Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(State or other jurisdiction of (I.R.S. Employer
incorporation organization) Identification Number)
3847 East Loop 820 South, Ft. Worth, Texas 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class Shares outstanding as of August 14, 1998
- ---------------------------------------- ----------------------------------------
Common Stock, par value $.0024 per share 9,853,161
</TABLE>
<PAGE>
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
-----------------
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997................................ 3
Consolidated Statements of Income (Loss)
Three and six months ended June 30, 1998 and 1997................... 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997............................. 5
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss)
Six months ended June 30, 1998 and 1997............................. 6
Notes to Consolidated Financial Statements.......................... 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9-13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 14
Item 6. Exhibits and Reports on Form 8-K............................. 14
SIGNATURES............................................................. 15
EXHIBIT INDEX.......................................................... 16-17
2
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------ ------------
ASSETS (UNAUDITED)
<S> <C>
CURRENT ASSETS:
Cash $ 307,886 $ 70,496
Cash restricted for payment on revolving credit facility 200,606 319,133
Accounts receivable-trade, net of allowance for
doubtful accounts of $51,000 and $28,000
in 1998 and 1997, respectively 1,923,471 1,865,276
Inventory 7,172,492 7,279,702
Prepaid income taxes 294,929 285,970
Deferred income taxes 117,020 109,411
Other current assets 594,247 385,199
------------ ------------
Total current assets 10,610,651 10,315,187
------------ ------------
PROPERTY AND EQUIPMENT, at cost 2,591,158 2,534,839
Less-accumulated depreciation and amortization (1,661,218) (1,505,098)
------------ ------------
Property and equipment, net 929,940 1,029,741
GOODWILL and other, net of accumulated amortization of
$988,000 and $878,000 in 1998 and 1997, respectively 5,477,410 5,679,621
------------ ------------
$ 17,018,001 $ 17,024,549
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,337,668 $ 942,046
Accrued expenses and other liabilities 468,817 559,776
Notes payable and current maturities of
long-term debt 4,657,283 4,650,742
------------ ------------
Total current liabilities 6,463,768 6,152,564
------------ ------------
DEFERRED INCOME TAXES 118,963 136,611
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 2,402,415 2,602,728
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 1998 and 1997 23,648
23,648
Paid-in capital 4,092,717 4,119,915
Less: Notes receivable - secured by common stock (234,250) (257,617)
Unearned shares held by ESOP, 48,280 and 54,262
shares in 1998 and 1997, respectively (243,662) (273,851)
Retained earnings 4,412,497 4,534,569
Accumulated other comprehensive income (18,095) (14,018)
------------ ------------
Total stockholders' equity 8,032,855 8,132,646
------------ ------------
$ 17,018,001 $ 17,024,549
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
THREE MONTHS SIX MONTHS
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 5,471,463 $ 6,526,992 $ 11,182,295 $ 12,986,884
COST OF SALES 3,044,623 3,787,708 6,340,761 7,683,789
------------ ------------ ------------ ------------
Gross Profit 2,426,840 2,739,284 4,841,534 5,303,095
OPERATING EXPENSES 2,192,639 2,304,413 4,492,533 4,701,755
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 234,201 434,871 349,001 601,340
OTHER (INCOME) EXPENSE:
Interest expense 259,702 217,429 500,347 418,767
Other, net (16,040) 4,132 (23,801) 3,288
------------ ------------ ------------ ------------
Total other (income) expense 243,662 221,561 476,546 422,055
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (9,461) 213,310 (127,545) 179,285
PROVISION (BENEFIT) FOR INCOME TAXES 24,083 125,452 (5,473) 127,612
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (33,544) $ 87,858 $ (122,072) $ 51,673
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE $ -- $ 0.01 $ (0.01) $ 0.01
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution $ -- 0.01 (0.01) 0.01
============ ============ ============ ============
DIVIDENDS PAID PER COMMON SHARE $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (122,072) $ 51,673
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation & amortization 266,570 257,532
(Gain) loss on sales of assets (9,118) --
Deferred financing costs 109,582 --
Deferred income taxes (25,257) 6,457
Other 2,600 (1,614)
Net changes in operating assets and liabilities:
Accounts receivable-trade, net (58,195) (405,003)
Inventory 107,210 470,055
Income taxes (8,959) 114,710
Other current assets (209,048) 56,096
Accounts payable 395,622 318,876
Accrued expenses and other liabilities (90,959) (56,190)
------------ ------------
Total adjustments 480,048 760,919
------------ ------------
Net cash provided by operating activities 357,976 812,592
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (56,642) (170,165)
Proceeds from sales of assets 10,000 --
Other intangible costs (441) (32,061)
------------ ------------
Net cash used in investing activities (47,083) (202,226)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 11,390,113 302,957
Payments on notes payable and long-term debt (11,464,883) (1,101,863)
Decrease in cash restricted for payment on revolving credit facility 118,527 --
Payments received on notes secured by common stock 23,367 --
Deferred financing costs (140,627) --
------------ ------------
Net cash used in financing activities (73,503) (798,906)
------------ ------------
NET INCREASE (DECREASE) IN CASH 237,390 (188,540)
CASH, beginning of period 70,496 488,192
------------ ------------
CASH, end of period $ 307,886 $ 299,652
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 378,265 $ 422,555
Income taxes paid during the period, net of refunds 25,507 6,445
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Common Stock Notes
------------------ Receivable
Number Par Paid-in - Secured by Unearned Retained
of Shares Value Capital Common Stock ESOP Shares Earnings
--------- -------- ---------- ------------ ----------- ----------
<S> <C> <C>
BALANCE, December 31, 9,853,161 $ 23,648 $4,130,796 $ (269,305) $ (326,184) $4,464,277
1996
Net Income - - - - - 51,673
Foreign currency
translation adjustment - - - - - -
--------- -------- ---------- ------------ ----------- ----------
BALANCE, June 30, 1997 9,853,161 $ 23,648 $4,130,796 $ (269,305) $ (326,184) $4,515,950
========= ======== ========== ============ =========== ==========
BALANCE, December 31, 9,853,161 $ 23,648 $4,119,915 $ (257,617) $ (273,851) $4,534,569
1997
Payments received on notes
secured by common stock - - - 23,367 - -
Allocation of suspended
ESOP shares committed to
be released - - (27,198) - 30,189 -
Net loss - - - - - (122,072)
Foreign currency
translation adjustment,
net of tax of ($2,499) - - - - - -
--------- -------- ---------- ------------ ----------- ----------
BALANCE, June 30, 1998 9,853,161 $ 23,648 $4,092,717 $ (234,250) $ (243,662) $4,412,497
========= ======== ========== ============ =========== ==========
</TABLE>
Accumulated
Other Total
Comprehensive Stockholder's Comprehensive
Income Equity Income (Loss)
------------- ------------- -------------
BALANCE, December 31, $ (295) $ 8,022,937
1996
Net Income - 51,673 $ 51,673
Foreign currency
translation adjustment (3,223) (3,223) (3,223)
------------- -------------
BALANCE, June 30, 1997 $ (3,518) $ 8,071,387
============= =============
------------
Comprehensive income (loss)for the six months ended June 30, 1997 $ 48,450
============
BALANCE, December 31, $ (14,018) $ 8,132,646
1997
Payments received on notes
secured by common stock - 23,367
Allocation of suspended
ESOP shares committed to
be released - 2,991
Net loss - (122,072) $ (122,072)
Foreign currency
translation adjustment,
net of tax of ($2,499) (4,077) (4,077) (4,077)
------------- -------------
BALANCE, June 30, 1998 $ (18,095) $ 8,032,855
============= =============
------------
Comprehensive income (loss)for the six months ended June 30, 1998 $ (126,149)
============
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly its financial position as of June 30,
1998 and December 31, 1997, and the results of operations and cash flows for the
three and six month periods ended June 30, 1998 and 1997. The results of
operations for the three and six month periods are not necessarily indicative of
the results to be expected for the full fiscal year. The consolidated financial
statements should be read in conjunction with the financial statements and
disclosures contained in the Company's 1997 Annual Report on Form 10-K ("Annual
Report").
2. INVENTORY
The components of inventory consist of the following:
<TABLE>
June 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Finished goods held for sale $ 5,839,035 $ 5,833,002
Raw materials and work in process 1,333,457 1,446,700
=============== ===============
$ 7,172,492 $ 7,279,702
=============== ===============
</TABLE>
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C>
Numerator for basic and
diluted earnings per share:
Net income (loss) $ (33,544) $ 87,858 $ (122,072) $ 51,673
========== ========== =========== ===========
Denominator for basic and
diluted earnings per share:
Weighted-average shares outstanding 9,802,259 9,788,530 9,800,832 9,788,530
Basic earnings per share $ - $ 0.01 $ (0.01) $ 0.01
========== ========== =========== ============
Diluted earnings per share $ - $ 0.01 $ (0.01) $ 0.01
========== ========== =========== ============
</TABLE>
Unexercised employee and director stock options to purchase 585,000 and 535,000
shares of common stock as of June 30, 1998 and 1997, respectively, were not
included in the computations of diluted EPS because the options' exercise prices
were greater than or equal to the average market price of the common stock
during the respective periods.
Warrants (see note 9 to consolidated financial statements in the Annual Report
and Subsequent Event under Item 2 of this Report on Form 10-Q) to acquire
300,000 shares of common stock were not included in the computations of diluted
EPS because the exercise price was greater than the average market price of the
common stock during the quarter ended June 30, 1998.
The 13% convertible debt (see note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted earnings per share
because the interest cost (net of tax) per assumed converted share was more than
basic earnings per share and, therefore, the effect would be antidilutive.
7
<PAGE>
4. COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
The following table sets forth the computation of comprehensive income:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C>
Net income (loss) $ (33,544) $ 87,858 $ (122,072) $ 51,673
Other comprehensive income:
Translation adjustment, net of tax (5,277) 556 (4,077) (3,223)
----------- ---------- ----------- ---------
Comprehensive income $ (38,821) $ 88,414 $ (126,149) $ 48,450
=========== ========== =========== =========
</TABLE>
5. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
131 establishes annual and interim reporting requirements for an enterprise's
operating segments and related disclosures about its products and services,
geographical areas in which it operates and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997, and therefore, the
Company will adopt the new requirements retroactively in 1998 if applicable. The
Company operates in one broad industry and historically has not identified
separate segments of its business. Management has not completed its review of
Statement 131, but does not anticipate that the adoption of this statement will
have a significant effect on the Company's disclosures.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Leather Factory, Inc. (the "Company") is the premier distributor of
leather and leathercraft products to over 40,000 customers ranging from the
individual hobbyist to large retail chains. 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. The Company operates in one broad
industry segment and distributes products through twenty-two sales/distribution
units in the United States and Canada or through its subsidiary, Roberts,
Cushman & Company, Inc. ("Cushman"), in New York. Cushman manufactures and
distributes hat trims in braids, leather, and woven fabrics; and small finished
leather goods, such as cigar cases, picture frames, wallets and other
accessories.
Results of Operations
Income Statement Comparison
<TABLE>
<CAPTION>
The following table sets forth, for the interim periods indicated,
certain items from the Company's Consolidated Statements of Income (Loss)
expressed as a percentage of net sales:
Quarterly Period Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------ ------
<S> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 55.6 58.0 56.7 59.2
------- ------- ------- ------
Gross profit 44.4 42.0 43.3 40.8
Operating expenses 40.1 35.3 40.2 36.2
------- ------- ------- ------
Income from operations 4.3 6.7 3.1 4.6
Interest expense and other, net 4.5 3.4 4.3 3.2
------- ------- ------- ------
Income (loss) before income taxes (0.2) 3.3 (1.2) 1.4
(Benefit) provision for income taxes 0.4 1.9 (0.1) 1.0
------- ------- ------- ------
Net income (loss) (0.6)% 1.4% (1.1)% 0.4%
======= ======= ======= ======
</TABLE>
Revenues
For the quarter and six months ended June 30, 1998, net sales decreased
16.2% and 13.9%, respectively compared to the same interim periods in 1997. The
declines reflect decreased unit sales to manufacturers, shoe-finders,
distributors and retailers resulting from: weak overall industry conditions in
the retail craft and western apparel markets; strategic merchandising decisions;
and the economic crisis in Asia. These decreases were offset by gains in unit
sales to customers in the Company's institutional markets. The following table
sets forth the approximate percentage of the overall decline represented by each
of the above:
9
<PAGE>
Interim Periods Ended
June 30, 1998
------------------------
Three Six
Months Months
---------- -----------
Craft markets -40% -41%
Western apparel markets -30% -33%
Strategic merchandising decisions -36% -30%
Asian economic difficulties -7% -4%
Institutional markets +13% +8%
========== ==========
-100% -100%
The sales declines from strategic merchandising decisions were
expected. The Company's analysis showed certain products did not produce
adequate margins for the selling expense and risks associated with them.
Therefore, prices were selectively raised where appropriate or products were
eliminated from the Company's line entirely. These merchandising decisions
account for approximately $374,000 and $550,000, respectively, of the declines
for the three and six month periods ended June 30, 1998, compared to the same
periods in 1997.
When adjusted for the above expected declines, sales decreases due to
continued negative external forces were approximately 10.4% and 9.7%,
respectively, for the quarter and six month periods ended June 30, 1998,
compared to the same interim periods in 1997. These declines continue trends
that have existed over the past two to three years. To combat such negative
trends, the Company is investing working capital from eliminated product lines
into its growing markets and new product development.
These efforts are reflected by gains achieved in the Company's sales to
institutional customers, expansion of the Company's finished leather goods
product line, and introduction of several new products. The Company also sees
opportunities for growth in export sales although economic conditions in Asia
resulted in a slight decline in second quarter exports compared to last year's
second quarter. This brought year to date export sales essentially even with
levels for the first six months of 1997.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 55.6% for the second
quarter of 1998 as compared to 58.0% for the same quarter in 1997. Cost of sales
percentages for the six months ended June 30, 1998 and 1997, were 56.7% and
59.2%, respectively. These 2.4% and 2.5% reductions for the respective three and
six month periods resulted from improved product mix and the Company's strategic
efforts to selectively increase prices and eliminate low margin products as
discussed above.
Lower relative cost of sales percentages meant that gross profit as a
percentage of sales improved to 44.4% and 43.3% for the respective three and six
month periods ended June 30, 1998, as compared to only 42.0% and 40.8% for the
same periods in 1997. The Company's strategy for combating declining sales
includes emphasis on improved gross margins so that the decline in gross profit
is proportionately less than the revenue decline. Accordingly, gross profit
dollars decreased $312,444 or only 11.4% and $461,561 or only 8.7% for the
quarterly and six month periods ended June 30, 1998, compared to the respective
1997 periods.
Operating expenses decreased $111,774 or 4.9% to $2,192,639 during the
second quarter of 1998 from $2,304,413 during the quarter ended June 30, 1997.
The decrease in the dollar amount of operating expenses between the two quarters
resulted primarily from lower freight, payroll related and insurance costs;
offset by higher advertising expenditures and increased bad debt write-offs. For
the six months ended June 30, 1998, operating expenses declined $209,222 or 4.5%
compared to the six months ended June 30, 1997. The decrease in the dollar
amount of operating expenses between the two six month periods resulted
primarily from lower freight, payroll related and insurance costs; decreased
bad-debt write-offs; and a reduction in non-recurring professional fees
associated with the search for financing sources in 1997.
10
<PAGE>
Other (Income) Expense
Other expenses increased $22,101 or 10.0% to $243,662 for the second
quarter of 1998 from $221,561 during the same quarter in 1997. The increase was
primarily due to higher interest expense resulting from the amortization of
deferred financing costs offset by non-recurring other income in the amount of
$20,000. Other expenses increased $54,491 or 12.9% to $476,546 for the first six
months of 1998 from $422,055 during the same period in 1997. The increase was
primarily due to higher interest expense resulting from the amortization of
deferred financing costs offset by non-recurring other income in the amount of
$27,000.
Net Income (Loss)
The Company reported a net loss for the three and six month periods
ended June 30, 1998, in the amounts of $33,544 and $122,072, respectively as
compared to net income of $87,858 and $51,673 in the corresponding periods
during 1997. The decreased operating results for such periods resulted from the
factors noted above regarding sales, gross profit, operating and other expenses.
Outlook
The statements contained in this Outlook section are based upon
management's current expectations and contain forward-looking statements that
involve numerous risks and uncertainties. Actual results may differ materially.
The Company believes that opportunities exist to use its size and
competitive advantages to increase market share in: the core leathercraft,
institutional and saddle and tack businesses; and the leather accessories and
travelware markets. To effectively cover North America, the Company plans to
resume its internal expansion program opening two to four new Leather Factory
distribution units a year over the next five years. The grand opening in
Portland, Oregon is scheduled for early fourth quarter.
Management believes the Company's steady expansion with emphasis on its
more profitable markets and service to its customers will gradually offset the
sales declines experienced in the last three years and provide the critical mass
needed to return the Company to its historical profit trends. Meanwhile, the
Company is poised to take advantage of cyclical improvements in the retail craft
and western markets if and when they occur which is difficult to predict.
Capital Resources and Liquidity
The primary sources of liquidity and capital resources during the first
six months of 1998 were net funds provided by operating activities in the amount
of $357,976, a decrease in restricted cash in the amount of $118,527 and
borrowings on the Company's revolving credit facility with FINOVA Capital
Corporation ("FINOVA"). The Company's unrestricted cash increased to $307,886 at
June 30, 1998 from $70,496 at December 31, 1997. This increase was primarily the
result of cash generated by operating activities and the decrease in restricted
cash offset by capital expenditures, payment of deferred financing costs and net
repayments of debt.
11
<PAGE>
With the decline in sales, the Company is reducing its investment in
inventory which along with non-cash expenses for depreciation, amortization and
deferred financing cost continue to give rise to significant operating cash
flows despite the essentially flat operating results for the first six months of
1998. Inventory decreased to $7,172,492 at June 30, 1998, from $ $7,279,702 at
December 31, 1997. The sum of the cash flows from this reduction and all
non-cash expenses included in the net loss for the six month period totaled
$445,521. Other significant operating cash flow resulted from an increase of
$395,622 in accounts payable to vendors at June 30, 1998 compared to the balance
at December 31, 1997.
These operating cash flows were partially used to fund increases in
accounts receivable of $58,195 and other current assets, principally prepaid
expenses, of $209,048 at June 30, 1998, compared to the balances at December 31,
1997. Other significant uses of operating cash flows were to reduce accrued
expenses and other liabilities to $468,817 at June 30, 1998 compared to $559,776
at December 31, 1997.
The revolving credit facility with FINOVA is based upon the level of
the Company's accounts receivable and inventory. At June 30, 1998 and December
31, 1997, the Company had additional availability on the revolving credit
facility of approximately $189,715 and $377,000, respectively. As the Company's
sales and operations expand requiring larger investments in accounts receivable
and inventory, the Company could have almost $3,000,000 in additional funds
available under the revolving credit facility.
The largest non-operating uses of cash beyond debt payments in the
first six months of 1998 were for the payment of deferred financing costs
related to the FINOVA transaction closed on November 21, 1997 and capital
expenditures. The deferred financing cost paid during the six month period
totaled $140,627, and cash used for capital expenditures totaled $56,642. The
capital expenditures principally relate to the new computer system installed in
Fort Worth, warehouse fixtures and other equipment additions or replacements at
various sales/distribution units.
The Company believes that the current sources of liquidity and capital
resources will be sufficient to fund current operations, meet debt obligations
and fund the opening of new sales/distribution units. In 1998, the funding for
the opening of new units is expected to be provided by operating leases, cash
flows from operating activities, and the Company's Revolving Credit Loan with
FINOVA. In addition, the Company anticipates funding for completion of the
computer installation in the remaining locations to be provided by capital
leases.
Subsequent Event
On July 30, 1998, the Company announced that it had reached an
agreement with Evert I. Schlinger, President of the Schlinger Foundation, to
serve as an advisor to the Company in analyzing financing alternatives and
evaluating locations with regard to the Company's expansion plans.
As previously reported, The Schlinger Foundation is the holder of the
Company's $1,000,000 subordinated debt that is partially convertible into common
stock. Pursuant to the terms of the new consulting agreement, Mr. Schlinger will
serve in his advisory capacity for the next eighteen months to be compensated by
the issuance of a warrant to acquire common stock. The warrant agreement
provides for issuance of 200,000 shares of the Company's common stock at the
market value on the date of grant. The warrant will have a five year term.
Copies of the final agreement and warrant will be filed as Exhibits to the
Company's Third quarter report on Form 10-Q.
12
<PAGE>
Cautionary Statement
The disclosures under "-Results of Operations"; "-Outlook"; "-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, continued negative trends in the craft
and western retail markets, customer acceptance or not of existing and new
products, and pricing pressures due to competitive industry conditions.
Additional factors that may result in different actual results include:
increased prices for leather, which is a world-wide commodity, that can not be
passed on to customers for some reason, 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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1998 the Annual Meeting of the Stockholders of the Company
was held in the El Dorado room at the Arlington Hilton Hotel, Arlington, Texas
to consider and act on the following matter:
(1) To elect the following individuals to serve as directors until the
Company's 1999 Annual Meeting of Stockholders or until their
successors are duly elected and qualified:
Wray Thompson Anthony C. Morton
Ronald C. Morgan H. W. "Hub" Markwardt
Robin L. Morgan Joseph R. Mannes
William M. Warren John Tittle, Jr.
As to item (1) above, the following table depicts the votes cast for and
against, as well as those which abstained from voting, as to the election of the
aforementioned individuals as a director of the Company as noted above:
For Against Abstaining
--------- ------- ----------
Wray Thompson 9,269,349 3,559 33,200
Ronald C. Morgan 9,269,249 3,659 33,200
Robin L. Morgan 9,269,349 3,559 33,200
William M. Warren 9,269,349 3,559 33,200
Anthony C. Morton 9,269,249 3,659 33,200
H. W. "Hub" Markwardt 9,269,349 3,559 33,200
Joseph R. Mannes 9,268,049 4,859 33,200
John Tittle, Jr. 9,268,549 4,359 33,200
The foregoing matters are described in detail in the Company's proxy statement
dated April 21, 1998 for the 1998 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Exhibit Index which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: August 14, 1998 /s/ Wray Thompson
-----------------
Wray Thompson
Chairman of the Board, President,
and Chief Executive Officer
Date: August 14, 1998 /s/ Anthony C. Morton
---------------------
Anthony C. Morton
Chief Financial Officer,
Treasurer and Director
(Chief Accounting Officer)
15
<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.
4.1 Loan and Security Agreement dated November 21, 1997, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation, filed as Exhibit 4.1 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 February 6, 1998, and incorporated by reference herein.
4.2 Revolving Note (Revolving Credit Loan) dated November 21, 1997, in the
principal amount of $7,000,000, payable to the order of FINOVA Capital
Corporation, which matures December 1, 1999 filed as Exhibit 4.2 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 February 6, 1998, and incorporated by reference herein.
4.3 Term Loan A Note (Term Loan A) dated November 21, 1997, in the
principal amount of $400,000, payable to the order of FINOVA Capital
Corporation, which matures December 1, 1999 filed as Exhibit 4.3 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 February 6, 1998, and incorporated by reference herein.
4.4 Term Loan C Note (Term Loan C) dated November 21, 1997, in the
principal amount of $1,500,000, payable to the order of FINOVA Capital
Corporation, which matures December 1, 1999 filed as Exhibit 4.5 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 February 6, 1998, and incorporated by reference herein.
4.5 Subordination Agreement dated November 21, 1997, by and between FINOVA
Capital Corporation, The Schlinger Foundation, The Leather Factory,
Inc., a Delaware corporation, The Leather Factory, Inc., a Texas
corporation, The Leather Factory, Inc., an Arizona corporation,
Hi-Line Leather & Manufacturing Company, a California corporation, and
Roberts, Cushman & Company, Inc., a New York corporation filed as
Exhibit 4.6 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 February 6, 1998, and incorporated by reference
herein.
4.6 Pledge Agreement dated November 21, 1997, by and between Ronald C.
Morgan and Robin L. Morgan and FINOVA Capital Corporation filed as
Exhibit 4.7 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 February 6, 1998, and incorporated by reference
herein.
4.7 Patent Security Agreement dated November 21, 1997, by and between The
Leather Factory, Inc., a Delaware corporation, The Leather Factory,
Inc., a Texas corporation, The Leather Factory, Inc., an Arizona
corporation, Hi-Line Leather & Manufacturing Company, a California
corporation, Roberts, Cushman & Company, Inc., a New York corporation,
and FINOVA Capital Corporation filed as Exhibit 4.8 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 February
6, 1998, and incorporated by reference herein.
16
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(CONTINUED)
Exhibit
Number Description
------- -----------
4.8 Trademark Security Agreement dated November 21, 1997, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation filed as Exhibit 4.9 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 February 6, 1998, and incorporated by reference herein.
4.9 Copyright Security Agreement dated November 21, 1997, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation filed as Exhibit 4.10 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 February 6, 1998, and incorporated by reference herein.
4.10 Promissory Note (Subordinated Debenture) dated November 14, 1997, in
the principal amount of $1,000,000, payable to the order of The
Schlinger Foundation, which matures December 1, 1999 filed as Exhibit
4.11 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 February 6, 1998, and incorporated by reference herein.
4.11 Pledge and Security Agreement dated November 14, 1997, by and between
The Schlinger Foundation and J. Wray Thompson, Sr. filed as Exhibit
4.12 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 February 6, 1998, and incorporated by reference herein.
4.12 Amendment to Loan and Security Agreement dated May 13, 1998, by and
between The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation effective as of March
31,1998 filed as Exhibit 4.15 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 15, 1998, and incorporated
by reference herein.
21.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the 1995
Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission
File No. 1-12368), filed with the Securities and Exchange Commission
on March 28, 1996, and incorporated herein by reference.
*27.1 Financial Data Schedule
------------
*Filed herewith.
17
<PAGE>
EXHIBIT 27.1
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