FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 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
Incorporation or organization) Identification Number)
3847 EAST LOOP 820 SOUTH, FT. WORTH, TEXAS 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X____X No _______
Indicate by check mark whether the registrant is an accelerated 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.
Shares outstanding as
Class of May 10,August 6, 2004
- --------------------------------------------- ---------------------
Common Stock, par value $.0024 per share 10,555,66110,560,661
1
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2004
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31,June 30, 2004 and December 31, 2003 3
Consolidated Statements of IncomeOperations
Three and six months ended March 31,June 30, 2004 and 2003 4
Consolidated Statements of Cash Flows
ThreeSix months ended March 31,June 30, 2004 and 2003 5
Consolidated Statements of Stockholders' Equity
ThreeSix months ended March 31,June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Changes in SecuritiesOther Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December
JUNE 30, DECEMBER 31,
2004 2003
----------- -------------
(unaudited)
------------ --------------
ASSETS
CURRENT ASSETS:
Cash $ 1,678,6071,181,604 $ 1,728,344
Accounts receivable-trade, net of allowance for doubtful accounts of
$63,000$107,000 and $31,000 in 2004 and 2003, respectively 3,055,5452,695,997 1,828,738
Inventory 11,392,31212,189,111 11,079,893
Prepaid income taxes -4,388 206,023
Deferred income taxes 161,674199,368 134,312
Other current assets 1,054,036808,784 702,236
------------ --------------
Total current assets 17,342,17417,079,252 15,679,546
------------ --------------
PROPERTY AND EQUIPMENT, at cost 5,689,1065,738,042 5,574,992
Less-accumulatedLess accumulated depreciation and amortization (3,784,460)(3,893,754) (3,669,099)
------------ --------------
Property and equipment, net 1,904,6461,844,288 1,905,893
GOODWILL, net of accumulated amortization of $757,000$755,000 and $758,000
in 2004 and 2003, respectively 731,094729,390 704,235
OTHER INTANGIBLES, net of accumulated amortization of $178,000$192,000 and $164,000
in 2004 and 2003, respectively 439,493425,503 432,549
OTHER assets 322,107ASSETS 323,896 336,183
------------ --------------
$20,739,514$20,402,329 $ 19,058,406
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,355,0921,888,053 $ 1,545,079
Accrued expenses and other liabilities 1,113,2371,102,728 1,000,427
Income taxes payable 229,631 -
Notes payable and current maturities of long-term debt - 1,134
------------ --------------
Total current liabilities 3,697,9602,990,781 2,546,640
------------ --------------
DEFERRED INCOME TAXES 216,877207,947 209,289
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 1,267,9841,100,000 1,792,984
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,00020,000 shares authorized,
none issued or outstanding - -
Common stock, $0.0024 par value; 25,000,000 shares authorized, 10,525,66110,560,661
and 10,487,961 shares issued and outstanding atin 2004 and 2003, respectively 25,26125,345 25,171
Paid-in capital 4,755,2084,796,999 4,673,158
Retained earnings 10,775,68511,291,897 9,804,719
Less: Notesnotes receivable - secured by common stock (15,000) (20,000)
Accumulated other comprehensive income 15,539loss 4,360 26,445
------------ --------------
Total stockholders' equity 15,556,69316,103,601 14,509,493
------------ --------------
$20,739,514$20,402,329 $ 19,058,406
============ ==============
The accompanying notes are an integral part of these financial statements.
3
THE LEATHER FACTORY, INC.INC
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(UNAUDITED)
THREE AND SIX MONTHS ENDED MARCH 31,JUNE 30, 2004 AND 2003
2004 2003
----------- ------------THREE MONTHS SIX MONTHS
2004 2003 2004 2003
------------- ----------- ----------- -----------
NET SALES $12,180,877 $10,560,085$ 10,959,813 $10,460,675 $23,140,689 $21,020,760
COST OF SALES 5,455,964 4,914,5814,978,754 4,739,621 10,434,717 9,654,202
------------- ----------- ----------------------- -----------
Gross profit 6,724,913 5,645,5045,981,059 5,721,054 12,705,972 11,366,558
OPERATING EXPENSES 5,277,778 4,529,8325,127,223 4,566,590 10,405,002 9,096,422
------------- ----------- ----------------------- -----------
INCOME FROM OPERATIONS 1,447,135 1,115,672853,836 1,154,464 2,300,970 2,270,136
OTHER EXPENSE:INCOME (EXPENSE):
Interest expense 13,638 63,352(12,471) (70,468) (26,109) (133,820)
Other, net 1,737 (30,818)(25,353) 43,705 (27,089) 74,523
------------- ----------- ----------------------- -----------
Total other expense 15,375 32,534income (expense) (37,824) (26,763) (53,198) (59,297)
------------- ----------- ----------------------- -----------
INCOME BEFORE INCOME TAXES 1,431,760 1,083,138816,012 1,127,701 2,247,772 2,210,839
PROVISION FOR INCOME TAXES 460,794 308,620299,799 348,997 760,594 657,617
------------- ----------- ----------------------- -----------
NET INCOME $ 970,966516,213 $ 774,518778,704 $ 1,487,178 $ 1,553,222
============= =========== ======================= ===========
NET INCOME PER COMMON SHARE - BASICSHARE-BASIC $ 0.090.05 $ 0.08 $ 0.14 $ 0.15
============= =========== ======================= ===========
NET INCOME PER COMMON SHARE - DILUTEDSHARE-DILUTED $ 0.090.05 $ 0.07 $ 0.14 $ 0.14
============= =========== ======================= ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 10,506,995 10,177,43310,553,243 10,234,054 10,530,119 10,205,900
Diluted 11,011,122 10,793,46411,006,638 10,805,019 11,011,525 10,802,677
The accompanying notes are an integral part of these financial statements.
4
THE LEATHER FACTORY, INC.INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2004 AND 2003
2004 2003
----------- ------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 970,9661,487,178 $ 774,5181,553,222
Adjustments to reconcile net income to net
cash (used in) provided by operating activities-
Depreciation & amortization 129,418 125,031252,701 275,127
Loss on disposal of assets - 9,3719,372
Deferred income taxes (19,774) 24,479(66,398) 47,818
Other (9,766) 10,609(19,240) 7,843
Net changes in assets and liabilities:
Accounts receivable-trade, net (1,226,807) (829,103)(867,259) (882,519)
Inventory (267,966) 22,759(1,064,766) 531,217
Income taxes 435,654 187,386201,635 50,479
Other current assets (351,800) (352,038)(106,548) (86,169)
Accounts payable 810,013 (90,543)342,974 (280,681)
Accrued expenses and other liabilities 112,810 (1,507,392)
-----------102,301 (1,652,021)
------------ ------------
Total adjustments (388,218) (2,399,441)
-----------(1,224,599) (1,979,534)
------------ ------------
Net cash (used in) provided by (used in) operating activities 582,748 (1,624,923)
-----------262,578 (426,312)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (82,115) (93,972)(131,050) (270,377)
Payments in connection with businesses acquired (125,452) -
Proceeds from sale of assets - 6,217
Increase in other assets 14,076 (17,197)
-----------12,287 (16,966)
------------ ------------
Net cash used in investing activities (193,491) (104,952)
-----------(244,215) (281,126)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (525,000) 1,597,065(692,684) 550,201
Payments on notes payable and long-term debt (1,134) (1,600)(3,226)
Decrease in cash restricted for payment on revolving credit facility - 90,18683,718
Payments received on notes secured by common stock 5,000 -24,003
Proceeds from issuance of common stock 82,140 47,655
-----------124,015 111,806
------------ ------------
Net cash provided by (used in) financing activities (438,994) 1,733,306
-----------(565,103) 766,502
------------ ------------
NET CHANGE IN CASH (49,737) 3,431(546,740) 59,064
CASH, beginning of period 1,728,344 101,557
----------------------- ------------
CASH, end of period $ 1,678,6071,181,604 $ 104,988
===========160,621
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 16,20529,639 $ 59,930131,122
Income taxes paid during the period, net of (refunds) 44,914 41,620577,678 512,151
The accompanying notes are an integral part of these financial statements.
5
THE LEATHER FACTORY, INC.INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2004 AND 2003
COMPREHENSIVE
NUMBER OF SHARES PAR VALUE PAID-IN CAPITAL RETAINED EARNINGS
----------------- ----------- ---------------- ------------------
BALANCE, December 31, 2002 10,149,961 $ 24,360 $ 4,163,901 $ 7,064,345
Payments on notes receivable-secured by common stock - - - -
Shares issued - stock options exercised 62,500 150 47,506120,500 289 111,517 -
Warrants to acquire 100,000 shares of common stock issued - - 126,381 -
Net income - - - 774,5181,553,222
Translation adjustment - - - -
----------------- ----------- ---------------- ---------- ---------------- -----------------------------------
BALANCE, March 31,June 30, 2003 10,212,46110,270,461 $ 24,51024,649 $ 4,211,4074,401,799 $ 7,838,863
================8,617,567
================= ========== ================ ===================================
BALANCE, December 31, 2003 10,487,961 $ 25,171 $ 4,673,158 $ 9,804,719
Payments on notes receivable-secured by common stock - - - -
Shares issued - stock options exercised 37,700 90 82,05072,700 174 74,896 -
Warrants to acquire 50,000 shares of common stock issued - - 48,945 -
Net income - - - 970,9661,487,178
Translation adjustment - - - -
---------------- --------------------------- ----------- ---------------- -----------------
BALANCE, March 31,June 30, 2004 10,525,66110,560,661 $ 25,26125,345 $ 4,755,2084,796,999 $ 10,775,685
================11,291,897
================= ========== ================ =================
NOTES RECEIVABLE - ACCUMULATED OTHER
COMPREHENSIVE
SECURED BY CUMULATIVE COMPREHENSIVE
COMMON STOCK CUMULATIVE INCOME (LOSS) TOTAL INCOME (LOSS)
----------------------- ---------------------------------------- ------------------ ----------- -------------
--------------
BALANCE, December 31, 2002 $ (44,003) $ (38,541) $11,170,062
Payments on notes receivable-secured by common stock 24,003 - - -24,003
Shares issued - stock options exercised - - 47,656111,806
Warrants to acquire 100,000 shares of common stock issued - - 126,381
Net income - - 774,5181,553,222 $ 774,5181,553,222
Translation adjustment - 10,609 10,609 10,609
----------------------- ------------------------21,751 21,751 21,751
---------------- ------------------ -----------
-------------
BALANCE, March 31,June 30, 2003 $ (44,003)(20,000) $ (27,932) $12,002,845
======================= ======================== ===========(16,790) $13,007,225
================ ================== ============ --------------
Comprehensive income for the threesix months ended March 31,June 30, 2003 $ 785,127
=============1,574,973
==============
BALANCE, December 31, 2003 $ (20,000) $ 26,445 $14,509,493
Payments on notes receivable-securedreceivable=secured by common stock 5,000 - 5,000
Shares issued -= stock options exercised - - 82,14075,070
Warrants to acquire 50,000 shares of common stock issued - - 48,945
Net income - - 970,9661,487,178 $ 970,9661,487,178
Translation adjustment - (10,906) (10,906) (10,906)
----------------------- ------------------------(22,085) (22,085) (22,085)
---------------- ------------------ -----------
-------------
BALANCE, March 31,June 30, 2004 $ (15,000) $ 15,539 $15,556,693
======================= ======================== ===========4,360 $16,103,601
================ ================== ============ --------------
Comprehensive income for the threesix months ended March 31,June 30, 2004 $ 960,060
=============1,465,093
==============
The accompanying notes are an integral part of these financial statements.
6
THE LEATHER FACTORY, INC.INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.1 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) contain
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly its financial position as of March 31,June 30, 2004 and December 31, 2003,
and its results of operations and cash flows for the three-monththree and six-month periods
ended March 31,June 30, 2004 and 2003. Operating results for the three-month periodthree and six-month
periods ended March 31,June 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 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, 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.
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
JUNE 30, DECEMBER 31,
2004 2003
------------- -------------
Finished goods held for sale $ 11,145,271 $ 9,902,140
Raw materials and work in process 1,043,840 1,177,753
------------- -------------
$ 12,189,111 $ 11,079,893
============= =============
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
during the interim. The first phase screens for impairment, while the second
phase (if necessary) measures the impairment. The Company has elected to
perform the annual analysis during the fourth calendar quarter of each year. As
of December 31, 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 half of 2004.
Other intangibles consist of the following:
AS OF JUNE 30, 2004 AS OF DECEMBER 31, 2003
------------------------------------- ---------------------------------
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
------------- ------------ -------- -------- ------------- --------
Trademarks, Copyrights $ 544,369 $ 156,366 $388,003 $544,369 $ 138,320 $406,049
Non=Compete Agreements 73,000 35,500 37,500 52,000 25,500 26,500
------------- ------------ -------- -------- ------------- --------
$ 617,369 $ 191,866 $425,503 $596,369 $ 163,820 $432,549
============= ============ ======== ======== ============= ========
7
The Company recorded amortization expense of $28,046 during the first six months
of 2004 compared to $38,256 during the first half of 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 is as follows:
LEATHER FACTORY TANDY LEATHER ROBERTS, CUSHMAN TOTAL
---------------- ------------- ---------------- -------
2004 $ 5,954 $ 54,004 $ 0 $59,958
2005 5,954 38,004 0 43,958
2006 5,954 37,337 0 43,291
2007 5,954 36,504 0 42,458
2008 5,954 33,337 0 39,291
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 is the case. Net sales represent gross sales less negotiated
price allowances, product returns, and allowances for defective merchandise.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
"Consolidation of Variable Interest Entities (VIE's)," an Interpretation of
Accounting Research Bulletin No. 51. FIN 46 requires certain variable interest
entities (VIEs) to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity 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 FIN 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 the
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 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
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Finished goods held for sale $ 10,323,322 $ 9,902,140
Raw materials and work in process 1,068,990 1,177,753
-------------- -----------------
$ 11,392,312 $ 11,079,893
============== =================
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
during the interim. The first phase screens for impairment, while the second
phase (if necessary) measures the impairment. The Company has elected to
perform the annual analysis during the fourth calendar quarter of each year. As
of December 31, 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 quarter of 2004.
Other intangibles consist of the following:
AS OF MARCH 31, 2004 AS OF DECEMBER 31, 2003
-------------------------------------- ---------------------------------
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
-------------- ------------ -------- -------- ------------ --------
Trademarks, Copyrights $ 544,369 $ 147,393 $396,976 $544,369 $ 138,320 $406,049
Non-Compete Agreements 73,000 30,483 42,517 52,000 25,500 26,500
-------------- ------------ -------- -------- ------------ --------
$ 617,369 $ 177,876 $439,493 $596,369 $ 163,820 $432,549
============== ============ ======== ======== ============ ========
The Company recorded amortization expense of $14,056 during the first quarter of
2004 compared to $12,740 during the first quarter of 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 is as follows:
ROBERTS,
LEATHER FACTORY TANDY LEATHER CUSHMAN TOTAL
---------------- -------------- -------- -------
2004 $ 5,954 $ 54,004 $ 0 $59,958
2005 5,954 38,004 0 43,958
2006 5,954 37,337 0 43,291
2007 5,954 36,504 0 42,458
2008 5,954 33,337 0 39,291
statements.
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 six months ended March 31,June 30, 2004 and 2003, on a
pro forma basis, would have been as follows:
8
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 -------- --------2004 2003
------------ ------------ ---------- ----------
Net income, as reported $970,966 $774,518$ 516,213 $ 778,704 $1,487,178 $1,553,222
Add: Stock-based compensation expense
included in reported net income - - - -
Deduct: Stock-based compensation expense
determined under fair value method 27,145 20,266
-------- --------20 266 54,290 40,533
------------ ------------ ---------- ----------
Net income, pro forma $943,821 $754,252
======== ========$ 489,068 $ 758,438 $1,432,888 $1,512,689
============ ============ ========== ==========
Net income per share:
Basic - as reported $ 0.090.05 $ 0.08 $ 0.14 $ 0.15
Basic - pro forma $ 0.090.05 $ 0.07 $ 0.14 $ 0.15
Diluted - as reported $ 0.090.05 $ 0.07 $ 0.14 $ 0.14
Diluted - pro forma $ 0.090.04 $ 0.07 $ 0.070.13 $ 0.14
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% and 3.00%2.62% for 2004 and 2003,
respectively; dividend yields of 0% for both periods; volatility factors of .696
for 2004 and .725 for 2003; and an expected life of the valued options of 5
years.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------- ---------- ----------- -----------
Numerator:
Net income $ 970,966516,213 $ 774,518778,704 $ 1,487,178 $ 1,553,222
---------- ---------- ----------- -----------
Numerator for basic and diluted earnings per share 970,966 774,518
Denominator for basic earnings per share -
weighted-average516,213 778,704 1,487,178 1,553,222
Denominator:
Weighted-average shares 10,506,995 10,177,433outstanding-basic 10,553,243 10,234,054 10,530,119 10,205,900
Effect of dilutive securities:
Stock options 462,562 442,884416,580 398,684 441,999 423,109
Warrants 41,565 173,14736,815 172,281 39,407 173,668
---------- ---------- ----------- -----------
Dilutive potential common shares 504,127 616,031453,395 570,965 481,406 596,777
---------- ---------- ----------- -----------
Denominator for diluted earnings per share -
weighted-averageshare:
Weighted-average shares 11,011,122 10,793,46411,006,638 10,805,019 11,011,525 10,802,677
========== ========== =========== ===========
Basic earnings per share $ 0.090.05 $ 0.08 $ 0.14 $ 0.15
========== ========== =========== ===========
Diluted earnings per share $ 0.090.05 $ 0.07 $ 0.14 $ 0.14
========== ========== =========== ===========
The net effect of converting stock options and warrants to purchase 825,200637,500 and 747,200684,700
shares of common stock at exerciseoption prices less than the average market prices has
been included in the computations of diluted EPS for the quarterthree and six months
ended March 31,June 30, 2004 and 2003, respectively.
9
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 storeswholesale centers 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
THE LEATHER FACTORY TANDY LEATHER COMPANY ROBERTS,CUSHMAN & CO TOTAL
--------------- ------------- --------------- ------------
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2004
Net sales $ 8,443,0917,423,795 $ 3,166,7382,972,746 $ 571,048 $12,180,877563,272 $10,959,813
Gross profit 4,575,838 1,926,649 222,426 6,724,9133,978,355 1,848,618 154,086 5,981,059
Operating earnings 1,078,409 301,567 67,159 1,447,135645,146 190,756 17,934 853,836
Interest expense (13,638)(12,471) - - (13,638)(12,471)
Other, net (1,803) 66(26,196) 843 - (1,737)(25,353)
------------
Income before income taxes 1,062,968 301,633 67,159 1,431,760606,479 191,599 17,934 816,012
------------
Depreciation and amortization 102,028 25,153 2,237 129,41893,351 27,716 2,216 123,283
Fixed asset additions 39,737 38,043 4,335 82,1157,972 37,348 3,615 48,935
Total assets $ 16,731,24616,224,401 $ 3,079,6053,248,015 $ 928,663 $20,739,514929,913 $20,402,329
--------------- ------------- ---------------- ------------
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2003
Net sales $ 8,201,2587,801,742 $ 1,864,5392,113,479 $ 494,288 $10,560,085545,454 $10,460,675
Gross profit 4,297,502 1,181,332 166,670 5,645,5044,182,812 1,325,072 213,170 5,721,054
Operating earnings 923,637 146,993 45,042 1,115,672918,434 166,230 69,800 1,154,464
Interest expense (63,352)(70,468) - - (63,352)(70,468)
Other, net 31,290 (472)43,091 614 - 30,81843,705
------------
Income before income taxes 891,575 146,521 45,042 1,083,138891,057 166,844 69,800 1,127,701
------------
Depreciation and amortization 106,367 15,839 2,825 125,031129,328 18,247 2,521 150,096
Fixed asset additions 39,497 54,475112,605 62,944 856 176,405
Total assets $16,163,098 $ 3,078,121 $ 925,018 $20,166,237
--------------- ------------- ---------------- ------------
LEATHER FACTORY TANDY LEATHER ROBERTS,CUSHMAN TOTAL
--------------- ------------- --------------- ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Net sales $ 15,866,885 $ 6,139,484 $ 1,134,320 $23,140,689
Gross profit 8,554,193 3,775,267 376,512 12,705,972
Operating earnings 1,718,178 492,322 90,470 2,300,970
Interest expense (26,109) - 93,972- (26,109)
Other, net (27,998) 909 - (27,089)
------------
Income before income taxes 1,664,071 493,231 90,470 2,247,772
------------
Depreciation and amortization 195,379 52,869 4,453 252,701
Fixed asset additions 47,709 75,391 7,950 131,050
Total assets $ 17,364,51316,224,401 $ 2,447,6113,248,015 $ 845,938 $20,658,062929,913 $20,402,329
--------------- ------------- ---------------- ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003
Net sales $ 16,003,000 $ 3,978,018 $ 1,039,742 $21,020,760
Gross profit 8,480,314 2,506,403 379,841 11,366,558
Operating earnings 1,842,071 313,223 114,842 2,270,136
Interest expense (133,820) - - (133,820)
Other, net 74,381 142 - 74,523
------------
Income before income taxes 1,782,632 313,365 114,842 2,210,839
------------
Depreciation and amortization 235,695 34,086 5,346 275,127
Fixed asset additions 152,102 117,419 856 270,377
Total assets $ 16,163,098 $ 3,078,121 $ 925,018 $20,166,237
--------------- ------------- ---------------- ------------
Net sales for geographic areas were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
MARCH 31,
2004 MARCH 31, 2003 -------------- --------------2004 2003
United States $ 11,285,85710,198,130 $ 9,870,6369,711,785 $21,483,986 $19,582,421
All other countries 895,020 689,449
-------------- --------------761,683 748,890 1,656,703 1,438,339
------------ ----------- ----------- -----------
$ 12,180,877 $ 10,560,085
=============== ===============10,959,813 $10,460,675 $23,140,689 $21,020,760
============ =========== =========== ===========
Geographic sales information is based on the location of the customer. NoNet
sales from no single foreign country accounted for anywas material amounts ofto the Company's consolidated
net sales for the three-monththree and six month periods ended March 31,June 30, 2004 and 2003. The
Company does not have any significant long-lived assets outside of the United
States.
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 outletswholesale centers located throughout
the United States and Canada.
Tandy Leather, founded in 1919, 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 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 April
15,June 30, 2004,
we have opened 3032 Tandy Leather retail stores located throughout the United
States.
Cushman, whose origins date back to the mid-1800's,mid-1800s, 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, 2003.
RESULTS OF OPERATIONS
- -----------------------
The following tables present selected financial data on the operating results of
each of the Company's three segments for the quarters and six months ended March 31,June
30, 2004 and 2003:
QUARTER ENDED JUNE 30, 2004 QUARTER ENDED MARCH 31, 2004 MARCH 31,JUNE 30, 2003
-------------------------- --------------------------------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
------------- ---------- ----------- ----------
Leather Factory $ 7,423,795 $ 645,146 $ 7,801,742 $ 918,434
Tandy 2,972,746 190,756 2,113,479 166,230
Cushman 563,272 17,934 545,454 69,800
------------- ---------- ----------- ----------
Total Operations $ 10,959,813 $ 853,836 $10,460,675 $1,154,464
============= ========== =========== ==========
SIX MONTHS ENDED JUNE 30, 2004 SIX MONTHS ENDED JUNE 30, 2003
------------------------------ ------------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
------------ ------------------------- ---------- ----------- ----------
Leather Factory $ 8,443,09115,866,885 $ 1,078,409 $ 8,201,258 $ 923,6371,718,178 $16,003,000 $1,842,071
Tandy Leather 3,166,738 301,567 1,864,539 146,993
Roberts,6,139,484 492,322 3,978,018 313,223
Cushman 571,048 67,160 494,288 45,042
------------ ------------1,134,320 90,470 1,039,742 114,842
------------- ---------- ----------- ----------
Total Operations $ 12,180,87723,140,689 $ 1,447,135 $10,560,085 $1,115,672
============ ============2,300,970 $21,020,760 $2,270,136
============= ========== =========== ==========
10
Consolidated net sales for the quarter ended March 31,June 30, 2004 increased $1.6
million,$499,000,
or 15.4%4.8%, compared to the same period in 2003. Leather Factory
contributed $242,000 to the increase, Tandy contributed $1.3 million$859,000 and
Cushman recorded a gain of $18,000. Leather Factory's sales increase of $77,000.were down $378,000.
Operating income on a consolidated basis for the quarter ended March 31,June 30, 2004 was
down 26% or $300,000 over the second quarter of 2003.
Consolidated net sales for the six months ended June 30, 2004 increased $2.1
million, or 10%, compared to the same period in 2003. Tandy contributed $2.2
million of the sales gain while Cushman added $95,000. Leather Factory's 2004
sales were down $136,000 from those of a year ago. Operating income on a
consolidated basis for the six months ended June 30, 2004 was up 29.7%1.4% or $331,000$31,000
over the first
quarter of 2003.last year.
The following table shows in comparative form our consolidated net income for
the first quarters ofsecond quarter and six months ended June 30, 2004 and 2003:
2004 2003QUARTER ENDED QUARTER ENDED
06/30/04 06/30/03 % CHANGE
--------- ---------------------- ------------- --------
Net income $ 970,966516,213 $ 774,518 25.4%778,704 (33.7%)
============= ============= ========
SIX MONTHS ENDED SIX MONTHS ENDED
06/30/04 06/30/03 % CHANGE
------------- ------------- --------
Net income $ 1,487,178 $ 1,553,222 (4.2%)
============= ============= ========
While our Leather Factory operation recorded 69.3% of our sales in the quarter,
the continued growth and expansion of the Tandy Leather retail 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 wholesale centers increased 2.95%, or
$242,000,decreased 4.8% for the
second quarter of 2004 as follows:
QUARTER ENDED
06/30/04 06/30/03 $ CHANGE % CHANGE
---------- ---------- --------- --------
Sales, excluding NATIONAL ACCOUNTS $6,223,275 $5,952,823 $ 270,452 4.5%
NATIONAL ACCOUNT sales 1,200,520 1,848,919 (648,399) (35.1)%
---------- ---------- --------- --------
Total sales $7,423,795 $7,801,742 $(377,947) (4.8)%
========== ========== ========== =========
As shown by the table above, the Leather Factory wholesale centers achieved
solid sales gains, excluding the impact of the NATIONAL ACCOUNT customer group.
The 4.5% increase is at the upper end of management's expectations for sales
growth of 2-4%. Sales to our WHOLESALE customer group continues its positive
momentum as we are still benefiting from the advertising initiatives put in
place in late 2003. Sales to our NATIONAL ACCOUNTS were down significantly in
the second quarter of 2004 and were also down in the first quarter of 2004.this year.
Although there can be no assurance, we are optimistic that these decreases are
only temporary. For example, we understand that there have been some internal
changes with several national customers, such as changes in purchasing personnel
and the implementation of new automated inventory and purchasing systems, that
have impacted the timing and amount of their purchases from us. Even if this
optimism is correct, we may not see any significant improvement in these sales
until the fourth quarter of 2004 or later. We are currently redesigning our
sales strategy in order to increase the customer base and diversify the revenue
from this customer group.
The following table presents TLF's sales mix by customer categories for the
quarters ended March 31,June 30, 2004 and 2003:
QUARTER ENDED
CUSTOMER GROUP 3/31/06/30/04 3/31/06/30/03
- ------------------------------------------------------------------------------------- --------------------- -------- --------
RETAIL (end users, consumers, individuals) 23% 23%21% 19%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 7% 8%etc) 9 10
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 45% 42%etc) 45 39
NATIONAL ACCOUNTS 19% 21%18 24
MANUFACTURERS 6% 6%
-------7 8
-------- --------
100% 100%
=============== ========
Our biggest sales gains were in our WHOLESALE and MANUFACTURER customer groups.
We believe that in both cases, new advertising programs begun in the second half
of 2003 contributed to these gains. 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 renewals will
produce increased sales for our NATIONAL ACCOUNT customer group later in 2004.
Operating income for Leather Factory increased $155,000decreased $273,000 for the currentsecond quarter
compared to 2003, an improvementa decline of 16.7%30%. Gross profit margins remained steady at
53.6% for the second quarters of 2004 and 2003. The decrease in sales resulted
in a decline in gross profit dollars of $204,000. Operating expenses increased
$69,000, or 2.1%, in the second quarter of 2004. The cost of health insurance
benefits for employees accounted for the majority of the increase over last
year. Management is cautiously optimistic with the progress we have made to
contain our operating expenses during the quarter. However, our success is
somewhat clouded by the sales loss as athe percentage of operating expenses to
sales were 41.4%, slightly higher ($120,000) than our targetappears to be high. A large number of 40% of sales.
Advertising and marketing expenses were up slightlyactually decreased this
quarter duecompared to expanding 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 end of the first quarter, as a result of a few
customer accounts whose collectability appears questionable.year ago.
11
TANDY LEATHER OPERATIONS
The Tandy Leather retail store chain has grown from 1922 stores at March 31,June 30, 2003
to 2932 a year later. Net sales for Tandy Leather were up approximately 70%41% for the
firstsecond quarter of 2004 over the same quarter last year.
QTR ENDED QTR ENDED $INCR % INCR
3/31/QTR ENDED QTR ENDED $ INCR % INCR
6/30/04 3/31/6/30/03 (DECR) (DECR)
---------- ---------- ---------- ----------------- -------
Same (existing) store sales $1,832,591 $1,806,293 $ 26,298 1.46%(22 stores) $2,306,231 $2,112,150 $194,081 9.2%
New or acquired store sales 1,334,147 57,187 1,276,960 N/A
Order(10 stores) 666,515 - 666,515 ***
Closed store (order fulfillment househouse) - closed - 1,059 (1,059) (100.00)1,329 (1,329) (100.0)
---------- ---------- ---------- ----------------- -------
Total sales $3,166,738 $1,864,539 $1,302,199 69.84%$2,972,746 $2,113,479 $859,267 40.7%
========== ========== ========== ========= =======
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 opened in February and March 2003.
Sales in the current quarter were solid - although as the table above indicates,
our existing stores did not produce as strongly as we expected.showed healthy growth. The results are
uneven, with existing stores reporting"same stores" continue
to post strong gains. Average sales gains ranging from 4% to 48%per month for
the quarter. We produced and mailed a sales flyer in a new format during the
quarter that failed to produce the sales that we expected. We have gone back to
our more traditional format for sales flyers, expecting it to produce more
customer interest. The retail stores that arehave been open
for at least threesix months old are
averaging approximately $38,000 in salesas of June 30, 2004 is $36,000, which continues to beat
our internal expectations of $30,000 per month.month per store.
The following table presents Tandy Leather's sales mix by customer categories
for the quarters ended March 31,June 30, 2004 and 2003:
QUARTER ENDED
CUSTOMER GROUP 3/31/06/30/04 3/31/06/30/03
- ------------------------------------------------------------------------------------- ------- --------------------- -------- --------
RETAIL (end users, consumers, individuals) 74% 72%68% 67%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 4 4etc) 10 10
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 20etc) 22 23
NATIONAL ACCOUNTS - -* *
MANUFACTURERS 2 1
------- -------* *
-------- --------
100% 100%
======= =============== ========
* less than 1%
OperatingSecond quarter operating income as a percentage of salesfor Tandy Leather increased $25,000 or 15% over
operating income in last year's second quarter. Gross profit margins declined
0.5% from 7.9% in62.7% to 62.2% for the first
quarter 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 percentage of sales decreased
from 55.5% to 51.3% due primarily to limitations in
increasing selling prices to match cost increases. Tandy's selling prices are
set at the increasetime the product catalog is produced. The latest catalog was
distributed in leverage obtained asJanuary 2004. As a result, it is difficult to initiate price
increases to customers until we distribute a new catalog. Historically, we
distribute our new catalog at the beginning of each calendar year. However, due
to the significantcost increases in metals, etc. this year and the need to pass on these
increases, we will be distributing a new catalog on November 1.
Operating expenses were 55.8% of sales increase.
12
in the current quarter compared to 54.8%
in the same quarter last year. The expenses associated with opening the six new
stores so far in 2004, such as additional personnel, rents, utilities, etc.,
accounted for the operating expense increase over last year.
ROBERTS, CUSHMAN OPERATIONS
Net sales for Cushman increased $77,000 or 15.5%$18,000 for the firstsecond quarter of 2004 over the
second quarter of 2003, although operating income decreased $52,000. The
increase in sales is the result of an increase in orders from hat manufacturers.
However, the sales mix is more heavily weighted toward the production of bands
(pure manufacturing achieves lower margins) rather than the sale of components
that require no manufacturing (and as a result, earn higher margins). Also,
due to the nature of this business, samples are made and improved itsproduct is priced up to
six months before the bands are actually produced. As a result, there is the
possibility that, if cost of raw materials increases from the time of quote to
the time of production and that cost increase cannot be passed on to the
customer, our gross profit margin from 34%will decrease. We experienced this during the
second quarter due to 39%.fluctuations in metal prices, etc. and should have been
more aggressive with our vendors and customers to try to minimize the impact to
us. Operating income for
Cushman increased $22,000 or 49.1%. We eliminated one management position in
the operation at the beginning of 2004, which contributed to the improvement in
operating income.
COSTS AND EXPENSES
Our consolidated gross profit as a percent of net sales increased to 55.2%expenses decreased $7,000 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 42.9% of net sales in the first three
months of 2003.quarter.
OTHER EXPENSES
Interest expense in the firstsecond quarter of 2004 ($14,000) was $12,000, down 78.5% from $70,000 in
the firstsecond quarter of 2003 ($63,000) due2003. The decrease was attributable to the decrease in
our average debt balance for the outstanding debt
balance.first six months of 2004 to $1.4 million,
compared to $4.5 million for the first six months of 2003. We added $75,000 to
our reserve for uncollectible accounts in 2004 in connection with the increased
investment in accounts receivable described below.
12
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------------------------------
There was a slight change (approximately 9%) inOn our consolidated balance sheet, total assets from December 31, 2003 to March 31, 2004, increasingincreased from $19.0 million at
year-end 2003 to $20.7$20.4 million at March 31. OurJune 30, 2004. An increase in inventory of
$1.1 million and accounts receivable of $867,000 accounted for the majorityincrease in
total assets, partially offset by a decrease in cash of the increase.$546,000. Total
stockholders' equity increased from $14.5 million at December 31, 2003 to $15.5$16.1
million at March 31,June 30, 2004. Most ofThe increase in equity is attributable to the
increase was from
earnings in the first quarterhalf of thisthe year.
The Company's
current ratio fell slightly from 6.16Our investment in inventory was $12.2 million at June 30, 2004 compared to $11.1
million at December 31, 2003 to 4.69 at March 31,
2004.
Inventory increased by $312,000 at March 31, 2004 from year-end 2003. Inventory turnover increased to an annualized
rate of 4.343.98 times during the first quartersix months of 2004, an improvement from 3.473.52
times for the first quarterhalf of 2003 and 3.51 times for all of 2003. We compute our
inventory turns as sales divided by average inventory. InventoryAs we stated in our 2003
Form 10-K, we expect our inventory to slowly trend upward as we continue our
expansion of the Tandy Leather store chain. However, we continually analyze our
inventory levels as inventory management is a significant factor in our
financial position. We
strive to maintainOur inventory at June 30, 2004 was within 5% of our
internal optimal targets.
Credit sales increased in the optimal amountfirst six months of inventory throughout2004, and the system in
order to fill customer orders timely without tying up too much working capital.
We are pleased with our achievement in this area as of the end of the quarter
and continue to monitor our inventory levels in order to maximize optimum
availability.
The Company's
investment in accounts receivable was $3.1$2.7 million at March 31,June 30, 2004, up $1.2 million$867,000
from $1.8 million at year-end 2003. This is a result of
an increase in credit sales to our national accounts during the quarter ended
March 31, 2004 as compared to that of the quarter ended December 31, 2003. TheConsolidated average days to collect
accounts slowedimproved slightly over the first quarterhalf of 2003 from 45.043.3 days to 47.242.8
days. Cushman posted the most improvement in average days to collect accounts,
from 66.768.2 days to 51.1 days outstanding. Tandy Leather's days outstanding
decreased in the first half of 2004 compared to 2003, from 43.7 in 2003 to 41.1
days in 2004, while Leather Factory's days outstanding increased from 40.2 days
in 2003 to 50.1 days for the first
quarter of 2004, respectively. Leather Factory and Tandy Leather's days to
collect were 44.7 and 39.041.7 days in the first quarter of 2004 compared to 41.1
and 39.6 days in the first quarter of 2003, respectively.2004.
Accounts payable increased $810,000$343,000 to $2.4$1.9 million at the end of the firstsecond
quarter, due primarily to the increase in inventory purchases to supportduring the increased sales and the negotiations with some vendors for longer payment terms.period.
Accrued expenses and other liabilities increased $113,000.$102,000, from $1.0 million at
December 31, 2003 to $1.1 million at June 30, 2004.
At June 30, 2004, our ratio of debt to equity was 0.07, an improvement from
December 31, 2003 at which time the debt-to-equity ratio was 0.12. Our current
ratio fell to 5.71 at June 30, 2004, from 6.16 at the end of 2003.
During the first quarterhalf of 2004, cash flowflows provided by operating activities was
$583,000. The net$263,000. Net income, generated for the quarter and the increase in accounts
payable contributed to the cash flow, offset somewhatreduced by the increase in accounts receivable.inventory from year-end to
June 30, 2004, accounted for the majority of the cash flow. Cash flowflows used in
investing activities totaled $193,000.
$125,000 of this was$244,000. Capital expenditures for the assetsfirst six
months of 2004 totaled $131,000. The asset purchases of the Syracuse, NY and
St. Louis, MO Tandy Leather retail stores. Equipment purchased during the quarter totaled
$82,000. Most of the equipment purchased was for the new Tandy Leather stores.stores required $125,000. Cash flowflows used by
financing activities was $439,000, consisting$565,000 during the first half of payments on2004. The funds were
primarily used to reduce the principal balance of our revolving credit facility during the quarter totaling $525,000, offset
primarily by stock option exercises by employees.facility.
At MarchDecember 31, 2003, our bank debt totaled $5.8$1.8 million. At March 31,June 30, 2004, the
balance was $1.3$1.1 million, a decrease of 77%.39% in the first six months of 2004.
From June 30, 2003, we have repaid $3.7 million on our bank debt.
We expect to fund our operating and liquidity needs as well as our current
expansion of Tandy Leather's retail store chain from a combination of current
cash balances, internally generated funds and our revolving credit facility with
Wells Fargo, whichour lender. The borrowing base on our revolving line of credit is based uponon the
level of the our accounts receivable and inventory. At March 31,June 30, 2004, the
available, and unused portion of the credit facility was approximately $3.7$3.9 million.
13
FORWARD-LOOKING STATEMENTS
- ---------------------------
This report (particularly Items 2, 3 and 4 of this Item 2)Part I) 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 thatwhich could cause actual
results to differ materially from those suggested by the forward-looking
statements include, among other things:
- - We mightmay fail to realize the anticipated benefits of the opening of Tandy
Leather retail stores or we mightmay be unable to obtain sufficient new locations on
acceptable terms to meet our growth plans. Also, other retail initiatives mightmay
not be successful.
- -When we acquired the assets of Tandy Leather in late 2000, there was only a
single Tandy Leather distribution center and no retail outlets. In 2002, we
began a program of developing Tandy Leather retail stores, and through June 30,
2004, we have added 32 Tandy Leather stores and closed the distribution center.
We believe that these store openings and acquisitions have been successful, but
there can be no assurance that this success will continue or that we will be
able to find additional locations for new stores or existing leathercraft stores
to acquire on economically viable terms. Because, in recent years, the
expansion of Tandy Leather has produced much of the increase in our profits,
disruption of this expansion would likely slow or stop this increase in profits.
Also, both our Leather Factory and Tandy Leather segments depend on marketing
efforts to support sales. Recently we conducted an advertising campaign at the
Leather Factory that failed to generate anticipated sales. While we believe
this was caused by a change in the format of our advertising, there can be no
assurance that future advertising will be successful.
Recent declines in sales to national accounts by our Leather Factory
operation could continue.
Sales to national accounts by our Leather Factory operation decreased at the end
of 2003 and were also down in the first six months of 2004. We are working to
reverse this trend, but, if it continues, our consolidated net income could be
reduced.
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 war and other military operations in the
Middle East and other areas abroad could disrupt international trade and affect
the Company's inventory sources.
- -Recent political discussions have suggested that the United States impose
barriers on the importation of certain goods. We rely heavily on imported goods
as sources of the inventory we sell. Tariffs, taxes and limits on these imports
could affect our ability to obtain inventory or increase the price we pay for
inventory. If these disruptions occur, our operations could be adversely
affected.
Also, the involvement of the United States in the war in Iraq and the
anti-terrorist activities in Afghanistan have produced political uncertainty
and, in certain countries, resentment against the United States and its citizens
and companies. These issues may also affect our ability to obtain products from
abroad.
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.
The prices of hides and leathers fluctuate in normal times, and these
fluctuations can affect the Company. Livestock diseases such as mad cow could
reduce the availability of hides and leathers or increase their cost.
We believe that the recent rise in oil and natural gas prices will increase
the costs of the goods that we sell, including the costs of shipping those goods
from the manufacturer to our stores and customers.
Various oils used to manufacture certain leather and leathercrafts are derived
from petroleum and natural gas. Also, the carriers who transport our goods rely
on petroleum-based fuels to power their ships, trucks and trains. They are
likely to pass their increased costs on to us. We are unsure how much of this
increase we will be able to pass on to our customers.
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.
- - As a resultRecently, the world economy has shown signs of recovering from an economic
slump. However, this recovery is not yet complete, and there can be no
assurance that increased oil and gas prices, terrorism, or other factors will
not impede this recovery. Continuation or worsening of the on-goingeconomic slump is
likely to limit or decrease our profits.
In addition, terrorism or the threat of terrorist attacks onin the United States
or against U.S. interests abroad could cause consumer buying habits couldto change
and decrease our sales. - - Livestock diseasesWe believe that major disruptions (such as terrorist
attacks) could reduce consumer spending, particularly purchases of non-essential
products such as mad cow could reduce the availability of hides
and leathers or increase their cost. Also, the prices of hides and leathers
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.
- -ours.
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.
- - 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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKRISK.
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, 2003. The Company
believes that its exposure to market risks has not changed significantly since
December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
At the end of the firstsecond quarter of 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 periodperiods specified in the resultsrules 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 operatingoperated 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 SECURITIES4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 24,May 26, 2004, the Company entered into a Capital Markets Services
Engagement Agreement ("Services Agreement") with Westminster Securities
Corporation ("Westminster"), a member firmAnnual Meeting of the New York Stock Exchange.
Under the Services Agreement, Westminster agreed to provideStockholders of the Company with
capital market services, including corporate finance advisory services, research
services,was held
in the Hall of Fame Room at the Wyndham Hotel, Arlington, Texas to consider and
salesact on the election of the following individuals to serve as directors until the
Company's 2005 Annual Meeting of Stockholders or until their successors are duly
elected and trading services.
Forqualified:
Shannon L. Greene Michael A. Markwardt Joseph R. Mannes
T. Field Lange Ronald C. Morgan Wray Thompson
Michael A. Nery H.W. "Hub" Markwardt
The following table shows the servicesvotes cast for and against, as well as those that
abstained from voting, the election of these individuals as directors of the
Company:
For Against Abstaining
--------- ------- ----------
Shannon L Greene 9,556,122 2,930 4,170
T Field Lange 9,548,463 5,585 9,174
Joseph R Mannes 9,548,963 5,085 9,174
HW "Hub" Markwardt 9,338,149 215,899 9,174
Michael A Markwardt 9,548,213 5,835 9,174
Ronald C Morgan 9,556,472 2,580 4,170
Michael A Nery 9,555,967 3,085 4,170
Wray Thompson 9,552,187 3,055 12,984
The Company's proxy statement dated April 23, 2004, for the 2004 Annual Meeting
of Stockholders, provided detailed information about this meeting and the action
to be provided during the two-year term of the Services
Agreement,taken there.
15
ITEM 5. OTHER INFORMATION
In an effort to reduce our administrative and compliance costs for stockholders
who only have a small investment in the Company, agreedour Board of Directors approved
an offer to pay $4,000purchase the holdings of stockholders who hold fewer than 100 shares
of our common stock. The Board set June 25, 2004 as the record date for this
offer, with the offer to begin July 1, 2004 and the closing price on July 8,
2004 ($4.35 per month duringshare) to be the contract's
term. Also,offer price.
This offer terminates on August 30, 2004, unless sooner terminated by the
Company. At June 30, 2004 we had approximately 300 registered stockholders who
held fewer than 100 shares of our common stock and another 200 stockholders who
held less than 100 shares in brokerage accounts.
In addition to benefiting the Company, issuedwe believe this offer will be beneficial
to Westminster and certain named employees
warrantsinvestors with small holdings by allowing them the opportunity to purchase 50,000sell their
shares without the expense of selling them in 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
market.
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
31.2 13a-4(a) Certification by Shannon L.L Greene, Chief Financial Officer and Treasurer
32.132 Certification Pursuant to 18 U.S.C.USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
----------------------
On March 9,April 28, 2004, the Company filed a report on Form 8-K in which we furnished
under Items 7 and 12.12 the press release entitled "The Leather Factory Expects Net
Income Up 25% for First Quarter 2004" relating to certain preliminary financial
information for the quarter ended March 31, 2004.
On April 29, 2004, the Company filed a report on Form 8-K in which we furnished
under Items 7 and 12 the press release entitled "The Leather Factory Reports 1st
Quarter 2004 Results - Net Income up 25% on Record Revenues" relating to the
results of our first quarter ended March 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: May 14,August 9, 2004 By: /s/ Wray Thompson
--------------------
Wray Thompson
Chairman of the Board and Chief Executive Officer
Date: May 14,August 9, 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, certify that:
1. I have reviewed this quarterly report on Form 10-K10-Q 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. No. 33-8238] for the registrant and have:
(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) [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
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's fourthsecond fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying 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) 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) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: May 14,August 9, 2004
/s/ Wray Thompson
-------------------
Wray Thompson
PresidentChairman and Chief Executive Officer
(principal executive officer)
2317
EXHIBIT 31.2
RULE 13A-4(A) CERTIFICATION
I, SHANNON L. GREENE, certify that:
1. I have reviewed this quarterly report on Form 10-K10-Q 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. No. 33-8238] for the registrant and have:
(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) [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
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's fourthsecond fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying 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) 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) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: May 14,August 9, 2004
/s/ Shannon L. Greene
-------------------------
Shannon L. Greene
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
2418
EXHIBIT 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 March 31,June 30, 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 fully presents, in all material
respects, the financial condition and results of operations of the Company.
May 14,August 9, 2004 By: /s/ Wray Thompson
-------------------
WRAY THOMPSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
May 14,August 9, 2004 By: /s/ Shannon L. Greene
------------------------
SHANNON L. GREENE
CHIEF FINANCIAL OFFICER AND TREASURER
19