10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 1-12368 THE LEATHER FACTORY, INC. (Exact name of registrant as specified in its charter) Delaware 75-2543540 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3847 East Loop 820 South, Ft. Worth, Texas 76119 (Address of principal executive offices) (Zip code) (817) 496-4414 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to by filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of May 15, 1996 ----- ------------------------------------- Common Stock, par value $.0024 per share 9,853,161 Page 1 of 28 pages contained in the sequential numbering system. The Exhibit Index may be found on Page 14 of the sequential numbering system. THE LEATHER FACTORY, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 TABLE OF CONTENTS ----------------- PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income Three months ended March 31, 1996 and 1995 ........................... 3 Consolidated Balance Sheets March 31, 1996 and December 31, 1995................................... 4 Consolidated Statements of Cash Flows Three months ended March 31, 1996 and 1995............................. 5 Consolidated Statement of Stockholders' Equity Three months ended March 31, 1996 ................................. 6 Notes to Consolidated Financial Statements.............................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................8-11 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 12 Item 6. Exhibits and Reports on Form 8-K .................................. 12 SIGNATURES.................................................................. 13 EXHIBIT INDEX..............................................................14-18 2 THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1996 1995 ---- ---- NET SALES $ 7,356,805 $ 8,568,942 COST OF SALES 4,462,141 4,821,538 -------------- ------------- Gross Profit 2,894,664 3,747,404 OPERATING EXPENSES 2,753,592 2,645,362 -------------- ------------- INCOME FROM OPERATIONS 141,072 1,102,042 OTHER (INCOME) EXPENSE: Interest expense 170,983 168,823 Other, net (5,097) (5,839) -------------- ------------- Total other (income) expense 165,886 162,984 -------------- ------------- INCOME BEFORE INCOME TAXES (24,814) 939,058 PROVISION FOR INCOME TAXES (2,820) 381,033 --------------- ------------- NET INCOME (LOSS) $ (21,994) $ 558,025 ============== ============= NET INCOME PER SHARE OF COMMON STOCK $ - $ 0.06 ============== ============= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 9,788,530 9,812,030 ============== ============= DIVIDENDS PAID PER SHARE $ - $ - ============== =============
The accompanying notes are an integral part of these financial statements. 3 THE LEATHER FACTORY, INC. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1996 1995 ------------------ ------------------ ASSETS (UNAUDITED) CURRENT ASSETS: Cash $ 158,169 $ 477,159 Accounts receivable-trade, net of allowance for doubtful accounts of $42,000 and $39,000 in 1996 and 1995, respectively 2,787,784 2,784,050 Inventory 8,306,275 7,903,179 Prepaid income taxes 201,346 203,559 Deferred income taxes 101,992 88,321 Other current assets 783,644 656,837 ------------------ ------------------ Total current assets 12,339,210 12,113,105 ------------------ ------------------ PROPERTY AND EQUIPMENT, at cost 2,587,488 2,474,056 Less-accumulated depreciation and amortization (1,076,725) (1,014,966) ------------------ ------------------ Property and equipment, net 1,510,763 1,459,090 GOODWILL and other, net of accumulated amortization of $350,000 and $300,000 in 1996 and 1995, respectively 6,014,609 5,761,181 ------------------ ------------------ $ 19,864,582 $ 19,333,376 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,890,209 $ 1,398,917 Accrued expenses and other liabilities 477,042 655,489 Income taxes payable 47,250 48,300 Notes payable and current maturities of long-term debt 8,046,414 1,296,359 ------------------ ------------------ Total current liabilities 10,460,915 3,399,065 ------------------ ------------------ DEFERRED INCOME TAXES 88,576 85,197 NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 54,780 6,566,809 SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK - - COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.10 par value; 20,000,000 shares authorized, none issued or outstanding - - Common stock, $0.0024 par value; 25,000,000 shares authorized, 9,853,161 shares issued in 1996 and 1995 23,648 23,648 Paid-in capital 4,130,796 4,130,796 Retained earnings 5,432,051 5,454,045 Less: Unearned Shares held by ESOP, 64,631 shares in 1996 and 1995 (326,184) (326,184) ------------------ ------------------ Total stockholders' equity 9,260,311 9,282,305 ------------------ ------------------ $ 19,864,582 $ 19,333,376 ================== ==================
The accompanying notes are an integral part of these financial statements. 4 THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1996 1995 ---------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (21,994) $ 558,025 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation & amortization 118,283 101,254 (Gain) loss on sales of assets (346) (1,800) Net changes in assets and liabilities, net of effect of acquisitions: Accounts receivable-trade (3,734) (450,161) Inventory (403,096) (489,953) Prepaid income taxes 2,213 - Other current assets (126,807) (193,801) Accounts payable 491,292 (76,774) Accrued expenses and other liabilities (178,447) (517,911) Income taxes payable (1,050) 328,053 Deferred income taxes (10,292) (34,670) ---------------- --------------- Total adjustments (111,984) (1,335,763) ---------------- --------------- Net cash used in operating activities (133,978) (777,738) ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (119,480) (61,025) Proceeds from sales of assets 236 2,000 Cash paid for acquisitions, net of cash acquired (300,000) (5,127,532) Decrease in assets restricted for acquisitions - 5,040,656 Other intangible costs (3,792) (4,132) ---------------- --------------- Net cash used in investing activities (423,036) (150,033) ---------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and long-term debt 1,300,000 950,000 Payments on notes payable and long-term debt (1,061,976) (298,211) Stock issuance costs - (1,903) ---------------- --------------- Net cash provided by financing activities 238,024 649,886 ---------------- --------------- NET INCREASE (DECREASE) IN CASH (318,990) (277,885) CASH, beginning of period 477,159 402,253 ---------------- --------------- CASH, end of period $ 158,169 $ 124,368 ================ =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the period $ 37,243 $ 106,476 Income taxes paid during the period 6,715 87,653
The accompanying notes are an integral part of these financial statements. 5 THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1996
Common Stock ------------------------- Number Paid-in Retained Unearned of Shares Par Value Capital Earnings ESOP Shares Total ------------ ---------- ------------ ------------- ----------- ------------- BALANCE, December 31, 1995 9,853,161 $ 23,648 $ 4,130,796 $ 5,454,045 $ (326,184) $ 9,282,305 Net loss - - - (21,994) - (21,994) ------------ ---------- ------------ ------------- ---------- ------------- BALANCE, March 31, 1996 9,853,161 $ 23,648 $ 4,130,796 $ 5,432,051 $ (326,184) $ 9,260,311 ============ ========== ============ ============= ========== =============
The accompanying notes are an integral part of these financial statements. 6 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, 1996 and December 31, 1995, and the results of operations and cash flows for the three months ended March 31, 1996 and 1995. 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 statement disclosures contained in the Company's 1995 Annual Report to Stockholders. 2. Inventories The components of inventory consist of the following: March 31, December 31, 1996 1995 ---- ---- Finished goods held for sale $6,945,737 $6,736,811 Raw materials and work in process 1,360,538 1,166,368 ---------- ---------- $8,306,275 $7,903,179 ========== ========== 3. Acquisitions On March 1, 1996, the Company acquired all of the issued and outstanding shares of capital stock of The Leather Factory of Canada, Ltd., the Company's Canadian distributor located in Winnipeg, Manitoba. For financial reporting purposes, the transaction was accounted for under the purchase method, effective March 1, 1996. The total purchase price was $300,000 (USD). Cost in excess of assets acquired (goodwill) is being amortized over 10 years. Pro forma financial information for the Canadian acquisition is not provided, as such amounts would be insignificant. 4. Notes Payable and Long-Term Debt As reported in the Company's 1995 Annual Report on Form 10-KSB, the Company has certain financing arrangements with NationsBank of Texas, N.A. (the "Bank"). These financing arrangements include a working capital line of credit, an acquisition line of credit, and a term facility. On March 31, 1996, the Company was in noncompliance of certain of its affirmative covenants relating to the aforementioned financing arrangements. These affirmative covenants generally relate to the testing of net income or a derivative thereof, on a rolling four quarters basis. In addition, the Company was also in noncompliance of the net income element of the borrowing base provisions associated with its working capital line of credit. The Bank has waived these events of noncompliance from March 31, 1996 to June 30, 1996. As a result of the events of noncompliance and given that management anticipates being in noncompliance with the bank covenants as of June 30, 1996, even though the Bank has extended the maturity date of the working capital line of credit from March 31, 1997 to June 30, 1997, all debt owed to the Bank as March 31, 1996 has been classified as a current obligation in the accompanying financial statements. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General ------- The Leather Factory, Inc. ("the Company") is a leading one stop source for leather, traditional leathercraft materials involving such products as do-it-yourself kits, stamping sets, and leatherworking tools, craft-related items including various types of leather lace, beads, and wearable art accessories, hardware, metal garment accessories such as belt buckles, belt buckle designs and conchos, shoe repairing supplies and leather finishes. These products are distributed primarily on a wholesale level and principally through the Company's twenty-two sales/distribution units in the United States and Canada. Moreover, the Company is a manufacturer and distributor of hat trims in braids, leather, and woven fabrics. These hat trims are sold to hat manufacturers and distributors. Results of Operations --------------------- Income Statement Comparison The following table sets forth, for the interim periods indicated, certain items from the Company's Consolidated Statements of Income expressed as a percentage of net sales: Quarterly Period Ended March 31, 1996 1995 ---- ---- Net sales 100.0% 100.0% Cost of sales 60.7 56.3 ------ ------ Gross profit 39.3 43.7 Operating expenses 37.4 30.8 ------ ------ Income from operations 1.9 12.9 Interest expense, net 2.2 1.9 ------ ------ Income before income taxes 0.3 11.0 Provision for income taxes -0.0 4.5 ------ ------ Net income -0.3% 6.5% ====== ====== Revenues -------- The Company's net sales decreased by 14.1% to $7,356,805 during the first fiscal quarter ended March 31, 1996 from $8,568,942 generated in the first quarter of 1995. The decrease in revenues was primarily due to reduced unit sales to the retail craft industry. These sales include sales to craft store chains, as well as to mass merchandisers. The decrease in sales was not price driven, rather it was a function of weak overall conditions in the retail craft industry. Sales have been impacted by what our customers in the craft and western markets continue to consider "a difficult retail environment." The decrease in craft market sales represented approximately 71% of the reduction in sales compared to last year's quarter. The Company also experienced some losses in other areas of the business generally because of continued softness in the markets for western and southwestern items. These losses were, again, due to changes in unit sales, not price fluctuations and represented approximately 29% of the loss in sales. The sales of the Company's hat trim subsidiary, Roberts,Cushman & Company, Inc. ("Cushman"), broke even with the first quarter of last year, despite the labor strike. The effect of the new locations, TLF of Canada and the Charlotte unit are immaterial at this time. 8 Historical trends have shown that the third and fourth quarters have generally been somewhat better than the other quarters of the year. Given the softness and conditions of the markets in which the Company does business, there may not be a departure from this tenet, yet long-term trends continue to be difficult to determine at this point. This may be mitigated in the future due to the Company's planned growth through acquisition. For more information on the acquisition strategy of the Company, please see "-Capital Resources and Liquidity" below. No one customer makes up ten percent (10%) or more of the Company's sales. Costs, Gross Profit, and Expenses --------------------------------- Cost of sales as a percentage of revenue was 60.7% for the first fiscal quarter of 1996 as compared to 56.3% for the same quarter in 1995. The difference in the relative cost of sales percentage was principally attributable to a change in sales mix. The changes in sales mix is due to the reduced sales and market conditions noted above. A higher relative cost of sales percentage meant that gross profit as a percentage of sales was lower for the quarter ended March 31, 1996 compared to March 31, 1995. Gross profit as a percentage of sales decreased to 39.3% in 1996 from 43.7% in 1995. Total gross profit decreased 22.8% to $2,894,664 from $3,747,404 generated in the quarter ended March 31, 1995. This decrease was due to unit sales decreases and the change in sales mix as discussed above. Operating expenses increased $108,230 or 4.1% to $2,753,592 during the first fiscal quarter of 1996 from $2,645,362 during the quarter ended March 31, 1995. The increase in the dollar amount of operating expenses between the two quarters was the net result of an increase in operating expenses at Cushman, some of which were related to the labor strike, increased advertising to generate sales in a difficult environment, and increased salary expense to build Company infrastructure. This increase was mitigated by reduced discretionary bonuses and lower commissions to Company sales representatives due to lower sales and profits. The two new units did not cause a significant increase in operating expenses. Net Income ---------- Net income decreased to a net loss of $21,994 during the first fiscal quarter of 1996 from a net gain of $558,025 during the quarter ended March 31, 1995. The size of this decrease in net income between the two quarters is due to the factors noted above regarding sales, gross profit, operating expenses. 9 Capital Resources and Liquidity ------------------------------- The primary sources of liquidity and capital resources during the first quarter of 1996 were the Company's Acquisition Facility (defined below), borrowings on the Company's working capital line of credit with NationsBank of Texas, N.A., reinvesting cash flows from operating activities, and operating leases. Accounts receivable and inventory increased to $2,787,784 and $8,306,275 from 2,784,050 and $7,903,179 at December 31, 1995, respectively. The slight increase in accounts receivable, despite lower sales for the quarter, is reflective of somewhat slower collections due to market conditions as noted above. However, the slowdown in collections was not considerable, in that the number of days' receivables remained relatively constant, increasing from 32 days at December 31, 1995 to 34 days at March 31, 1996. Inventory turned during the first three months of 1996 at an annual rate of 2.20 times. This is slightly lower than the number of inventory turns of 2.32 times, which resulted during the fiscal year ended December 31, 1995. The inventory increase and turn decrease principally reflects the addition of inventory purchased to open the new unit in Charlotte, North Carolina and to increased inventory in the Fort Worth manufacturing location and the central warehouse for an anticipated increase in sales to larger volume customers in the second quarter of 1996. The uses of cash beyond inventory, accounts receivable, and debt payments involved the cash portion of the consideration paid to acquire the stock of TLF of Canada, and the making of capital expenditures. Cash used for capital expenditures totaled $119,480 and $61,025 for the fiscal quarters ended March 31, 1996 and 1995, respectively. These capital expenditures involved various equipment and furniture and fixtures additions associated with the Company's expansion. As reported in the Company's 1995 Annual Report on Form 10-KSB, the Company has certain financing arrangements with NationsBank of Texas, N.A. ("NationsBank"). These financing arrangements include a working capital line of credit, an acquisition line of credit, and a term facility. On March 31, 1996, the Company was in noncompliance of certain of its affirmative covenants relating to the aforementioned financing arrangements. These affirmative covenants generally relate to the testing of net income or a derivative thereof, on a rolling four quarters basis. In addition, the Company was also in noncompliance of the net income element of the borrowing base provisions associated with its working capital line of credit. NationsBank has waived these events of noncompliance from March 31, 1996 to June 30, 1996. As a result of the events of noncompliance and given that management anticipates being in noncompliance with the bank covenants as of June 30, 1996, even though NationsBank has extended the maturity date of the working capital line of credit from March 31, 1997 to June 30, 1997, all debt owed to NationsBank as March 31, 1996 has been classified as a current obligation in the financial statements contained elsewhere herein. Accordingly, at June 30, 1996, NationsBank may also waive the noncompliance, or elect to terminate the Company's financing arrangements, demand immediate payment of all outstanding balances and foreclose on the Company's assets securing the NationsBank loans if payment is not made. In this event, if the Company cannot obtain alternative financing, the Company could be forced to consider other strategies, including reorganization under federal bankruptcy protection. However, management believes that such strategies will not be necessary in that: (i) the Company is financially sound, in that it is not overly leveraged and its financial condition has not deteriorated during this period of lower earnings; and (ii) management anticipates rising earnings levels as the downturn in the sales to craft retailers should abate in the later part of the second quarter and these sales will begin to increase in the historically better third and fourth quarters. See also Notes to Consolidated Financial Statements contained herein. Notwithstanding the issues and possible ramifications regarding the Company's financing arrangements discussed above, due to the possible trends noted immediately above, management believes that the current sources of liquidity and capital resources will be sufficient to fund current operations, internal growth, including the opening or adding of new sales/distribution units, and the acquisition of companies in a related business. In 1996, funding for the opening of new units and any acquisition of companies in a related business is expected to be provided by operating leases, cash flow from operating activities, the Company's $10 million working capital line of credit with NationsBank, and the Company's $20 million acquisition line ("Acquisition Facility"). The following summarizes the Acquisition Facility. 10 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 proceeds from the sale of Preferred Stock to the Buyers will be used solely by the Company to provide financing for the Company's acquisition of businesses related to the current business of the Company. 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 comprise the Acquisition Facility. The obligations of the Buyers to purchase shares of Preferred Stock and NationsBank to allow the Company to draw down on the Acquisition Line, are subject to the satisfaction of certain conditions precedent, which generally regard the required terms of the Company's planned acquisitions and continued compliance with all covenants pertaining to the Company's financing arrangements. The Company was also in noncompliance with the covenants contained in the Acquisition Facility as of March 31, 1996. However, the covenants allowing for a drawing on the Acquisition Facility will be tested on a pro forma basis with the Company and the acquisition target combined. Any of the conditions can be waived at the option of either the Buyers or NationsBank. As of March 31, 1996, the Company had not drawn on the Acquisition Facility. For further detail, see Note 8 to the Consolidated Financial Statements included in the Company's 1995 Annual Report to Stockholders. At the present time, the Company is in discussion with the Buyers and NationsBank regarding an extension of the time for the Acquisition Facility. In the event that the extension is not obtained, the Company must seek alternate means of financing its acquisitions, including debt and stock offerings on a public or private basis. There can be no assurance that such alternative financings will be available to the Company on acceptable terms. In addition to the Acquisition Facility, the Company's management also intends to utilize Common Stock to assist in purchase transactions where appropriate. Management can make no assurances as to whether the Company can make any acquisitions using the Acquisition Facility or the Common Stock. Cautionary Statement -------------------- The disclosures under "-Results of Operations" and "-Capital Resources and Liquidity" and in the Notes to Consolidated Financial Statements as provided elsewhere herein contain forward-looking statements. There are certain important factors which could cause results to differ materially than those anticipated by some of the forward-looking statements. Some of the important factors which could cause actual results to differ materially from those in the forward-looking statements include, among other things, changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, including, but not limited to, retail craft buying patterns, and possible negative trends in the craft and western retail markets, customer acceptance of existing and new products, or otherwise, pricing pressures due to competitive industry conditions, increases in prices for leather, which is a world-wide commodity, which for some reason, may not be passed on to the customers of the Company's products, change in tax rates, change in interest rates, 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. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, in connection with the labor strike by the Union of Needletrades, Industrial and Textile Employees ("UNITE") at the Cushman manufacturing facility in New York, New York, the Company is party to certain actions before the National Labor Relations Board ("NLRB"). The following narrative describes the recent developments in these matters. The case filed against the New York local of UNITE by the Company on November 28, 1995, in which the Company alleged that UNITE engaged in coercive tactics by blocking entrance to the Company's place of business, threatening employees with physical violence and physically restraining and assaulting employees and business invitees, has been settled and UNITE has agreed to post a notice. The case filed on January 17, 1996, by the Company against UNITE alleging that UNITE engaged in unlawful secondary activity in violation of the National Labor Relations Act by picketing and otherwise encouraging the public not to purchase from customers of Cushman, was dismissed. The Company appealed the decision to the Washington, D.C. office of the NLRB, where the Regional Director's decision was upheld. On February 14, 1996, UNITE filed charges against the Company (Cause No. 16-CA-17849) before the NLRB in which it was alleged that the Company unlawfully discharged an employee because of her union activities. There were also claims that the Company unilaterally granted increased benefits for the purpose of frustrating organization of its employees. On April 11, 1996, the Regional Director of the NLRB refused to process the complaint insofar as the discharge was concerned. UNITE has appealed this decision to the Washington, D.C. office of the NLRB. There has been no decision on this appeal. 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 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 17, 1996 By /s/ Wray Thompson ----------------- Wray Thompson Chairman of the Board, President and Chief Executive Officer Date: May 17, 1996 By /s/ John Tittle, Jr. -------------------- John Tittle, Jr. Chief Financial Officer, Treasurer and Director (Chief Financial and Accounting Officer) 13 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Sequentially Number Description Numbered Page ------ ----------- ------------- 3.1 Certificate of Incorporation of The Leather Factory, Inc., filed as Exhibit 3.1 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 3.3 Amendment to Certificate of Incorporation of The Leather Factory, Inc. -- Certificate of Designation, Preferences and Rights of the Senior Cumulative Convertible Preferred Stock Dated July 24, 1995, filed as Exhibit 3.3 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein. 4.1 Second Restated Loan Agreement dated July 24, 1995, by and between The Leather Factory, Inc., a Delaware corporation, and NationsBank of Texas, N.A., filed as Exhibit 4.1 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein. 4.2 Promissory Note (Working Capital Line of Credit) dated July 24, 1995, in the principal amount of $10,000,000, payable to the order of NationsBank of Texas, N.A., which matures March 31, 1997, filed as Exhibit 4.2 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein. 4.3 Promissory Note (Acquisition Line) dated July 24, 1995, in the principal amount of $10,000,000, payable to the order of NationsBank of Texas, N.A., which matures August 1, 2000, filed as Exhibit 4.3 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein. 4.4 Promissory Note dated December 28, 1994 in the principal amount of $5,000,000, payable to the order of NationsBank of Texas, N.A., which matures December 28, 1999, filed as Exhibit No. 4.5 to the 1994 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 27, 1995, and incorporated herein by reference. 4.5 Stock Purchase Agreement dated as of July 28, 1995, by and between Center Street Capital Partners, L.P., a Delaware Limited Partnership, Stratford Capital Partners, L.P., a Texas Limited Partnership, and The Leather Factory, Inc., a Delaware Corporation, filed as Exhibit 4.5 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein.
14 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued)
Exhibit Sequentially Number Description Numbered Page ------ ----------- ------------- 4.6 Commitment Agreement dated July 28, 1995, by and among The Leather Factory, Inc., a Delaware Corporation, Center Street Capital Partners, L.P., a Delaware Limited Partnership, and Stratford Capital Partners, L.P., a Texas Limited Partnership, filed as Exhibit 4.6 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein. 4.7 Registration Rights Agreement dated July 28, 1995, by and between Center Street Capital Partners, L.P., a Delaware Limited Partnership, Stratford Capital Partners, L.P., a Texas Limited Partnership, and The Leather Factory, Inc., a Delaware Corporation, filed as Exhibit 4.7 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein. 4.8 Shareholders Agreement dated July 28, 1995, by and between Wray Thompson, an individual and resident of the State of Texas, Sally A. Thompson, an individual and resident of the State of Texas, Ronald C. Morgan, an individual and resident of the State of Texas, Robin L. Morgan, an individual and resident of the State of Texas, Center Street Capital Partners, L.P., a Delaware Limited Partnership, Stratford Capital Partners, L.P., a Texas Limited Partnership, and The Leather Factory, Inc., a Delaware Corporation, filed as Exhibit 4.8 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on August 10, 1995, and incorporated by reference herein. 4.9 First Amendment to Second Restated Loan Agreement effective as of December 31, 1995, by and between The Leather Factory, Inc., a Delaware Corporation, and NationsBank of Texas, N.A., filed as Exhibit No. 4.9 to the 1995 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368), filed with the Securities and Exchange Commission on March 28, 1996, and incorporated herein by reference. *4.10 Second Amendment to Second Restated Loan Agreement effective as of 19 March 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. 15 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued)
Exhibit Sequentially Number Description Numbered Page ------ ----------- ------------- 10.3 Stock Purchase Agreement dated as of June 30, 1993, by and between The Leather Factory, Inc., a Texas corporation and Steve Lindley, filed as Exhibit No. 10.3 to the Registration Statement on Form 10-SB of The Leather Factory, Inc. (Commission File No. 0-22128), including any amendments thereto, filed with the Securities and Exchange Commission on July 22, 1993, and incorporated herein by reference. 10.4 Amendment to Stock Purchase Agreement executed September 20, 1993, to be effective June 30, 1993, by and between The Leather Factory, Inc., a Texas corporation and Steve Lindley, filed as Exhibit No. 19.1 to the 1993 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368), filed with the Securities and Exchange Commission on March 30, 1994, and incorporated herein by reference. 10.5 Stock Purchase Agreement dated as of June 30, 1993, by and between The Leather Factory, Inc., a Texas corporation and Kevin F. White and Durham Hefta, filed as Exhibit No. 10.4 to the Registration Statement on Form 10-SB of The Leather Factory, Inc. (Commission File No. 0-22128), including any amendments thereto, filed with the Securities and Exchange Commission on July 22, 1993, and incorporated herein by reference. 10.6 Stock Purchase Agreement dated as of June 30, 1993, by and between The Leather Factory, Inc., a Texas corporation and James Durr, filed as Exhibit No. 10.5 to the Registration Statement on Form 10-SB of The Leather Factory, Inc. (Commission File No. 0-22128), including any amendments thereto, filed with the Securities and Exchange Commission on July 22, 1993, and incorporated herein by reference. 10.7 The Leather Factory, Inc. 1993 Non-Qualified Incentive Stock Option Plan, filed as Exhibit No. 10.6 to the 1993 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 30, 1994, and incorporated herein by reference. 10.8 Acquisition Agreement dated as of January 10, 1994, by and between The Leather Factory, Inc., a Colorado corporation and Hi-Line Leather & Manufacturing Company, filed as Exhibit No. 2.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on January 10, 1994, and incorporated herein by reference. 10.9 Asset Purchase Agreement dated as of April 15, 1994, by and among The Leather Factory, Inc., a Colorado corporation, The Leather Warehouse Company, a Michigan corporation, Daniel W. Holbert, Linda S. McCleary, Richard J. Hill, and the Richard J. Hill Trust, filed as Exhibit No. 2.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on April 15, 1994, and incorporated herein by reference.
16 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued)
Exhibit Sequentially Number Description Numbered Page ------ ----------- ------------- 10.10 Acquisition Agreement by and among The Leather Factory, Inc. and David Lieberman, Individually and as the Shareholder of Roberts, Cushman & Company, Inc., related to the acquisition of the issued and outstanding capital stock of Roberts, Cushman & Company, Inc., filed as Exhibit No. 2.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on January 9, 1995, and incorporated herein by reference. 10.11 The Leather Factory, Inc. Employees' Stock Ownership Plan and Trust (Restated), dated February 22, 1994, effective as of October 1, 1993, filed as Exhibit No. 4.1 to the Registration Statement on Form S-8 of The Leather Factory, Inc. (Commission File No. 33-81214), including any amendments thereto, filed with the Securities and Exchange Commission on July 5, 1994, and incorporated herein by reference. 10.12 Amendment No.1 to The Leather Factory, Inc. Employees' Stock Ownership Plan and Trust (Restated as of October 1, 1993), dated October 5, 1994 to be effective December 28, 1990, filed as Exhibit No. 10.12 to the 1994 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 27, 1995, and incorporated herein by reference. 10.13 Participation Agreement in The Leather Factory, Inc. Employees' Stock Ownership Plan and Trust (Restated as of October 1, 1993), dated February 28, 1995 to be effective January 2, 1995, filed as Exhibit No. 10.13 to the 1994 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 27, 1995, and incorporated herein by reference. 10.14 Indemnification Agreement dated October 17, 1994, by and among The Leather Factory, Inc., a Delaware corporation, Securities Transfer Corporation, a Texas corporation, and Halter Capital Corporation, a Texas corporation, filed as Exhibit No. 10.14 to the 1994 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 27, 1995, and incorporated herein by reference. 10.15 Guaranty, as amended, dated July 24, 1995, by and between NationsBank of Texas, N.A., The Leather Factory, Inc., Wray Thompson, Ronald Morgan, and Robin Morgan, filed as Exhibit No. 10.15 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on November 9, 1995, and incorporated herein by reference. 10.16 The Leather Factory, Inc. 1995 Director Non-Qualified Stock Option Plan and Stock Option Agreement, effective as of September 26, 1995, subject to approval by the Company's stockholders at the 1996 Annual Meeting of Stockholders, filed as Exhibit No. 10.16 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on November 9, 1995, and incorporated herein by reference.
17 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued)
Exhibit Sequentially Number Description Numbered Page ------ ----------- ------------- 10.17 The Leather Factory, Inc. 1995 Stock Option Plan and Stock Option Agreements, effective as of September 26, 1995, subject to approval by the Company's stockholders at the 1996 Annual Meeting of Stockholders, filed as Exhibit No. 10.17 to the Quarterly Report on Form 10-QSB of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on November 9, 1995, and incorporated herein by reference. 13.1 The Leather Factory, Inc. 1995 Annual Report to Stockholders, filed as Exhibit No. 13.1 to the 1995 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368), filed with the Securities and Exchange Commission on March 28, 1996. Such report, except to the extent incorporated by reference into the Annual Report on Form 10-KSB, was furnished for the information of the Securities and Exchange Commission only and was not deemed filed as a part of the aforementioned Annual Report on Form 10-KSB. 22.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the 1995 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368), filed with the Securities and Exchange Commission on March 28, 1996, and incorporated herein by reference. *27.1 Financial Data Schedule 27
------------ *Filed herewith. 18 EX-4 2 EX 4.10 EXHIBIT 4.10 SECOND AMENDMENT TO SECOND RESTATED LOAN AGREEMENT SECOND AMENDMENT TO SECOND RESTATED LOAN AGREEMENT This Second Amendment to Second Restated Loan Agreement ("Amendment") is entered into and is effective as of March 31, 1996, by and among NATIONSBANK OF TEXAS, N.A. ("Bank"), THE LEATHER FACTORY, INC., a Delaware corporation ("Borrower"), and THE LEATHER FACTORY, INC., a Texas corporation, and ROBERTS, CUSHMAN & COMPANY, INC., a New York corporation (together hereinafter referred to as "Guarantors"). This Amendment amends a Second Restated Loan Agreement dated as of July 24, 1995, by and among Bank, Borrower and Guarantors, as amended by a First Amendment to Second Restated Loan Agreement dated as of December 31, 1995 ("Loan Agreement"), and for purposes of this Amendment, the capitalized terms used herein shall have the same meaning as assigned to them in the Loan Agreement, except as otherwise provided herein. WHEREAS, Borrower is in default under certain financial covenants contained in the Loan Agreement and Borrower has requested Bank to: (i) forbear exercising its legal rights arising from the default for a specified period of time; and (ii) amend the Loan Agreement in certain respects, and Bank has agreed to the same subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements hereinafter set forth, Borrower, Bank and Guarantors hereby agree as follows: 1. Existing Defaults. Borrower acknowledges that it is in default of the Borrowing Base under Section 2D and certain financial covenants under Section 4A of the Loan Agreement ("Existing Defaults") as follows: Actual Required ------ -------- Borrowing Base (Multiple of Net Income) 5.5 3.5 Total Liabilities/ Tangible Net Worth 3.27 2.75 EBITDA Ratio 3.77 2.50 Cash Flow Ratio 0.99 1.50 2. Waiver. The Bank agrees that from the effective date hereof until June 30, 1996 ("Waiver Period"), it will not make demand or institute legal proceedings to enforce collection of the Loans; provided, however, Bank's temporary waiver in exercising these rights and remedies will be conditioned upon there being no other default under the Loan Documents, and in the event any such default occurs, this Agreement will become null and void and the Bank may exercise any and all rights and remedies available at law or in equity. At the end of the Waiver Period, the Bank's waiver of the Existing Defaults will cease, and Borrower will be subject to compliance with the Borrowing Base set forth in Section 2D and the financial covenant ratios set forth in Section 4A of the Loan Agreement, as well as all other terms and provisions of the Loan Documents. 3. Amendments to Loan Documents. The Loan Documents are amended as follows: (a) Revolving Line Maturity. The maturity of the Revolving Line set forth in the Promissory Note dated July 24, 1995, in the face amount of $10,000,000.00, executed by Borrower and payable to the order of Bank, is extended from March 31, 1997 to June 30, 1997. (b) Prime Rate Option. Paragraph 2B(i) of the Loan Agreement is hereby amended to read in its entirety as follows: 2 (i) Prime Rate Option. A rate 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 charged on similar loans, which rate of interest may not be the lowest rate of interest charged by the Bank to other borrowers, plus the "Applicable Percentage" set forth below, determined based upon Borrower's compliance, as reflected in the most recent Compliance Certificate, as defined herein, furnished to Bank of the EBITDA Ratio ("Prime Rate Option"): Applicable Percentage EBITDA Ratio --------------------- ------------ 0.0 % Under 3.01 0.25% 3.01 to 1.0 - 4.0 to 1.0 0.50% 4.01 to 1.0 and greater (c) Libor Rate Option. The Applicable Percentages set forth in Paragraph 2B(ii) of the Loan Agreement are hereby amended by adding the following: Applicable Percentage EBITDA Ratio --------------------- ------------ 2.50% 2.26 to 1.0 - 3.0 to 1.0 2.75% 3.01 to 1.0 - 4.0 to 1.0 3.0 % 4.01 to 1.0 and greater 4. Waiver Fee. As additional consideration for the Bank's waiver of the Existing Defaults during the Waiver Period, Borrower will pay the Bank a fee equal to $10,000.00 simultaneously with the execution of this Agreement. 5. No Waiver. The Bank's waiver of the Existing Defaults will not be construed as a waiver of the Existing Defaults after the Waiver Period or a waiver of any other default now existing or hereafter arising under the Loan Documents, or a waiver of any rights, remedies or recourses available to Bank or an election of remedies resulting from any default under the Loan Documents. 3 6. Ratification. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement and the other Loan Documents, and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Loan Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. The Loan Agreement and the other Loan Documents, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. 7. Representations and Warranties. Borrower and Guarantors hereby represent and warrant to the Bank that: (a) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of Borrower and will not violate the Certificate and/or Articles of Incorporation or Bylaws of Borrower; (b) the officers executing this Amendment on behalf of Borrower have been authorized by the Board of Directors to execute this Amendment and any and all other Loan Documents to be executed and/or delivered in connection herewith; (c) the representations and warranties contained in the Loan Agreement, as amended hereby, and the other Loan Documents are true and correct on and as of the date hereof as though made on and as of each such date; (d) except for the Existing Defaults, no default under the Loan Agreement, as amended hereby, has occurred and is continuing; (e) except for the Existing Defaults, Borrower and Guarantors are in full compliance with all covenants and agreements contained in the Loan Agreement and the other Loan Documents, as amended hereby; and (f) Borrower has not amended its Certificate and/or Articles of Incorporation or its Bylaws since the date of the Loan Agreement. 4 8. Survival of Representations and Warranties. All representations and warranties made in the Loan Agreement or any other Loan Documents, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by the Bank or any closing shall affect the representations and warranties or the right of the Bank to rely upon them. 9. Reference to Loan Agreement. The Loan Agreement and each of the other Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Loan Agreement, as amended hereby, are hereby amended so that any reference to the Loan Agreement and such other Loan Documents to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby. 10. Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 11. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of the Bank, Borrower and Guarantors, and their respective heirs, executors, successors and assigns, except that Borrower and Guarantors may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Bank. 12. Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. 5 13. Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 14. Governing Law. This Amendment and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Texas and applicable United States federal law, and is performable by Borrower and Guarantors in the county or city of Bank's address set out in the Loan Agreement, and they expressly waive any objection as to venue in such location. 15. NO FURTHER AGREEMENTS. THIS WRITTEN AGREEMENT, AND THE OTHER LOAN DOCUMENTS SPECIFICALLY REFERENCED HEREIN, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES HERETO. BANK: NATIONSBANK OF TEXAS, N.A. By:/s/ Eric Kosmin ---------------- ERIC KOSMIN, Vice President BORROWER: THE LEATHER FACTORY, INC., a Delaware corporation By:/s/ John Tittle, Jr. -------------------- JOHN TITTLE, JR., Chief Financial Officer and Treasurer 6 GUARANTORS: THE LEATHER FACTORY, INC., a Texas corporation By:/s/ John Tittle, Jr. -------------------- JOHN TITTLE, JR., Chief Financial Officer and Treasurer ROBERTS, CUSHMAN & COMPANY, INC., a New York corporation By:/s/ John Tittle, Jr. -------------------- JOHN TITTLE, JR., Chief Financial Officer and Treasurer 7 EX-27 3 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 158,159 0 2,787,784 42,000 8,306,275 12,339,210 2,587,488 1,076,725 19,864,582 10,460,915 0 0 0 23,648 9,236,663 19,864,582 7,356,805 7,356,805 4,462,141 4,462,141 2,753,592 0 170,983 (24,814) (2,820) (21,994) 0 0 0 (21,994) 0 0