-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FARj69npB+ReFpZlcFvzI+ZZI1ifotfjwLbF0cah7eJ6Mgh4yF8gwqLD62ibs4W8 q6IikNe/sI2J7FoWMKhpfQ== 0001010549-98-000246.txt : 19980817 0001010549-98-000246.hdr.sgml : 19980817 ACCESSION NUMBER: 0001010549-98-000246 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEATHER FACTORY INC CENTRAL INDEX KEY: 0000909724 STANDARD INDUSTRIAL CLASSIFICATION: LEATHER & LEATHER PRODUCTS [3100] IRS NUMBER: 752543540 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12368 FILM NUMBER: 98691215 BUSINESS ADDRESS: STREET 1: 3847 EAST LOOP STREET 2: 820 SOUTH CITY: FT WORTH STATE: TX ZIP: 76119 BUSINESS PHONE: 8174964414 MAIL ADDRESS: STREET 1: 3847 EAST LOOP STREET 2: 820 SOUTH CITY: FT WORTH STATE: TX ZIP: 76119 10-Q 1 QUARTERLY REPORT Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-12368 THE LEATHER FACTORY, INC. (Exact name of registrant as specified in its charter) Delaware 75-2543540 (State or other jurisdiction of (I.R.S. Employer incorporation organization) Identification Number) 3847 East Loop 820 South, Ft. Worth, Texas 76119 (Address of principal executive offices) (Zip code) (817) 496-4414 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to by filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of August 14, 1998 - ---------------------------------------- ---------------------------------------- Common Stock, par value $.0024 per share 9,853,161
THE LEATHER FACTORY, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 TABLE OF CONTENTS ----------------- PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets June 30, 1998 and December 31, 1997................................ 3 Consolidated Statements of Income (Loss) Three and six months ended June 30, 1998 and 1997................... 4 Consolidated Statements of Cash Flows Six months ended June 30, 1998 and 1997............................. 5 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) Six months ended June 30, 1998 and 1997............................. 6 Notes to Consolidated Financial Statements.......................... 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 9-13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.......... 14 Item 6. Exhibits and Reports on Form 8-K............................. 14 SIGNATURES............................................................. 15 EXHIBIT INDEX.......................................................... 16-17 2
THE LEATHER FACTORY, INC. CONSOLIDATED BALANCE SHEETS June 30, December 31, 1998 1997 ------------ ------------ ASSETS (UNAUDITED) CURRENT ASSETS: Cash $ 307,886 $ 70,496 Cash restricted for payment on revolving credit facility 200,606 319,133 Accounts receivable-trade, net of allowance for doubtful accounts of $51,000 and $28,000 in 1998 and 1997, respectively 1,923,471 1,865,276 Inventory 7,172,492 7,279,702 Prepaid income taxes 294,929 285,970 Deferred income taxes 117,020 109,411 Other current assets 594,247 385,199 ------------ ------------ Total current assets 10,610,651 10,315,187 ------------ ------------ PROPERTY AND EQUIPMENT, at cost 2,591,158 2,534,839 Less-accumulated depreciation and amortization (1,661,218) (1,505,098) ------------ ------------ Property and equipment, net 929,940 1,029,741 GOODWILL and other, net of accumulated amortization of $988,000 and $878,000 in 1998 and 1997, respectively 5,477,410 5,679,621 ------------ ------------ $ 17,018,001 $ 17,024,549 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,337,668 $ 942,046 Accrued expenses and other liabilities 468,817 559,776 Notes payable and current maturities of long-term debt 4,657,283 4,650,742 ------------ ------------ Total current liabilities 6,463,768 6,152,564 ------------ ------------ DEFERRED INCOME TAXES 118,963 136,611 NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 2,402,415 2,602,728 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.10 par value; 20,000,000 shares authorized, none issued or outstanding -- -- Common stock, $0.0024 par value; 25,000,000 shares authorized, 9,853,161 shares issued in 1998 and 1997 23,648 23,648 Paid-in capital 4,092,717 4,119,915 Less: Notes receivable - secured by common stock (234,250) (257,617) Unearned shares held by ESOP, 48,280 and 54,262 shares in 1998 and 1997, respectively (243,662) (273,851) Retained earnings 4,412,497 4,534,569 Accumulated other comprehensive income (18,095) (14,018) ------------ ------------ Total stockholders' equity 8,032,855 8,132,646 ------------ ------------ $ 17,018,001 $ 17,024,549 ============ ============
The accompanying notes are an integral part of these financial statements. 3
THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 THREE MONTHS SIX MONTHS 1998 1997 1998 1997 ------------ ------------ ------------ ------------ NET SALES $ 5,471,463 $ 6,526,992 $ 11,182,295 $ 12,986,884 COST OF SALES 3,044,623 3,787,708 6,340,761 7,683,789 ------------ ------------ ------------ ------------ Gross Profit 2,426,840 2,739,284 4,841,534 5,303,095 OPERATING EXPENSES 2,192,639 2,304,413 4,492,533 4,701,755 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 234,201 434,871 349,001 601,340 OTHER (INCOME) EXPENSE: Interest expense 259,702 217,429 500,347 418,767 Other, net (16,040) 4,132 (23,801) 3,288 ------------ ------------ ------------ ------------ Total other (income) expense 243,662 221,561 476,546 422,055 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (9,461) 213,310 (127,545) 179,285 PROVISION (BENEFIT) FOR INCOME TAXES 24,083 125,452 (5,473) 127,612 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (33,544) $ 87,858 $ (122,072) $ 51,673 ============ ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE $ -- $ 0.01 $ (0.01) $ 0.01 ============ ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution $ -- 0.01 (0.01) 0.01 ============ ============ ============ ============ DIVIDENDS PAID PER COMMON SHARE $ -- $ -- $ -- $ -- ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 4
THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1998 AND 1997 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (122,072) $ 51,673 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation & amortization 266,570 257,532 (Gain) loss on sales of assets (9,118) -- Deferred financing costs 109,582 -- Deferred income taxes (25,257) 6,457 Other 2,600 (1,614) Net changes in operating assets and liabilities: Accounts receivable-trade, net (58,195) (405,003) Inventory 107,210 470,055 Income taxes (8,959) 114,710 Other current assets (209,048) 56,096 Accounts payable 395,622 318,876 Accrued expenses and other liabilities (90,959) (56,190) ------------ ------------ Total adjustments 480,048 760,919 ------------ ------------ Net cash provided by operating activities 357,976 812,592 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (56,642) (170,165) Proceeds from sales of assets 10,000 -- Other intangible costs (441) (32,061) ------------ ------------ Net cash used in investing activities (47,083) (202,226) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and long-term debt 11,390,113 302,957 Payments on notes payable and long-term debt (11,464,883) (1,101,863) Decrease in cash restricted for payment on revolving credit facility 118,527 -- Payments received on notes secured by common stock 23,367 -- Deferred financing costs (140,627) -- ------------ ------------ Net cash used in financing activities (73,503) (798,906) ------------ ------------ NET INCREASE (DECREASE) IN CASH 237,390 (188,540) CASH, beginning of period 70,496 488,192 ------------ ------------ CASH, end of period $ 307,886 $ 299,652 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the period $ 378,265 $ 422,555 Income taxes paid during the period, net of refunds 25,507 6,445
The accompanying notes are an integral part of these financial statements. 5 THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1998 AND 1997 Common Stock Notes ------------------ Receivable Number Par Paid-in - Secured by Unearned Retained of Shares Value Capital Common Stock ESOP Shares Earnings --------- -------- ---------- ------------ ----------- ---------- BALANCE, December 31, 9,853,161 $ 23,648 $4,130,796 $ (269,305) $ (326,184) $4,464,277 1996 Net Income - - - - - 51,673 Foreign currency translation adjustment - - - - - - --------- -------- ---------- ------------ ----------- ---------- BALANCE, June 30, 1997 9,853,161 $ 23,648 $4,130,796 $ (269,305) $ (326,184) $4,515,950 ========= ======== ========== ============ =========== ========== BALANCE, December 31, 9,853,161 $ 23,648 $4,119,915 $ (257,617) $ (273,851) $4,534,569 1997 Payments received on notes secured by common stock - - - 23,367 - - Allocation of suspended ESOP shares committed to be released - - (27,198) - 30,189 - Net loss - - - - - (122,072) Foreign currency translation adjustment, net of tax of ($2,499) - - - - - - --------- -------- ---------- ------------ ----------- ---------- BALANCE, June 30, 1998 9,853,161 $ 23,648 $4,092,717 $ (234,250) $ (243,662) $4,412,497 ========= ======== ========== ============ =========== ==========
Accumulated Other Total Comprehensive Stockholder's Comprehensive Income Equity Income (Loss) ------------- ------------- ------------- BALANCE, December 31, $ (295) $ 8,022,937 1996 Net Income - 51,673 $ 51,673 Foreign currency translation adjustment (3,223) (3,223) (3,223) ------------- ------------- BALANCE, June 30, 1997 $ (3,518) $ 8,071,387 ============= ============= ------------ Comprehensive income (loss)for the six months ended June 30, 1997 $ 48,450 ============ BALANCE, December 31, $ (14,018) $ 8,132,646 1997 Payments received on notes secured by common stock - 23,367 Allocation of suspended ESOP shares committed to be released - 2,991 Net loss - (122,072) $ (122,072) Foreign currency translation adjustment, net of tax of ($2,499) (4,077) (4,077) (4,077) ------------- ------------- BALANCE, June 30, 1998 $ (18,095) $ 8,032,855 ============= ============= ------------ Comprehensive income (loss)for the six months ended June 30, 1998 $ (126,149) ============ The accompanying notes are an integral part of these financial statements. 6 THE LEATHER FACTORY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its financial position as of June 30, 1998 and December 31, 1997, and the results of operations and cash flows for the three and six month periods ended June 30, 1998 and 1997. The results of operations for the three and six month periods are not necessarily indicative of the results to be expected for the full fiscal year. The consolidated financial statements should be read in conjunction with the financial statements and disclosures contained in the Company's 1997 Annual Report on Form 10-K ("Annual Report"). 2. INVENTORY The components of inventory consist of the following: June 30, December 31, 1998 1997 --------------- --------------- Finished goods held for sale $ 5,839,035 $ 5,833,002 Raw materials and work in process 1,333,457 1,446,700 =============== =============== $ 7,172,492 $ 7,279,702 =============== ===============
3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Six Months Ended June 30, June 30, --------------------------- ----------------------------- 1998 1997 1998 1997 ---------- ----------- ----------- ----------- Numerator for basic and diluted earnings per share: Net income (loss) $ (33,544) $ 87,858 $ (122,072) $ 51,673 ========== ========== =========== =========== Denominator for basic and diluted earnings per share: Weighted-average shares outstanding 9,802,259 9,788,530 9,800,832 9,788,530 Basic earnings per share $ - $ 0.01 $ (0.01) $ 0.01 ========== ========== =========== ============ Diluted earnings per share $ - $ 0.01 $ (0.01) $ 0.01 ========== ========== =========== ============
Unexercised employee and director stock options to purchase 585,000 and 535,000 shares of common stock as of June 30, 1998 and 1997, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than or equal to the average market price of the common stock during the respective periods. Warrants (see note 9 to consolidated financial statements in the Annual Report and Subsequent Event under Item 2 of this Report on Form 10-Q) to acquire 300,000 shares of common stock were not included in the computations of diluted EPS because the exercise price was greater than the average market price of the common stock during the quarter ended June 30, 1998. The 13% convertible debt (see note 3 to consolidated financial statements in the Annual Report) was not included in the computation of diluted earnings per share because the interest cost (net of tax) per assumed converted share was more than basic earnings per share and, therefore, the effect would be antidilutive. 7 4. COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income: Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ---------- Net income (loss) $ (33,544) $ 87,858 $ (122,072) $ 51,673 Other comprehensive income: Translation adjustment, net of tax (5,277) 556 (4,077) (3,223) ----------- ---------- ----------- --------- Comprehensive income $ (38,821) $ 88,414 $ (126,149) $ 48,450 =========== ========== =========== =========
5. IMPACT OF NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes annual and interim reporting requirements for an enterprise's operating segments and related disclosures about its products and services, geographical areas in which it operates and major customers. Statement 131 is effective for fiscal years beginning after December 15, 1997, and therefore, the Company will adopt the new requirements retroactively in 1998 if applicable. The Company operates in one broad industry and historically has not identified separate segments of its business. Management has not completed its review of Statement 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's disclosures. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Leather Factory, Inc. (the "Company") is the premier distributor of leather and leathercraft products to over 40,000 customers ranging from the individual hobbyist to large retail chains. Customer groups served include: wholesale distributors, tack and saddle shops, shoe-findings customers, institutions, prisons and prisoners, dealer stores, western stores, craft stores and craft store chains, hat manufacturers and distributors, other large volume purchasers, manufacturers, and retailers. The Company operates in one broad industry segment and distributes products through twenty-two sales/distribution units in the United States and Canada or through its subsidiary, Roberts, Cushman & Company, Inc. ("Cushman"), in New York. Cushman manufactures and distributes hat trims in braids, leather, and woven fabrics; and small finished leather goods, such as cigar cases, picture frames, wallets and other accessories. Results of Operations Income Statement Comparison
The following table sets forth, for the interim periods indicated, certain items from the Company's Consolidated Statements of Income (Loss) expressed as a percentage of net sales: Quarterly Period Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------- ------ ------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 55.6 58.0 56.7 59.2 ------- ------- ------- ------ Gross profit 44.4 42.0 43.3 40.8 Operating expenses 40.1 35.3 40.2 36.2 ------- ------- ------- ------ Income from operations 4.3 6.7 3.1 4.6 Interest expense and other, net 4.5 3.4 4.3 3.2 ------- ------- ------- ------ Income (loss) before income taxes (0.2) 3.3 (1.2) 1.4 (Benefit) provision for income taxes 0.4 1.9 (0.1) 1.0 ------- ------- ------- ------ Net income (loss) (0.6)% 1.4% (1.1)% 0.4% ======= ======= ======= ======
Revenues For the quarter and six months ended June 30, 1998, net sales decreased 16.2% and 13.9%, respectively compared to the same interim periods in 1997. The declines reflect decreased unit sales to manufacturers, shoe-finders, distributors and retailers resulting from: weak overall industry conditions in the retail craft and western apparel markets; strategic merchandising decisions; and the economic crisis in Asia. These decreases were offset by gains in unit sales to customers in the Company's institutional markets. The following table sets forth the approximate percentage of the overall decline represented by each of the above: 9 Interim Periods Ended June 30, 1998 ------------------------ Three Six Months Months ---------- ----------- Craft markets -40% -41% Western apparel markets -30% -33% Strategic merchandising decisions -36% -30% Asian economic difficulties -7% -4% Institutional markets +13% +8% ========== ========== -100% -100% The sales declines from strategic merchandising decisions were expected. The Company's analysis showed certain products did not produce adequate margins for the selling expense and risks associated with them. Therefore, prices were selectively raised where appropriate or products were eliminated from the Company's line entirely. These merchandising decisions account for approximately $374,000 and $550,000, respectively, of the declines for the three and six month periods ended June 30, 1998, compared to the same periods in 1997. When adjusted for the above expected declines, sales decreases due to continued negative external forces were approximately 10.4% and 9.7%, respectively, for the quarter and six month periods ended June 30, 1998, compared to the same interim periods in 1997. These declines continue trends that have existed over the past two to three years. To combat such negative trends, the Company is investing working capital from eliminated product lines into its growing markets and new product development. These efforts are reflected by gains achieved in the Company's sales to institutional customers, expansion of the Company's finished leather goods product line, and introduction of several new products. The Company also sees opportunities for growth in export sales although economic conditions in Asia resulted in a slight decline in second quarter exports compared to last year's second quarter. This brought year to date export sales essentially even with levels for the first six months of 1997. Costs, Gross Profit, and Expenses Cost of sales as a percentage of revenue was 55.6% for the second quarter of 1998 as compared to 58.0% for the same quarter in 1997. Cost of sales percentages for the six months ended June 30, 1998 and 1997, were 56.7% and 59.2%, respectively. These 2.4% and 2.5% reductions for the respective three and six month periods resulted from improved product mix and the Company's strategic efforts to selectively increase prices and eliminate low margin products as discussed above. Lower relative cost of sales percentages meant that gross profit as a percentage of sales improved to 44.4% and 43.3% for the respective three and six month periods ended June 30, 1998, as compared to only 42.0% and 40.8% for the same periods in 1997. The Company's strategy for combating declining sales includes emphasis on improved gross margins so that the decline in gross profit is proportionately less than the revenue decline. Accordingly, gross profit dollars decreased $312,444 or only 11.4% and $461,561 or only 8.7% for the quarterly and six month periods ended June 30, 1998, compared to the respective 1997 periods. Operating expenses decreased $111,774 or 4.9% to $2,192,639 during the second quarter of 1998 from $2,304,413 during the quarter ended June 30, 1997. The decrease in the dollar amount of operating expenses between the two quarters resulted primarily from lower freight, payroll related and insurance costs; offset by higher advertising expenditures and increased bad debt write-offs. For the six months ended June 30, 1998, operating expenses declined $209,222 or 4.5% compared to the six months ended June 30, 1997. The decrease in the dollar amount of operating expenses between the two six month periods resulted primarily from lower freight, payroll related and insurance costs; decreased bad-debt write-offs; and a reduction in non-recurring professional fees associated with the search for financing sources in 1997. 10 Other (Income) Expense Other expenses increased $22,101 or 10.0% to $243,662 for the second quarter of 1998 from $221,561 during the same quarter in 1997. The increase was primarily due to higher interest expense resulting from the amortization of deferred financing costs offset by non-recurring other income in the amount of $20,000. Other expenses increased $54,491 or 12.9% to $476,546 for the first six months of 1998 from $422,055 during the same period in 1997. The increase was primarily due to higher interest expense resulting from the amortization of deferred financing costs offset by non-recurring other income in the amount of $27,000. Net Income (Loss) The Company reported a net loss for the three and six month periods ended June 30, 1998, in the amounts of $33,544 and $122,072, respectively as compared to net income of $87,858 and $51,673 in the corresponding periods during 1997. The decreased operating results for such periods resulted from the factors noted above regarding sales, gross profit, operating and other expenses. Outlook The statements contained in this Outlook section are based upon management's current expectations and contain forward-looking statements that involve numerous risks and uncertainties. Actual results may differ materially. The Company believes that opportunities exist to use its size and competitive advantages to increase market share in: the core leathercraft, institutional and saddle and tack businesses; and the leather accessories and travelware markets. To effectively cover North America, the Company plans to resume its internal expansion program opening two to four new Leather Factory distribution units a year over the next five years. The grand opening in Portland, Oregon is scheduled for early fourth quarter. Management believes the Company's steady expansion with emphasis on its more profitable markets and service to its customers will gradually offset the sales declines experienced in the last three years and provide the critical mass needed to return the Company to its historical profit trends. Meanwhile, the Company is poised to take advantage of cyclical improvements in the retail craft and western markets if and when they occur which is difficult to predict. Capital Resources and Liquidity The primary sources of liquidity and capital resources during the first six months of 1998 were net funds provided by operating activities in the amount of $357,976, a decrease in restricted cash in the amount of $118,527 and borrowings on the Company's revolving credit facility with FINOVA Capital Corporation ("FINOVA"). The Company's unrestricted cash increased to $307,886 at June 30, 1998 from $70,496 at December 31, 1997. This increase was primarily the result of cash generated by operating activities and the decrease in restricted cash offset by capital expenditures, payment of deferred financing costs and net repayments of debt. 11 With the decline in sales, the Company is reducing its investment in inventory which along with non-cash expenses for depreciation, amortization and deferred financing cost continue to give rise to significant operating cash flows despite the essentially flat operating results for the first six months of 1998. Inventory decreased to $7,172,492 at June 30, 1998, from $ $7,279,702 at December 31, 1997. The sum of the cash flows from this reduction and all non-cash expenses included in the net loss for the six month period totaled $445,521. Other significant operating cash flow resulted from an increase of $395,622 in accounts payable to vendors at June 30, 1998 compared to the balance at December 31, 1997. These operating cash flows were partially used to fund increases in accounts receivable of $58,195 and other current assets, principally prepaid expenses, of $209,048 at June 30, 1998, compared to the balances at December 31, 1997. Other significant uses of operating cash flows were to reduce accrued expenses and other liabilities to $468,817 at June 30, 1998 compared to $559,776 at December 31, 1997. The revolving credit facility with FINOVA is based upon the level of the Company's accounts receivable and inventory. At June 30, 1998 and December 31, 1997, the Company had additional availability on the revolving credit facility of approximately $189,715 and $377,000, respectively. As the Company's sales and operations expand requiring larger investments in accounts receivable and inventory, the Company could have almost $3,000,000 in additional funds available under the revolving credit facility. The largest non-operating uses of cash beyond debt payments in the first six months of 1998 were for the payment of deferred financing costs related to the FINOVA transaction closed on November 21, 1997 and capital expenditures. The deferred financing cost paid during the six month period totaled $140,627, and cash used for capital expenditures totaled $56,642. The capital expenditures principally relate to the new computer system installed in Fort Worth, warehouse fixtures and other equipment additions or replacements at various sales/distribution units. The Company believes that the current sources of liquidity and capital resources will be sufficient to fund current operations, meet debt obligations and fund the opening of new sales/distribution units. In 1998, the funding for the opening of new units is expected to be provided by operating leases, cash flows from operating activities, and the Company's Revolving Credit Loan with FINOVA. In addition, the Company anticipates funding for completion of the computer installation in the remaining locations to be provided by capital leases. Subsequent Event On July 30, 1998, the Company announced that it had reached an agreement with Evert I. Schlinger, President of the Schlinger Foundation, to serve as an advisor to the Company in analyzing financing alternatives and evaluating locations with regard to the Company's expansion plans. As previously reported, The Schlinger Foundation is the holder of the Company's $1,000,000 subordinated debt that is partially convertible into common stock. Pursuant to the terms of the new consulting agreement, Mr. Schlinger will serve in his advisory capacity for the next eighteen months to be compensated by the issuance of a warrant to acquire common stock. The warrant agreement provides for issuance of 200,000 shares of the Company's common stock at the market value on the date of grant. The warrant will have a five year term. Copies of the final agreement and warrant will be filed as Exhibits to the Company's Third quarter report on Form 10-Q. 12 Cautionary Statement The disclosures under "-Results of Operations"; "-Outlook"; "-Capital Resources and Liquidity"; and in the Notes to Consolidated Financial Statements as provided elsewhere herein contain forward-looking statements and projections of management. There are certain important factors which could cause results to differ materially than those anticipated by some of the forward-looking statements. Some of the important factors which could cause actual results to differ materially from those in the forward-looking statements include, among other things: changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, including, but not limited to, retail craft buying patterns, continued negative trends in the craft and western retail markets, customer acceptance or not of existing and new products, and pricing pressures due to competitive industry conditions. Additional factors that may result in different actual results include: increased prices for leather, which is a world-wide commodity, that can not be passed on to customers for some reason, change in tax rates, change in interest rates, change in the commercial banking environment, problems with the importation of the products which the Company buys in 14 countries around the world, including, but not limited to, transportation problems or changes in the political climate of the countries involved, including the maintenance by said countries of Most Favored Nation status with the United States of America, and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On May 21, 1998 the Annual Meeting of the Stockholders of the Company was held in the El Dorado room at the Arlington Hilton Hotel, Arlington, Texas to consider and act on the following matter: (1) To elect the following individuals to serve as directors until the Company's 1999 Annual Meeting of Stockholders or until their successors are duly elected and qualified: Wray Thompson Anthony C. Morton Ronald C. Morgan H. W. "Hub" Markwardt Robin L. Morgan Joseph R. Mannes William M. Warren John Tittle, Jr. As to item (1) above, the following table depicts the votes cast for and against, as well as those which abstained from voting, as to the election of the aforementioned individuals as a director of the Company as noted above: For Against Abstaining --------- ------- ---------- Wray Thompson 9,269,349 3,559 33,200 Ronald C. Morgan 9,269,249 3,659 33,200 Robin L. Morgan 9,269,349 3,559 33,200 William M. Warren 9,269,349 3,559 33,200 Anthony C. Morton 9,269,249 3,659 33,200 H. W. "Hub" Markwardt 9,269,349 3,559 33,200 Joseph R. Mannes 9,268,049 4,859 33,200 John Tittle, Jr. 9,268,549 4,359 33,200 The foregoing matters are described in detail in the Company's proxy statement dated April 21, 1998 for the 1998 Annual Meeting of Stockholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits A list of exhibits required to be filed as part of this report is set forth in the Exhibit Index which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K None 14 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LEATHER FACTORY, INC. (Registrant) Date: August 14, 1998 /s/ Wray Thompson ----------------- Wray Thompson Chairman of the Board, President, and Chief Executive Officer Date: August 14, 1998 /s/ Anthony C. Morton --------------------- Anthony C. Morton Chief Financial Officer, Treasurer and Director (Chief Accounting Officer) 15 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Description ------- ------------ 3.1 Certificate of Incorporation of The Leather Factory, Inc., filed as Exhibit 3.1 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 4.1 Loan and Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation, filed as Exhibit 4.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.2 Revolving Note (Revolving Credit Loan) dated November 21, 1997, in the principal amount of $7,000,000, payable to the order of FINOVA Capital Corporation, which matures December 1, 1999 filed as Exhibit 4.2 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.3 Term Loan A Note (Term Loan A) dated November 21, 1997, in the principal amount of $400,000, payable to the order of FINOVA Capital Corporation, which matures December 1, 1999 filed as Exhibit 4.3 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.4 Term Loan C Note (Term Loan C) dated November 21, 1997, in the principal amount of $1,500,000, payable to the order of FINOVA Capital Corporation, which matures December 1, 1999 filed as Exhibit 4.5 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.5 Subordination Agreement dated November 21, 1997, by and between FINOVA Capital Corporation, The Schlinger Foundation, The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, and Roberts, Cushman & Company, Inc., a New York corporation filed as Exhibit 4.6 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.6 Pledge Agreement dated November 21, 1997, by and between Ronald C. Morgan and Robin L. Morgan and FINOVA Capital Corporation filed as Exhibit 4.7 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.7 Patent Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation filed as Exhibit 4.8 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 16 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX (CONTINUED) Exhibit Number Description ------- ----------- 4.8 Trademark Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation filed as Exhibit 4.9 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.9 Copyright Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation filed as Exhibit 4.10 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.10 Promissory Note (Subordinated Debenture) dated November 14, 1997, in the principal amount of $1,000,000, payable to the order of The Schlinger Foundation, which matures December 1, 1999 filed as Exhibit 4.11 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.11 Pledge and Security Agreement dated November 14, 1997, by and between The Schlinger Foundation and J. Wray Thompson, Sr. filed as Exhibit 4.12 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.12 Amendment to Loan and Security Agreement dated May 13, 1998, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation effective as of March 31,1998 filed as Exhibit 4.15 to the Quarterly Report on Form 10-Q of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on May 15, 1998, and incorporated by reference herein. 21.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the 1995 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368), filed with the Securities and Exchange Commission on March 28, 1996, and incorporated herein by reference. *27.1 Financial Data Schedule ------------ *Filed herewith. 17 EXHIBIT 27.1 EX-27 2 FDS --
5 0000909724 The Leather Factory, Inc. 1 US DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 307,886 0 1,974,471 51,000 7,172,492 10,610,651 2,591,158 1,661,218 17,018,001 6,463,768 2,402,415 0 0 23,648 8,009,207 17,018,001 11,182,295 11,182,295 6,340,761 6,340,761 0 0 500,347 (127,545) (5,473) (122,072) 0 0 0 (122,072) (.001) (.001)
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