 31, 1996);
matures on April 1, 1998 66,744 112,180
Other notes payable - 988
---------- ---------
8,566,744 7,863,168
Less - Current maturities 8,549,366 1,296,359
---------- ----------
$ 17,378 $6,566,809
========== ==========
</TABLE>
In addition to the above amounts payable to NationsBank of Texas, N.A.
("Nations"), the bank holds letters of credit in the Company's name for
inventory purchase commitments with terms ranging from sight to 90 days. As of
December 31, 1996 and 1995, the Company had $273,065 and $745,072, respectively,
in outstanding purchase commitments on these letters of credit.
25
<PAGE>
Pursuant to the Loan Agreement, the overall combined limit for borrowings under
the Working Capital Line of Credit facility as amended and outstanding balance
on letters of credit is $6,500,000. Of the overall $6,500,000 limit, letters of
credit cannot exceed $1,000,000. The unused portion of the letter of credit
limit can be utilized for borrowings, up to the limits imposed for said
indebtedness. Total borrowings under this arrangement are also limited to a
certain percentage of trade accounts receivable and inventory reduced by the
outstanding balance of letters of credit. Total availability at December 31,
1996, under the Working Capital Line of Credit facility and for letters of
credit was $107,170.
The Loan Agreement as amended has affirmative financial covenants which require
the maintenance of a minimum current ratio, and a maximum ratio of total
liabilities to tangible net worth. The Agreement also restricts the Company from
paying dividends other than those payable solely in additional shares of stock.
The Company's long-term debt matures as follows:
1997 $ 8,549,366
1998 17,378
----------
$ 8,566,744
==========
In January 1997, the Company with the assistance of consultants implemented a
plan to secure financing to replace the Nations debt. The Company seeks to raise
$6,000,000 in senior debt and $4,000,000 in mezzanine financing. The proposed
senior debt would be comprised of a $5,500,000 revolving line of credit with a
$1,000,000 sublimit for Letters of Credit to be secured by inventory and
receivables and a $500,000 term loan secured by property and equipment. The
proposed revolving line of credit will require monthly interest payments and
will mature within one year of initiation. The proposed term loan will require
monthly principal and interest payments on a five year amortization. The
proposed mezzanine financing will require monthly coupon interest payments with
a five year balloon and detachable warrants.
Management and their consultants believe that the Company will secure such
proposed financing although there can be no guarantee this will occur.
4. EMPLOYEE BENEFIT PLAN
The Company has an Employee Stock Ownership Plan (the "Plan") for employees with
at least one year of service (as defined by the Plan) and who have reached their
21st birthday. Under the Plan, the Company makes annual cash or stock
contributions to a trust for the benefit of eligible employees. The trust
invests in shares of the Company's common stock. The amount of the Company's
annual contribution is discretionary. Benefits under the Plan are 100% vested
after three years of service and are payable upon death, disability or
retirement. Vested benefits are payable upon termination of employment.
26
<PAGE>
During 1994, the Company adopted Statement of Position 93-6 ("SOP 93-6"),
"Employers Accounting for Employee Stock Ownership Plans," of the Accounting
Standards Division of the American Institute of CPAs, issued in November 1993.
The Company contributed $27,500; $133,378; and $325,000 in cash to the Plan
during 1996, 1995 and 1994, respectively. Of these amounts $27,500; $33,416; and
$98,778 represented current year contributions, while $0; $99,962; and $226,222
represented securities acquisition loans for 1996, 1995 and 1994, respectively.
During 1995, the Plan purchased 23,500 shares of Company stock on the open
market for $99,962. In 1994, the Plan purchased 56,364 shares of Company stock
for $310,000 from certain officers of the Company. In accordance with SOP 93-6,
these purchases have been recorded as unearned ESOP shares. The unearned ESOP
share account will be reduced by the cost of the shares when they are released
to participants as payments are made on the loans using the principal and
interest method. Compensation expense is measured using the average fair market
value when shares are committed to be released to the employee. The Company
recognized compensation expense related to the Plan of $27,500; $33,416; and
$98,778 in 1996, 1995 and 1994, respectively.
The following table summarizes the number of shares held by the Plan and the
market value as of December 31, 1996, 1995 and 1994:
No. of Shares Market Value
------------- ------------
1996 1995 1994 1996 1995 1994
----- ---- ---- ---- ---- ----
Allocated 681,547 725,605 777,440 $ 554,098 $ 1,769,025 $ 3,353,099
Unearned 64,631 64,631 41,131 52,545 157,570 177,398
------- ------- ------- --------- ----------- -----------
Total 746,178 790,236 818,571 $ 606,643 $ 1,926,595 $ 3,530,497
======= ======= ======= ========= =========== ===========
The Company currently offers no postretirement or postemployment benefits to its
employees.
27
<PAGE>
5. INCOME TAXES
The provision for income taxes consists of the following:
1996 1995 1994
----- ----- ----
Current provision (benefit):
Federal ($ 282,917) $ 658,975 $ 864,945
State (47,098) 137,026 152,814
---------- ---------- ----------
(330,015) 796,001 1,017,759
---------- ---------- ----------
Deferred provision (benefit):
Federal 11,351 (7,870) (24,136)
State 2,128 (1,387) (3,426)
---------- ---------- ----------
13,479 (9,257) (27,562)
---------- ---------- ----------
($ 316,536) $ 786,744 $ 990,197
========== ========= ==========
Deferred taxes relate primarily to temporary differences in the bases of
accounts receivable, inventory, fixed assets and accrued expenses.
The effective tax rate differs from the statutory rate as follows:
1996 1995 1994
---- ---- ----
Statutory rate (34%) 34% 34%
State taxes (3%) 4% 3%
Non-deductible
goodwill amortization 10% 4% 1%
Other 3% (2%) 2%
-----------------------
Effective rate (24%) 40% 40%
=======================
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's primary office facility and warehouse are leased under a
seven-year lease agreement that expires in March 1998. Rental agreements for the
sales/distribution units expire on dates ranging from November 30, 1997 to
December 31, 2003. The Company's lease agreement for the manufacturing facility
in New York, New York, expires on December 31, 1997. Future minimum lease
payments for all noncancellable operating leases are as follows:
Year Ending December 31,
1997 $ 1,039,148
1998 694,987
1999 443,366
2000 288,649
2001 183,023
2002 and thereafter 135,005
----------
Total future minimum lease payments $2,784,178
==========
Rent expense on all operating leases for the years ended December 31, 1996, 1995
and 1994, was $1,008,458; $928,433; and $710,650, respectively.
28
<PAGE>
Litigation
The Company has litigation in the ordinary course of its business and
operations. The Company does not expect the outcome of any current litigation to
have a material impact on its financial position and results of operations.
7. MAJOR VENDORS
Two major vendors accounted for 16% and 10% of the Company's 1996 inventory
purchases. These same vendors accounted for 15% and 14% of 1995 inventory
purchases, and 18% and 12% of 1994 inventory purchases. Due to the number of
alternative sources of supply, it is management's opinion that the loss of
either or both of these principal suppliers would not have a material impact on
the operations of the Company.
8. STOCKHOLDERS' EQUITY
Stock Option Plans
The Company has outstanding options to purchase its common stock under The 1995
Stock Option Plan for officers and key management employees and The 1995
Director Non-qualified Stock Option Plan for non-employee directors. The plan
for employees provides for the granting of either qualified incentive stock
options or non-qualified options at the discretion of the Compensation Committee
of the Board of Directors. Options are granted at the fair market value of the
underlying common stock at the date of grant. Employee options vest over a
five-year period while the director options vest after six months. All options
expire ten years from the date of grant and are exerciseable at any time after
vesting. As of December 31, 1996, 1,000,000 shares of common stock have been
reserved for future issuance under the employee plan and 100,000 shares are
reserved for future issuance under the director plan.
In accordance with the Company's 1993 Non-Qualified Incentive Stock Option Plan,
an aggregate of 600,000 common shares could be granted to officers, key
employees, vendors and consultants. The options were exercisable at any time
from the date of grant to March 31, 1994 when they expired.
A summary of the Company's stock option activity and related information for the
years ended December 31, 1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995 1994
--------------------- -------------------- -----------------------
Weighted Weightedd Weighted
Average Averagee Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
--------- ---------- -------- ---------- --------- ----------
Outstanding at January 1 585,000 $3.063 - $ - 110,000 $3.000
Granted 106,000 1.088 585,000 3.063 40,000 3.000
Forfeited (181,000) 3.063 - - - -
Expired - - - - (13,000) 3.000
Exercised - - - - (137,000) 3.000
--------- --------- ----------- --------- --------- ----------
Outstanding at December 31 510,000 $2.653 585,000 $3.063 - $ -
========= ========= =========== ========= ========= ==========
Exercisable at end of year 84,000 $3.063 - $ - - $ -
========= ========= =========== ========= ========= ==========
Weighted-average fair value of
options granted during the year $0.52 $1.45
========= ===========
</TABLE>
29
<PAGE>
The following table segregates outstanding options into groups based on exercise
price ranges of less than and more than $2 per share.
Outstanding Exercisable
------------------------------ --------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Option Exercise Maturity Option Exercise Maturity
Exercise Price Range Shares Price (Years) Shares Price (Years)
- -------------------- --------- ---------- -------- ------ ------- --------
Less than $2 106,000 $1.088 9.83 - $ - -
More than $2 404,000 3.063 8.75 84,000 3.063 8.75
--------- ---------- ------- ------ ----- --------
510,000 $2.653 8.97 84,000 $3.063 8.75
========= ========== ======= ====== ===== ========
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method. The fair value for these
options was estimated at the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 6.72% in 1996 and 6.38% in 1995; dividend yields of 0% for
both years; volatility factors of .439 for both years; and an expected life of
the valued options of 5 years in both 1996 and 1995.
Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility, and changes in these input
assumptions can materially affect the fair value estimate they produce. Because
of this, it is management's opinion that existing models do not necessarily
provide a reliable single measure of fair value for the Company's stock options.
For pro forma disclosures, the estimated fair values determined by the model are
being amortized to expense on a straight-line basis over the options vesting
period as adjusted for estimated forfeitures.
The Company's pro forma information follows:
1996 1995
------------ ---------
Pro forma net income (loss) ($1,057,818) $1,121,736
Pro forma net income (loss) per share ($0.11) $0.11
Private Placements
During 1994, forty thousand shares of the Company's common stock were issued for
cash in the amount of $5.00 per share pursuant to the sale of four private
placement units.
30
<PAGE>
Notes Receivable Secured by Common Stock
During 1996, the Company purchased certain notes from NationsBank that are
collateralized by the Company's common stock. These notes relate to shares
issued under the Company's 1993 Non-Qualified Incentive Stock Option Plan. The
notes are due from seven individuals including officers and other members of
management and mature on December 31, 1997.
9. ACQUISITIONS
On January 10, 1994, the Company acquired all of the issued and outstanding
shares of capital stock of Hi-Line Leather & Manufacturing Company ("Hi-Line"),
a distributor of shoe repair and care supplies located in Oakland, California.
For financial reporting purposes, the transaction was accounted for under the
purchase method, effective January 1, 1994.
On April 15, 1994, the Company purchased certain assets of The Leather Warehouse
Company ("Warehouse"), a Michigan corporation which distributes shoe repair and
care supplies located in Grand Rapids, Michigan. For financial reporting
purposes, the transaction was accounted for under the purchase method, effective
April 1, 1994.
On January 2, 1995, the Company acquired all of the issued and outstanding
shares of capital stock of Roberts, Cushman & Co., Inc., a manufacturer of fancy
hat trims located in New York, New York, for an approximate purchase price of
$5,000,000. The purchase price was funded with the proceeds of the Term Loan
discussed in Note 3 above, which along with legal and other acquisition costs,
comprised the restricted assets at December 31, 1994. The purchase was accounted
for under the purchase method effective, January 1, 1995.
On January 31, 1995, the Company acquired certain assets of Gulf Coast Leather
Company, Inc., a distributor of shoe care and repair supplies located in New
Orleans, Louisiana. The assets purchased include inventory, furniture, fixtures,
equipment, and rental and utility deposits. The total purchase price was
approximately $91,869 which was funded with cash generated from operations. The
purchase was accounted for under the purchase method effective, January 31,
1995.
On December 29, 1995, the Company acquired certain assets of B & J Leather
Company ("B & J") of Fort Worth, Texas, which was engaged primarily in the sale
of leather and related products to the shoe repair and care industry. These
assets, which included primarily salable inventory and intangible assets such as
vendor and customer lists, were valued at $100,094 which was funded with cash
generated from operations. The two principal shareholders of B & J were employed
by the Company subsequent to closing, with the business performed by B & J being
incorporated into the Company's sales/distribution unit located in Fort Worth,
Texas. The purchase was accounted for under the purchase method effective,
December 31, 1995.
31
<PAGE>
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. The total purchase price was
approximately $300,000 which was funded with cash generated from operations and
the Company's revolving credit facility. For financial reporting purposes, the
transaction was accounted for under the purchase method, effective March 1,
1996.
Unaudited pro forma results of operations for the year ended December 31, 1994,
as if the Cushman acquisition had occurred January 1, 1994, are as follows:
Net sales $34,743,952
Net income 2,054,566
Net income per common share $ .21
The pro forma financial information presented above does not include the effects
of the other acquisitions consummated by the Company during 1996, 1995 and 1994,
as such amounts would not be significantly different.
10. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
In conjunction with the 1994 acquisitions discussed in Note 9 above, liabilities
were assumed and common stock was issued as follows:
Hi-Line Warehouse Total
------- --------- -------
Fair value of assets acquired $ 688,007 $ 344,688 $1,032,695
Cost in excess of assets acquired 324,667 123,568 448,235
---------- --------- ----------
Total assets acquired 1,012,674 468,256 1,480,930
Consideration paid:
Cash (409,612) (173,175) (582,787)
Fair value of common stock issued (422,577) (114,953) (537,530)
---------- ---------- ----------
Liabilities assumed $ 180,485 $ 180,128 $ 360,613
=========== ========== ==========
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and accounts receivable-trade
The carrying amount approximates fair value because of the short maturity of
those instruments.
Accounts payable
The carrying amount approximates fair value because of the short maturity of
those instruments.
32
<PAGE>
Notes payable and long-term debt
The interest rates on the Company's notes payable and long-term debt fluctuate
with changes in the prime rate and are the rates currently available to the
Company; therefore, the carrying amount of those instruments approximates their
fair value.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
** First (*)(**)Second **Third Fourth
1996 Quarter Quarter Quarter Quarter
- ----------------------------- --------------------------------------------------------
Net sales $ 7,356,805 $ 7,155,218 $ 7,015,834 $ 6,725,775
Gross profit 2,894,664 2,337,962 2,777,628 2,553,405
Net income (loss) (21,994) (810,963) 14,391 (171,202)
Net income (loss) per
share of common stock - (0.08) - (0.02)
Weighted average number
of common shares outstanding 9,788,530 9,788,530 9,788,530 9,788,530
First Second Third ** Fourth
1995 Quarter Quarter Quarter Quarter
- ----------------------------- --------------------------------------------------------
Net sales $ 8,568,942 $ 7,619,499 $ 7,580,224 $ 7,679,184
Gross profit 3,747,404 3,304,296 3,076,549 2,873,222
Net income (loss) 558,025 391,258 204,486 19,535
Net income (loss) per
share of common stock 0.06 0.04 0.02 -
Weighted average number
of common shares outstanding 9,812,030 9,812,030 9,836,645 9,788,530
</TABLE>
* The second quarter results for 1996 include several items that affect the
comparability to the other quarters. These items include the write-off of
deferred costs related to financing commitments that expired, the goodwill
write-down, a large bad debt due to a customer bankruptcy, and a minimum
royalty accrual and inventory write-off due to a licensing agreement. The
aggregate amount of such costs is approximately $560,000.
** The results for the fourth quarter of 1995 through the third quarter of
1996 were affected by excessive labor, production, travel and legal cost
related to the labor dispute at the Company's New York facility that affect
comparability to the other quarters. The labor dispute was settled on
favorable terms in October of 1996. The aggregate amount of such cost is
approximately $600,000.
33
<PAGE>
THE LEATHER FACTORY, INC.
SCHEDULE II -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 1996
Balance at beginning of year $ 39,000
Additions charged to income 229,000
Balances written off, net of recoveries (214,000)
--------
Balance at end of year $ 54,000
========
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Leather Factory, Inc.
We have audited the accompanying consolidated balance sheet of The Leather
Factory, Inc. as of December 31, 1996, and the related consolidated statements
of income, stockholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule referred to in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial consolidated position of The
Leather Factory, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Fort Worth, Texas,
February 21, 1997
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF
THE LEATHER FACTORY, INC.:
We have audited the accompanying consolidated balance sheet of The Leather
Factory, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the two years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Leather Factory, Inc. and
subsidiaries as of December 31, 1995 and the results of their operations and
their cash flows for each of the the years then ended, in conformity with
generally accepted accounting principles.
/s/Arthur Andersen LLP
Fort Worth, Texas,
February 16, 1996
36
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" and "Directors and
Executive Officers" in the Proxy Statement for the 1997 Annual Meeting of
Stockholders.
Item 11. Executive Compensation
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated by reference to the
material appearing under the heading "Principal Stockholders" and "Certain
Transactions" in the Proxy Statement for the 1997 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference to the
material appearing under the heading "Certain Transactions" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial statements and financial statement schedules
The financial statements and schedules listed in the accompanying
index to consolidated financial statements at Item 8 are filed as part
of this annual report.
2. Exhibits:
The exhibits listed on the accompanying Exhibit Index, which
immediately precedes such exhibits, are filed or incorporated by
reference as part of this Report and such Exhibit Index.
(b) Reports on Form 8-K
None
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: March 28, 1997 /s/ Wray Thompson
-------------- -----------------
Wray Thompson
Chairman of the Board, President,
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Fred N. Howell Chief Financial Officer, March 28, 1997
- ----------------------- Treasurer and Director
Fred N. Howell (Chief Accounting Officer)
/s/ Wray Thompson Chairman of the Board March 28, 1997
- -----------------------
Wray Thompson
/s/ Ronald C. Morgan Director March 28, 1997
- -----------------------
Ronald C. Morgan
/s/ Robin L. Morgan Director March 28, 1997
- -----------------------
Robin L. Morgan
/s/ William M. Warren Director March 28, 1997
- -----------------------
William M. Warren
/s/ Luther A. Henderson Director March 28, 1997
- -----------------------
Luther A. Henderson
/s/ H. W. Markwardt Director March 28, 1997
- -----------------------
H. W. Markwardt
38
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
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.
39
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Number Description
- ------ -----------
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.
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.
40
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Number Description
- ------ -----------
*4.13 Fifth Amendment to Second Restated Loan Agreement effective as of
December 31, 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.
41
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Number Description
- ------ -----------
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.
42
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(Continued)
Exhibit
Number Description
- ------ -----------
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.
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.
*23.1 Consent of Ernst & Young LLP dated March 27, 1997.
*23.2 Consent of Arthur Anderson LLP dated March 27, 1997.
*27.1 Financial Data Schedule
- ------------
*Filed herewith.
43
<PAGE>
EXHIBIT 4.13
FIFTH AMENDMENT TO SECOND RESTATED LOAN AGREEMENT
This Fifth Amendment to Second Restated Loan Agreement ("Amendment")
dated effective as of December 31, 1996 ("Effective Date") is entered into among
The Leather Factory, Inc., a Delaware corporation ("Borrower"), The Leather
Factory, Inc., a Texas corporation, and Roberts, Cushman & Company, Inc., New
York corporation (collectively, "Guarantors"), and NationsBank of Texas, N.A.
("Bank"), as follows:
Recitals
--------
(a) Bank, Borrower and Guarantors are parties to the certain Second
Restated Loan Agreement dated as of July 24, 1995, as amended by the First
Amendment to Second Restated Loan Agreement dated as of December 31, 1995, the
Second Amendment to Second Restated Loan Agreement dated as of March 31, 1996,
the Forbearance Agreement and Third Amendment to Second Restated Loan Agreement
dated as of June 30, 1996 and the Forbearance Agreement and Fourth Amendment to
Second Restated Loan Agreement dated as of September 30, 1996 (the "Forbearance
Agreement"), each among Borrower, Guarantors and Bank (collectively the "Loan
Agreement"). Terms defined in the Loan Agreement, wherever used in this
Agreement, shall have the same meanings herein as are prescribed by the Loan
Agreement.
(b) Borrower, Guarantors and Bank wish to further amend the Loan
Agreement as provided hereinbelow. Therefore, for valuable consideration, the
receipt and sufficiency of which hereby is acknowledged, and in consideration of
the mutual agreements provided herein, Bank, Borrower and each of the Guarantors
hereby agree as follows:
Agreement
---------
Section 1. Amendment of Loan Agreement. As of the Effective Date, the Loan
----------------------------
Agreement is amended as follows:
1.1 Paragraph 1 ("Definitions and Reference Terms") of the Loan Agreement is
---------------------------------
amended by replacing or adding (as the case may be) the following definitions in
their entirety:
Accounts Receivable. Accounts Receivables has the meaning specified in Section
- -------------------
2D of this Agreement and also includes all property defined and described as
"Accounts" in the Security Agreements, and all proceeds of any of the foregoing
now owned or hereafter acquired or arising.
Borrowing Base. Borrowing Base shall have the meaning prescribed by paragraph
- --------------
2D.
43
<PAGE>
Borrowing Base Certificate. Borrowing Base Certificate means a Borrowing Base
- --------------------------
Certificate required by paragraph 2D.
Collateral. Collateral means all property from time to time included within the
- ----------
definition of "Collateral" as prescribed by the Security Agreements.
Default. Default means any defined event of default and any other breach or
- -------
other noncompliance with any of the Loan Documents.
Obligations. Obligations mean all obligations and indebtedness from time to
- -----------
time owing by Borrower or any of Guarantors under the Loan Documents, including
without limitation all "Obligations" defined in the Security Agreements, in each
case as may be renewed, extended or modified from time to time.
Security Agreements. Security Agreements means, collectively, the certain
- --------------------
Security Agreement dated December 28, 1994 between Bank and The Leather Factory,
Inc., a Texas corporation, and the certain Security Agreement dated January 3,
1995 between Bank and Roberts, Cushman & Company, Inc., respectively, in each
case including any and all renewals, extensions, modifications, amendments,
replacements, supplements or restatements thereof, and any other security
agreement at any time executed by either Guarantor for the benefit of Bank.
1.2 Notwithstanding anything to the contrary contained in the Loan Documents to
the contrary, as of the Effective Date the maximum principal amount which may be
outstanding under the Revolving Line from time to time shall not exceed
$6,500,000.00. Accordingly, as of the Effective Date, Section 2.A ("Loan")
hereby is amended by deleting the dollar figure "$7,500,000.00" in clause (i)
thereof and replacing same with the dollar figure "$6,500,000.00."
1.3 Effective as of January 1, 1997, Section 2.B ("Interest") is amended and
restated in its entirety to read as follows:
44
<PAGE>
"B. Interest. The interest to be paid by Borrower and collected by Bank on the
Notes (except with respect to the Acquisition Line which has terminated and
is no longer in effect on such date) shall be a rate per annum equal to the
Prime Rate established by Bank from time to time, being the variable rate
of interest announced by Bank from time to time as its general reference
rate of interest, which rate of interest may not be the lowest rate of
interest charged by Bank to other borrowers, plus one and one-half percent
(1.50%)."
1.4 Section 2D ("Borrowing Base") hereby is amended in the following respects:
a. The dollar figure "$7,500,000.00" in clause (i) of the first unnumbered
paragraph is deleted and replaced with the dollar figure "$6,500,000.00" (and
the dollar figure "7,500,000.00" in line 1 of the form of Borrowing Base
Certificate which appears as Exhibit "B" to the Loan Agreement is deleted and
replaced with the dollar figure "$6,500,000.00").
b. Clause (c) of the definition of "Eligible Inventory" is amended and
restated to read as follows:
"(c) inventory which is located at locations which have not been
identified to Bank and a security interest perfected or which are
outside the United States;"
c. The following two unnumbered paragraphs hereby are added, immediately
after the existing last unnumbered paragraph thereof:
"The advance rates from time to time utilized by Bank in determining
the Borrowing Base may be adjusted from time to time based upon such
considerations as Bank may deem appropriate in its discretion. Such
advance rates are for the sole purpose of determining the maximum
amount of unpaid loans under the Revolving Line that may be
outstanding from time to time and shall not be evidentiary of or
binding upon Bank with respect to the market value or liquidation
value of any Collateral. Funding of loans hereunder shall at all times
remain subject to confirmation of existence and acceptability of
Eligible Accounts Receivable and Eligible Inventory, and the Borrowing
Base, in Bank's sole discretion. Bank shall have the right in its
discretion at any time to establish reserves against Eligible Accounts
Receivable or Eligible Inventory, or otherwise in reduction of the
Borrowing Base, in respect of any costs, expenses, liens, claims,
contingencies or other potential factors which, in the event they
should occur, could adversely affect or otherwise reduce the
anticipated net amount of timely collections in payment of Eligible
Accounts Receivable or Eligible Inventory (it is understood that any
such reserve does not represent cash funds). The criteria for
determining such reserves and the amount thereof shall at all times be
subject to adjustment or change as determined by Bank in its
discretion without prior notice.
44
<PAGE>
"Together with each request for a loan under the Revolving Line and in
any event at least monthly or, following written notice to Borrower at
any time when any default is in existence, at least weekly, and at
such other times as Bank may request, Borrower and Guarantors each
shall execute and deliver to Bank, in form satisfactory to Bank, a
Borrowing Base Certificate setting forth a certification of Eligible
Accounts Receivable and Eligible Inventory, and calculation of the
Borrowing Base, in form satisfactory to Bank. Each Borrowing Base
Certificate shall include a reconciliation of the calculation of the
Borrowing Base as certified in the most recent Borrowing Base
Certificate delivered to Bank, and be accompanied by such documents
and supporting information relating to Eligible Accounts Receivable
and Eligible Inventory as Bank may request. Borrower and Guarantors
shall maintain, and shall furnish to Bank at Bank's request, such
supporting documents as Bank may require including, but not limited
to: a schedule of Eligible Accounts Receivable created, and Eligible
Inventory purchased and received, since the previous Borrowing Base
Certificate delivered to Bank; copies of invoices and supporting
delivery or service records in connection therewith; a schedule of
collections received; copies of credit memos or other advices of
credit or reductions against amounts previously billed; and such other
reports as Bank may request from time to time. If any of such records
or reports are prepared by an accounting service or other agent,
Borrower and Guarantors each hereby authorizes such service or agent
to deliver such records, reports and related documents to Bank. Bank
may exhibit a copy of this Agreement to any such service or agent and
such service or agent shall be entitled to rely on the provisions
hereof in providing such documentation to Bank. Each Borrowing Base
Certificate shall bear a signed statement by an authorized officer of
Borrower and each Guarantor certifying the accuracy and completeness
of all information included therein and shall incorporate therein by
reference, as if fully set forth therein, all the terms and provisions
hereof. The execution and delivery of a Borrowing Base Certificate
shall in each instance constitute an agreement, representation and
warranty by Borrower and Guarantors to Bank that, except for the
security interest of Bank therein (and Permitted Liens, if any):
Borrower or a Guarantor, as applicable, is the sole owner of and has
full unrestricted power to grant to Bank a continuing security
interest and lien in and to all collateral included therein free from
any lien, security interest or encumbrance; each account included
therein is in existence, unconditional and valid, and arose from a
bona fide outright sale of Inventory by Borrower or a Guarantor, in
the ordinary course of business, for liquidated amounts as set forth
in the Borrowing Base Certificate, and such Inventory has been
delivered or provided to the respective account debtors; no account
included therein arose in connection with a contract or assignment
which purports to make an assignment or security interest therein void
or conditions such assignment or security interest on consent of the
account debtor; no account is subject to any sale, assignment, claim
or security interest of any character and neither Borrower nor
Guarantors will make any sale or other assignment thereof or create
45
<PAGE>
any other security interest therein; no account is subject to any
claim for credit, deduction, allowance, extension or adjustment,
defense, dispute, setoff or counterclaim, except for discounts for
early payment allowed in the ordinary course of business as previously
disclosed to Bank and as reflected on the face of the invoice
evidencing such account; all Inventory reflected in such Borrowing
Base Certificate is held for sale in the ordinary course of business,
and no such Inventory is located at any location in breach of the
requirements of this Agreement and no negotiable documents have been
issued in respect of any such Inventory; no Inventory reflected in
such Borrowing Base Certificate is returned Inventory unless otherwise
disclosed to Bank in writing."
1.5 Section 2E ("Usage Fee") is deleted in its entirety.
1.6 The dollar figure "2,000,000.00" in Section 2.F ("Letter of Credit
Subfeature") is deleted and replaced with the dollar figure "1,000,000.00".
1.7 Section 2H ("Acquisition of Business Under Acquisition Line") hereby is
deleted in its entirety and replaced with the following new Section 2H, which
shall read in its entirety as follows:
"H. Accounts Receivables; Collections. All collections and proceeds of
---------------------------------
Accounts Receivables shall be subject to an express trust for the
benefit of Bank., subject to the following:
a. Subject to subparagraph (b) below, Borrower shall be allowed
to collect and retain collections and proceeds of Accounts Receivables
and use such collections and proceeds in the ordinary course of
business.
b. Immediately upon notice by Bank to Borrower at any time when
any default is in existence, unless and until expressly agreed
otherwise by Bank in writing (i) all collections and proceeds of
Accounts Receivables shall be directed daily to Bank for deposit to
one or more blocked collection accounts approved by Bank for such
purpose, (ii) Borrower and Guarantors shall notify all account debtors
on Accounts Receivable, in writing (by notation directly on the
related invoice, or otherwise, in form satisfactory to Bank) that all
payments thereon shall be directed to a post office box designated by,
and under the sole control of, Bank (iii) all checks and instruments
from time to time received by Bank in such post office box shall be
subject to Bank's continuing security interests under the Security
Agreements, and shall be deposited daily to such blocked collection
account, (iv) all collected funds from collections and proceeds of
Accounts Receivables from time to time deposited to such blocked
collection account(s) shall be applied directly to the Obligations,
(v) in the event Borrower or any Guarantor at any time receives any
collections or proceeds of Accounts
46
<PAGE>
Receivables, it shall promptly deliver same to Bank in the form
received, with any necessary endorsement to the order of Bank, (vi)
Borrower and Guarantor each agrees that it will not commingle proceeds
of Accounts Receivables with any other funds, and that no deposits
will be made to any blocked collection account other than collections
and proceeds of Accounts Receivables and (vii) Borrower and Guarantors
shall have no right of withdrawal, transfer or access to any blocked
collection account. Pending application to the Obligations as provided
herein, all amounts from time to time deposited to any such blocked
collection account shall remain subject to Bank's continuing security
interest under the Security Agreements.
Borrower and Guarantors will not use, dispose, withhold or otherwise
exercise dominion over any proceeds of Accounts Receivables except as
expressly allowed by this Agreement. Borrower and Guarantors shall
promptly report to Bank in writing any instance in which a dispute of
Accounts Receivables by an account debtor involves an amount in excess
of $1,000.00. Borrower and Guarantors each agrees that it will not
settle, adjust, compromise or discharge any such Accounts Receivables
or extend the time for payment without Bank's consent."
1.8 Section 4.A ("Financial Condition") hereby is amended as follows:
a. Subparagraph (i), which prescribes minimum requirements for the
ratio of current assets to current liabilities, is amended and
restated to read in its entirety as follows:
"(i) Maintain a minimum ratio of current assets to current
liabilities as follows:
Ratio Effective Date
----- --------------
1.08 to 1.00 January 31, 1997
1.10 to 1.00 March 31, 1997"
b. Subparagraph (ii), which prescribes minimum requirements for the
ratio of total liabilities to Tangible Net Worth, hereby is
supplemented to add the following to the "Ratio" and "Period"
columns, respectively, immediately after the existing last line
thereof:
Ratio Period
----- ------
"3.75 to 1.0 January 31, 1997
3.50 to 1.0 March 31, 1997"
47
<PAGE>
c. Subparagraph (iii), which prescribes a minimum EBITDA Ratio
requirement, hereby is deleted in its entirety.
d. Subparagraph (iv), which prescribes a minimum Cash Flow
requirement, hereby is deleted in its entirety.
1.9 Section 4.B ("Financial Statements and Other Information") hereby is
amended in the following respects:
a. Subparagraph (i) hereby is amended to add the words "and
consolidating" immediately following the word "consolidated".
b. Subparagraph (iv) hereby is amended to read in its entirety as
follows:
"(iv)Furnish to Bank a Borrowing Base Certificate, in form
attached as Exhibit "B" or in such other form as may be
prescribed by or satisfactory to, Bank, at such times as are
required by Paragraph 2D."
1.10 Section 4.E ("Adverse Conditions or Events") hereby is amended in the
following respects:
a. Clause (i) is amended and restated to read in its entirety as
follows:
"(i) any condition, event or act which comes to its
attention that would or might materially adversely affect
Borrower's or either Guarantor's financial condition or
operations, the collateral for the Loans, or Bank's rights under
the Loan Documents, or the occurrence of any liability that would
be treated as a contingent liability according to GAAP;"
b. The following hereby is added immediately after the last sentence
thereof:
"Borrower and Guarantors each agrees that it shall immediately
notify Bank in writing in the event its board of directors
authorizes the filing of a petition in bankruptcy, or if a
meeting of its board of directors is called for the purpose of
proposing or considering authorization of any such filing.
48
<PAGE>
1.11 Section 4 ("Affirmative Covenants") hereby is amended to add a new
paragraph I entitled "Field Examinations; Inspections" and a new paragraph J
entitled Appraisals", each of which shall read as follows, respectively:
"I. Field Examinations; Inspections. Bank shall have the right without
---------------------------------
hindrance or delay to conduct field examinations to inspect Borrower's
or any Guarantor's properties, including all collateral covered by the
Security Agreements, and to inspect, review, audit and copy books,
records, journals, correspondence and other records and data relating
to such properties and its business, operations and affairs. Bank is
authorized to discuss Borrower's or any Guarantor's affairs with any
employee of Borrower or any Guarantor. Promptly upon request, Borrower
agrees to pay Bank's customary examination fees, plus reimbursement of
Bank's out-of-pocket expenses and disbursements relating to such field
examinations. Bank shall have full access to all records available to
Borrower or any Guarantor from any credit reporting service, bureau or
similar service and shall have the right to examine and make copies of
any such records. Bank may exhibit a copy of this Agreement to such
service and such service shall be entitled to rely on the provisions
hereof in providing access to Bank as provided herein."
"J. Appraisals. At Bank's request at any time when any default is in
----------
existence, Borrower will cause to be ordered and delivered to Bank, at
Borrower's expense, an appraisal of all or any portion of the
Collateral, performed by a credentialed appraiser and in form
acceptable to Bank."
1.12 Section 5 ("Negative Covenants") is amended to add a new Section 5.H
entitled "Capital Expenditures", a new Section 5.I entitled "Investments", a new
Section 5.J entitled "Merger; Liquidation; Sale of Assets" and a new Section 5.K
entitled "Leases", immediately following existing Section 5.G, which shall read,
respectively, as follows:
"H. Capital Expenditures. Make capital expenditures during any period of
---------------------
twelve (12) calendar months which, in the aggregate with all other
capital expenditures by Borrower and Guarantors during such period,
would exceed the maximum aggregate amount of $250,000.00. As used
herein "capital expenditures" means expenditures which would be
classified as capital expenditures according to GAAP."
"I. Investments. Make any investments or permit any investments to remain
-----------
outstanding other than (i) investments in cash or cash equivalents
with a United States commercial bank having assets in excess of
$250,000,000 or (ii) investments in obligations or securities of the
United States. As used herein, "investment" includes, without
limitation, the direct or indirect purchase or acquisition of any
equity or beneficial interest, share of capital stock, evidence of
Indebtedness or other security of or issued by any person or entity."
49
<PAGE>
"J. Merger; Liquidation; Sale of Assets. Merge or consolidate with, any
-------------------------------------
other person or entity, or dissolve or liquidate, or sell, lease or
transfer or otherwise dispose of all or any material portion of its
assets to any person or entity."
"K. Leases. Make any increase in existing monthly lease expenses, except
------
additional lease expenses in an amount up to, but not exceeding,
$8,000.00 per month (in the aggregate for Borrower and Guarantors) in
connection with a new lease for computer systems and equipment."
1.13 Section 6 ("Default") hereby is amended to add a new clause (v),
clause (vi) and clause (vii), immediately following existing clause (iv), which
together shall read as follows:
"(v) Bank determines that Borrower will not be able to refinance the
Obligations by a time not later than April 30, 1997, (vi) any material
adverse change in the business, assets, properties, liabilities, existing
or projected condition (financial or otherwise), results of operations or
business prospects of Borrower or any Guarantor, or Borrower and Guarantors
taken as a whole, or the respective ability of Borrower or any Guarantor to
perform any obligations under any Loan Document to which it is a party or
(vii) the filing of any petition in bankruptcy by or against Borrower or
any Guarantor under the United States Bankruptcy Code."
1.14 Paragraph 7 ("Remedies") hereby is amended to add the following,
--------
immediately following the existing solo sentence thereof:
"In addition, without limitation of the foregoing:
A. Cash Collateral; Injunctive Relief. All cash proceeds of Collateral
------------------------------------
from time to time existing, including without limitation collections
and payments of Accounts Receivables, whether consisting of cash,
checks or other similar items, at all times shall be subject to an
express trust for the benefit of Bank. All such proceeds shall be
subject to Bank's continuing security interests under the Loan
Documents. Borrower and Guarantors each is expressly prohibited from
using, spending, retaining or otherwise exercising any dominion over
such proceeds, except as may be specifically allowed otherwise by this
Agreement or the Loan Documents. Borrower and Guarantors each
acknowledges and agrees that an action for damages for any breach of
such prohibitions shall not be an adequate remedy at law. In the event
of any such breach, Borrower and Guarantors each agrees to the fullest
extent allowed by law that Bank shall be entitled to injunctive relief
to restrain such breach and require compliance with the requirements
of this Agreement.
50
<PAGE>
B. Special Rights of Bank; Power of Attorney. Borrower and Guarantors
-------------------------------------------
each hereby irrevocably appoints Bank as its agent and
attorney-in-fact to take any action necessary to preserve and protect
the Collateral and Bank's interests under the Credit Documents.
Borrower and each Guarantor hereby authorizes and appoints Bank as
attorney in fact to sign and file any financing statement or other
document necessary to perfect Bank's security interest in the
Collateral. Bank shall have the right at any time to take any of the
following action, in its own name or in the name of Borrower or any
Guarantor, whether or not an Event of Default is in existence: (i)
make written or verbal requests for verification of amounts owing on
Accounts Receivables from any or all Persons which Bank believes may
be account debtors or obligors on Accounts Receivables; (ii) take
possession and control of proceeds of Accounts Receivables; (iii)
redirect the deposit and disposition of collections and proceeds of
Accounts Receivables; (iv) endorse the name of Borrower or any
Guarantor on checks, instruments or other evidences of payment on
Accounts Receivables; (v) prepare, sign and file, on behalf of
Borrower or any Guarantor, in Borrower's or such Guarantor's name or
in Bank's name as assignee, any notice of lien, or any proof of claim
or other document in any bankruptcy proceedings of any account debtor
or obligor on Accounts Receivables; (vi) access, copy or utilize any
information recorded or contained in any computer or data processing
equipment or system in respect of the Accounts Receivables maintained
by Borrower or a Guarantor, or to which Borrower or any Guarantor has
access; (vii) enter onto the premises of Borrower or any Guarantor and
discuss Borrower's or any Guarantor's affairs with personnel as may be
reasonably necessary in connection with maintaining or enforcing
Bank's rights under the Loan Documents; (viii) access and utilize the
information recorded on or contained in any data processing equipment
and computer hardware and software relating to the Accounts
Receivables, Inventory or other Collateral to which Borrower or a
Guarantor has access; and (ix) take all other action allowed by law as
may be necessary to carry out the Credit Documents and give effect to
Bank's rights thereunder. In addition, Bank shall have the right to
take any of the following action, in its own name or in the name of
Borrower or a Guarantor, at any time when any Event of Default is in
existence, whether or not Bank has taken any action to make demand or
exercise any remedies under any of the Loan Documents: (x) notify any
or all Persons which Bank believes may be account debtors or obligors
on Accounts Receivables to make payments directly to Bank; (xi)
settle, adjust, compromise or discharge Accounts Receivables or extend
time of payment upon such terms as Bank may determine; (xii) take
action in Bank's name or Borrower's or a Guarantor's name to enforce
collection of Accounts Receivables; (xiii) open mail addressed to
Borrower or a Guarantor to take possession of and dispose of checks or
other proceeds of Accounts Receivables in accordance with this
Agreement; and (xiv) direct the U.S. Postal service to change the
address to which Borrower's or a Guarantor's mail is delivered. Should
Bank at any time elect to exercise its right of verification or
notification with respect to the Accounts Receivables as provided in
clause (i) or clause (ii) above, respectively, Bank shall have the
right in its sole discretion to direct such request for verification,
or notification, as the case may be, to all Persons which Bank
believes may have transacted business with Borrower or a Guarantor at
any time, whether or not such Persons are then indebted to Borrower or
such Guarantor, and Bank is hereby released and discharged from any
liability by reason of any such request for verification or
notification. Costs and expenses incurred by Bank in connection with
any of such actions by Bank, including attorneys' fees and
out-of-pocket expenses, shall be reimbursed to Bank on demand.
C. Continuing Rights of Bank in Respect of Obligations. In the event any
---------------------------------------------------
amount from time to time applied in reduction of the Obligations is
subsequently set aside, avoided, declared invalid or recovered by
Borrower or any trustee or in bankruptcy, or in the event Bank is
otherwise required to refund or repay any such amount pursuant to any
applicable law, then the Obligations shall automatically be deemed to
be revived and increased to the extent of such amount and the same
shall continue to be secured by the Collateral as if such amount had
not been so applied."
51
<PAGE>
1.15 Section 10 ("Miscellaneous") hereby is amended to add a new Section
10.J, entitled "Release of Collateral", immediately following existing Section
10.I, which shall read as follows:
"Release of Collateral. Bank shall have no obligation to release the
-----------------------
Collateral until (i) Borrower shall have paid to Bank, in collected funds,
an amount equal to the aggregate amount of all Obligations outstanding as
of the date of such payment, together with unpaid accrued interest thereon,
all fees payable pursuant to the Loan Documents, (ii) Borrower shall have
deposited with Bank an amount equal to the sum of (a) the aggregate undrawn
amount of all letters of credit issued by Bank and outstanding at such time
for the account of Borrower plus (b) the aggregate amount of all drawings
under any letters of credit issued by Bank for the account of Borrower for
which Bank has not been reimbursed plus (c) the aggregate amount of all
bankers acceptances made by Bank for the account of Borrower, to be held by
Bank as cash collateral security for the payment of, and to be applied to,
the payment of any reimbursement obligations which may thereafter become
due with respect to any such letter of credit or bankers acceptances and
(iii) Borrower shall have provided Bank with an indemnification agreement
in form and substance satisfactory to Bank with respect to returned and
dishonored items and such other matters as Lender shall require."
Section 2. Amendment of Notes. As of the Effective Date, the Note evidencing the
------------------
Revolving Line and the R,C&Co. Loan, respectively, in each case is modified and
amended, as follows:
a. Revolving Line. The certain promissory note dated September 30, 1996
---------------
executed by Borrower payable to the order of Bank in the face amount of
$7,500,00.00, evidencing the Revolving Line, hereby is modified and amended as
follows:
(i) The stated maturity as set forth therein is modified and amended to be
April 30, 1997; and
(ii) The face amount thereof hereby is modified and amended to be
$6,500,000.00.
b. R,C&Co. Loan. The certain promissory note dated December 28, 1994
-------------
executed by Borrower payable to the order of Bank in the face amount of
$5,000,000.00, evidencing the R,C&Co. Loan, hereby is modified and amended as
follows:
(i) The stated maturity of the R,C&Co. Loan as set forth therein hereby is
modified to be April 30, 1997; and
52
<PAGE>
(ii) Notwithstanding the payment schedule presently provided thereby, the
Note evidencing the R,C&Co. Loan shall be payable as follows: Accrued
interest shall be payable monthly on the first (1st) day of each
calendar month, and principal shall be payable on March 31, 1997 in
the amount of $250,000.00 and all remaining unpaid principal shall be
paid on the final maturity date, April 30, 1997.
Section 3. Amendment of Security Agreement. As of the Effective Date, each of
--------------------------------
the Security Agreements hereby is amended as follows:
3.1 Subparagraph 1 of paragraph B ("Collateral"), in each of the Security
Agreements, hereby is amended as follows:
a. The unnumbered paragraph, entitled "Accounts" hereby is amended to add
the following immediately following the existing solo sentence thereof:
"As used herein "contract rights" includes, without limitation, any and all
rights of Debtor, now or hereafter existing, under or in connection with
any contracts or agreements in respect of the provision or supplying of
mailing lists, customer lists or other lists of names and/or addresses of
potential customers for use by Debtor, now or hereafter acquired or
arising."
b. A new unnumbered paragraph entitled "General Intangibles" hereby is
added immediately following the existing unnumbered paragraph entitled
"Equipment":
"General Intangibles. All general intangibles now owned or hereafter
acquired by Debtor. General intangibles includes, without limitation, all
customer lists, mailing lists and similar data respecting names and
addresses of customers or potential customers, whether in tangible or
intangible form and however recorded or stored, together with all systems
and software for retrieving or utilizing same."
3.2. Paragraph E.22 ("Collection and Segregation of Accounts") hereby is
amended and restated to read in its entirety as follows:
"22. Collection and Segregation of Accounts. All collections and proceeds of
---------------------------------------
Accounts Receivables shall be subject to an express trust for the benefit of
Bank., subject to the following:
53
<PAGE>
a. Subject to subparagraph (b) below, Borrower shall be allowed to collect
and retain collections and proceeds of Accounts Receivables and use such
collections and proceeds in the ordinary course of business.
b. Immediately upon notice by Bank to Borrower at any time when any default
is in existence, unless and until expressly agreed otherwise by Bank in writing
(i) all collections and proceeds of Accounts Receivables shall be directed daily
to Bank for deposit to one or more blocked collection accounts approved by Bank
for such purpose, (ii) Borrower and Guarantors shall notify all account debtors
on Accounts Receivable, in writing (by notation directly on the related invoice,
or otherwise, in form satisfactory to Bank) that all payments thereon shall be
directed to a post office box designated by, and under the sole control of, Bank
(iii) all checks and instruments from time to time received by Bank in such post
office box shall be subject to Bank's continuing security interests under the
Security Agreements, and shall be deposited daily to such blocked collection
account, (iv) all collected funds from collections and proceeds of Accounts
Receivables from time to time deposited to such blocked collection account(s)
shall be applied directly to the Obligations, (v) in the event Borrower or any
Guarantor at any time receives any collections or proceeds of Accounts
Receivables, it shall promptly deliver same to Bank in the form received, with
any necessary endorsement to the order of Bank, (vi) Borrower and Guarantor each
agrees that it will not commingle proceeds of Accounts Receivables with any
other funds, and that no deposits will be made to any blocked collection account
other than collections and proceeds of Accounts Receivables and (vii) Borrower
and Guarantors shall have no right of withdrawal, transfer or access to any
blocked collection account. Pending application to the Obligations as provided
herein, all amounts from time to time deposited to any such blocked collection
account shall remain subject to Bank's continuing security interest under the
Security Agreements.
c. Borrower and Guarantors will not use, dispose, withhold or otherwise
exercise dominion over any proceeds of Accounts Receivables except as expressly
allowed by this Agreement. Borrower and Guarantors shall promptly report to Bank
in writing any instance in which a dispute of Accounts Receivables by an account
debtor involves an amount in excess of $1,000.00. Borrower and Guarantors each
agrees that it will not settle, adjust, compromise or discharge any such
Accounts Receivables or extend the time for payment without Bank's consent."
Section 4. Additional Agreements.
---------------------
4.1 In consideration of this Amendment, Borrower and Guarantors each represents
and warrants to Bank the following:
4.1.1 The execution, delivery and performance of this Agreement are within
its corporate power and authority and have been duly authorized by appropriate
proceedings and this Agreement constitutes a legal, valid and binding obligation
of Borrower and Guarantors, enforceable in accordance with its terms, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the rights of creditors generally and general principles
of equity.
54
<PAGE>
4.1.2 Borrower and Guarantors each has disclosed to Bank all material facts
known to it concerning its financial condition and business operations. All such
information furnished by Borrower and any Guarantor to Bank was true and
complete at the time of delivery thereof to Bank, and there has been no material
change in any such information except as may have been disclosed to Bank in
writing. There is no fact known to Borrower or Guarantors which would be
reasonably expected to materially and adversely effect Borrower's or a
Guarantor's financial condition, operations or ability to perform its
obligations under the Loan Documents. Upon execution of this Amendment (i) all
representations and warranties provided by the Loan Documents, as amended, are
true and correct in all material respects and (ii) no Default is in existence
other than the Existing Defaults.
4.1.3 Borrower has employed Price Waterhouse to consult with and assist
Borrower in obtaining alternative financing to refinance the Obligations no
later than April 30, 1997. Borrower agrees to promptly furnish Bank with a true
and complete copy of all written work product (both draft and final form)
produced and delivered by such consultants to Borrower in connection with such
engagement, including without limitation memoranda, business plans, projections
and appraisals. Borrower hereby irrevocably authorizes such consultants to
furnish and deliver any such copies directly to Bank and to provide Bank with
verbal or written status reports concerning the status and results of Borrower's
such consultant's activities in connection with such engagement. Bank is
authorized to deliver a copy of this signed Agreement to such consultants, which
shall be sufficient evidence of the foregoing authority.
4.2 The following items shall be delivered to Bank prior to or simultaneously
with execution and delivery of this Amendment:
4.2.1 A certificate signed by the corporate secretary of Borrower and each
Guarantor (i) certifying to Bank that its Certificate of Incorporation and
Bylaws have not been amended since its most recent certification thereof to
Bank, and certifying the names and signatures of its duly appointed officers
authorized to act in respect of the Loan Documents and (ii) attaching and
certifying resolutions duly adopted by its board of directors authorizing this
Amendment and the transactions evidenced hereby, and authorizing and directing
one or more named officers to execute and deliver this Amendment, and all
related documentation required by Bank on behalf of Borrower and Guarantors,
which certificate shall be in form satisfactory to Bank;
4.2.2 Such other amendments of any of the Loan Documents in conformity with
this Agreement, duly executed, as may be required by Bank and in form
satisfactory to Bank.
55
<PAGE>
4.3 Borrower and Guarantors each shall reimburse Bank for all expenses,
including attorneys fees and disbursements of legal counsel for Bank, in
connection with the preparation, negotiation and closing of this Amendment. In
consideration of this Amendment, Borrower and Guarantors each agrees to pay to
Bank on demand any and all costs and expenses, including reasonable attorneys'
fees, legal expenses and disbursements, appraisal fees, search fees, filing and
recording fees, fees and costs of experts or other consultants, court costs,
travel expenses, and all other costs and expenses incurred or paid by Bank in
administering the Loan Documents and protecting or enforcing any of its rights
thereunder, including without limitation (i) ongoing administration of the Loan
Documents, including field examinations and inspection of Collateral, (ii)
negotiating, preparing and closing any amendment, waiver or consent relating to
the Loan Documents, and (iii) taking possession, holding, storing, preparing for
sale, selling or otherwise disposing of, or collecting the proceeds of, the
Collateral, collecting the Obligations, or exercising or enforcing any other
rights or remedies or pursuing or defending any claim arising out of, or in any
way relating to the Loan Documents. Borrower and Guarantors each will pay any
applicable stamp, registration, recordation and similar taxes, fees and charges
in respect of the Collateral or perfection or maintenance of Bank's rights under
the Loan Documents, and agrees to indemnify Bank against any liabilities
resulting from any delay, deferral or omission in payment of any such taxes,
fees or charges. All fees, costs and expenses for which Borrower or a Guarantor
is obligated under the Loan Documents shall be payable to Bank on demand. At
Bank's option, the amount of such fees, costs and expenses may be deducted from
the proceeds of any loan hereunder or added to the unpaid principal due by
Borrower under the Revolving Line, in which event such amount will be deemed
paid and the amount thereof shall be treated as a loan thereunder.
4.4 Except as amended by this Amendment, the Loan Agreement (including all
previous amendments to the extent not superseded by the terms hereof) and all
other Loan Documents remain in full force and effect as provided therein.
Borrower and Guarantors each hereby ratifies and confirms the Loan Documents, as
amended hereby, and agrees that the Security Agreements, and all Collateral,
continue to secure all Obligations. Without limiting the foregoing, each of the
Guarantors hereby expressly ratifies and confirms its obligations under the
certain guaranty agreements previously executed by it for the benefit of Bank,
and agrees that the Obligations continue to be included within the obligations
and indebtedness guaranteed thereby. Borrower and Guarantors each agrees that it
will comply with all terms and provisions of the Loan Documents, as amended by
this Amendment.
4.5 Wherever any Loan Document makes reference to the Agreement, the same
shall be deemed to mean the Agreement as amended by this Amendment. This
Amendment is a Loan Document for purposes of the provisions of all other Loan
Documents. Any breach of the representations, warranties and covenants under
this Amendment shall constitute a Default under the Loan Documents.
56
<PAGE>
4.6 In consideration of this Amendment, the Existing Defaults as defined by
the Forbearance Agreement are hereby waived, provided, that such waiver extends
only to such Existing Defaults and is expressly limited as provided herein, and
Bank shall be entitled to expect and require strict compliance with all other
requirements of the Loan Documents in accordance with their respective terms.
4.7 This Agreement shall be governed by the laws of the State of Texas. If
any provision in this Agreement is held to be unenforceable, such provision
shall be severed and the remaining provisions shall remain in full force and
effect. All representations, warranties, and covenants of this Agreement shall
survive the execution of this Agreement and any other contract or agreement. The
provisions of this Agreement may be waived or amended only in a writing signed
by all of the parties hereto. This Agreement shall bind Borrower and Guarantors
and their respective successors and assigns and shall inure to the benefit of
Bank and its successors and assigns. This Agreement may be executed in multiple
counterparts which together shall constitute one and the same agreement.
4.8 The provisions of Section 10 ("Arbitration") of the Loan Agreement
shall be deemed applicable to this Amendment and are incorporated herein by
reference.
4.9 This Amendment (i) shall be deemed effective prospectively as of the
Effective Date, (ii) contains the entire agreement among the parties and may not
be amended or modified except in writing signed by all parties, (iii) shall be
governed and construed according to the laws of the State of Texas and (iv) may
be executed in any number of counterparts, each of which shall be valid as an
original and all of which shall be one and the same agreement. A telecopy of any
executed counterpart shall be deemed valid as an original.
56
<PAGE>
THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS 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.
Executed as of the Effective Date.
NATIONSBANK OF TEXAS, N.A.
By: /s/ Mark L. Henze
-----------------------------------------
Title: Vice President
--------------------------------------
THE LEATHER FACTORY, INC.
A Delaware corporation
By: /s/ Fred N. Howell
-----------------------------------------
Title: Chief Financial Officer and Treasurer
--------------------------------------
THE LEATHER FACTORY, INC.
A Texas corporation
By: /s/ Fred N. Howell
-----------------------------------------
Title: Chief Financial Officer and Treasurer
--------------------------------------
ROBERTS, CUSHMAN & COMPANY, INC.
By: /s/ Fred N. Howell
-----------------------------------------
Title: Chief Financial Officer and Treasurer
--------------------------------------
57
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-81214) pertaining to the Employee Stock Ownership Plan and Trust of
The Leather Factory, Inc. and the Registration Statement (Form S-8 No.
333-07147) pertaining to the 1995 Stock Option Plan of The Leather Factory, Inc.
of our report dated February 21, 1997 with respect to the consoidated financial
statements and schedule of The Leather Factory, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
/S/ERNST & YOUNG LLP
- ----------------------
ERNST & YOUNG LLP
Fort Worth, Texas
March 25, 1997
58
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public ccountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed Form S-8
Registration Statements on File Nos. 33-81214 and 333-07147.
/s/ARTHUR ANDERSEN LLP
- --------------------------
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 25, 1997
59
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,001,698
<ALLOWANCES> 54,000
<INVENTORY> 7,737,320
<CURRENT-ASSETS> 11,381,432
<PP&E> 2,672,253
<DEPRECIATION> 1,273,609
<TOTAL-ASSETS> 18,264,547
<CURRENT-LIABILITIES> 10,086,922
<BONDS> 0
0
0
<COMMON> 23,648
<OTHER-SE> 7,999,289
<TOTAL-LIABILITY-AND-EQUITY> 18,264,547
<SALES> 28,253,632
<TOTAL-REVENUES> 28,253,632
<CGS> 17,689,973
<TOTAL-COSTS> 17,689,973
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,007,544
<INCOME-PRETAX> (1,306,304)
<INCOME-TAX> (316,536)
<INCOME-CONTINUING> (989,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (989,768)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
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