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 September 30, 2003March 31, 2004
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
incorporationIncorporation 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___X____ No ---- ----_______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).filer.
Yes ________ No X
----- ----___X___
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
Class of October 31, 2003May 10, 2004
- ---------------------------------------------- ------------------------------------------------------------------------ ---------------------
Common Stock, par value $.0024 per share 10,470,16110,555,661
1
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003MARCH 31, 2004
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2003March 31, 2004 and December 31, 2002 ----------------------------------2003 3
Consolidated Statements of OperationsIncome
Three and nine months ended September 30,March 31, 2004 and 2003 and 2002 ---------------------------------- 4
Consolidated Statements of Cash Flows
NineThree months ended September 30,March 31, 2004 and 2003 and 2002 ---------------------------------- 5
Consolidated Statements of Stockholders' Equity
NineThree months ended September 30,March 31, 2004 and 2003 and 2002 ---------------------------------- 6
Notes to Consolidated Financial Statements ---------------------------------- 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ---------------------------------- 1110
Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------- 18. 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 4. Controls and Procedures ---------------------------------- 185. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K ---------------------------------- 1816
SIGNATURES ---------------------------------- 1916
2
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBERMarch 31, December 31,
2004 2003
----------- -------------
(unaudited)
2003 2002
------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 188,1991,678,607 $ 101,557
Cash restricted for payment on revolving credit facility 510,155 553,8391,728,344
Accounts receivable-trade, net of allowance for doubtful accounts
of $45,000$63,000 and $78,000,$31,000 in 2004 and 2003, respectively 2,329,505 1,938,6983,055,545 1,828,738
Inventory 11,621,127 12,695,34411,392,312 11,079,893
Prepaid income taxes 52,707 55,644- 206,023
Deferred income taxes 148,111 159,090161,674 134,312
Other current assets 709,270 672,117
---------------1,054,036 702,236
------------ --------------
Total current assets 15,559,074 16,176,289
---------------17,342,174 15,679,546
------------ --------------
PROPERTY AND EQUIPMENT, at cost 5,517,844 5,321,749
Less accumulated5,689,106 5,574,992
Less-accumulated depreciation and amortization (3,547,038) (3,301,898)
---------------(3,784,460) (3,669,099)
------------ --------------
Property and equipment, net 1,970,806 2,019,8511,904,646 1,905,893
GOODWILL, net of accumulated amortization of $753,000$757,000 and
$734,000$758,000 in 2004 and 2003, and 2002, respectively 700,262 686,484731,094 704,235
OTHER INTANGIBLES, net of accumulated amortization of
$151,000$178,000 and $113,000$164,000, in 2004 and 2003, and 2002, respectively 445,289 483,507439,493 432,549
OTHER ASSETS 331,776 309,471
---------------assets 322,107 336,183
------------ --------------
$20,739,514 $ 19,007,207 $ 19,675,602
===============19,058,406
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,432,2912,355,092 $ 1,594,9091,545,079
Accrued expenses and other liabilities 964,989 2,503,3311,113,237 1,000,427
Income taxes payable 229,631 -
Notes payable and current maturities of long-term debt 2,671,929 4,218,968
---------------- 1,134
------------ --------------
Total current liabilities 5,069,209 8,317,208
---------------3,697,960 2,546,640
------------ --------------
DEFERRED INCOME TAXES 234,605 186,076216,877 209,289
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities - 2,2561,267,984 1,792,984
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,00020,000,000 shares authorized,
none issued or outstanding - -
Common stock, $0.0024 par value; 25,000,000 shares authorized, 10,470,46110,525,661 and
10,149,96110,487,961 shares issued 25,129 24,360and outstanding at 2004 and 2003, respectively 25,261 25,171
Paid-in capital 4,488,819 4,163,9014,755,208 4,673,158
Retained earnings 9,219,247 7,064,34510,775,685 9,804,719
Less: notesNotes receivable - secured by common stock (15,000) (20,000) (44,003)
Accumulated other comprehensive loss (9,802) (38,541)
---------------income 15,539 26,445
------------ --------------
Total stockholders' equity 13,703,393 11,170,062
---------------15,556,693 14,509,493
------------ --------------
$20,739,514 $ 19,007,207 $ 19,675,602
===============19,058,406
============ ==============
The accompanying notes are an integral part of these financial statements.
3
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2004 AND 2003 AND 2002
THREE MONTHS NINE MONTHS
---------------------------- ---------------------------2004 2003
----------- ------------
2003 2002 2003 2002
-------------- ------------- ------------ ------------
NET SALES $ 10,119,070 $ 9,484,730 $31,139,830 $ 29,740,717$12,180,877 $10,560,085
COST OF SALES 4,529,258 4,396,332 14,183,460 13,848,098
-------------- ------------- ------------5,455,964 4,914,581
----------- ------------
Gross profit 5,589,812 5,088,398 16,956,370 15,892,6196,724,913 5,645,504
OPERATING EXPENSES 4,672,820 4,246,873 13,769,241 12,646,486
-------------- ------------- ------------5,277,778 4,529,832
----------- ------------
INCOME FROM OPERATIONS 916,992 841,525 3,187,129 3,246,1331,447,135 1,115,672
OTHER INCOME (EXPENSE):EXPENSE:
Interest expense (40,735) (54,108) (174,555) (191,419)13,638 63,352
Other, net (6,089) (18,578) 68,433 (45,199)
-------------- ------------- ------------1,737 (30,818)
----------- ------------
Total other income (expense) (46,824) (72,686) (106,122) (236,618)
-------------- ------------- ------------expense 15,375 32,534
----------- ------------
INCOME BEFORE INCOME TAXES and CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE. 870,168 768,839 3,081,007 3,009,5151,431,760 1,083,138
PROVISION FOR INCOME TAXES 268,488 234,747 926,105 924,071
-------------- ------------- ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 601,680 534,092 2,154,902 $ 2,085,444
CUMULATIVE EFFECT OF CHANGE IN ACCTG PRINCIPLE, net of income taxes - - - (4,008,831)
-------------- ------------- ------------460,794 308,620
----------- ------------
NET INCOME (LOSS) $ 601,680970,966 $ 534,092 $ 2,154,902 $(1,923,387)
============== =============774,518
=========== ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $0.06 $0.05 $0.21 $ 0.21
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET. . . . . - - - (0.37)
----- ----- ----- -------
NET INCOME (LOSS) PER COMMON SHARE-BASIC . . . . . . . . . . . . $0.06 $0.05 $0.21 $(0.19)
===== ===== ===== =======
NET INCOME (LOSS) PER COMMON SHARE - DILUTED:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $0.06 $0.05 $0.20SHARE - BASIC $ 0.19
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET. . . . . - - - (0.37)
----- ----- ----- -------0.09 $ 0.08
=========== ============
NET INCOME (LOSS) PER COMMON SHARE-DILUTED. . . . . . . . . . . . $0.06 $0.05 $0.20 $(0.18)
===== ===== ===== =======SHARE - DILUTED $ 0.09 $ 0.07
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 10,506,995 10,177,433
Diluted 11,011,122 10,793,464
The accompanying notes are an integral part of these financial statements.
4
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2004 AND 2003 AND 2002
2004 2003
2002----------- ------------
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,154,902 $(1,923,387)970,966 $ 774,518
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities-
Depreciation & amortization 397,959 370,234129,418 125,031
Loss on disposal of assets 9,372 - Amortization of deferred financing costs - 37,0389,371
Deferred income taxes 59,508 (42,711)(19,774) 24,479
Other 14,960 (3,116)
Cumulative effect of change in accounting principle - 4,008,831(9,766) 10,609
Net changes in assets and liabilities:
Accounts receivable-trade, net (390,808) (102,459)(1,226,807) (829,103)
Inventory 1,074,217 (1,222,308)(267,966) 22,759
Income taxes 2,936 (94,697)435,654 187,386
Other current assets (37,153) (343,101)(351,800) (352,038)
Accounts payable (162,618) 321,886810,013 (90,543)
Accrued expenses and other liabilities (1,538,342) 244,926
------------112,810 (1,507,392)
----------- ------------
Total adjustments (569,969) 3,174,523
------------(388,218) (2,399,441)
----------- ------------
Net cash provided by (used in) operating activities 1,584,933 1,251,136
------------582,748 (1,624,923)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (326,284) (429,250)(82,115) (93,972)
Payments in connection with businesses acquired (125,452) - (227,747)
Proceeds from sale of assets - 6,217 -
Increase in other assets (22,305) (415,809)
------------14,076 (17,197)
----------- ------------
Net cash used in investing activities (342,372) (1,072,806)
------------(193,491) (104,952)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (1,544,417) (601,043)(525,000) 1,597,065
Payments on notes payable and long-term debt (4,878) (25,905)(1,134) (1,600)
Decrease in cash restricted for payment on revolving credit facility 43,685 5,092- 90,186
Payments received on notes secured by common stock 24,003 26,2865,000 -
Proceeds from issuance of common stock 325,688 120,300
------------82,140 47,655
----------- ------------
Net cash used inprovided by (used in) financing activities (1,155,919) (475,270)
------------(438,994) 1,733,306
----------- ------------
NET CHANGE IN CASH 86,642 (296,940)(49,737) 3,431
CASH, beginning of period 1,728,344 101,557
409,040
----------------------- ------------
CASH, end of period $ 188,1991,678,607 $ 112,100
============104,988
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 178,55816,205 $ 157,91659,930
Income taxes paid during the period, net of (refunds) 819,602 1,076,31344,914 41,620
The accompanying notes are an integral part of these financial statements.
5
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2004 AND 2003 AND 2002
Common Stock
---------------------------------
Number Par Paid-in Retained
of shares value capital Earnings
-------------- ----------------- -------------- -----------NUMBER OF SHARES PAR VALUE PAID-IN CAPITAL RETAINED EARNINGS
BALANCE, December 30, 2001 9,991,16131, 2002 10,149,961 $ 23,97924,360 $ 4,030,5084,163,901 $ 8,478,1877,064,345
Payments on notes receivable -
securedreceivable-secured by common stock - - - -
Shares issued - warrants and
employee stock options exercised 73,000 175 76,32062,500 150 47,506 -
Net lossincome - - - (2,457,479)774,518
Translation adjustment - - - -
------------------------------ ---------- ---------------- -----------------
-------------- -----------
BALANCE, September 30, 2002 10,064,161March 31, 2003 10,212,461 $ 24,15424,510 $ 4,106,8284,211,407 $ 6,020,708
==============7,838,863
================ ========== ================ ================= ============== ===========
Notes Accumulated
receivable other
- secured by comprehensive Comprehensive
common stock loss Total Income (Loss)
-------------- --------------- --------------- -------------
BALANCE, December 30, 200131, 2003 10,487,961 $ (71,939)25,171 $ (37,064)4,673,158 $ 12,423,6719,804,719
Payments on notes receivable -
secured by common stock 24,636 - 24,636
Shares issued - warrants and
employee stock options exercised - - 76,495
Net loss - - (2,457,479) $ (2,457,479)
Translation adjustment - 3,197 3,197 3,197
-------------- --------------- ---------------
BALANCE, September 30, 2002 $ (47,303) $ (33,867) $ 10,070,520
============== =============== ===============
-------------
Comprehensive loss for the nine months ended September 30, 2002 $(2,454,282)
=============
Common Stock
---------------------------------
Number Par Paid-in Retained
of shares value capital Earnings
-------------- ----------------- ------------------ -----------
BALANCE, December 31, 2002 10,149,961 $24,360 $4,163,901 $ 7,064,345
Payments on notes receivable -
securedreceivable-secured by common stock - - - -
Shares issued - warrants and
employee stock options exercised 320,500 769 198,537 -
Warrants to acquire 100,000
shares of common stock issued - - 126,38137,700 90 82,050 -
Net income - - - 2,154,902970,966
Translation adjustment - - - -
------------------------------ ---------- ---------------- -----------------
------------------BALANCE, March 31, 2004 10,525,661 $ 25,261 $ 4,755,208 $ 10,775,685
================ ========== ================ =================
NOTES RECEIVABLE - ACCUMULATED OTHER COMPREHENSIVE
SECURED BY COMMON STOCK CUMULATIVE INCOME (LOSS) TOTAL INCOME (LOSS)
----------------------- ------------------------ -----------
BALANCE, September 30, 2003 10,470,461 $25,129 $4,488,819 $ 9,219,247
============== ================= ================== ===========
Notes Accumulated
receivable other
- secured by comprehensive Comprehensive
common stock loss Total Income (Loss)
-------------- --------------- --------------- -------------
BALANCE, December 31, 2002 $ (44,003) $ (38,541) $ 11,170,062$11,170,062
Payments on notes receivable -
securedreceivable-secured by common stock 24,003 - 24,003- -
Shares issued - warrants and
employee stock options exercised - - 199,306
Warrants to acquire 100,000
shares of common stock issued - - 126,38147,656
Net income - - 2,154,902774,518 $ 2,154,902774,518
Translation adjustment - 28,739 28,739 28,739
-------------- --------------- ---------------10,609 10,609 10,609
----------------------- ------------------------ ----------- -------------
BALANCE, September 30,March 31, 2003 $ (44,003) $ (27,932) $12,002,845
======================= ======================== ===========
Comprehensive income for the three months ended March 31, 2003 $ 785,127
=============
BALANCE, December 31, 2003 $ (20,000) $ (9,802)26,445 $14,509,493
Payments on notes receivable-secured by common stock 5,000 - 5,000
Shares issued - stock options exercised - - 82,140
Net income - - 970,966 $ 13,703,393
============== =============== ===============
------------970,966
Translation adjustment - (10,906) (10,906) (10,906)
----------------------- ------------------------ ----------- -------------
BALANCE, March 31, 2004 $ (15,000) $ 15,539 $15,556,693
======================= ======================== ===========
Comprehensive income for the ninethree months ended September 30, 2003March 31, 2004 $ 2,183,641
============960,060
=============
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 AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying consolidated financial statements
for The Leather Factory, Inc. and its consolidated subsidiaries ("TLF")(TLF) contain
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly its financial position as of September 30, 2003March 31, 2004 and December 31,
2002,2003, and its results of operations and cash flows for the three and nine monththree-month periods
ended September 30, 2003March 31, 2004 and 2002.
Certain reclassifications have been made to prior year amounts in order to
conform to the current year presentation.2003. Operating results for the three and
nine month periodsthree-month period
ended September 30, 2003March 31, 2004 are not necessarily indicative of the results that may be
expected for the year endedending December 31, 2003.2004. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in our Annual Report on Form 10-K for
the year ended December 31, 2002.2003.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In December 2002,January 2003, the Financial Accounting Standards Board ("FASB")(FASB) issued StatementFIN 46,
"Consolidation of FinancialVariable Interest Entities (VIE's)," an Interpretation of
Accounting Standards ("SFAS")Research Bulletin No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement 123, ("SFAS 148"). SFAS 148 amends SFAS No.123, Accounting for
Stock-Based Compensation, ("SFAS 123"),51. FIN 46 requires certain variable interest
entities (VIEs) to provide alternative transition
methods for an entity's voluntary change in their accounting for stock-based
compensation frombe consolidated by the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB No. 25")
and related interpretations to the fair value method under SFAS 123. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require disclosureprimary beneficiary of the pro forma effectsentity if
the equity investors in the entity do not have the characteristics of usinga
controlling financial interest or do not have sufficient equity at risk for the
fair value methodentity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN 46R (revised
December 2003) which delayed the application of accountingFIN 46 to TLF until the interim
period ended March 31, 2004, and provides additional technical clarifications to
implementation issues. The application of this interpretation did not have a
material impact on the Company's consolidated financial statements for stock-based compensation in interim as well as annual financial
statements. The Company currently accounts for its stock-based compensation
using the
intrinsic value method as prescribed by APB No. 25. The disclosure
provisions of SFAS No. 148 were adopted on December 31, 2002 and are discussed
in Note 2.quarter.
Revenue Recognition
The Company recognizes revenue for over-the-counter sales as transactions occur
and other sales upon shipment of product provided that there are no significant
post-delivery obligations to the customer and collection is reasonably assured,
which generally occurs upon shipment.is the case. Net sales represent gross sales less negotiated
price allowances, product returns, and allowances for defective merchandise.
Inventory
Inventory is stated at the lower of cost or market and is accounted for on the
"first in, first out" method. In addition, the value of inventory is
periodically reduced for slow-moving or obsolete inventory based on management's
review of items on hand compared to their estimated future demand. The
components of inventory consist of the following as of:following:
AS OF
SEPTEMBER 30,MARCH 31, 2004 DECEMBER 31, 2003
2002
-------------- ------------------------------
Finished goods held for sale $ 10,457,89310,323,322 $ 11,693,8689,902,140
Raw materials and work in process 1,163,234 1,001,4761,068,990 1,177,753
-------------- ------------------------------
$ 11,621,12711,392,312 $ 12,695,34411,079,893
============== ==============================
7
Goodwill and Other Intangibles
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," prescribes a two-phase process for impairment testing
of goodwill, which is performed once annually, absent indicators of impairment.impairment
during the interim. The first phase screens for impairment, while the second
phase (if necessary) measures the impairment. As a result of SFAS 142, we incurred an impairment
write-down in the first quarter of 2002 of our investment in our subsidiary,
Roberts, Cushman &The Company Inc., in the amount of $4.0 million. The remaining
goodwill on our balance sheet is analyzed by management periodically to
determine the appropriateness of its carrying value. We havehas elected to
perform ourthe annual analysis during the fourth calendar quarter of each year. As
of December 31, 2002,2003, management determined that the present value of the
discounted estimated future cash flows of the stores associated with the
goodwill is sufficient to support their respective goodwill balances. No
indicators of impairment were identified during the first nine monthsquarter of 2003.2004.
Other intangibles consist of the following:
AS OF SEPTEMBER 30, 2003MARCH 31, 2004 AS OF DECEMBER 31, 2002
-------------------------------------2003
-------------------------------------- ---------------------------------
ACCUMULATED ACCUMULATED
----------- -------------- -------- -------- ------------- --------
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
----------- -------------- ------------ -------- -------- ------------ --------
Trademarks, Copyrights $ 544,369 $ 129,247 $415,122147,393 $396,976 $544,369 $ 102,029 $442,340138,320 $406,049
Non-Compete Agreements 73,000 30,483 42,517 52,000 21,833 30,167 52,000 10,833 41,167
-----------25,500 26,500
-------------- ------------ -------- -------- ------------------------- --------
$ 596,369617,369 $ 151,080 $445,289177,876 $439,493 $596,369 $ 112,862 $483,507
===========163,820 $432,549
============== ============ ======== ======== ========================= ========
The Company recorded amortization expense of $39,161$14,056 during the first nine
monthsquarter of
20032004 compared to $35,401$12,740 during the first nine monthsquarter of 2002.2003. The Company has no
intangible assets not subject to amortization under SFAS 142. Based on the
current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the succeeding 5 years areis as follows:
ROBERTS,
LEATHER FACTORY.FACTORY TANDY LEATHER CUSHMAN TOTAL
---------------- -------------- -------- -------
20032004 $ 5,9185,954 $ 45,00454,004 $ 0 $50,922
2004 5,918 45,004$59,958
2005 5,954 38,004 0 50,922
2005 5,918 35,00443,958
2006 5,954 37,337 0 40,922
2006 5,918 34,33743,291
2007 5,954 36,504 0 40,255
2007 5,918 33,50442,458
2008 5,954 33,337 0 39,42239,291
2. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to its directors and employees
using the intrinsic value method prescribed by APB No. 25 which requires
compensation expense be recognized for stock options when the quoted market
price of the Company's common stock on the date of grant exceeds the option's
exercise price. No compensation cost has been reflected in net income for the
granting of director and employee stock options as all options granted had an
exercise price equal to the quoted market price of the Company's common stock on
the date the options were granted.
Had compensation cost for the Company's stock options been determined consistent
with the SFAS 123 fair value approach, the Company's net income and net income
per common share for the three and nine
months ended September 30,March 31, 2004 and 2003, and 2002, on a pro
forma basis, would have been as follows:
THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,2004 2003
2002
------------------- -------------------------- --------
Net income, (loss), as reported $ 601,680 $ 534,092$970,966 $774,518
Add: Stock-based compensation expense included in reported net income (loss) - -
Deduct: Stock-based compensation expense determined under fair value method 24,546 25,905
------------------- ------------------27,145 20,266
-------- --------
Net income, (loss), pro forma $ 577,134 $ 508,187$943,821 $754,252
======== ========
Net income (loss) per share:
Basic - as reported $ 0.060.09 $ 0.050.08
Basic - pro forma $ 0.060.09 $ 0.050.07
Diluted - as reported $ 0.060.09 $ 0.05
Diluted - pro forma 0.05 $ 0.05
NINE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------------- -------------------
Net income (loss), as reported $ 2,154,902 $ (1,923,387)
Add: Stock-based compensation expense included in reported net income (loss) - -
Deduct: Stock-based compensation expense determined under fair value method 73,639 77,714
------------------- ------------------
Net income (loss), pro forma $ 2,081,263 $ (2,001,101)
Net income (loss) per share:
Basic - as reported $ 0.21 $ (0.19)
Basic - pro forma $ 0.20 $ (0.20)
Diluted - as reported $ 0.20 $ (0.18)0.07
Diluted - pro forma $ 0.190.09 $ (0.19)0.07
8
The fair values of stock options granted were estimated on the dates of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 3.125% for 2003 and 3.00% for 2002;2004 and 2003,
respectively; dividend yields of 0% for both periods; volatility factors of .706.696
for 20032004 and ..736.725 for 2002;2003; and an expected life of the valued options of 45
years.
8
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
Three Months Ended March 31,
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------2004 2003
2002 2003 2002
-------------- ------------- ----------- ------------
Numerator:-----------
Net income (loss) $ 601,680970,966 $ 534,092 $ 2,154,902 $(1,923,387)
-------------- -------------774,518
----------- -----------------------
Numerator for basic and diluted earnings per share 601,680 534,092 2,154,902 (1,923,387)
Denominator:
Weighted-average970,966 774,518
Denominator for basic earnings per share -
weighted-average shares outstanding-basic 10,394,374 10,064,249 10,269,415 10,035,89010,506,995 10,177,433
Effect of dilutive securities:
Stock options 422,000 448,836 425,818 483,760462,562 442,884
Warrants 86,420 210,318 145,531 240,027
-------------- -------------41,565 173,147
----------- -----------------------
Dilutive potential common shares 508,420 659,154 571,349 723,787
-------------- -------------504,127 616,031
----------- -----------------------
Denominator for diluted earnings per share-share -
weighted-average shares 10,902,794 10,723,403 10,840,764 10,759,677
============== =============11,011,122 10,793,464
=========== =====================
Basic earnings (loss) per share $ 0.060.09 $ 0.05 $ 0.21 $ (0.19)
============== =============0.08
=========== =====================
Diluted earnings (loss) per share $ 0.060.09 $ 0.05 $ 0.20 $ (0.18)
============== =============0.07
=========== =====================
The net effect of converting stock options and warrants to purchase 924,700825,200 and
1,081,000747,200 shares of common stock at optionexercise prices less than the average market
prices has been included in the computations of diluted EPS for the threequarter
ended March 31, 2004 and nine months
ended September 30, 2003, and 2002, respectively.
4. SEGMENT INFORMATION
The Company identifies its segments based on the activities of three distinct
businesses:
a. The Leather Factory,A. THE LEATHER FACTORY, which sells primarily to wholesale customers through
a chain of 30 outlet stores located in the United States and Canada;
b. Tandy Leather Company,B. TANDY LEATHER COMPANY, which sells primarily to retail customers through
a chain of retail stores located in the United States; and
c. Roberts, CushmanC. ROBERTS, CUSHMAN & Company,COMPANY, manufacturer of decorative hat trims sold
directly to hat manufacturers and distributors.
The Company's reportable operating segments have been determined as separately
identifiable business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes.
9
ROBERTS,
THE LEATHER FACTORY TANDY LEATHER COMPANY ROBERTS, CUSHMAN & CO TOTAL
----------------- -------------- ---------- -----------
FOR THE QUARTER ENDED SEPTEMBER 30,MARCH 31, 2004
Net sales $ 8,443,091 $ 3,166,738 $ 571,048 $12,180,877
Gross profit 4,575,838 1,926,649 222,426 6,724,913
Operating earnings 1,078,409 301,567 67,159 1,447,135
Interest expense (13,638) - - (13,638)
Other, net (1,803) 66 - (1,737)
Income before income taxes 1,062,968 301,633 67,159 1,431,760
Depreciation and amortization 102,028 25,153 2,237 129,418
Fixed asset additions 39,737 38,043 4,335 82,115
Total assets $ 16,731,246 $ 3,079,605 $ 928,663 $20,739,514
FOR THE QUARTER ENDED MARCH 31, 2003
Net sales $ 7,372,1598,201,258 $ 2,334,1271,864,539 $ 412,784 $10,119,070494,288 $10,560,085
Gross profit 3,996,866 1,475,312 117,634 5,589,8124,297,502 1,181,332 166,670 5,645,504
Operating earnings 784,322 117,514 15,156 916,992923,637 146,993 45,042 1,115,672
Interest expense (40,735)(63,352) - - (40,735)(63,352)
Other, net (6,315) 22631,290 (472) - (6,089)
------------30,818
Income before income taxes 737,272 117,740 15,156 870,168
------------891,575 146,521 45,042 1,083,138
Depreciation and amortization 99,489 20,978 2,365 122,832106,367 15,839 2,825 125,031
Fixed asset additions 33,230 21,300 1,377 55,90739,497 54,475 - 93,972
Total assets $ 15,300,40717,364,513 $ 2,802,2182,447,611 $ 904,582 $19,007,207
----------------- -------------- ---------- -----------
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Net sales 7,244,610 1,727,925 512,195 $ 9,484,730
Gross profit 3,848,893 1,026,681 212,824 5,088,398
Operating earnings 631,125 76,231 134,169 841,525
Interest expense (53,995) (113) - (54,108)
Other, net (18,578) - - (18,578)
------------
Income before income taxes 558,552 76,118 134,169 768,839
------------
Depreciation and amortization 94,369 29,612 3,399 127,380
Fixed asset additions 139,454 55,050 1,936 196,440
Total assets $ 14,528,938 $ 2,241,064 $ 921,378 $17,691,380
----------------- -------------- ---------- -----------
9
ROBERTS,
LEATHER FACTORY TANDY LEATHER CUSHMAN TOTAL
----------------- -------------- ---------- -----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Net sales $ 23,375,158 $ 6,312,145 $1,452,527 $31,139,830
Gross profit 12,477,180 3,981,715 497,475 16,956,370
Operating earnings 2,626,394 430,737 129,998 3,187,129
Interest expense (174,555) - - (174,555)
Other, net 68,064 369 - 68,433
------------
Income before income taxes 2,519,903 431,106 129,998 3,081,007
------------
Depreciation and amortization 335,184 55,064 7,711 397,959
Fixed asset additions 201,862 122,189 2,233 326,284
Total assets $ 15,300,407 $ 2,802,218 $ 904,582 $19,007,207
----------------- -------------- ---------- -----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Net sales $ 22,769,549 $ 5,420,108 $1,551,060 $29,740,717
Gross profit 12,151,507 3,179,498 561,614 15,892,619
Operating earnings 2,625,651 315,268 305,214 3,246,133
Interest expense (190,903) (516) - (191,419)
Other, net (44,566) (633) - (45,199)
------------
Income before income taxes 2,390,182 314,119 305,214 3,009,515
------------
Depreciation and amortization 279,033 81,256 9,945 370,234
Fixed asset additions 267,823 157,953 3,474 429,250
Total assets $ 14,528,938 $ 2,241,064 $ 921,378 $17,691,380
----------------- -------------- ---------- -----------845,938 $20,658,062
Net sales for geographic areas were as follows:
THREE MONTHS ENDED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2004 MARCH 31, 2003
2002 2003 2002
--------------- -------------- ----------- -------------------------
United States $ 9,456,44011,285,857 $ 8,941,654 $29,038,861 $28,052,7749,870,636
All other countries 662,630 543,076 2,100,969 1,687,943
---------------895,020 689,449
-------------- ----------- -------------------------
$ 10,119,07012,180,877 $ 9,484,730 $31,139,830 $29,740,71710,560,085
=============== ============== =========== ==========================
Geographic sales information is based on the location of the customer. Net
sales from noNo single
foreign country wasaccounted for any material toamounts of the Company's consolidated
net sales for the three and nine monththree-month periods ended September 30, 2003March 31, 2004 and 2002.2003. The Company
does not have any significant long-lived assets outside of the United States.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The Leather Factory, Inc. ("TLF" or the "Company") is a Delaware corporation
whose common stock trades on the American Stock Exchange under the symbol "TLF".
The Company is managed on a business entity basis, with those businesses being
The Leather Factory ("Leather Factory"), Tandy Leather Company ("Tandy" or
"Tandy Leather"), and Roberts, Cushman & Company, Inc. ("Cushman"). See Note 4
to the Consolidated Financial Statements for additional information concerning
the Company's segments, as well as its foreign operations.
10
Leather Factory, founded in 1980 by Wray Thompson and Ron Morgan, distributes
leather and related products, including leatherworking tools, buckles and
adornments for belts, leather dyes and finishes, saddle and tack hardware, and
do-it-yourself kits. The products are sold primarily through 30 company-owned
outlets located throughout the United States and Canada.
Tandy Leather is the oldest and best-known supplier of leather and related
supplies used in the leathercraft industry. From its founding in 1919, Tandy
has been the primary leathercraft resource world wide.worldwide. Products include quality
tools, leather, accessories, kits and teaching materials. In early 2002, we
initiated a plan to expand Tandy Leather by opening retail stores. As of October 31, 2003,April
15, 2004, we have opened 2630 Tandy Leather retail stores located throughout the
United States.
Cushman, whose origins date back to the mid-1800's, custom designs and
manufactures a product line of decorative hat trims for headwear manufacturers.
CRITICAL ACCOUNTING POLICIES
A description of the Company's critical accounting policies appears in "Item 2.
Management's Discussions and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.2003.
RESULTS OF OPERATIONS
- -----------------------
The following tables present selected financial data of each of the Company's
three segments for the quarters ended March 31, 2004 and nine months ended September 30, 2003 and
2002:2003:
QUARTER ENDED QUARTER ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------------------- -----------------------
OPERATING OPERATING
QUARTER ENDED SEPTEMBER 30, 2003 QUARTER ENDED SEPTEMBER 30, 2002
-------------------------------- --------------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
--------------- ------------- --------------- ------------------------- ------------ ----------- ----------
Leather Factory $ 7,372,1598,443,091 $ 784,3221,078,409 $ 7,244,6108,201,258 $ 631,125923,637
Tandy 2,334,127 117,514 1,727,925 76,231Leather 3,166,738 301,567 1,864,539 146,993
Roberts, Cushman 412,784 15,156 512,195 134,169
--------------- ------------- --------------- -------------571,048 67,160 494,288 45,042
------------ ------------ ----------- ----------
Total Operations $ 10,119,07012,180,877 $ 916,992 $ 9,484,730 $ 841,525
=============== ============= =============== =============1,447,135 $10,560,085 $1,115,672
============ ============ =========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------ ------------------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
--------------- ------------- --------------- -------------
Leather Factory $ 23,375,158 $ 784,322 $ 7,244,610 $ 631,125
Tandy 6,312,145 117,514 1,727,925 76,231
Cushman 1,452,527 15,156 512,195 134,169
---------------- ------------- --------------- -------------
Total Operations $ 31,139,830 $ 916,992 $ 9,484,730 $ 841,525
================ ============= =============== =============
11
Consolidated net sales for the quarter ended September 30, 2003March 31, 2004 increased $634,000,$1.6
million, or 6.7%15.4%, compared to the same period in 2002.2003. Leather Factory's salesFactory
contributed $242,000 to the increase, was $127,000; Tandy contributed $606,000 while$1.3 million and Cushman
recorded a sales reductionincrease of $99,000.$77,000. Operating income on a consolidated basis
for the quarter ended September 30, 2003 increased 9.0%March 31, 2004 was up 29.7% or $75,000$331,000 over the thirdfirst
quarter of 2002.
Total consolidated net sales for the nine months ended September 30, 2003
increased $1.4 million, or 4.7%, compared to the same period in 2002. Leather
Factory contributed $606,000 of the sales gain while Tandy added $892,000.
Cushman's 2003 sales were down $98,000 compared to a year ago. Operating income
on a consolidated basis for the nine months ended September 30, 2003 was down
1.8% or $59,000 over last year.2003.
The following table shows in comparative form our consolidated net income (loss)
for
the thirdfirst quarters of 20032004 and 2002 and the first nine months of the two
years, both before and after the cumulative effect of a previously reporting
change in accounting principle in 2002:2003:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003 2002 % CHANGE
Income before cumulative effect of change in accounting principle $601,680 $534,092 12.6%
Cumulative effect of change in accounting principle* - - ---------- --------- -------- -------- ---------
Net income (loss) $601,680 $534,092 12.6%
======== ======== =========$ 970,966 $ 774,518 25.4%
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002 % CHANGE
Income before cumulative effect of change in accounting principle $2,154,902 $ 2,085,444 3.3%
Cumulative effect of change in accounting principle* - (4,008,831) -
---------- ------------ ---------
Net income (loss) $2,154,902 $(1,923,387) N/A
========== ============ =========
_____________
*The amount shown forWhile our Leather Factory operation recorded 69.3% of our sales in the quarter,
the cumulative effect of change in accounting principle is net of income taxes.
The relatively large increase in income before the effects of the accounting
change for the third quarter (12.6%) as compared to this measure for the
comparable nine-month periods of 2002 (3.3%) is attributable to continued growth in sales fromand expansion of the Tandy Leather stores.
12retail operation is
responsible for the majority of the improvement in our consolidated net income.
11
LEATHER FACTORY OPERATIONS
Net sales from Leather Factory's 30 warehouse distributionwholesale centers increased 1.76%2.95%, or
$127,000,$242,000, for the thirdfirst quarter of 2003.2004.
The following table presents TLF's sales mix by customer categories for the
quarters ended September 30, 2003March 31, 2004 and 2002:2003:
QUARTER ENDED
QUARTER ENDED
CUSTOMER GROUP 09/30/3/31/04 3/31/03 09/30/02
- ------------------------------------------------------------------------------------- -------------- ---------------- --------
RETAIL (end users, consumers, individuals) 22% 18%23% 23%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 7 77% 8%
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 45 4545% 42%
NATIONAL ACCOUNTS 20 2319% 21%
MANUFACTURERS 6 7
-------------- ---------6% 6%
------- --------
100% 100%
============== ================ ========
We have re-categorizedOur biggest sales gains were in our WHOLESALE and MANUFACTURER customer groups for the purpose of reporting our
sales mix as we believe this revised presentation is more meaningful to the
reader. The following table provides the sales mix in the modified categories
for the first two quarters of 2003 and 2002 for comparison purposes:
QUARTER ENDED QUARTER ENDED
CUSTOMER GROUP 03/31/03 03/31/02 06/30/03 06/30/02
- ------------------- -------------- -------------- --------- ---------
RETAIL 23% 21% 19% 18%
INSTITUTION 8 9 10 10
WHOLESALE 42 43 39 45
NATIONAL ACCOUNTS 21 23 24 21
MANUFACTURERS 6 4 8 6
-------------- -------------- --------- ---------
100% 100% 100% 100%
============== ============== ========= =========
The majority of Leather Factory's sales gain was with our retail customers. The
other customer groups achieved very modest gains, with the exception of our
national accounts. Several of the customers in this group are re-setting their
programs with us during the last half of this year. This is a normal part of
doing business with these customers and occurs every two to four years,
depending on the agreements negotiated with the customer. Simply stated, these
customers determine what products they intend to purchase from us for the next
several years and what products they intend to discontinue carrying in their
product lines. Although they often continue to order these "to-be-discontinued"
products until the new program is in place (which is to occur in January 2004),
we intentionally begin decreasing our inventory of these items in order to
eliminate these products in their entirety by the end of the year. As a result,
our sales to these customers decrease during this time as we intentionally do
not have all of the product they are attempting to purchase as they wind-down
the year.groups.
We believe that in both cases, new advertising programs begun in the second half
of 2003 contributed to these intentional reductions in product availability
andgains. Sales to our small business customers (part
of our WHOLESALE group) were up approximately 30% over sales to that same
customer group a year ago. Sales to small manufacturers were up 11% from last
year. Although the percent of national account sales decreased in the first
quarter of 2004 compared to that same quarter in 2003, we renewed two of our
large accounts during the first quarter. We anticipate that these customers are temporary andrenewals will
not have a long-term effect
on Leather Factory's total sales.produce increased sales for our NATIONAL ACCOUNT customer group later in 2004.
Operating income for Leather Factory increased $153,000$155,000 for the current quarter
compared to 2002.2003, an improvement of 16.7%. Operating expenses as a percentage of
sales in the third
quarterwere 41.4%, slightly higher ($120,000) than our target of 2003 were 43.58%, down from 44.4% a year ago.40% of sales.
Advertising and marketing costs continueexpenses were up slightly this quarter due to
be a significant expense; however, we believe these
efforts are pivotalexpanding direct mail programs in an attempt to increase market awareness and
target new customer sub-groups. We also increased our bad debt reserve by
$32,000 to $63,000 at the successend of the operation. We have been successful in
reducing discretionary expenses in some areas suchfirst quarter, as temporary personnel,
property maintenance, and miscellaneous supplies, and will continue to look for
ways to cut administrative costs without jeopardizing operations.
13
a result of a few
customer accounts whose collectability appears questionable.
TANDY LEATHER OPERATIONS
The Tandy Leather retail store chain has grown from 19 stores at March 31, 2003
to 29 a year later. Net sales for Tandy which consisted of twenty-six retail stores as of September
30, 2003,Leather were up 35.1%approximately 70% for
the thirdfirst quarter of 20032004 over the same quarter last year, which consisted of ten retail stores, as follows:year.
QTR ENDED QTR ENDED $INCR % INCR
QTR ENDED QTR ENDED $ INCR % INCR
09/30/3/31/04 3/31/03 09/30/02 (DECR) (DECR)
---------- ---------- ----------- ----------------- ---------
Same (existing) store sales (10 stores) $1,133,337 $1,121,736$1,832,591 $1,806,293 $ 11,601 1.03%26,298 1.46%
New store sales (16 stores) 1,198,2461,334,147 57,187 1,276,960 N/A
Order fulfillment house - 1,198,246closed - Centralized mail order facility (closed 09/01/02) 2,544 606,189 (603,645) (99.58)1,059 (1,059) (100.00)
---------- ---------- ----------- ----------------- ---------
Total sales $2,334,127 $1,727,925 $ 606,202 35.08%$3,166,738 $1,864,539 $1,302,199 69.84%
========== ========== ========== ================
The ten "same"A store is categorized as "new" if it was operating less than half of the
comparable period in the prior year. In the above table, the sales amount for
"new store sales" for the quarter ended March 31, 2003 represents the sales from
the four stores are those that were opened August 2002 or earlier.in February and March 2003.
Sales in the current quarter were generallysolid - although as the table above indicates,
our existing stores did not produce as strongly as we expected. The results are
uneven, with existing stores reporting sales gains ranging from 4% to 48% for
the quarter. We produced and mailed a sales flyer in line witha new format during the
quarter that failed to produce the sales that we expected. We have gone back to
our internal
expectations.more traditional format for sales flyers, expecting it to produce more
customer interest. The third quarter of the year is generally the weakest quarter
for sales. Average sales per month in theretail stores that have been open forare at least three months through September 30, 2003 was approximately $35,000 which is
still ahead of our internal goal of $30,000 per month per store. The stores
that were opened in 2002old are
averaging monthlyapproximately $38,000 in sales over $38,000 per store.month.
The following table presents Tandy'sTandy Leather's sales mix by customer categories
for the quarters ended September 30, 2003March 31, 2004 and 2002. Tandy's customer groups have been
re-grouped consistent with the categories for Leather Factory discussed above.2003:
QUARTER ENDED
QUARTER ENDED
CUSTOMER GROUP 09/30/3/31/04 3/31/03
09/30/02
- --------------- -------------- ---------------------------------------------------------------------------------------------- ------- -------
RETAIL (end users, consumers, individuals) 74% 72%
62%
INSTITUTION 7 12(prisons, prisoners, hospitals, schools, youth organizations, etc.) 4 4
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 20 2523
NATIONAL ACCOUNTS - -
MANUFACTURERS 2 1
1
-------------- ---------------- -------
100% 100%
============== ================ =======
The following table provides the sales mix in the modified categories for the
first two quarters of 2003 and 2002 for comparison purposes:
QUARTER ENDED QUARTER ENDED
CUSTOMER GROUP 03/31/03 03/31/02 06/30/03 06/30/02
- --------------- -------------- -------------- --------- ---------
RETAIL 72% 61% 67% 57%
INSTITUTION 4 12 10 17
WHOLESALE 23 27 23 26
MANUFACTURERS 1 0 0 0
-------------- -------------- --------- ---------
100% 100% 100% 100%
============== ============== ========= =========
Third quarter operatingOperating income for Tandy increased $41,000 or 54% over operating
income in last year's third quarter. Gross profit margins improved from 59.4%
to 63.2% for the quarter due to the continued increase in retail sales versus
other sales categories. Operating expenses were 58.2%as a percentage of sales in the current
quarter compared to 55.0% in the same quarter last year. The 3.2% increase
aroseincreased from $70,000 of additional expenses. The four new stores opened in August
2003 accounted for $50,000 of the increase, as management's policy is to expense
the stores' set-up and openings costs7.9% in the first
monthquarter of 2003 to 9.5% in the first quarter of 2004. Our gross margin
decreased from 63.4% to 60.8% due to an increase in leather sales at the Tandy
stores during the current quarter. As discussed in previous filings, leather is
our lowest gross margin category. We offset that low margin by the other
products that we sell. Operating expenses as a store is open.
14percentage of sales decreased
from 55.5% to 51.3% due primarily to the increase in leverage obtained as a
result of the significant sales increase.
12
ROBERTS, CUSHMAN OPERATIONS
Net sales for Cushman decreased $99,000increased $77,000 or 15.5% for the thirdfirst quarter of 2003 over the
third quarter of 2002.2004,
and improved its gross profit margin from 34% to 39%. Operating income for
Cushman decreased $119,000. The
decreaseincreased $22,000 or 49.1%. We eliminated one management position in
sales and operating income is the resultoperation at the beginning of the continued demand for
less expensive hats (straw vs. felt) and therefore less expensive hatbands
(ribbon or felt vs. leather). Overall hat sales appear to be down throughout
the industry. Several of Cushman's hat manufacturing customers are on short
work weeks (3 or 4 days as compared2004, which contributed to the usual 5improvement in
operating income.
COSTS AND EXPENSES
Our consolidated gross profit as a percent of net sales increased to 55.2% for
the first quarter of 2004, compared with 53.5% for the same period in 2003.
Operating expenses ($5.3 million) were 43.3% of net sales in the first quarter
of 2004, compared with $4.5 million, or 6 days).
Because Cushman's operation is not material to our company and it does not fit42.9% of net sales in our specialty retail business model on a long-term basis, we are currently
analyzing the proper direction to take with respect to this subsidiary.
OTHER EXPENSESfirst three
months of 2003.
Interest expense of $40,735 in the thirdfirst quarter of 2004 ($14,000) was down 78.5% from the
first quarter of 2003 decreased from $54,108
in($63,000) due to the third quarter of 2002. The decrease was attributable to an decrease in the averageoutstanding debt
balance and the reduction in the interest rate during the
current period as compared to a year ago. The interest rate during 2002 was
4.75%. The interest rate throughout during 2003 has ranged from 4.25% to 4.00%.
The average debt balance for the first nine months of 2003 was $3.4 million
compared to $4.2 million for the first nine months of 2002.balance.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------------------------------
There was a slight decrease (3.4%change (approximately 9%) in our consolidated total assets
from December 31, 20022003 to September 30, 2003. Total assets decreasedMarch 31, 2004, increasing from $19.7$19.0 million at
year-end to $19.0$20.7 million at September 30. The reduction in
inventory of $1.0 million, partially offset by an increase inMarch 31. Our accounts receivable of $400,000, accounted for
the majority of the decrease.increase. Total stockholders' equity increased from $11.2$14.5
million at December 31, 20022003 to $13.7$15.5 million at September 30, 2003. TheMarch 31, 2004. Most of the
increase in equity is attributable to thewas from earnings in the first nine monthsquarter of thethis year. Also, during the first nine
months ofThe Company's
current ratio fell slightly from 6.16 at December 31, 2003 we reduced the outstanding principal balance of our revolving
credit lineto 4.69 at March 31,
2004.
Inventory increased by $1.5 million.
Inventory decreased $1.0 million$312,000 at September 30, 2003March 31, 2004 from year-end 2002.2003. Inventory
turnover decreasedincreased to an annualized rate of 3.414.34 times during the first nine monthsquarter
of 2003, a slowdown2004, from 4.083.47 times for the first nine monthsquarter of 20022003 and 3.653.51 times for all of
2002. The slowdown in turns is still due
primarily to the high inventory balance at the end of 2002 discussed in earlier
reports.2003. We compute our inventory turns as sales divided by average inventory.
Leather Factory stores are holding an average inventory of approximately $90,000
per store whichInventory management is on target with expected levels. Tandy stores are averaging
approximately $50,000a significant factor in our financial position. We
strive to maintain the optimal amount of inventory per store - which is alsothroughout the system in
lineorder to fill customer orders timely without tying up too much working capital.
We are pleased with management's targetour achievement in this area as of $50,000 or less.
Trade accounts receivable was $2.3 million at September 30, 2003, up $390,000
from $1.9 million at year-end 2002, reflecting an overall increase in sales and
the effect of the timing of orders shipped to some of our larger accounts
towards the end of the third quarter
and continue to monitor our inventory levels in order to maximize optimum
availability.
The Company's investment in accounts receivable was $3.1 million at March 31,
2004, up $1.2 million from $1.8 million at year-end 2003. This is a result of
2003an increase in credit sales to our national accounts during the quarter ended
March 31, 2004 as compared to the endthat of the fourth
quarter of 2002. Consolidatedended December 31, 2003. The
average days to collect accounts improvedslowed slightly over the first three-fourthsquarter of 20022003
from 42.445.0 days to 41.047.2 days. Leather FactoryCushman posted the most improvement in average
days to collect accounts, from 41.466.7 days in 2003 to 50.1 days for the first
quarter of 2004, respectively. Leather Factory and Tandy Leather's days to
37.4 days. Tandycollect were 44.7 and Cushman39.0 days outstanding increased in the first nine monthsquarter of 20032004 compared to 2002, from 23.5541.1
and 64.8239.6 days in 2002 to 39.23 and 72.25 days in 2003, respectively. Tandy's days outstanding
has improved from the secondfirst quarter of 2003, by approximately five days while
Cushman's days outstanding hasrespectively.
Accounts payable increased by approximately four days from June
30, 2003.
Total accounts payable decreased $163,000$810,000 to $1.4$2.4 million at the end of the third quarter.first
quarter, due primarily to the increase in inventory purchases to support the
increased sales and the negotiations with some vendors for longer payment terms.
Accrued expenses and other liabilities decreased $1.5 million,
from $2.5 million at December 31, 2002 to $964,000 at September 30, 2003. The
reduction is due to the decrease of accrued inventory in transit of $1.0 million
between December 31 and September 30 as well as the change in the balance of
accrued managers' bonuses. Bonuses are accrued throughout the year based on the
operating profits of each stores and then paid annually in March. Accrued
bonuses at December 31, 2002 totaled $930,000, which represents bonuses earned
based on the stores' twelve months of operating profits, compared to that at
September 30, 2003 totaling $435,000, which represents bonuses earned on the
stores' nine months of operating profits. The Company applied its cash flow
from operating activities to reduce the notes payable and current maturities of
long-term debt decreased from $4.2 million at the end of 2002 to $2.7 million at
September 30, 2003.
15
The Company's current ratio rose from 1.94 at December 31, 2002 to 3.07 at
September 30, 2003. Generally accepted accounting principles ("GAAP") require
the Company's debt with Wells Fargo Bank Minnesota, N.A. ("Wells Fargo") to be
classified as short-term (even though the stated maturity is in November 2004)
because our credit agreement with Wells Fargo includes both a subjective
acceleration clause and a requirement to maintain an arrangement whereby cash
collections from our customers directly reduce the debt outstanding (Emerging
Issues Task Force Issue 95-22).
If GAAP permitted this loan to be report as long-term indebtedness, the
Company's current ratio at September 30, 2003 would have been 6.48. The
following table reconciles this non-GAAP disclosure to the presentation required
by GAAP:
AS OF SEPTEMBER 30, 2003
------------------------
GAAP PRESENTATION NON-GAAP PRESENTATION
------------------ -----------------------
Current Assets $ 15,559,074 $ 15,559,074
Current Liabilities 5,069,209 5,069,209
Less Wells Fargo debt maturing after September 30, 2004 N/A (2,669,116)
Adjusted Current Liabilities 5,069,209 2,400,093
Current Ratio (Current Assets/Current Liabilities (or as adjusted) 3.07 6.48
After the close of the third quarter of 2003, the Company refinanced its bank
debt with another Wells Fargo bank. Under the terms of the refinancing, the
Company's bank debt with maturities beyond 12 months will no longer be
classified as a current liability under GAAP. In light of this change,
management believes that the non-GAAP presentation above will facilitate
comparisons of the current ratios at the end of the third quarter of 2003 and at
year-end. Management has used this non-GAAP measure in comparing the Company to
other companies whose funded debt is recorded as long-term liabilities under
GAAP.increased $113,000.
During the first nine months of 2003, cash flow provided from operating
activities was $1.6 million, up from $1.3 million for the first nine months of
2002. The increase in 2003 was attributable to several factors that occurred
during the first nine months of this year: (1) the reduction of inventory, and
(2) the net income generated, partially offset by the payment of manager bonuses
in the first quarter of 2003.2004, cash flow provided by operating activities was
$583,000. The net income generated for the quarter and the increase in accounts
payable contributed to the cash flow, offset somewhat by the increase in
accounts receivable. Cash flowsflow used in investing activities totaled $342,000, $326,000$193,000.
$125,000 of whichthis was for capital expenditures.the assets purchases of the Syracuse, NY and St. Louis,
MO Tandy Leather retail stores. Equipment purchased during the quarter totaled
$82,000. Most of the purchases
wereequipment purchased was for the new Tandy stores opened as well as replacements and upgrades of
existing computer equipment as needed.Leather stores.
Cash flowsflow used forby financing activities was $1.2 million, representing our net$439,000, consisting of payments on
our revolving credit facility forduring the yearquarter totaling $525,000, offset
primarily by stock option exercises by employees.
At March 31, 2003, our bank debt totaled $5.8 million. At March 31, 2004, the
balance was $1.3 million, a decrease of $1.5 million, partially offset by cash received from employees
on exercises of stock options.
The principal requirements for77%.
We expect to fund our operating and liquidity needs are operational expenses andas well as our current
expansion of Tandy'sTandy Leather's retail store chain. We anticipate that the Company
will fund these requirementschain from a combination of current
cash balances, revenues from operationsinternally generated funds and our revolving credit facility with
Wells Fargo.
The amount available on this credit facilityFargo, which is based upon the level of the our accounts receivable and
inventory. At September 30, 2003,March 31, 2004, the available and unused portion of the credit
facility was approximately $4.0$3.7 million.
1613
FORWARD-LOOKING STATEMENTS
- ---------------------------
This report (particularly Items 2, 3 and 4 of this Part I)Item 2) contains forward-looking statements of
management. In general, these are predictions or suggestions of future events
and statements or expectations of future trends or occurrences. There are
certain important risks that could cause results to differ materially from those
anticipated by some of the forward-looking statements. Some, but not all, of the
important risks whichthat could cause actual results to differ materially from those
suggested by the forward-looking statements include, among other things:
- - We might fail to realize the anticipated benefits of the opening of Tandy
Leather retail stores or we might be unable to obtain sufficient new locations
on acceptable terms to meet our growth plans. Also, other retail initiatives
might not be successful.
- - Political considerations here and abroad could disrupt our sources of
supplies from abroad or affect the prices we pay for goods.
- - Continued involvement by the United States in militarywar and other military
operations in the Middle East and other areas abroad could disrupt international
trade and affect the Company's inventory sources.
- - The recent slump in the economy in the United States, as well as abroad,
may cause our sales to decrease or not to increase or adversely affect the
prices charged for our products. Also, hostilities, terrorism or other events
could worsen this condition.
- - Several of our wholesale customers are conducting a periodic review of the
products they purchase from us. If these reviews were to have an overall
reduction in the volume of products purchased from us, our total sales could be
affected.
- - As a result of the on-going threat of terrorist attacks on the United
States, consumer buying habits could change and decrease our sales.
- - TheLivestock diseases such as mad cow could reduce the availability of hides
and leathers or increase their cost. Also, the prices of hides and leathers also
fluctuate in normal times, and these fluctuations can affect the Company.
- - If, for whatever reason, the costs of our raw materials and inventory
increase, we may not be able to pass those costs on to our customers,
particularly if the economy has not recovered from its downturn.
- - Other factors could cause either fluctuations in buying patterns or
possible negative trends in the craft and western retail markets. In addition,
our customers may change their preferences to products other than ours, or they
may not accept new products as we introduce them.
- - We might fail to realize the anticipated benefits of opening of additional
Tandy Leather retail stores or other retail initiatives might not be successful.
- - Tax or interest rates might increase. In particular, interest rates are
likely to increase at some point from their present low levels. These increases
will increase our costs of borrowing funds as needed in our business.
- - Any change in the commercial banking environment may affect us and our
ability to borrow capital as needed.
- - Other uncertainties, which are difficult to predict and many of which are
beyond the control of the Company, may occur as well.
The Company does not intend to update forward-looking statements.
1714
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK
For disclosures about market risk affecting the Company, see Item 7A
"Quantitative and Qualitative Disclosures About Market Risk" in our Annual
Report on Form 10-K for our fiscal year ended December 31, 2002.2003. The Company
believes that its exposure to market risks has not changed significantly since
December 31, 2002.
PART II. OTHER INFORMATION2003.
ITEM 4. CONTROLS AND PROCEDURES
At the end of the thirdfirst quarter of 2003,2004, our President, Chief Executive Officer
and Chief Financial Officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15(b)
under the Securities and Exchange Act of 1934, as amended (the "Exchange Act").
Based upon this evaluation, they concluded that, subject to the limitations
described below, the Company's disclosure controls and procedures offer
reasonable assurance that the information required to be disclosed by the
Company in the reports it files under the Exchange Act is recorded, processed,
summarized,, and reported within the time periodsperiod specified in the rulesresults and
forms adopted by the Securities and Exchange Commission.
During the period covered by this report, there has been no significant change in the
Company's internal controls over financial reporting that materially affected,
or is reasonably likely to materially affect, these controls.
Limitations on the Effectiveness of Controls. Our management, including the
President, Chief Executive Officer and Chief Financial Officer, does not expect
that the Company's disclosure controls and procedures or the Company's internal
controls will prevent all error and all fraud. A well conceived and operatedoperating
control system is based in part upon certain assumptions about the likelihood of
future events and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
PART II. OTHER INFORMATION
ITEM 5. CHANGES IN SECURITIES
On February 24, 2004, the Company entered into a Capital Markets Services
Engagement Agreement ("Services Agreement") with Westminster Securities
Corporation ("Westminster"), a member firm of the New York Stock Exchange.
Under the Services Agreement, Westminster agreed to provide the Company with
capital market services, including corporate finance advisory services, research
services, and sales and trading services.
For the services to be provided during the two-year term of the Services
Agreement, the Company agreed to pay $4,000 per month during the contract's
term. Also, the Company issued to Westminster and certain named employees
warrants to purchase 50,000 shares of the Company's common stock at an exercise
price of $5.00 per share, subject to adjustment for certain issuances at a per
share price below $5.00 that might occur during the five-year term of the
warrants.
The issuance of the warrants was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 4(2) of that act. The related
Financial Advisor's Warrant Agreement, dated as of February 24, 2004, contained
representations as to investment intent and restrictions on transfer. Also the
warrant certificates contain prominent legends stating the restrictions on
transfer.
In addition, the Financial Advisor's Warrant Agreement grants demand and
piggyback registration rights to the holders of the warrants to facilitate
resale of the Company's common stock upon exercise of the warrants.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
EXHIBIT NUMBER EXHIBIT
- ------- ------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------
4.1 Financial Advisor's Warrant Agreement, dated February 24, 2004, between The Leather Factory, Inc.
and Westminster Securities Corporation
4.2 Capital Markets Services Engagement Agreement, dated February 24, 2004, between The Leather
Factory, Inc. and Westminster Securities Corporation
31.1 13a-4(a) Certification by Wray Thompson, Chairman of the Board and Chief Executive Officer
pursuant to Rule 13a-14(a)
31.2 13a-4(a) Certification ofby Shannon L. Greene, Chief Financial Officer pursuant to Rule 13a-14(a)
32and Treasurer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
----------------------
On July 23, 2003,March 9, 2004, the Company filed a report on Form 8-K in which we furnished
under Item 9 the press release entitled "The Leather Factory Reports 2nd Quarter
2003 Results" relating to the result of our second quarter ended June 30, 2003.
This report was dated July 22, 2003.
On August 21, 2003, the Company filed a report on Form 8-K in which we furnished
under Item 4 details regarding a change in independent auditors for 2003. This
report was dated August 18, 2003.
18
Items 7 and 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: November 7, 2003May 14, 2004 By: /s/ Wray Thompson
---------------------------------------
Wray Thompson
Chairman of the Board and Chief Executive Officer
Date: November 7, 2003May 14, 2004 By: /s/Shannon L. Greene
----------------------------------------------
Shannon L. Greene
Chief Financial Officer and Treasurer
(Chief Accounting Officer)
16
EXHIBIT 4.1
FINANCIAL ADVISOR'S WARRANT AGREEMENT dated as of February 24, 2004,
("Engagement Date") between THE LEATHER FACTORY, INC., a Delaware corporation
(the "Company"), and WESTMINSTER SECURITIES CORPORATION, a New York corporation
and its assignees or designees (hereinafter referred to variously as a "Holder"
or "Financial Advisor").
W I T N E S S E T H:
WHEREAS, the Financial Advisor has agreed pursuant to the Engagement
Agreement dated as of February 24, 2004 (the "Engagement Agreement"), between
the Financial Advisor and the Company, to act as financial advisor to the
Company.
WHEREAS, pursuant to the Engagement Agreement, the Company agreed to issue
warrants to the Financial Advisor to purchase up to an aggregate of 50,000
shares of Common Stock (the "Financial Advisor's Warrants"); and
WHEREAS, the Financial Advisor's Warrants to be issued pursuant to this
Agreement will be issued to the Financial Advisor in consideration for, and as
part of the compensation in connection with, the Financial Advisor's services
pursuant to the Engagement Agreement.
NOW, THEREFORE, in consideration of the premises, the agreements herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. GRANT. The Financial Advisor is hereby granted the right to purchase, at any
time from the Engagement Date until 5:00 p.m., New York time, on February 24,
2009 (5 years from the Engagement Agreement), at which time the Financial
Advisor's Warrants expire, an aggregate of 50,000 shares of Common Stock,
subject to adjustment as provided in Section 11 hereof (the "Financial Advisor's
Securities"). Each Financial Advisor's Warrant shall entitle the holder thereof
to purchase one (1) share of common stock, $0.0024 par value per share, of the
Company (the "Common Stock"), at an initial exercise price of $5.00 (as defined
in Section 9.3(e)) (the "Common Stock Exercise Price").
2. FINANCIAL ADVISOR'S WARRANT CERTIFICATES. The Financial Advisor's warrant
certificates (the "Warrant Certificates") delivered and to be delivered pursuant
to this Agreement shall be in the form set forth in Exhibit A, attached hereto
and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. REGISTRATION OF WARRANT. The Financial Advisor's Warrants shall be numbered
and shall be registered on the books of the Company when issued.
4. EXERCISE OF FINANCIAL ADVISORS'S WARRANT.
4.1 METHOD OF EXERCISE. The Financial Advisor's Warrants initially are
exercisable at the Common Stock Exercise Price (subject to adjustment as
provided in Section 11 hereof) per Financial Advisor's Warrant set forth in
Section 8 hereof payable by certified or official bank check in New York
Clearing House funds. Upon surrender of a Financial Advisor's Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Common Stock Exercise Price for shares of Common
Stock purchased at the Company's principal offices presently located at 3827
East Loop 820 South, Fort Worth, Texas 76119 the registered holder of a
Financial Advisor's Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the shares of Common Stock
so purchased. The purchase rights represented by each Financial Advisor's
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares underlying the Financial
Advisor's Warrants) in increments of not less than 5,000 shares at one time. In
the case of the purchase of less than all of the shares purchasable under any
Financial Advisor's Warrant Certificate, the Company shall cancel said Financial
Advisor's Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Financial Advisor's Warrant Certificate of like tenor for the
balance of the shares purchasable thereunder.
4.2 CASHLESS EXERCISE. In addition to the right to exercise the Financial
Advisor's Warrant for cash pursuant to Section 4.1, Financial Advisor shall have
the right to exercise the Financial Advisor's Warrant (in whole but not in part)
by the surrender of the Financial Advisor's Warrant (with the annexed Form of
Election of Cashless Exercise) at the office of the Company at any time during
the term of the Financial Advisor's Warrant, into shares of Common Stock as
provided for in this Section 4.2. Upon exercise of this cashless exercise right,
Financial Advisor shall be entitled to receive that number of shares of Common
Stock of the Company equal to the quotient obtained by dividing [(A - B)(X)] by
(A), where:
(A) = the Market Price (as defined in Section 9.3(e)) of one share of
Common Stock on the date of exercise of the Financial Advisor's Warrant.
(B) = the Common Stock Exercise Price for one share of Common Stock
under the Financial Advisor's Warrant.
(X) = the number of Shares issuable upon exercise of the Financial Advisor's
Warrant.
If the above calculation results in a negative number, then no shares of Common
Stock shall be issued or issuable upon cashless exercise of the Financial
Advisor's Warrant.
Upon any cashless exercise of the Financial Advisor's Warrant, the Financial
Advisor shall be entitled to receive a certificate for the number of shares of
Common Stock determined under this Section 4.2.
5. ISSUANCE OF CERTIFICATES. Upon the exercise of the Financial Advisor's
Warrant, the issuance of certificates for securities, properties or rights
underlying such Financial Advisor's Warrant shall be made forthwith (and in any
event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 7 and 9 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
6. TRANSFER OF FINANCIAL ADVISORS'S WARRANT. The Financial Advisor's
Warrant shall be transferable only on the books of the Company maintained at its
principal office, where its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
Financial Advisor accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration of transfer, the Company shall
execute and deliver the new Financial Advisor's Warrant to the person entitled
thereto.
7. RESTRICTION ON TRANSFER OF FINANCIAL ADVISOR'S WARRANT. The Holder of a
Financial Advisor's Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Financial Advisor's Warrant is being acquired as an
investment and not with a view to the distribution thereof, and that the
Financial Advisor's Warrant may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for the term of the Financial
Advisor's Warrant, except to officers or affiliates of the Financial Advisor or
by operation of law.
8. EXERCISE PRICE AND NUMBER OF SECURITIES. Except as otherwise provided in
Section 11 hereof, each Financial Advisor's Warrant is exercisable to purchase
one share of Common Stock at an initial exercise price equal to the Common Stock
Exercise Price. The Common Stock Exercise Price, and the number of shares for
which the Financial Advisor's Warrant may be exercised shall be the price and
the number of shares which shall result from time to time from any and all
adjustments in accordance with the provisions of Section 11 hereof.
9. REGISTRATION RIGHTS.
9.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. Each Financial
Advisor's Warrant Certificate and each certificate representing securities
issuable upon exercise of the Financial Advisor's Warrant (collectively, the
"Warrant Shares") shall bear the following legend unless (i) such Financial
Advisor's Warrant or Warrant Shares are distributed to the public pursuant to a
registration statement filed under the Securities Act of 1933, as amended (the
"Act"), or (ii) the Company has received an opinion of counsel, in form and
substance reasonably satisfactory to counsel for the Company, that such legend
is unnecessary for any such certificate:
THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933 (THE "ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY
SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THE
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE FINANCIAL ADVISOR'S WARRANT
AGREEMENT REFERRED TO HEREIN.
9.2 PIGGYBACK REGISTRATION. If, at any time the Company proposes to
register any of its securities under the Act (other than in connection with a
merger or pursuant to Form S-4 or Form S-8), it will give written notice by
registered mail, at least twenty (20) days prior to the filing of each such
registration statement, to the Holders of the Financial Advisor's Warrants
and/or the Warrant Shares of its intention to do so. If any of the Holders of
the Financial Advisor's Warrants and/or Warrant Shares notify the Company within
ten (10) days after mailing of any such notice of its or their desire to include
any such securities in such proposed registration statement, the Company shall
afford such Holders of the Financial Advisor's Warrants and/or Warrant Shares
the opportunity to have any such Financial Advisor's Warrants and/or Warrant
Shares registered under such registration statement. In the event that the
managing underwriter for said offering advises the Company in writing that in
its opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
causing a diminution in the offering price or otherwise adversely affecting the
offering, the Company will include in such registration (a) FIRST, the
securities the Company proposes to sell, (b) SECOND, the securities held by the
entities that made the demand for registration, (c) THIRD, the Financial
Advisor's Warrants and/or Warrant Shares requested to be included in such
registration which in the opinion of such underwriter can be sold, PRO RATA
among the Holders of Financial Advisor's Warrants and/or Warrant Shares on the
basis of the number of Financial Advisor's Warrants and/or Warrant Shares
requested to be registered by such Holders, and (d) FOURTH, other securities
requested to be included in such registration.
Notwithstanding the provisions of this Section 9.2, the Company shall have the
right at any time after it shall have given written notice pursuant to this
Section 9.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to the
effective date thereof.
9.3 DEMAND REGISTRATION.
(a) At any time after the Engagement Date and expiring five (5) years after
the Engagement Date, the Holders of the Financial Advisor's Warrants and/or
Warrant Shares representing a "Majority" (as hereinafter defined in Section
9.4(k) hereof) of the Financial Advisor's Warrants and/or Warrant Shares shall
have the right (which right is in addition to the registration rights under
Section 9.2 hereof), exercisable by written notice to the Company, to have the
Company prepare and file with the Securities and Exchange Commission (the
"Commission"), on one occasion, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale by such
Holders and any other Holders of the Financial Advisor's Warrant and/or Warrant
Shares who notify the Company within fifteen (15) days after the Company mails
notice of such request pursuant to Section 9.3(b) hereof (collectively, the
"Requesting Holders") of their respective Warrant Shares for the earlier of (i)
six (6) consecutive months or (ii) until the sale of all of the Warrant Shares
requested to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 9.3 by any Holder or Holders
representing a Majority of the Financial Advisor's Warrants and/or Warrant
Shares to all other registered Holders of the Financial Advisor's Warrants and
the Warrant Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) Intentionally Omitted.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Shares
within the time period specified in Section 9.4(a) hereof pursuant to the
written notice specified in Section 9.3(a) of the Holders of a Majority of the
Financial Advisor's Warrants and/or Warrant Shares, the Company, at its option,
may repurchase (i) any and all Warrant Shares at the higher of the Market Price
(as defined in Section 9.3(e)) per share of Common Stock on (x) the date of the
notice sent pursuant to Section 9.3(a) or (y) the expiration of the period
specified in Section 9.4(a) and (ii) any and all Financial Advisor's Warrant at
such Market Price less the exercise price of such Financial Advisor's Warrant.
Such repurchase shall be in immediately available funds and shall close within
two (2) days after the later of (i) the expiration of the period specified in
Section 9.4(a) or (ii) the delivery of the written notice of election specified
in this Section 9.3(d).
(e) DEFINITION OF MARKET PRICE. As used herein, the phrase "Market
Price" at any date shall mean the fair value as determined in good faith by the
Company's Board of Directors; provided, however, that where there exists a
public market for the Company's Common Stock at the time of Financial Advisor's
exercise of this conversion right, the Market Price per share of Common Stock
shall be deemed to be the last reported sale price of the Common Stock on the
trading day before the Financial Advisor's Warrant, with attached Notice of
Conversion, are duly surrendered to the Company for conversion thereof or, in
case no such reported sale takes place on such day, the average of the last
reported closing sale prices for the last three (3) trading days, in either case
as officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the average closing
sale price as furnished by the NASD through The NASDAQ Stock Market, Inc.
("NASDAQ") or similar organization if NASDAQ is no longer-reporting such
information, or if the Common Stock is not quoted on NASDAQ, the OTC Electronic
Bulletin Board, or as determined in good faith by resolution of the Board of
Directors of the Company, based on the best information available to it.
9.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within sixty (60) days of receipt of any demand therefor, and to have
any registration statements declared effective at the earliest possible time,
and shall furnish each Holder desiring to sell Warrant Shares such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 9.2 and 9.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses (including those of the Company)
in connection with the registration statement filed pursuant to Section 9.3(c).
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Shares included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Shares to be
sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify each of the Underwriters contained in Section 7 of the
Engagement Agreement.
(e) Intentionally Omitted
(f) Nothing contained in this Agreement shall be construed as requiring the
Holder(s) to exercise their Financial Advisor's Warrant prior to the initial
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other than
the Warrant Shares to be included in any registration statement filed pursuant
to Section 9.3 hereof, or permit any other registration statement to be or
remain effective during the effectiveness of a registration statement filed
pursuant to Section 9.3 hereof, without the prior written consent of National
Securities Corporation or as otherwise required by the terms of any existing
registration rights granted prior to the date of this Agreement by the Company
to the holders of any of the Company's securities.
(h) For purposes of this Agreement, the term "Majority" in reference to the
Financial Advisor's Warrants or Warrant Shares, shall mean in excess of 50,000
of the then outstanding Financial Advisor's Warrants or Warrant Shares.
10. OBLIGATIONS OF HOLDERS. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to SECTION 9 hereof that
each of the selling Holders shall:
(a) Furnish to the Company such information regarding themselves, the
Warrant Shares held by them, the intended method of sale or other disposition of
such securities, the identity of and compensation to be paid to any underwriters
proposed to be employed in connection with such sale or other disposition, and
such other information as may reasonably be required to effect the registration
of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus relating to the
Warrant Shares covered by a registration statement is required to be delivered
under the Act, of the happening of any event with respect to such selling Holder
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(c) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Engagement
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
11. ADJUSTMENTS TO COMMON STOCK EXERCISE PRICE. The Common Stock
Exercise Price in effect at any time shall be subject to adjustment from time to
time only upon the happening of the following events:
11.1 STOCK DIVIDEND, SUBDIVISION AND COMBINATION. In case the Company shall
(i) declare a dividend or make a distribution on its outstanding shares of
Common Stock in shares of Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Common Stock Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that it shall
equal the price determined by multiplying the Common Stock Exercise Price by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action. Such adjustment shall be made successively whenever any event listed
above shall occur.
11.2 DILUTIVE ISSUANCES. In the event the Company issues any shares of
Common Stock (or Common Stock equivalents) during the period from February 24,
2004 until a Financial Advisor's Warrant is exercised, the Company shall compute
the weighted average issuance price for all issuances during the period, and, if
the weighted average issuance price shall be less than $5.00, then the Common
Stock Exercise Price shall, for that exercise, be equal to the weighted average
issuance price for the period.
11.3 Intentionally Omitted
11.4 DEFINITION OF COMMON STOCK. For the purpose of this Agreement, the
term "Common Stock" shall mean (i) the class of stock designated as Common Stock
in the Articles of Incorporation of the Company as amended as of the date
hereof, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
11.5 MERGER OR CONSOLIDATION. In case of any consolidation of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of each Financial Advisor's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Financial Advisor's Warrant) to receive, upon exercise of
such Financial Advisor's Warrant, the kind and amount of shares of stock and
other securities and property receivable upon such consolidation or merger by a
holder of the number of shares of Common Stock for which such Financial
Advisor's Warrant might have been exercised immediately prior to such
consolidation or merger. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in this Section
11. The above provision of this subsection shall similarly apply to successive
consolidations or mergers.
11.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No adjustment of the
Common Stock Exercise Price shall be made:
(a) Upon the issuance or sale of the Financial Advisor's Warrant or the
Warrant Shares;
(b) Upon the issuance or sale of Common Stock (or any other Common Stock
equivalent) upon the direct or indirect conversion, exercise, or exchange of any
options, rights, warrants, or other securities or indebtedness of the Company
outstanding as of the date of this Agreement or granted pursuant to any stock
option plan of the Company in existence as of the date of this Agreement,
pursuant to the terms thereof; or
(c) If the amount of said adjustment shall be less than two cents ($0.02)
per share, provided, however, that in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment which, together
with any adjustment so carried forward, shall amount to at least two cents
($0.02) per Financial Advisor's Warrant.
12. EXCHANGE AND REPLACEMENT OF FINANCIAL ADVISOR'S WARRANT CERTIFICATES.
Each Financial Advisor's Warrant Certificate is exchangeable, without expense,
upon the surrender thereof by the registered Holder at the principal executive
office of the Company for a new Financial Advisor's Warrant Certificate of like
tenor and date representing in the aggregate the right to purchase the same
number of Warrant Shares in such denominations as shall be designated by the
Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of any Financial Advisor's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Financial Advisor's Warrant, if mutilated, the Company will make and deliver
a new Warrant Certificate of like tenor, in lieu thereof.
13. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Financial Advisor's Warrant, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
14. RESERVATION AND LISTING OF SECURITIES. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Financial Advisor's
Warrant, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. The Company will
keep a copy of this Agreement on file with every Transfer Agent for the Common
Stock and other securities of the Company issuable upon the exercise of the
Financial Advisor's Warrant. The Company will supply every such Transfer Agent
with duly executed stock and other certificates, as appropriate, for such
purpose. The Company covenants and agrees that, upon exercise of the Financial
Advisor's Warrant and payment of the Common Stock Exercise Price therefor, all
shares of Common Stock and other securities issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any stockholder. As long as the Financial Advisor's
Warrant shall be outstanding, the Company shall use its best efforts to cause
all shares of Common Stock issuable upon the exercise of the Financial Advisor's
Warrant to be listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock issued to the public in connection herewith
may then be listed and/or quoted on Nasdaq or the OTC Electronic Bulletin Board.
15. NOTICES TO FINANCIAL ADVISOR'S WARRANT HOLDERS. Nothing contained in
this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however,
at any time prior to the expiration of the Financial Advisor's Warrants and
their exercise, any of the following event shall occur:
(a) the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially all
of its property, assets and business as an entirety shall be proposed;
then in any one or more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
16. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, mailed by registered or certified mail, return receipt
requested, or received via facsimile:
(a) if to the registered Holder of the Financial Advisor's Warrant, to the
address of such Holder as shown on the books of the Company; or
(b) if to the Company, to the address set forth in SECTION 4 hereof or to
such other address as the Company may designate by notice to the Holders.
17. SUPPLEMENTS; AMENDMENTS; ENTIRE AGREEMENT. This Agreement (including
the Engagement Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought. The Company and the Financial Advisor may from time to
time supplement or amend this Agreement without the approval of any holders of
Financial Advisor's Warrant Certificates (other than the Financial Advisor) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Financial Advisor may deem necessary or desirable and
which the Company and the Financial Advisor deem shall not adversely affect the
interests of the Holders of
Financial Advisor's Warrant Certificates.
18. SUCCESSORS. All of the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
19. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements in any
schedule, exhibit or certificate or other instrument delivered by or on behalf
of the parties hereto, or in connection with the transactions contemplated by
this Agreement, shall be deemed to be representations and warranties hereunder.
Notwithstanding any investigations made by or on behalf of the parties to this
Agreement, all representations, warranties and agreements made by the parties to
this Agreement or pursuant hereto shall survive.
20. GOVERNING LAW. This Agreement and each Financial Advisor's Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
21. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
22. CAPTIONS. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
23. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Financial Advisor and any other registered Holder(s) of the Financial Advisor's
Warrant Certificates or Warrant Shares any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Underwriters and any other Holder(s) of
the Financial Advisor's Warrant Certificates or Warrant Shares.
24. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ATTEST: THE LEATHER FACTORY, INC.
By: /s/ Ronald C. Morgan By: /s/ Shannon L. Greene
Name:Mr. Ronald C. Morgan Name:Ns. Shannon L. Greene
Title: President Title: CFO
WESTMINSTER SECURITIES CORPORATION
By: /s/ John O'Shea
-----------------
Name: John O'Shea
Title: President
17
EXHIBIT A
[FORM OF FINANCIAL ADVISOR'S WARRANT CERTIFICATE]
THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE
OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 (THE "ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT
(OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY
TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE FINANCIAL ADVISOR'S WARRANT
AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME BEFORE FEBRUARY 24, 2009
Financial Advisor's Warrant No.
Issuable for
50,000 Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that Westminster Securities Corporation,
a New York corporation, is the registered holder of Warrants to purchase
initially at any time from February 24, 2004 until 5:00 p.m., New York time on,
February 24, 2009 ("Expiration Date"), up to 100,000 shares of Common Stock,
$0.0024 par value per share, of the Company (the "Common Stock"), at an exercise
price of $5.00 per share (the "Common Stock Exercise Price"), upon surrender of
this Financial Advisor's Warrant Certificate and payment of the Common Stock
Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Financial Advisor's Warrant Agreement
dated as of February 24, 2004 among the Company and Westminster Securities
Corporation (the "Warrant Agreement"). Payment of the Exercise Price shall be
made either by certified or official bank check in New York Clearing House funds
payable to the order of the Company or by surrender of the Financial Advisor's
Warrant as provided in the Warrant Agreement.
No Warrant may be exercised after 5:00 p.m., New York time, on the Expiration
Date, at which time all Financial Advisor's Warrant evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Financial Advisor's Warrant evidenced by this Warrant Certificate is part of
a duly authorized issue of Financial Advisor's Warrants issued pursuant to the
Warrant Agreement, which Warrant Agreement is hereby incorporated by reference
in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Financial
Advisor's Warrant.
The Warrant Agreement provides that upon the occurrence of certain events the
Exercise Price and the type and/or number of the Company's securities issuable
thereupon may, subject to certain conditions, be adjusted. In such event, the
Company will, at the request of the holder, issue a new Warrant Certificate
evidencing the adjustment in the Exercise Price and the number and/or type of
securities issuable upon the exercise of the Financial Advisor's Warrant;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant Certificate at
an office or agency of the Company, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Financial Advisor's Warrant shall be issued to the transferees in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Financial Advisor's Warrant evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such unexercised Financial Advisor's
Warrant.
In addition to the right of exercise, the holder shall have the right to make a
cashless exercise of this Warrant Certificate (in whole but not in part) by the
surrender of this Warrant Certificate (with the attached Form of Election to
Convert) at the office of the Company at any time during the duration of this
Warrant, into shares of Common Stock, as provided in the Warrant Agreement.
The Company may deem and treat the registered holder(s) hereof as the absolute
owner(s) of this Warrant Certificate (notwithstanding any notation of ownership
or other writing hereon made by anyone), for the purpose of any exercise hereof,
and of any distribution to the holder(s) hereof, and for all other purposes, and
the Company shall not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
This Warrant Certificate does not entitle any holder thereof to any of the
rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed.
Dated as of February 24, 2004.
ATTEST: THE LEATHER FACTORY, INC.
By:___________________________ By:_______________________________
Name: Name: Ms. Shannon Greene
Title: Title: CFO
18
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ shares of Common
Stock, and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of The
Leather Factory, Inc. (the "Company") in the amount of $_________, all in
accordance with the terms of Section 4.1 of the Financial Advisor's Warrant
Agreement dated as of February 24, 2004 among the Company and Westminster
Securities Corporation. The undersigned requests that a certificate for such
securities be registered in the name of ____________________, whose address is
__________________ and that such certificate to be delivered
to____________________ whose address is _______________________, and if said
number of shares shall not be all the shares purchasable hereunder, that a new
Warrant Certificate for the balance of the shares purchasable under the within
Warrant Certificate be registered in the name of the undersigned warrant holder
or his assignee as below indicated and delivered to the address stated below.
Dated:_____________________________
Signature:____________________________
(Signature must conform in all
respects to name of holder as specified
on the face of the Warrant Certificate.)
Address: ______________________________
______________________________
______________________________________
(Insert Social Security or Other Identifying
Number of Holder)
19
[FORM OF ASSIGNMENT]
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE
WARRANT CERTIFICATE.)
FOR VALUE RECEIVED ________________ hereby sells, assigns and transfers unto
[NAME OF TRANSFEREE) this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
________________, attorney, to transfer the within Warrant Certificate on the
books of the within-named Company, with full power of substitution.
Dated:_____________________
Signature:______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
Address: ______________________________
______________________________
______________________________________
(Insert Social Security or Other Identifying
Number of Holder)
20
[FORM OF ELECTION TO MAKE CASHLESS EXERCISE PURSUANT TO SECTION 4.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to exercise this Warrant Certificate
for ________ shares of Common Stock (assuming a Market Price calculated on the
basis of the last sale price for Common Stock on _________________, (the trading
day immediately preceding surrender of the Warrant Certificate and this Form of
Election to Make Cashless Exercise) of $_________), all in accordance with
Section 4.2 of the Financial Advisor's Warrant Agreement dated as of
February 24, 2004 between the Company and Westminster Securities Corporation.
The undersigned requests that a certificate for such securities be registered in
the name of ________________________, whose address is ________________________
and ________________________(attach separate sheet if necessary).
Dated:________________________
Signature:_____________________________
(Signature must conform in all
respects to name of holder as specified
on the face of the Warrant Certificate.)
Address: _______________________________
_______________________________
______________________________________
(Insert Social Security or Other Identifying
Number of Holder)
21
EXHIBIT 4.2
WESTMINSTER SECURITIES CORPORATION
MEMBER NEW YORK STOCK EXCHANGE
------------------------------
February 24, 2004
Ms. Shannon L. Greene
Chief Financial Officer
The Leather Factory, Inc.
3827 East Loop 820 South
Fort Worth, TX 76119
RE: CAPITAL MARKETS SERVICES ENGAGEMENT AGREEMENT
Dear Shannon,
This agreement ("Agreement") is made and entered into this 24th day of
February, 2004 between The Leather Factory, Inc., a Delaware corporation (the
"Company"), and Westminster Securities Corporation, a registered broker/dealer
("Westminster"). Pursuant to this Agreement, Westminster will provide services
to the Company as set forth below:
1. PURPOSE
- -----------
Based on the terms set forth in this Agreement, the Company hereby retains
Westminster on an exclusive basis during the Engagement Period (as defined
herein) to provide various capital markets services as set forth herein. It is
understood and acknowledged by the parties that the value of Westminster's
advice is not measurable in any quantitative manner, and that Westminster shall
not be obligated to spend any specific amount of time performing duties
hereunder.
2. ENGAGEMENT PERIOD
- ----------------------
This Agreement shall commence on March 1, 2004 and terminate on February
28, 2006 (the "Engagement Period") unless extended by mutual written agreement
of Westminster and the Company or earlier terminated as provided for in sections
12 or 15 (b) hereof.
3. SERVICES
- ------------
Westminster may assist the Company by performing the various capital
markets services ("Capital Markets Services or Services") that are listed below.
In connection with Westminster providing such capital markets services to the
Company, the Company shall provide Westminster with any information that
Westminster deems appropriate. The Company hereby acknowledges that Westminster
will be using and relying on said information without independent verification
and that Westminster assumes no responsibility for the accuracy and completeness
of any information provided to it by the Company. In performance of these
duties, Westminster shall provide the Company with the benefits of its
commercially reasonable judgment and efforts.
A. SERVICES
- ------------
Westminster will provide the Company with the following Capital Markets
Services:
(a) Corporate Finance Advisory Services;
(1) Advise on financial forecasting model(s);
(2) Provide sponsorship to investors;
(3) Advise on investor communications and presentations;
(4) Advise on shareholder value strategy; and
(5) Advise on shareholder base and distribution
(b) Research Services - Publish and distribute research covering Company's
publicly-traded common shares. (All Investment Recommendations, Risk Ratings and
Target Prices included in such coverage to be determined solely by Westminster
Equity Research department.)
(c) Sales and Trading Services;
(1) Advise and assist with exchange specialist;
(2) Advise on and develop institutional sales;
(3) Provide institutional research sales calls;
(4) Advise and assist on shareholder data base information and management;
(5) Advise and assist in block share transactions and redistributions; and
(6) Advise and assist in restricted stock and ESOP matters
B. COMPENSATION
- ----------------
Upon execution of this Agreement, the Company shall pay Westminster the
following monthly fees on or before the 15th day of each month during the
Engagement Period. Should a sale, merger or other business combination of the
Company occur, all sums shall be immediately due and payable. Payment of
engagement fees shall be as follows:
(1) Capital Markets Advisory Services - During the Engagement period, the
Company shall pay Westminster $4,000 on the 15th of each month commencing March
15, 2004
(2) Additionally, the Company shall issue Westminster warrants ("Warrants")
to purchase 50,000 shares of common stock of the Company which shall be
exercisable for a period of five years at an exercise price of $ 5.00 per share.
The Warrants shall contain customary terms, including, but not limited to,
demand and piggyback registration rights, anti-dilution and a cashless exercise
price.
(3) The Company agrees to pay Westminster additional fees for any and all
services performed by Westminster at the request of the Company that are not
specifically included in the engagement as provided for in Section 3 of this
Agreement. Such additional fees shall be customary and mutually agreeable and
shall be paid in full by the Company on or before the 1st day of each month
after which the Company receives an invoice from Westminster.
4. ADDITIONAL SERVICES
- ------------------------
Should the Company desire Westminster to provide any service(s) not listed
above, the Company agrees to pay Westminster additional fees for any and all
Services performed by Westminster that are not specifically included in the
Engagement as provided for in Section 3 of this Agreement. Under the terms of
this Agreement, the Company and Westminster shall enter into an additional
engagement letter to be executed by the parties hereto at the commencement of
the additional service(s) to be rendered by Westminster. Such additional fees
shall be customary and mutually agreeable and shall be paid in full by the
Company on or before the 1st day of each month after which the Company receives
an invoice from Westminster.
5. WESTMINSTER'S RIGHTS TO PARTICIPATE IN FUTURE OFFERINGS OF THE COMPANY.
- --------------------------------------------------------------------------------
The Company hereby grants to Westminster a right of first refusal to act as
placement agent or managing underwriter, as appropriate, during this engagement
and in any subsequent private placement or public offering of the Company's
securities for a period of twelve months (12) following the termination of the
Engagement Period. Westminster shall not be obligated to act as placement agent
or managing underwriter with respect to any such transaction. Any such
subsequent public offering or private placement shall be subject to an
additional engagement agreement executed by the parties hereto at the
commencement of services to be provided by Westminster.
6. MERGER/ACQUISITION SERVICES.
- -- -----------------------------
During the Engagement Period, Westminster shall have the right of first
refusal to provide merger/acquisition advisory services to the Company.
Westminster's role and specific compensation with respect to the Company's
consummation of an acquisition of assets, merger or other similar business
combination with another business (a "Business Combination") or in assisting in
an arrangement in a different form than as set forth herein, such as contracts,
licensing, ventures or other business transaction (Business Transactions")
during the Engagement Period shall be set forth in an additional engagement
letter to be executed by the parties hereto at the commencement of services
rendered by Westminster for the Business Combination or Business Transaction. If
the Company consummates a Business Combination or Business Transaction during
the Engagement Period, then Westminster shall receive mutually agreed upon fees
and other forms of compensation as are customarily received by investment
bankers in similar transactions. This may include fees for such Business
Combination, Business Transactions, financing fees and/or fees for fairness
opinion.
7. EXPENSES.
- -- ---------
The Company shall reimburse Westminster for any and all reasonable
out-of-pocket expenses incurred in connection with services provided to the
Company under this Agreement including, but not limited to travel, legal fees,
printing, and other expenses, incurred in connection with Westminster's
providing the services stated or contemplated herein. Westminster will not bear
any of the Company's legal, accounting, printing or other expenses in connection
with any transaction considered or consummated hereby. It also is understood
that neither Westminster, nor the directors, employees and agents of
Westminster, will be responsible for any fees or commissions payable to any
finder or to any other financial or other advisor utilized or retained by the
Company. With the exception of out of pocket expenses, Westminster shall obtain
prior approval from the Company. All expenses billed by Westminster to the
Company will be invoice to the Company and reimbursed on a monthly basis within
ten days of receipt.
8. RELATIONSHIPS WITH OTHERS; CONFIDENTIAL INFORMATION.
- -- --------------------------------------------------------
Westminster may utilize the fact of its engagement hereunder in a normal
tombstone advertising, news release or in accordance with standard industry
practice.
The Company acknowledges that Westminster or its affiliates are in the
business of providing investment banking, financial advisory and consulting
services to others. Nothing contained herein shall be construed to limit or
restrict Westminster in conducting such business with respect to others, or in
rendering such advice to others. In connection with the rendering of services
hereunder, Westminster has been or will be furnished with confidential
information concerning the Company including, but not limited to, financial
statements and information, cost and expense data, production data, trade
secrets, marketing and customer data, and such other information not generally
obtained from public or published information or trade sources. Such
information shall be deemed "Confidential Material" and, except as specifically
provided herein, shall not be disclosed by Westminster (except as used by
Westminster to perform services as contemplated by this Agreement) without prior
written consent of the Company. In the event it is required by applicable law or
legal process to disclose any of the Confidential Material, it is agreed that
Westminster will deliver to the Company prompt notice of such requirement prior
to disclosure of same so as to permit the Company an opportunity to seek an
appropriate protective order and/or waive compliance of this provision. If, in
the absence of a protective order or receipt of written waiver, Westminster is
nonetheless, in the written opinion of its counsel, compelled to disclose any
Confidential Material, Westminster may do so without liability hereunder
provided that notice of such prospective disclosure is delivered to the Company
prior to actual disclosure. Following the termination of this Agreement and a
written request by the Company, Westminster shall deliver to the Company all
Confidential Material. This Section shall survive the termination of this
Agreement.
9. LIMITATION UPON THE USE OF ADVICE AND SERVICES.
- -- ------------------------------------------------------
(a) The Company acknowledges that the advice (written or oral) rendered by
Westminster pursuant to this Agreement is intended solely for the benefit and
use of the Company in considering the matters to which this agreement relates,
and the Company agrees that such advice shall not be disclosed publicly or made
available to third parties without the prior written consent of Westminster.
Westminster may utilize the fact of its engagement hereunder in its normal
tombstone advertising or in accordance with standard industry practice. No
person or entity, other than the Company or any of its subsidiaries or directors
or officers of each of the foregoing, shall be entitled to make use of or rely
upon the advice Westminster to be given hereunder, and the Company shall not
transmit such advice to, or encourage or facilitate the use or reliance upon
such advice by others without the prior consent of Westminster.
(b) Research reports that may be prepared by research analysts at
Westminster will, when and if prepared, be done solely on the merits or judgment
of the research analysts of Westminster including but not limited to ratings,
price targets or other views expressed by the research analyst.
(c) Company hereby acknowledges that Westminster, for services rendered
under this Agreement, makes no commitment whatsoever to make a market in any of
the Company's securities on any stock exchange or in any electronic marketplace.
Any decision by Westminster to make a market in any of the Company's securities
shall be based solely on the independent judgment of Westminster's management,
employees, and agents.
(d) Use of the Westminster's name in annual reports or any other report of
the Company or releases by the Company must have the prior written approval of
Westminster unless the Company is required by law to include Westminster's name
in such annual reports, other report or release of the Company, in which event
Westminster will be furnished with copies of such annual reports or other
reports or releases using Westminster's name in advance of publication by the
Company, its affiliates or assigns.
10. LIMITATION OF LIABILITY.
- --- --------------------------
In the absence of gross negligence or willful misconduct on the part of
Westminster, Westminster shall not be liable to the Company or to any officer,
director, employee, agent, representative, stockholder or creditor of the
Company for any action or omission of Westminster or any of its officers,
directors, employees, agents, representatives or stockholders in the course of,
or in connection with, rendering or performing any services contemplated hereby.
11. INDEMNIFICATION.
- --- ----------------
The Company agrees to indemnify Westminster in accordance with the
provisions of Annex A hereto, which is incorporated by reference and made a part
hereof.
12. TERMINATION.
- --- ------------
This Engagement Letter may be terminated at any time during the Engagement
Period by Westminster upon five (5) days prior written notice to the Company, in
the event that Westminster becomes aware of (i) any change in the business or
operations of the Company which Westminster reasonably believes may adversely
affect Westminster's ability to render the services contemplated hereunder, (ii)
any misrepresentation by the Company with respect to its business operations,
assets, condition (financial or otherwise), results of operations or prospects
of the Company, or (iii) any breach by the Company of its obligations under this
Agreement.
Unless otherwise provided for herein, in the event of termination (i) this
Agreement shall become void, without liability on the part of Westminster or its
affiliates, directors, officers or stockholders, (ii) Westminster shall be
entitled to retain or receive compensation for services it has rendered,
including payment for expenses it has incurred up to the date of such
termination, or (iii) the Company's indemnification of Westminster pursuant to
Annex A shall remain in full force and effect.
13. DISCRETION.
- --- -----------
Nothing contained herein shall require the Company to enter into any
transaction presented to it by Westminster, which decision shall be at the
Company's sole discretion.
14. SEVERABILITY.
- --- -------------
Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or affecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
15. MISCELLANEOUS.
- --- --------------
(a) Any notice or communication between parties hereto shall be sufficiently
given if sent by certified or registered mail, postage prepaid, or faxed and
confirmed if to the Company, addressed to it at 3827 East Loop 820 South, Fort
Worth, TX 76119 or if to Westminster, addressed to it at Westminster Securities
Corporation, 100 Wall Street, 7th Floor, New York, NY 10005. Such notice or
other communication shall be deemed to be given on the date of receipt.
(b) If Westminster shall cease to do business, the provisions hereof
relating to duties of Westminster and compensation by the Company as it applies
to Westminster shall thereupon cease to be in effect, except for the Company's
obligation of payment for services rendered prior thereto. This Agreement shall
survive any merger of, acquisition of, or acquisition by Westminster and after
any such merger or acquisition shall be binding upon the Company and the entity
surviving such merger, acquisition or similar transaction.
(c) This Agreement embodies the entire agreement and understanding
between the Company and Westminster and supersedes any and all negotiations,
prior discussions and preliminary and prior agreements and understandings
related to the subject matter hereof, and may be modified only by a written
instrument duly executed by each party.
(d) This Agreement has been duly authorized, executed and delivered by
and on behalf of the Company and Westminster.
(e) This Agreement shall be deemed made in New York. This Agreement
and all controversies arising from or relating to performance under this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York, without giving effect to such state's rules concerning
conflicts of law.
The Company hereby irrevocably consents to personal jurisdiction and venue in
any court of the State of New York or any Federal court sitting in the County of
New York for the purposes of any suit, action or other proceeding arising out of
this Agreement or any of the agreements or transactions contemplated hereby,
which is brought by or against the Company, and hereby agrees that all claims in
respect of any such suit, action or proceeding shall be heard and determined in
any such court. The Company hereby irrevocably consents to the service of
process of any of the aforementioned courts in any such suit, action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to the Company at its address set forth above, such service to
become effective ten (10) days after such mailing. Each of the Company (on its
own behalf and, to the extent permitted by applicable law, on behalf of its
shareholders) and Westminster hereby waive any right to trial by jury with
respect to any claim, proceeding, counterclaim or action arising out of this
Agreement then the prevailing party in such action or proceeding, whether or not
the action or proceeding proceeds to final judgment.
(f) There is no relationship of partnership, agency, employment,
franchise or joint venture between the parties. Neither party has the authority
to bind the other or incur any obligation on its behalf.
(g) The Company hereby acknowledges that Westminster is not a fiduciary
of the Company and that Westminster makes no representations or warranties
regarding Company's ability to secure financing, whether now or in the future.
(h) This Agreement and the rights hereunder may not be assigned by
either party (except by operation of law) and shall be binding upon and inure to
the benefit of the parties and their respective permitted successors, assigns
and legal representatives.
(i) No waiver, amendment or other modification of this Agreement shall
be effective unless in writing and signed by both parties. This Agreement may
be executed in counterparts, each of which together shall be considered a single
document.
(j) All amounts payable to Westminster by the Company hereunder which
are not paid with thirty (30) days of the dates payable shall accrue interest at
a rate of twelve (12%) per annum from the date due until paid.
If you are in agreement with the foregoing, please execute and return one copy
of this letter of intent to Westminster, along with a check or wire transfer
made payable to Westminster Securities Corporation in the amount of 4,000.00 in
accordance with paragraphs three above.
Sincerely,
WESTMINSTER SECURITIES CORPORATION
By: /s/ John O'Shea
-----------------
Name: John O'Shea
Title: President
By: /s/ Samuel M. Chase, Jr.
----------------------------
Name: Samuel M. Chase Jr.
Title: Managing Director
Agreed to and accepted this 1st day of March 2004.
THE LEATHER FACTORY, INC.
By: /s/ Shannon L. Greene
------------------------
Name: Ms. Shannon L. Greene
Title: Chief Financial Officer
22
EXHIBIT 31.1
RULE 13A-4(A) CERTIFICATION
I, Wray Thompson,WRAY THOMPSON, certify that:
1. I have reviewed this quarterly report on Form 10-Q10-K of The Leather Factory,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) [language intentionally omitted SEC
Rel. 33-8238] for the registrant and have:
a.(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b.(b) [Left blank intentionally SEC Rel. No. 33-8238];
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c.(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recentfourth fiscal
quarter that has materially affected, or is reasonablereasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s)officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting , to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a.(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b.(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controlcontrols over
financial reporting.
November 7, 2003Date: May 14, 2004
/s/ Wray Thompson
-------------------
Wray Thompson
ChairmanPresident and Chief Executive Officer
20(principal executive officer)
23
EXHIBIT 31.2
- -------------RULE 13A-4(A) CERTIFICATION
I, ShannonSHANNON L. Greene,GREENE, certify that:
1. I have reviewed this quarterly report on Form 10-Q10-K of The Leather Factory,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) [language intentionally omitted SEC
Rel. 33-8238] for the registrant and have:
a.(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b.(b) [Left blank intentionally SEC Rel. No. 33-8238];
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c.(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recentfourth fiscal
quarter that has materially affected, or is reasonablereasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s)officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a.(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b.(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controlcontrols over
financial reporting.
November 7, 2003Date: May 14, 2004
/s/ Shannon L. Greene
-------------------------------------------------
Shannon L. Greene
Chief Financial Officer and Treasurer
21(principal financial and accounting officer)
24
EXHIBIT 32
- -----------32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Leather Factory,
Inc. for the quarter ended September 30, 2003March 31, 2004 as filed with the United States
Securities and Exchange Commission on the date hereof (the "Report"), Wray
Thompson, as Chairman and Chief Executive Officer, and Shannon L. Greene, as
Treasurer and Chief Financial Officer, each hereby certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
i. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
ii. The information contained in the Report fairlyfully presents, in all material
respects, the financial condition and results of operations of the Company.
November 7, 2003May 14, 2004 By: /s/ Wray Thompson
-------------------
WRAY THOMPSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
November 7, 2003May 14, 2004 By: /s/ Shannon L. Greene
-----------------------------------------------
SHANNON L. GREENE
CHIEF FINANCIAL OFFICER AND TREASURER