-----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, GJBDRknTRupJJYblexuIXDxCV/aIbvu2ZdEfc27BpyQIggnKZ8P447E+mfL3Z2CE QNaM+frmEdGZthLSve5fwg== 0001010549-99-000121.txt : 19990518 0001010549-99-000121.hdr.sgml : 19990518 ACCESSION NUMBER: 0001010549-99-000121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99627352 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 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-12368 THE LEATHER FACTORY, INC. (Exact name of registrant as specified in its charter) Delaware 75-2543540 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3847 East Loop 820 South, Ft. Worth, Texas 76119 (Address of principal executive offices) (Zip code) (817) 496-4414 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to by filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of May 15, 1999 - ---------------------------------------- ------------------------------------- Common Stock, par value $.0024 per share 9,853,161
THE LEATHER FACTORY, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 TABLE OF CONTENTS PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets March 31, 1999 and December 31, 1998............................................ 3 Consolidated Statements of Operations Three months ended March 31, 1999 and 1998...................................... 4 Consolidated Statements of Cash Flows Three months ended March 31, 1999 and 1998...................................... 5 Consolidated Statements of Stockholders' Equity and Comprehensive Loss Three months ended March 31, 1999 and 1998...................................... 6 Notes to Consolidated Financial Statements....................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 8-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................................... 12 SIGNATURES........................................................................... 13 EXHIBIT INDEX........................................................................ 14-15
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THE LEATHER FACTORY, INC. CONSOLIDATED BALANCE SHEETS March 31, December 31, 1999 1998 ------------ ------------ ASSETS (UNAUDITED) CURRENT ASSETS: Cash $ 445,886 $ 510,399 Cash restricted for payment on revolving credit facility 151,519 232,838 Accounts receivable-trade, net of allowance for doubtful accounts of $76,000 and $52,000 in 1999 and 1998, respectively 1,540,142 1,582,459 Inventory 7,021,185 6,956,606 Prepaid income taxes 131,376 228,939 Deferred income taxes 107,430 102,012 Other current assets 641,090 272,993 ------------ ------------ Total current assets 10,038,628 9,886,246 PROPERTY AND EQUIPMENT, at cost 2,911,927 2,671,827 Less-accumulated depreciation and amortization (1,892,630) (1,813,378) ------------ ------------ Property and equipment, net 1,019,297 858,449 GOODWILL and other, net of accumulated amortization of $1,364,000 and $1,246,000 in 1999 and 1998, respectively 5,177,053 5,285,242 ------------ ------------ $ 16,234,978 $ 16,029,937 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,351,176 $ 1,019,069 Accrued expenses and other liabilities 498,416 530,789 Notes payable and current maturities of long-term debt 5,991,790 6,139,327 Total current liabilities 7,841,382 7,689,185 ------------ ------------ DEFERRED INCOME TAXES 107,787 109,085 NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 197,206 61,389 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.10 par value; 20,000,000 shares authorized, none issued or outstanding -- -- Common stock, $0.0024 par value; 25,000,000 shares authorized, 9,853,161 shares issued in 1999 and 1998 23,648 23,648 Paid-in capital 3,901,740 3,901,740 Retained earnings 4,403,187 4,495,378 Less: Notes receivable - secured by common stock (211,851) (224,750) Accumulated other comprehensive loss (28,121) (25,738) ------------ ------------ Total stockholders' equity 8,088,603 8,170,278 $ 16,234,978 $ 16,029,937 ============ ============
The accompanying notes are an integral part of these financial statements. 3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1999 AND 1998 1999 1998 ----------- ----------- NET SALES $ 5,513,000 $ 5,710,832 COST OF SALES 3,154,110 3,296,138 ----------- ----------- Gross Profit 2,358,890 2,414,694 OPERATING EXPENSES 2,238,516 2,299,894 ----------- ----------- INCOME FROM OPERATIONS 120,374 114,800 OTHER (INCOME) EXPENSE: Interest expense 229,867 240,645 Other, net 683 (7,761) ----------- ----------- Total other (income) expense 230,550 232,884 ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (110,176) (118,084) PROVISION (BENEFIT) FOR INCOME TAXES (17,985) (29,556) ----------- ----------- NET INCOME (LOSS) $ (92,191) $ (88,528) ----------- =========== EARNINGS (LOSS) PER COMMON SHARE $ (0.01) $ (0.01) =========== =========== EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution $ (0.01) $ (0.01) =========== =========== DIVIDENDS PAID PER COMMON SHARE $ -- $ -- =========== ===========
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, 1999 AND 1998 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (92,191) $ (88,528) Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation & amortization 132,673 133,991 Deferred financing costs 62,942 53,038 Deferred income taxes (6,716) (12,217) Other (2,383) 1,961 Net changes in operating assets and liabilities: Accounts receivable-trade, net 42,317 21,087 Inventory (64,579) 247,661 Income taxes 97,563 (21,796) Other current assets (368,097) (109,640) Accounts payable 332,107 142,704 Accrued expenses and other liabilities (32,373) (186,205) --------- --------- Total adjustments 193,454 270,584 --------- --------- Net cash provided by operating activities 101,263 182,056 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (240,099) (26,926) Other intangible costs (8,174) -- --------- --------- Net cash used in investing activities (248,273) (26,926) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in revolving credit loans (118,574) (4,597) Proceeds from notes payable and long-term debt 217,493 -- Payments on notes payable and long-term debt (110,639) (112,430) Increase in cash restricted for payment on revolving credit facility 81,319 (36,618) Payments received on notes secured by common stock 12,898 19,135 Deferred financing costs -- (77,153) --------- --------- Net cash provided by (used in) financing activities 82,497 (211,663) --------- --------- NET INCREASE (DECREASE) IN CASH (64,513) (56,533) CASH, beginning of period 510,399 70,496 --------- --------- CASH, end of period $ 445,886 $ 13,963 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the period $ 169,554 $ 190,304 Income taxes paid during the period, net of refunds (91,243) 4,457
The accompanying notes are an integral part of these financial statements. 5
THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Common Stock Notes Accumulated ------------------ Receivable Other Total Number Par Paid-in Retained Unearned - Secured by Comprehensive Stockholder's of Shares Value Capital Earnings ESOP Shares Common Stock Loss Equity --------- -------- ---------- ----------- ------------ ------------- ------------- ------------ BALANCE, December 31, 1997 9,853,161 $ 23,648 $4,119,915 $4,534,569 $ (273,851) $ (257,617) $ (14,018) $8,132,646 Payments received on notes secured by common - - - - - 19,135 - 19,135 stock Allocation of suspended ESOP shares committed to - - (12,921) - 14,341 - - 1,420 be released Net loss - (88,528) (88,528) - - - - - Translation adjustment - - - - - - 1,200 1,200 --------- -------- ---------- ----------- ----------- ------------ ------------ ---------- BALANCE, March 31, 1998 9,853,161 23,648 $4,106,994 $4,446,041 $ (259,510) $ (238,482) $ (12,818) $8,065,873 ========= ======== ========== =========== =========== ============ ============ ========== Comprehensive income (loss) for the three months ended March 31, 1998 (see below) BALANCE, December 31, 1998 9,853,161 $23,648 $3,901,740 $4,495,378 $ - $ (224,750) $ (25,738) $8,170,278 Payments received on notes secured by common - - - - - 12,899 - 12,899 stock Allocation of suspended ESOP shares committed to - - - - - - - - be released Net loss - (92,191) - - (92,191) - - - Translation adjustment - - - - - - (2,383) (2,383) --------- -------- ---------- ----------- ----------- ------------ ------------ ---------- BALANCE, March 31, 1999 9,853,161 $23,648 $3,901,740 $4,403,187 $ - $ (211,851) $ (28,121) $8,088,603 ========= ======== ========== ========== =========== ============ ============ ========== Comprehensive Income (Loss) ------------ BALANCE, December 31, 1997 Payments received on notes secured by common stock Allocation of suspended ESOP shares committed to be released Net loss $ (88,528) Translation adjustment 1,200 BALANCE, March 31, 1998 ========= Comprehensive income (loss) for the three months ended March 31, 1998 $ (87,328) ========= BALANCE, December 31, 1998 Payments received on notes secured by common stock Allocation of suspended ESOP shares committed to be released Net loss $ (92,191) Translation adjustment (2,383) BALANCE, March 31, 1999 --------- Comprehensive income (loss)for the three months ended March 31, 1999 $ (94,574) =========
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, 1999 and December 31, 1998, and the results of operations and cash flows for the three-month periods ended March 31, 1999 and 1998. The results of operations for the three-month period are not necessarily indicative of the results to be expected for the full fiscal year. The consolidated financial statements should be read in conjunction with the financial statements and disclosures contained in the Company's 1998 Annual Report on Form 10-K ("Annual Report").
2. INVENTORY The components of inventory consist of the following: March 31, December 31, 1999 1998 ----------- ----------- Finished goods held for sale $ 5,729,822 $ 5,564,406 Raw materials and work in process 1,291,363 1,392,200 ----------- ----------- $ 7,021,185 $ 6,956,606 =========== =========== 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended March 31, ------------------------------- 1999 1998 ------------ ------------ Numerator: Net loss $ (92,191) $ (88,528) Numerator for basic and diluted ----------- ----------- earnings per share (92,191) (88,528) ----------- ----------- Denominator: Denominator for basic and diluted earnings per share -- weighted-average shares 9,853,161 9,799,404 Basic earnings per share $ (0.01) $ (0.01) =========== =========== Diluted earnings per share $ (0.01) $ (0.01) =========== ===========
Unexercised stock options owned by employees, directors and others to purchase 443,000 and 585,000 shares of common stock as of March 31, 1999 and 1998, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than or equal to the average market price of the common stock during the respective periods. Warrants (see Note 9 to consolidated financial statements in the Annual Report) to acquire 300,000 shares of common stock were not included in the computations of diluted EPS because the exercise price was greater than the average market price of the common stock during the quarter ended March 31, 1999. The 13% convertible debt (see Note 3 to consolidated financial statements in the Annual Report) was not included in the computation of diluted earnings per share because the interest cost (net of tax) per assumed converted share was more than basic earnings per share and, therefore, the effect would be antidilutive. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General The Leather Factory, Inc. (the "Company") is the premier distributor of leather and leathercraft products to over 40,000 customers ranging from the individual hobbyist to large retail chains. Customer groups served include: wholesale distributors, tack and saddle shops, shoe-findings customers, institutions, prisons and prisoners, dealer stores, western stores, craft stores and craft store chains, hat manufacturers and distributors, other large volume purchasers, manufacturers, and retailers. The Company's products are distributed primarily through 22 sales/distribution units in the United States and Canada or through its subsidiary, Roberts, Cushman & Company, Inc. ("Cushman"), in New York. Cushman manufactures and distributes: hat trims in braids, leather, and woven fabrics; and small finished leather goods, such as, cigar cases, picture frames, wallets and other accessories. Results of Operations Income Statement Comparison The following table sets forth, for the interim periods indicated, certain items from the Company's Consolidated Statements of Operations expressed as a percentage of net sales: Quarterly Period Ended March 31, ---------------------------- 1999 1998 ------------- ------------- Net sales 100.0% 100.0% Cost of sales 57.2 57.7 ------------- ------------- Gross profit 42.8 42.3 Operating expenses 40.6 40.3 ------------- ------------- Income from operations 2.2 2.0 Interest expense, net 4.2 4.1 ------------- ------------- Loss before income taxes (2.0) (2.1) (Benefit) provision for income taxes (0.3) (0.5) ------------- ------------- Net loss (1.7)% (1.6)% ============= ============= Revenues Net sales decreased 3.5% to $5,513,000 during the quarter ended March 31, 1999 from $5,710,832 in the same period of last year. First quarter sales to the Company's core business and institutional customers continued the steady growth shown over the past year and were up nearly 33% compared to the first quarter of 1998. However, these gains were more than offset by continuation of the planned reduction in sales of low-margin products and by an expected drop in crafts market sales (down 67% and 45%, respectively, from the first quarter of 1998). Crafts sales were negatively affected by inventory liquidations by Tandycrafts, Inc. as it continues the closings of its 121 Tandy Leather retail stores. Tandy Leather stores had offered a selection of products that overlapped many products sold by the Company. 8 The sales of the Company are not seasonal. Sales to core business customers and institutions have shown a steady increase since the beginning of last year, and first quarter 1999 total sales were up 3.0% over the fourth quarter of 1998 despite the first quarter drop in crafts sales and the continuing reduction in sales of low-margin products discussed above. Costs, Gross Profit, and Expenses Cost of sales as a percentage of revenue was 57.2% for the first quarter of 1999 as compared to 57.7% for the same quarter in 1998. This one-half percentage point reduction resulted from continuation of the Company's strategic efforts to eliminate low-margin products as discussed above. The lower relative cost of sales meant that gross profit as a percentage of sales improved to 42.8% for the three months ended March 31, 1999, as compared to 42.3% for the same period in 1998. Operating expenses decreased $61,378 or 2.7% to $2,238,516 during the first quarter of 1999 from $2,299,894 during the quarter ended March 31, 1998. The decrease in operating expenses between the two quarters reflects continued efforts to reduce overhead costs and resulted mainly from a decrease in salary and payroll-related costs, lower advertising expenditures, and lower utility costs. Other (Income) Expense Other expenses decreased $2,334 or 1.0% to $230,550 for the first quarter of 1999 from $232,884 during the same quarter in 1998. The decrease is mainly due to lower interest rates on borrowings which benefited from reductions in the prime rate in the latter half of 1998. Net Loss The Company reported a net loss of $92,191 during the first quarter of 1999 compared to a net loss of $88,528 for the same period a year ago. The increased loss was principally due to the reduced gross profit from lower sales in the first quarter of 1999. Capital Resources and Liquidity - ------------------------------- The primary sources of liquidity and capital resources during the first quarter of 1999 were funds provided by operating activities in the amount of $101,263, borrowings from the Company's Senior Debt Facility with FINOVA and a Subordinated Debenture with The Schlinger Foundation, and capital leases to finance investment in new computer equipment. The Company's investment in net accounts receivable was $1,540,142 at March 31, 1999, down $42,317 from $1,582,459 at year-end 1998 despite a 3.0% increase in sales over the fourth quarter of 1998. The decrease in accounts receivable reflects a significant reduction in the amount of receivables more than 60 days old as the Company continues to upgrade its product mix and uses new information systems to reduce sales to slower paying customers. Inventory increased $64,579 to $7,021,185 at March 31, 1999 from $6,965,606 at year-end 1998. Inventories were increased to support the increase in sales over the fourth quarter of 1998, but inventory turnover improved to an annual rate of 1.81 times during the first quarter of 1999, which is above the ratio of 1.74 times for all of 1998. New information systems assisted in monitoring sales and inventory levels and contributed to improved inventory management. The largest uses of cash beyond debt payments in the first quarter of 1999 were for capital expenditures, which totaled $240,099 and were principally related to the Company's new computer systems. 9 As discussed in Note 3 of the Company's 1998 Annual Report on Form 10-K, on November 21, 1997, the Company entered into a Loan and Security Agreement with FINOVA Capital Corporation ("FINOVA"), pursuant to which FINOVA agreed to provide a credit facility of up to $9,136,000 in senior debt (the "Senior Debt Facility"), containing a revolving credit facility and term notes. Simultaneously with the closing of the Senior Debt Facility, the Company also issued to The Schlinger Foundation at face value $1,000,000 in subordinated convertible debt (the "Subordinated Debenture"). The revolving credit facility with FINOVA is based upon the level of the Company's accounts receivable and inventory. At March 31, 1999 and December 31, 1998, the Company had additional availability on the revolving credit facility of approximately $647,000 and $475,000, respectively. As the Company's sales and operations expand requiring larger investments in accounts receivable and inventory, the Company could have in excess of $1,000,000 in additional funds available under the revolving credit facility. The Senior Debt Facility contains certain financial covenants which include requirements to 1) maintain a certain level of earnings before interest, taxes, depreciation and amortization ("EBITDA"), 2) limit capital expenditures, and 3) maintain certain debt service coverage ratios. Decreases in sales, earnings and cash flow during 1998 and in January and February of 1999 resulted in debt service coverage ratios falling below target amounts in the financial covenants of the Senior Debt Facility for the 12-month period ending March 31, 1999. Prior to the March 31 measurement date, the Company requested that FINOVA amend the targets in the financial covenants, and FINOVA agreed to the Company's request. The Company and FINOVA entered into an amendment to the Senior Debt Facility, dated May 13, 1999, effective as of March 31, 1999. The amendment reduces the targets for the 12-month period ending March 31, 1999 for the Senior Debt Coverage Ratio from 1.35 to 1.25 and for the Total Debt Service Coverage Ratio for the same period from 1.10 to 1.05. The amendment is filed as Exhibit 4.14 to this Form 10-Q. The Company believes that the current sources of liquidity and capital resources will be sufficient to fund current operations and the opening of several new sales/distribution units. In 1999, the funding for the opening of new units is expected to be provided by operating leases, cash flows from operating activities, the Senior Debt Facility and the Subordinated Debenture. In addition, the Company anticipates funding for software to complete the installation of new systems in remaining locations will be provided by cash flows from operating activities. The Company's Senior Debt Facility and Subordinated Debenture mature on December 1, 1999, and management intends to pursue negotiations with FINOVA and other potential investors/lenders in 1999 to extend or replace the maturing debt facilities. Management believes it will be able to secure the required financing prior to the maturity of these obligations. However, in the event of a future material adverse change in the Company's operations, FINOVA could accelerate its debt or otherwise determine not to renew the notes. In such a circumstance, the Company would pursue other sources of financing. If other financing could not be secured, the Company could experience a material adverse impact. Year 2000 Issue - --------------- The Year 2000 ("Y2K") problem arose because many computer programs use only the last two digits to refer to a year. As a consequence, unless modified, many computer systems will interpret "00" as 1900 rather than the year 2000. This issue is believed to affect virtually all organizations and failure to address the problem could result in system failures and the generation of erroneous data. Each company's potential costs and uncertainties will depend on a number of factors including but not limited to its software, hardware, the nature of its industry, and the sophistication of its manufacturing and process control systems. 10 The Company has developed a comprehensive Y2K readiness plan to ensure its systems will be Y2K compliant prior to the year 2000. Pursuant to this plan, the Company conducted preliminary reviews of its critical information technology ("IT") systems as well as its non-IT systems. The majority of systems that were found to be defective in this review, including the Company's point of sale ("POS") software used for invoicing and inventory maintenance in the Company's Texas locations, have now been replaced or upgraded. The installation of the POS system in the Company's remaining 19 distribution units was delayed until after the conversion and testing of the Y2K compliant version of the software. The conversion in Fort Worth and other Texas locations is complete. Installation in remaining locations is scheduled to be completed by October 31, 1999. The Company has appointed a Y2K committee composed of senior executives and middle management. This committee is charged with testing systems for potential Y2K problems missed in the preliminary review and remediation process as well as assessing potential risks from the Company's trading partners' Y2K failures. The committee's work is in process, and the committee will report periodically to the Company's Board of Directors. Testing is scheduled to be completed by June 30, 1999. The Company has managed its Y2K compliance program using mostly internal salaried staff. For this reason and the fact that much of the replacement cost of non-compliant IT systems would have been incurred anyway, it is difficult to quantify the actual Y2K remediation costs. The Company invested approximately $262,782 for new computer systems and software in 1998 and the first quarter of 1999. This investment includes systems upgrades that will facilitate completion of the Y2K compliance program. Management believes that the majority of the total expected system remediation cost has already been incurred. Additional software purchases and licenses are expected to cost approximately $70,000 during the remainder of the year. The Company believes because of the nature of its operations and the steps taken as discussed above that the Y2K issue will not have a material impact on the Company's results of operations, liquidity, or financial condition. Specifically the Company does not anticipate any disruption in its ability to provide goods or services to its customers. Actual results may differ from the forward-looking statements contained in this discussion and there can be no guarantee that the failure of certain systems will not have a material adverse effect on the Company. In the unlikely event that unforeseen Y2K problems are not remedied prior to a disruption in normal business operations, the Company would in most instances be able to temporarily revert to manual processes that the Company successfully used prior to automating many routine tasks. Because of the nature of the leathercraft industry and the numerous sources of supply, the Company does not expect any significant disruption that would hinder its ability to provide goods and services as a result of any of its vendors or trading partners failing to be ready for the year 2000. 11 Cautionary Statement - -------------------- The disclosures under "Results of Operations", "Capital Resources and Liquidity", and in the Notes to Consolidated Financial Statements as provided elsewhere herein contain forward-looking statements and projections of management. There are certain important factors which could cause results to differ materially than those anticipated by some of the forward-looking statements. Some of the important factors which could cause actual results to differ materially from those in the forward-looking statements include, among other things: changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, including, but not limited to, retail craft buying patterns, possible negative trends in the craft and western retail markets, customer acceptance of existing and new products, and pricing pressures due to competitive industry conditions. Additional factors that may result in different actual results include: increases in prices for leather (a world-wide commodity) that for some reason, may not be passed on to the customers of the Company's products, changes in tax rates, change in interest rates, change in the commercial banking environment, problems with the importation of the products which the Company buys in 14 countries around the world, including, but not limited to, transportation problems or changes in the political climate of the countries involved, including the maintenance by those countries of Most Favored Nation status with the United States of America, and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company's Senior Debt Facility includes loans with interest rates that vary with changes in the prime rate. An increase of one percentage point in the prime rate would not have a material impact on the Company's future earnings. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- A list of exhibits required to be filed as part of this report is set forth in the Exhibit Index, which immediately precedes such exhibits and is incorporated herein by reference. (b) Reports on Form 8-K - None. --------------------------- 12 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LEATHER FACTORY, INC. (Registrant) Date: May 14, 1999 /s/ Wray Thompson ---------------------------- Wray Thompson Chairman of the Board, President, Chief Executive Officer, and Chief Accounting Officer 13 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Description ------- ----------- 3.1 Certificate of Incorporation of The Leather Factory, Inc., filed as Exhibit 3.1 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 4.1 Loan and Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation, filed as Exhibit 4.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.2 Revolving Note (Revolving Credit Loan) dated November 21, 1997, in the principal amount of $7,000,000, payable to the order of FINOVA Capital Corporation, which matures December 1, 1999 filed as Exhibit 4.2 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.3 Term Loan A Note (Term Loan A) dated November 21, 1997, in the principal amount of $400,000, payable to the order of FINOVA Capital Corporation, which matures December 1, 1999 filed as Exhibit 4.3 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.4 Term Loan C Note (Term Loan C) dated November 21, 1997, in the principal amount of $1,500,000, payable to the order of FINOVA Capital Corporation, which matures December 1, 1999 filed as Exhibit 4.5 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. . 4.5 Subordination Agreement dated November 21, 1997, by and between FINOVA Capital Corporation, The Schlinger Foundation, The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, and Roberts, Cushman & Company, Inc., a New York corporation filed as Exhibit 4.6 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.6 Pledge Agreement dated November 21, 1997, by and between Ronald C. Morgan and Robin L. Morgan and FINOVA Capital Corporation filed as Exhibit 4.7 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.7 Patent Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation filed as Exhibit 4.8 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.8 Trademark Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation filed as Exhibit 4.9 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 14 THE LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX (CONTINUED) Exhibit Number Description ------- ----------- 4.9 Copyright Security Agreement dated November 21, 1997, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation filed as Exhibit 4.10 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.10 Promissory Note (Subordinated Debenture) dated November 14, 1997, in the principal amount of $1,000,000, payable to the order of The Schlinger Foundation, which matures December 1, 1999 filed as Exhibit 4.11 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.11 Pledge and Security Agreement dated November 14, 1997, by and between The Schlinger Foundation and J. Wray Thompson, Sr. filed as Exhibit 4.12 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on February 6, 1998, and incorporated by reference herein. 4.12 Amendment to Loan and Security Agreement dated May 13, 1998, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation effective as of March 31,1998 filed as Exhibit 4.15 to the Quarterly Report on Form 10-Q of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on May 15, 1998, and incorporated by reference herein. 4.13 The Leather Factory, Inc. Stock Purchase Warrant for 200,000 shares common stock, $.0024 par value issued to Evert I. Schlinger dated August 3, 1998 and terminating on August 3, 2003, filed as Exhibit 4.13 to the Quarterly Report on Form 10-Q of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission November 12, 1998, and incorporated by reference herein. *4.14 Second Amendment to Loan and Security Agreement dated May 13, 1999, by and between The Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc., an Arizona corporation, Hi-Line Leather & Manufacturing Company, a California corporation, Roberts, Cushman & Company, Inc., a New York corporation, and FINOVA Capital Corporation effective as of March 31, 1999. 10.1 Letter Agreement for Consulting Services dated July 24, 1998, by and between The Leather Factory, Inc. and Evert I. Schlinger, filed as Exhibit 4.13 to the Quarterly Report on Form 10-Q of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission November 12, 1998, and incorporated by reference herein. 21.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the 1995 Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission File No. 1-12368), filed with the Securities and Exchange Commission on March 28, 1996, and incorporated herein by reference. *27.1 Financial Data Schedule - ------------------- *Filed herewith. 15 EX-4.14 2 AMENDMENT TO LOAN AND SECURITY AGREEMENT SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT This SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of May 13, 1999, is among THE LEATHER FACTORY, INC., a Delaware corporation, THE LEATHER FACTORY, INC., a Texas corporation, THE LEATHER FACTORY, INC., an Arizona corporation, HI-LINE LEATHER & MANUFACTURING COMPANY, a California corporation and ROBERTS, CUSHMAN & COMPANY, INC., a New York corporation (hereinafter referred to individually as "Borrower" and collectively as "Borrowers"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"). R E C I T A L S --------------- A. Borrowers and FINOVA are parties to a certain Loan and Security Agreement dated as of November 21, 1997, as amended by that certain Amendment to Loan and Security Agreement dated as of May 13, 1998 (as the same may be further amended, restated, supplemented or otherwise modified, the "Loan Agreement"). B. Borrowers and FINOVA desire to amend the Loan Agreement to make certain changes in the covenants and to correct certain matters, all as set forth below. NOW, THEREFORE, in consideration of the mutual agreements contained herein, and subject to the terms and conditions hereof, Borrowers and FINOVA agree as follows: 1. Definitions. All capitalized terms used but not elsewhere defined herein shall have the respective meanings ascribed to such terms in the Loan Agreement, as amended by this Amendment. 2. Amendments to Loan Agreement. Section 6.1.13 (Financial Covenants) of the Schedule to the Loan Agreement is hereby amended as set forth below: (a) Senior Debt Service Coverage Ratio is hereby deleted in its entirety and the following is substituted in lieu thereof: Senior Debt Service Coverage Ratio. As of the last day of each calendar quarter ended March 31, June 30, September 30 or December 31 commencing with the calendar quarter ended June 30, 1998, Borrower's Operating Cash Flow/Actual for the consecutive 12-month period ending as of such last day must be at least 1.35 times the amount necessary to meet Borrower's Senior Contractual Debt Service for such 12-month period; provided however, with respect to the consecutive 12-month period ending March 31, 1999, Borrower's Operating Cash Flow/Actual must be at least 1.25 times the amount necessary to meet Borrower's Senior Contractual Debt Service for such 12-month period; provided however, that, with respect to the calculations set forth herein for the period from March 1, 1998 through December 31, 1998, Borrower's Operating Cash Flow/Actual and Senior Contractual Debt Service shall be determined beginning as of March 1, 1998 (the "Start Date") and be measured as follows: (x) the time period from the Start Date through June 30, 1998, shall be for such amounts for such period, (y) the time period from the Start Date through September 30, 1998, shall be for such amounts for such period, and (z) the time period from the Start Date through December 31, 1998, shall be for such amounts for such period; and, provided further, that all such determinations shall be made on a consolidated basis. (b) Total Debt Service Coverage Ratio is hereby deleted in its entirety and the following is substituted in lieu thereof: Total Debt Service Coverage Ratio. As of the last day of each calendar quarter ended March 31, June 30, September 30 or December 31 commencing with the calendar quarter ended June 30, 1998, Borrower's Operating Cash Flow/Actual for the consecutive 12-month period ending as of such last day must be at least 1.10 times the amount necessary to meet Borrower's Total Contractual Debt Service for such 12-month period; provided however, with respect to the consecutive 12-month period ending March 31, 1999, Borrower's Operating Cash Flow/Actual must be at least 1.05 times the amount necessary to meet Borrower's Total Contractual Debt Service for such 12 month period; provided however, that, with respect to the calculations set forth herein for the period from March 1, 1998, through December 31, 1998, Borrower's Operating Cash Flow/Actual and Total Contractual Debt Service shall be determined beginning as of the Start Date and be measured as follows: (x) the time period from the Start Date through June 30, 1998, shall be for such amounts for such period, (y) the time period from the Start Date through September 30, 1998, shall be for such amounts for such period and (z) the time period from the Start Date through December 31, 1998, shall be for such amounts for such period; and, provided further, that all such determinations shall be made on a consolidated basis. 3. Conditions to Effectiveness. The effectiveness of this Amendment shall be subject to the satisfaction of all of the following conditions in a manner, form and substance satisfactory to FINOVA: (a) Representations and Warranties. All of the representations and warranties of Borrowers set forth in the Loan Documents shall be true and correct in all material respects. (b) Approvals. The approval and/or consent shall have been obtained from all persons whose approval or consent is necessary or required to enable Borrowers to enter into this Amendment and the documents delivered in connection herewith and therewith and to perform its obligations hereunder and thereunder; (c) Material Adverse Change. No event shall have occurred since December 31, 1998 which has had or reasonably could be expected to have a material adverse effect. (d) Performance; No Default. Each Borrower shall have performed and complied with all agreements and conditions contained in the Loan Documents to be performed by or complied with by such Borrower prior to the date hereof, and no Event of Default then shall exist. (e) Proceedings and Documents. All corporate and other proceedings in connection with the execution and delivery of this Amendment by Borrowers shall be satisfactory to FINOVA, and FINOVA shall have received all such counterpart originals or certified or other copies of evidence of such as FINOVA may request. (f) Payment of Fees and Expenses. Borrowers shall have paid all fees and expenses of FINOVA incurred in connection with this Amendment, including, without limitation, (i) attorneys' fees and expenses and (ii) $1,500 amendment fee. 4. References. From and after the Effective Date, all references in the Loan Agreement to (i) the "Loan and Security Agreement" shall be deemed to refer to the Loan Agreement as amended hereby and (ii) a term defined in the Loan Agreement shall be deemed to refer to such defined term as amended by this Amendment. 5. Representations and Warranties. (a) Each Borrower hereby confirms to FINOVA that the representations and warranties set forth in Section 5 of the Loan Agreement, as amended by this Amendment, are true and correct in all material respects as of the date hereof, and shall be deemed to be remade as of the date hereof. (b) Each Borrower represents and warrants to FINOVA that: (i) such Borrower has full power and authority to execute and deliver this Amendment and to perform such Borrower's obligations hereunder, (ii) upon the execution and delivery hereof, this Amendment will be valid, binding and enforceable upon such Borrower in accordance with its terms, (iii) the execution and delivery of this Amendment does not and will not contravene, conflict with, violate or constitute a default under (A) the Loan Agreement, (B) any Loan Document, (C) any applicable law, rule, regulation, judgment, decree or order or any agreement, indenture or instrument to which such Borrower is a party or is bound or which is binding upon or applicable to all or any portion of such Borrower's property, (iv) no Event of Default exists, (v) such Borrower's property is free and clear of all Liens other than Permitted Liens, (vi) such Borrower has no Indebtedness except (A) such Borrower's Obligations and (B) Subordinated Debt, (vii) all balance sheets, all statements of operations and of changes in financial position, and other financial data which have been or shall hereafter be furnished to FINOVA for the purposes of or in connection with this Amendment have been and will be prepared in accordance with GAAP consistently applied throughout the periods involved and do and will present fairly the financial condition of the entities involved as of the dates thereof and the results of their operations for the periods covered thereby, and (viii) no material litigation (including, without limitation, derivative actions), arbitrations, governmental investigation or proceeding or inquiry shall, on the date hereof, be pending which was not previously disclosed in writing to FINOVA and no material adverse development shall have occurred in any litigation (including, without limitation, derivative actions), arbitration, government investigations, or proceeding or inquiry previously disclosed to FINOVA in writing. 6. Costs and Expenses. Borrowers agree to reimburse FINOVA for all fees and expenses incurred in the preparation, negotiation and execution of this Amendment, including, without limitation, the reasonable fees and expenses of counsel for FINOVA. 7. No Further Amendments; Ratification of Liability. Except as amended hereby, the Loan Agreement and each of the other Loan Documents shall remain in full force and effect in accordance with their respective terms. Each Borrower hereby ratifies and confirms its liabilities, obligations and agreements under the Loan Agreement and the other Loan Documents, all as amended by this Amendment, and the Liens created thereby, and acknowledges that (i) it has no defenses, claims or set-offs to the enforcement by FINOVA of such liabilities, obligations and agreements, (ii) FINOVA has fully performed all obligations to Borrowers which it may have had or has on and as of the date hereof and (iii) other than as specifically set forth herein, FINOVA does not waive, diminish or limit any term or condition contained in the Loan Agreement or the other Loan Documents. FINOVA's agreement to the terms of this Amendment shall not be deemed to establish or create a custom or course of dealing among FINOVA and Borrowers. 8. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. 9. Further Assurances. Each Borrower covenants and agrees that it will at any time and from time to time do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, documents and instruments as reasonably may be required by FINOVA in order to effectuate fully the intent of this Amendment. 10. Governing Law. This Amendment, including without limitation enforcement of the obligations, shall be interpreted in accordance with the internal laws (and not the conflict of laws rules) of the State of Arizona governing contracts to be performed entirely within such state. 11. Severability. If any term or provision of this Amendment or the application thereof to any party or circumstance shall be held to be invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, the validity, legality and enforceability of the remaining terms and provisions of this Amendment shall not in any way be affected or impaired thereby, and the affected term or provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Amendment. 12. Captions. The captions in this Amendment are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Amendment or any of the provisions hereof. 13. Successors. This Amendment shall be binding upon each Borrower and FINOVA and their respective representatives, successors and assigns, and shall inure to the sole benefit of each Borrower and FINOVA and their respective representatives, successors and assigns. 14. Effective Date. Upon execution by each of the parties hereto, the amendments herein shall be deemed to take effect as of March 31, 1999. [remainder of this page intentionally left blank] IN WITNESS WHEREOF, this Amendment has been executed and delivered by each of the parties hereto by a duly authorized officer of each such party on the date first set forth above. THE LEATHER FACTORY, INC., a Delaware corporation, THE LEATHER FACTORY, INC., a Texas corporation, THE LEATHER FACTORY, INC., an Arizona corporation, HI-LINE LEATHER & MANUFACTURING COMPANY, a California corporation, and ROBERTS CUSHMAN & COMPANY, INC., a New York corporation By: /s/ Wray Thompson --------------------------------------------------- Name: Wray Thompson --------------------------------------------------- Title: President --------------------------------------------------- FINOVA CAPITAL CORPORATION, a Delaware corporation By: /s/ Kenneth Sepp --------------------------------------------------- Name: Kenneth Sepp --------------------------------------------------- Title: Vice President --------------------------------------------------- EXHIBIT 27.1 EX-27 3 FDS
5 0000909724 THE LEATHER FACTORY, INC. 1 US DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 597,405 0 1,616,142 76,000 7,021,185 10,038,628 2,911,927 1,892,630 16,234,978 7,841,382 0 0 0 23,648 8,064,955 16,234,978 5,513,000 5,513,000 3,154,110 3,154,110 2,238,516 0 229,867 (110,176) (17,985) (92,191) 0 0 0 (92,191) (0.01) (0.01)
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