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 March 31, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3847 East Loop 820 South, Ft. Worth, Texas 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares outstanding as of May 15, 1999
- ---------------------------------------- -------------------------------------
Common Stock, par value $.0024 per share 9,853,161
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THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998............................................ 3
Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998...................................... 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998...................................... 5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Three months ended March 31, 1999 and 1998...................................... 6
Notes to Consolidated Financial Statements....................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................... 12
SIGNATURES........................................................................... 13
EXHIBIT INDEX........................................................................ 14-15
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2
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<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 445,886 $ 510,399
Cash restricted for payment on revolving credit facility 151,519 232,838
Accounts receivable-trade, net of allowance for
doubtful accounts of $76,000 and $52,000
in 1999 and 1998, respectively 1,540,142 1,582,459
Inventory 7,021,185 6,956,606
Prepaid income taxes 131,376 228,939
Deferred income taxes 107,430 102,012
Other current assets 641,090 272,993
------------ ------------
Total current assets 10,038,628 9,886,246
PROPERTY AND EQUIPMENT, at cost 2,911,927 2,671,827
Less-accumulated depreciation and amortization (1,892,630) (1,813,378)
------------ ------------
Property and equipment, net 1,019,297 858,449
GOODWILL and other, net of accumulated amortization of
$1,364,000 and $1,246,000 in 1999 and 1998, respectively
5,177,053 5,285,242
------------ ------------
$ 16,234,978 $ 16,029,937
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,351,176 $ 1,019,069
Accrued expenses and other liabilities 498,416 530,789
Notes payable and current maturities of
long-term debt 5,991,790 6,139,327
Total current liabilities 7,841,382 7,689,185
------------ ------------
DEFERRED INCOME TAXES 107,787 109,085
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 197,206 61,389
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 1999 and 1998 23,648 23,648
Paid-in capital 3,901,740 3,901,740
Retained earnings 4,403,187 4,495,378
Less: Notes receivable - secured by common stock (211,851) (224,750)
Accumulated other comprehensive loss (28,121) (25,738)
------------ ------------
Total stockholders' equity 8,088,603 8,170,278
$ 16,234,978 $ 16,029,937
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 5,513,000 $ 5,710,832
COST OF SALES 3,154,110 3,296,138
----------- -----------
Gross Profit 2,358,890 2,414,694
OPERATING EXPENSES 2,238,516 2,299,894
----------- -----------
INCOME FROM OPERATIONS 120,374 114,800
OTHER (INCOME) EXPENSE:
Interest expense 229,867 240,645
Other, net 683 (7,761)
----------- -----------
Total other (income) expense 230,550 232,884
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (110,176) (118,084)
PROVISION (BENEFIT) FOR INCOME TAXES (17,985) (29,556)
----------- -----------
NET INCOME (LOSS) $ (92,191) $ (88,528)
----------- ===========
EARNINGS (LOSS) PER COMMON SHARE $ (0.01) $ (0.01)
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution $ (0.01) $ (0.01)
=========== ===========
DIVIDENDS PAID PER COMMON SHARE $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (92,191) $ (88,528)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation & amortization 132,673 133,991
Deferred financing costs 62,942 53,038
Deferred income taxes (6,716) (12,217)
Other (2,383) 1,961
Net changes in operating assets and liabilities:
Accounts receivable-trade, net 42,317 21,087
Inventory (64,579) 247,661
Income taxes 97,563 (21,796)
Other current assets (368,097) (109,640)
Accounts payable 332,107 142,704
Accrued expenses and other liabilities (32,373) (186,205)
--------- ---------
Total adjustments 193,454 270,584
--------- ---------
Net cash provided by operating activities 101,263 182,056
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (240,099) (26,926)
Other intangible costs (8,174) --
--------- ---------
Net cash used in investing activities (248,273) (26,926)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (118,574) (4,597)
Proceeds from notes payable and long-term debt 217,493 --
Payments on notes payable and long-term debt (110,639) (112,430)
Increase in cash restricted for payment on revolving credit facility 81,319 (36,618)
Payments received on notes secured by common stock 12,898 19,135
Deferred financing costs -- (77,153)
--------- ---------
Net cash provided by (used in) financing activities 82,497 (211,663)
--------- ---------
NET INCREASE (DECREASE) IN CASH (64,513) (56,533)
CASH, beginning of period 510,399 70,496
--------- ---------
CASH, end of period $ 445,886 $ 13,963
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 169,554 $ 190,304
Income taxes paid during the period, net of refunds (91,243) 4,457
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Common Stock Notes Accumulated
------------------ Receivable Other Total
Number Par Paid-in Retained Unearned - Secured by Comprehensive Stockholder's
of Shares Value Capital Earnings ESOP Shares Common Stock Loss Equity
--------- -------- ---------- ----------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 9,853,161 $ 23,648 $4,119,915 $4,534,569 $ (273,851) $ (257,617) $ (14,018) $8,132,646
Payments received on
notes secured by common - - - - - 19,135 - 19,135
stock
Allocation of suspended
ESOP shares committed to - - (12,921) - 14,341 - - 1,420
be released
Net loss - (88,528) (88,528)
- - - - -
Translation adjustment - - - - - - 1,200 1,200
--------- -------- ---------- ----------- ----------- ------------ ------------ ----------
BALANCE, March 31, 1998 9,853,161 23,648 $4,106,994 $4,446,041 $ (259,510) $ (238,482) $ (12,818) $8,065,873
========= ======== ========== =========== =========== ============ ============ ==========
Comprehensive income (loss) for the three months ended March 31, 1998 (see below)
BALANCE, December 31, 1998 9,853,161 $23,648 $3,901,740 $4,495,378 $ - $ (224,750) $ (25,738) $8,170,278
Payments received on
notes secured by common - - - - - 12,899 - 12,899
stock
Allocation of suspended
ESOP shares committed to - - - - - - - -
be released
Net loss - (92,191) - - (92,191)
- - -
Translation adjustment - - - - - - (2,383) (2,383)
--------- -------- ---------- ----------- ----------- ------------ ------------ ----------
BALANCE, March 31, 1999 9,853,161 $23,648 $3,901,740 $4,403,187 $ - $ (211,851) $ (28,121) $8,088,603
========= ======== ========== ========== =========== ============ ============ ==========
Comprehensive
Income (Loss)
------------
BALANCE, December 31, 1997
Payments received on
notes secured by common
stock
Allocation of suspended
ESOP shares committed to
be released
Net loss $ (88,528)
Translation adjustment 1,200
BALANCE, March 31, 1998
=========
Comprehensive income (loss) for the three months ended March 31, 1998 $ (87,328)
=========
BALANCE, December 31, 1998
Payments received on
notes secured by common
stock
Allocation of suspended
ESOP shares committed to
be released
Net loss $ (92,191)
Translation adjustment (2,383)
BALANCE, March 31, 1999
---------
Comprehensive income (loss)for the three months ended March 31, 1999 $ (94,574)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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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 March 31,
1999 and December 31, 1998, and the results of operations and cash flows for the
three-month periods ended March 31, 1999 and 1998. The results of operations for
the three-month period 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 1998 Annual Report on Form 10-K ("Annual Report").
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2. INVENTORY
The components of inventory consist of the following:
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Finished goods held for sale $ 5,729,822 $ 5,564,406
Raw materials and work in process 1,291,363 1,392,200
----------- -----------
$ 7,021,185 $ 6,956,606
=========== ===========
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended March 31,
-------------------------------
1999 1998
------------ ------------
Numerator:
Net loss $ (92,191) $ (88,528)
Numerator for basic and diluted ----------- -----------
earnings per share (92,191) (88,528)
----------- -----------
Denominator:
Denominator for basic and diluted
earnings per share -- weighted-average shares 9,853,161 9,799,404
Basic earnings per share $ (0.01) $ (0.01)
=========== ===========
Diluted earnings per share $ (0.01) $ (0.01)
=========== ===========
</TABLE>
Unexercised stock options owned by employees, directors and others to purchase
443,000 and 585,000 shares of common stock as of March 31, 1999 and 1998,
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)
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 March 31, 1999.
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>
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's products are distributed primarily
through 22 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
The following table sets forth, for the interim periods indicated, certain items
from the Company's Consolidated Statements of Operations expressed as a
percentage of net sales:
Quarterly Period Ended
March 31,
----------------------------
1999 1998
------------- -------------
Net sales 100.0% 100.0%
Cost of sales 57.2 57.7
------------- -------------
Gross profit 42.8 42.3
Operating expenses 40.6 40.3
------------- -------------
Income from operations 2.2 2.0
Interest expense, net 4.2 4.1
------------- -------------
Loss before income taxes (2.0) (2.1)
(Benefit) provision for income taxes (0.3) (0.5)
------------- -------------
Net loss (1.7)% (1.6)%
============= =============
Revenues
Net sales decreased 3.5% to $5,513,000 during the quarter ended March 31, 1999
from $5,710,832 in the same period of last year. First quarter sales to the
Company's core business and institutional customers continued the steady growth
shown over the past year and were up nearly 33% compared to the first quarter of
1998. However, these gains were more than offset by continuation of the planned
reduction in sales of low-margin products and by an expected drop in crafts
market sales (down 67% and 45%, respectively, from the first quarter of 1998).
Crafts sales were negatively affected by inventory liquidations by Tandycrafts,
Inc. as it continues the closings of its 121 Tandy Leather retail stores. Tandy
Leather stores had offered a selection of products that overlapped many products
sold by the Company.
8
<PAGE>
The sales of the Company are not seasonal. Sales to core business customers and
institutions have shown a steady increase since the beginning of last year, and
first quarter 1999 total sales were up 3.0% over the fourth quarter of 1998
despite the first quarter drop in crafts sales and the continuing reduction in
sales of low-margin products discussed above.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 57.2% for the first quarter of 1999
as compared to 57.7% for the same quarter in 1998. This one-half percentage
point reduction resulted from continuation of the Company's strategic efforts to
eliminate low-margin products as discussed above. The lower relative cost of
sales meant that gross profit as a percentage of sales improved to 42.8% for the
three months ended March 31, 1999, as compared to 42.3% for the same period in
1998.
Operating expenses decreased $61,378 or 2.7% to $2,238,516 during the first
quarter of 1999 from $2,299,894 during the quarter ended March 31, 1998. The
decrease in operating expenses between the two quarters reflects continued
efforts to reduce overhead costs and resulted mainly from a decrease in salary
and payroll-related costs, lower advertising expenditures, and lower utility
costs.
Other (Income) Expense
Other expenses decreased $2,334 or 1.0% to $230,550 for the first quarter of
1999 from $232,884 during the same quarter in 1998. The decrease is mainly due
to lower interest rates on borrowings which benefited from reductions in the
prime rate in the latter half of 1998.
Net Loss
The Company reported a net loss of $92,191 during the first quarter of 1999
compared to a net loss of $88,528 for the same period a year ago. The increased
loss was principally due to the reduced gross profit from lower sales in the
first quarter of 1999.
Capital Resources and Liquidity
- -------------------------------
The primary sources of liquidity and capital resources during the first quarter
of 1999 were funds provided by operating activities in the amount of $101,263,
borrowings from the Company's Senior Debt Facility with FINOVA and a
Subordinated Debenture with The Schlinger Foundation, and capital leases to
finance investment in new computer equipment.
The Company's investment in net accounts receivable was $1,540,142 at March 31,
1999, down $42,317 from $1,582,459 at year-end 1998 despite a 3.0% increase in
sales over the fourth quarter of 1998. The decrease in accounts receivable
reflects a significant reduction in the amount of receivables more than 60 days
old as the Company continues to upgrade its product mix and uses new information
systems to reduce sales to slower paying customers. Inventory increased $64,579
to $7,021,185 at March 31, 1999 from $6,965,606 at year-end 1998. Inventories
were increased to support the increase in sales over the fourth quarter of 1998,
but inventory turnover improved to an annual rate of 1.81 times during the first
quarter of 1999, which is above the ratio of 1.74 times for all of 1998. New
information systems assisted in monitoring sales and inventory levels and
contributed to improved inventory management.
The largest uses of cash beyond debt payments in the first quarter of 1999 were
for capital expenditures, which totaled $240,099 and were principally related to
the Company's new computer systems.
9
<PAGE>
As discussed in Note 3 of the Company's 1998 Annual Report on Form 10-K, on
November 21, 1997, the Company entered into a Loan and Security Agreement with
FINOVA Capital Corporation ("FINOVA"), pursuant to which FINOVA agreed to
provide a credit facility of up to $9,136,000 in senior debt (the "Senior Debt
Facility"), containing a revolving credit facility and term notes.
Simultaneously with the closing of the Senior Debt Facility, the Company also
issued to The Schlinger Foundation at face value $1,000,000 in subordinated
convertible debt (the "Subordinated Debenture").
The revolving credit facility with FINOVA is based upon the level of the
Company's accounts receivable and inventory. At March 31, 1999 and December 31,
1998, the Company had additional availability on the revolving credit facility
of approximately $647,000 and $475,000, respectively. As the Company's sales and
operations expand requiring larger investments in accounts receivable and
inventory, the Company could have in excess of $1,000,000 in additional funds
available under the revolving credit facility.
The Senior Debt Facility contains certain financial covenants which include
requirements to 1) maintain a certain level of earnings before interest, taxes,
depreciation and amortization ("EBITDA"), 2) limit capital expenditures, and 3)
maintain certain debt service coverage ratios. Decreases in sales, earnings and
cash flow during 1998 and in January and February of 1999 resulted in debt
service coverage ratios falling below target amounts in the financial covenants
of the Senior Debt Facility for the 12-month period ending March 31, 1999. Prior
to the March 31 measurement date, the Company requested that FINOVA amend the
targets in the financial covenants, and FINOVA agreed to the Company's request.
The Company and FINOVA entered into an amendment to the Senior Debt Facility,
dated May 13, 1999, effective as of March 31, 1999. The amendment reduces the
targets for the 12-month period ending March 31, 1999 for the Senior Debt
Coverage Ratio from 1.35 to 1.25 and for the Total Debt Service Coverage Ratio
for the same period from 1.10 to 1.05. The amendment is filed as Exhibit 4.14 to
this Form 10-Q.
The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current operations and the opening of several new
sales/distribution units. In 1999, the funding for the opening of new units is
expected to be provided by operating leases, cash flows from operating
activities, the Senior Debt Facility and the Subordinated Debenture. In
addition, the Company anticipates funding for software to complete the
installation of new systems in remaining locations will be provided by cash
flows from operating activities.
The Company's Senior Debt Facility and Subordinated Debenture mature on December
1, 1999, and management intends to pursue negotiations with FINOVA and other
potential investors/lenders in 1999 to extend or replace the maturing debt
facilities. Management believes it will be able to secure the required financing
prior to the maturity of these obligations. However, in the event of a future
material adverse change in the Company's operations, FINOVA could accelerate its
debt or otherwise determine not to renew the notes. In such a circumstance, the
Company would pursue other sources of financing. If other financing could not be
secured, the Company could experience a material adverse impact.
Year 2000 Issue
- ---------------
The Year 2000 ("Y2K") problem arose because many computer programs use only the
last two digits to refer to a year. As a consequence, unless modified, many
computer systems will interpret "00" as 1900 rather than the year 2000. This
issue is believed to affect virtually all organizations and failure to address
the problem could result in system failures and the generation of erroneous
data. Each company's potential costs and uncertainties will depend on a number
of factors including but not limited to its software, hardware, the nature of
its industry, and the sophistication of its manufacturing and process control
systems.
10
<PAGE>
The Company has developed a comprehensive Y2K readiness plan to ensure its
systems will be Y2K compliant prior to the year 2000. Pursuant to this plan, the
Company conducted preliminary reviews of its critical information technology
("IT") systems as well as its non-IT systems. The majority of systems that were
found to be defective in this review, including the Company's point of sale
("POS") software used for invoicing and inventory maintenance in the Company's
Texas locations, have now been replaced or upgraded.
The installation of the POS system in the Company's remaining 19 distribution
units was delayed until after the conversion and testing of the Y2K compliant
version of the software. The conversion in Fort Worth and other Texas locations
is complete. Installation in remaining locations is scheduled to be completed by
October 31, 1999.
The Company has appointed a Y2K committee composed of senior executives and
middle management. This committee is charged with testing systems for potential
Y2K problems missed in the preliminary review and remediation process as well as
assessing potential risks from the Company's trading partners' Y2K failures. The
committee's work is in process, and the committee will report periodically to
the Company's Board of Directors. Testing is scheduled to be completed by June
30, 1999.
The Company has managed its Y2K compliance program using mostly internal
salaried staff. For this reason and the fact that much of the replacement cost
of non-compliant IT systems would have been incurred anyway, it is difficult to
quantify the actual Y2K remediation costs. The Company invested approximately
$262,782 for new computer systems and software in 1998 and the first quarter of
1999. This investment includes systems upgrades that will facilitate completion
of the Y2K compliance program. Management believes that the majority of the
total expected system remediation cost has already been incurred. Additional
software purchases and licenses are expected to cost approximately $70,000
during the remainder of the year.
The Company believes because of the nature of its operations and the steps taken
as discussed above that the Y2K issue will not have a material impact on the
Company's results of operations, liquidity, or financial condition. Specifically
the Company does not anticipate any disruption in its ability to provide goods
or services to its customers. Actual results may differ from the forward-looking
statements contained in this discussion and there can be no guarantee that the
failure of certain systems will not have a material adverse effect on the
Company.
In the unlikely event that unforeseen Y2K problems are not remedied prior to a
disruption in normal business operations, the Company would in most instances be
able to temporarily revert to manual processes that the Company successfully
used prior to automating many routine tasks. Because of the nature of the
leathercraft industry and the numerous sources of supply, the Company does not
expect any significant disruption that would hinder its ability to provide goods
and services as a result of any of its vendors or trading partners failing to be
ready for the year 2000.
11
<PAGE>
Cautionary Statement
- --------------------
The disclosures under "Results of Operations", "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, possible negative trends in the craft
and western retail markets, customer acceptance of existing and new products,
and pricing pressures due to competitive industry conditions. Additional factors
that may result in different actual results include: increases in prices for
leather (a world-wide commodity) that for some reason, may not be passed on to
the customers of the Company's products, changes 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 those
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 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's Senior Debt Facility includes loans with interest rates that vary
with changes in the prime rate. An increase of one percentage point in the prime
rate would not have a material impact on the Company's future earnings.
PART II. OTHER INFORMATION
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.
---------------------------
12
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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: May 14, 1999 /s/ Wray Thompson
----------------------------
Wray Thompson
Chairman of the Board, President,
Chief Executive Officer, and Chief
Accounting Officer
13
<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.
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.
14
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX (CONTINUED)
Exhibit
Number Description
------- -----------
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.
4.13 The Leather Factory, Inc. Stock Purchase Warrant for 200,000
shares common stock, $.0024 par value issued to Evert I.
Schlinger dated August 3, 1998 and terminating on August 3,
2003, filed as Exhibit 4.13 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
November 12, 1998, and incorporated by reference herein.
*4.14 Second Amendment to Loan and Security Agreement dated May 13,
1999, 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,
1999.
10.1 Letter Agreement for Consulting Services dated July 24, 1998,
by and between The Leather Factory, Inc. and Evert I.
Schlinger, filed as Exhibit 4.13 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
November 12, 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.
15
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of May 13, 1999, is among 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 (hereinafter referred to individually as "Borrower" and
collectively as "Borrowers"), and FINOVA CAPITAL CORPORATION, a Delaware
corporation ("FINOVA").
R E C I T A L S
---------------
A. Borrowers and FINOVA are parties to a certain Loan and Security
Agreement dated as of November 21, 1997, as amended by that certain Amendment to
Loan and Security Agreement dated as of May 13, 1998 (as the same may be further
amended, restated, supplemented or otherwise modified, the "Loan Agreement").
B. Borrowers and FINOVA desire to amend the Loan Agreement to make
certain changes in the covenants and to correct certain matters, all as set
forth below.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and subject to the terms and conditions hereof, Borrowers and FINOVA
agree as follows:
1. Definitions. All capitalized terms used but not elsewhere defined
herein shall have the respective meanings ascribed to such terms in the Loan
Agreement, as amended by this Amendment.
2. Amendments to Loan Agreement. Section 6.1.13 (Financial
Covenants) of the Schedule to the Loan Agreement is hereby amended as set forth
below:
(a) Senior Debt Service Coverage Ratio is hereby deleted in
its entirety and the following is substituted in lieu thereof:
Senior Debt Service Coverage Ratio. As of the last
day of each calendar quarter ended March 31, June 30,
September 30 or December 31 commencing with the calendar
quarter ended June 30, 1998, Borrower's Operating Cash
Flow/Actual for the consecutive 12-month period ending as of
such last day must be at least 1.35 times the amount necessary
to meet Borrower's Senior Contractual Debt Service for such
12-month period; provided however, with respect to the
consecutive 12-month period ending March 31, 1999, Borrower's
Operating Cash Flow/Actual must be at least 1.25 times the
amount necessary to meet Borrower's Senior Contractual Debt
Service for such 12-month period; provided however, that, with
respect to the calculations set forth herein for the period
from March 1, 1998 through December 31, 1998, Borrower's
Operating Cash Flow/Actual and Senior Contractual Debt Service
shall be determined beginning as of March 1, 1998 (the "Start
Date") and be measured as follows: (x) the time period from
the Start Date through June 30, 1998, shall be for such
amounts for such period, (y) the time period from the Start
Date through September 30, 1998, shall be for such amounts for
such period, and (z) the time period from the Start Date
through December 31, 1998, shall be for such amounts for such
<PAGE>
period; and, provided further, that all such determinations
shall be made on a consolidated basis.
(b) Total Debt Service Coverage Ratio is hereby deleted in its
entirety and the following is substituted in lieu thereof:
Total Debt Service Coverage Ratio. As of the last day
of each calendar quarter ended March 31, June 30, September 30
or December 31 commencing with the calendar quarter ended June
30, 1998, Borrower's Operating Cash Flow/Actual for the
consecutive 12-month period ending as of such last day must be
at least 1.10 times the amount necessary to meet Borrower's
Total Contractual Debt Service for such 12-month period;
provided however, with respect to the consecutive 12-month
period ending March 31, 1999, Borrower's Operating Cash
Flow/Actual must be at least 1.05 times the amount necessary
to meet Borrower's Total Contractual Debt Service for such 12
month period; provided however, that, with respect to the
calculations set forth herein for the period from March 1,
1998, through December 31, 1998, Borrower's Operating Cash
Flow/Actual and Total Contractual Debt Service shall be
determined beginning as of the Start Date and be measured as
follows: (x) the time period from the Start Date through June
30, 1998, shall be for such amounts for such period, (y) the
time period from the Start Date through September 30, 1998,
shall be for such amounts for such period and (z) the time
period from the Start Date through December 31, 1998, shall be
for such amounts for such period; and, provided further, that
all such determinations shall be made on a consolidated basis.
3. Conditions to Effectiveness. The effectiveness of this Amendment
shall be subject to the satisfaction of all of the following conditions in a
manner, form and substance satisfactory to FINOVA:
(a) Representations and Warranties. All of the representations
and warranties of Borrowers set forth in the Loan Documents shall be
true and correct in all material respects.
(b) Approvals. The approval and/or consent shall have been
obtained from all persons whose approval or consent is necessary or
required to enable Borrowers to enter into this Amendment and the
documents delivered in connection herewith and therewith and to perform
its obligations hereunder and thereunder;
(c) Material Adverse Change. No event shall have occurred
since December 31, 1998 which has had or reasonably could be expected
to have a material adverse effect.
(d) Performance; No Default. Each Borrower shall have
performed and complied with all agreements and conditions contained in
the Loan Documents to be performed by or complied with by such Borrower
prior to the date hereof, and no Event of Default then shall exist.
(e) Proceedings and Documents. All corporate and other
proceedings in connection with the execution and delivery of this
Amendment by Borrowers shall be satisfactory to FINOVA, and FINOVA
shall have received all such counterpart originals or certified or
other copies of evidence of such as FINOVA may request.
(f) Payment of Fees and Expenses. Borrowers shall have paid
all fees and expenses of FINOVA incurred in connection with this
Amendment, including, without limitation, (i) attorneys' fees and
expenses and (ii) $1,500 amendment fee.
<PAGE>
4. References. From and after the Effective Date, all references in the
Loan Agreement to (i) the "Loan and Security Agreement" shall be deemed to refer
to the Loan Agreement as amended hereby and (ii) a term defined in the Loan
Agreement shall be deemed to refer to such defined term as amended by this
Amendment.
5. Representations and Warranties.
(a) Each Borrower hereby confirms to FINOVA that the
representations and warranties set forth in Section 5 of the Loan
Agreement, as amended by this Amendment, are true and correct in all
material respects as of the date hereof, and shall be deemed to be
remade as of the date hereof.
(b) Each Borrower represents and warrants to FINOVA that:
(i) such Borrower has full power and authority to
execute and deliver this Amendment and to perform such
Borrower's obligations hereunder,
(ii) upon the execution and delivery hereof, this
Amendment will be valid, binding and enforceable upon such
Borrower in accordance with its terms,
(iii) the execution and delivery of this Amendment
does not and will not contravene, conflict with, violate or
constitute a default under (A) the Loan Agreement, (B) any
Loan Document, (C) any applicable law, rule, regulation,
judgment, decree or order or any agreement, indenture or
instrument to which such Borrower is a party or is bound or
which is binding upon or applicable to all or any portion of
such Borrower's property,
(iv) no Event of Default exists,
(v) such Borrower's property is free and clear of all
Liens other than Permitted Liens,
(vi) such Borrower has no Indebtedness except (A)
such Borrower's Obligations and (B) Subordinated Debt,
(vii) all balance sheets, all statements of
operations and of changes in financial position, and other
financial data which have been or shall hereafter be furnished
to FINOVA for the purposes of or in connection with this
Amendment have been and will be prepared in accordance with
GAAP consistently applied throughout the periods involved and
do and will present fairly the financial condition of the
entities involved as of the dates thereof and the results of
their operations for the periods covered thereby, and
(viii) no material litigation (including, without
limitation, derivative actions), arbitrations, governmental
investigation or proceeding or inquiry shall, on the date
hereof, be pending which was not previously disclosed in
writing to FINOVA and no material adverse development shall
have occurred in any litigation (including, without
limitation, derivative actions), arbitration, government
investigations, or proceeding or inquiry previously disclosed
to FINOVA in writing.
<PAGE>
6. Costs and Expenses. Borrowers agree to reimburse FINOVA for all fees
and expenses incurred in the preparation, negotiation and execution of this
Amendment, including, without limitation, the reasonable fees and expenses of
counsel for FINOVA.
7. No Further Amendments; Ratification of Liability. Except as amended
hereby, the Loan Agreement and each of the other Loan Documents shall remain in
full force and effect in accordance with their respective terms. Each Borrower
hereby ratifies and confirms its liabilities, obligations and agreements under
the Loan Agreement and the other Loan Documents, all as amended by this
Amendment, and the Liens created thereby, and acknowledges that (i) it has no
defenses, claims or set-offs to the enforcement by FINOVA of such liabilities,
obligations and agreements, (ii) FINOVA has fully performed all obligations to
Borrowers which it may have had or has on and as of the date hereof and (iii)
other than as specifically set forth herein, FINOVA does not waive, diminish or
limit any term or condition contained in the Loan Agreement or the other Loan
Documents. FINOVA's agreement to the terms of this Amendment shall not be deemed
to establish or create a custom or course of dealing among FINOVA and Borrowers.
8. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.
9. Further Assurances. Each Borrower covenants and agrees that it will
at any time and from time to time do, execute, acknowledge and deliver, or will
cause to be done, executed, acknowledged and delivered, all such further acts,
documents and instruments as reasonably may be required by FINOVA in order to
effectuate fully the intent of this Amendment.
10. Governing Law. This Amendment, including without limitation
enforcement of the obligations, shall be interpreted in accordance with the
internal laws (and not the conflict of laws rules) of the State of Arizona
governing contracts to be performed entirely within such state.
11. Severability. If any term or provision of this Amendment or the
application thereof to any party or circumstance shall be held to be invalid,
illegal or unenforceable in any respect by a court of competent jurisdiction,
the validity, legality and enforceability of the remaining terms and provisions
of this Amendment shall not in any way be affected or impaired thereby, and the
affected term or provision shall be modified to the minimum extent permitted by
law so as most fully to achieve the intention of this Amendment.
12. Captions. The captions in this Amendment are inserted for
convenience of reference only and in no way define, describe or limit the scope
or intent of this Amendment or any of the provisions hereof.
13. Successors. This Amendment shall be binding upon each Borrower and
FINOVA and their respective representatives, successors and assigns, and shall
inure to the sole benefit of each Borrower and FINOVA and their respective
representatives, successors and assigns.
14. Effective Date. Upon execution by each of the parties hereto, the
amendments herein shall be deemed to take effect as of March 31, 1999.
[remainder of this page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed and delivered by
each of the parties hereto by a duly authorized officer of each such party on
the date first set forth above.
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
By: /s/ Wray Thompson
---------------------------------------------------
Name: Wray Thompson
---------------------------------------------------
Title: President
---------------------------------------------------
FINOVA CAPITAL CORPORATION, a Delaware corporation
By: /s/ Kenneth Sepp
---------------------------------------------------
Name: Kenneth Sepp
---------------------------------------------------
Title: Vice President
---------------------------------------------------
<PAGE>
EXHIBIT 27.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000909724
<NAME> THE LEATHER FACTORY, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 597,405
<SECURITIES> 0
<RECEIVABLES> 1,616,142
<ALLOWANCES> 76,000
<INVENTORY> 7,021,185
<CURRENT-ASSETS> 10,038,628
<PP&E> 2,911,927
<DEPRECIATION> 1,892,630
<TOTAL-ASSETS> 16,234,978
<CURRENT-LIABILITIES> 7,841,382
<BONDS> 0
0
0
<COMMON> 23,648
<OTHER-SE> 8,064,955
<TOTAL-LIABILITY-AND-EQUITY> 16,234,978
<SALES> 5,513,000
<TOTAL-REVENUES> 5,513,000
<CGS> 3,154,110
<TOTAL-COSTS> 3,154,110
<OTHER-EXPENSES> 2,238,516
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 229,867
<INCOME-PRETAX> (110,176)
<INCOME-TAX> (17,985)
<INCOME-CONTINUING> (92,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (92,191)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
