FORM 10-Q10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2543540
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
3847 EAST LOOP 820 SOUTH, FT. WORTH, TEXAS 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer.
Yes No Xx
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares outstanding as
Class of August 6,May 10, 2004
Common Stock, par value $.0024 per share 10,560,661
110,555,661
THE LEATHER FACTORY, INC.
FORM 10-Q10-Q/A
FOR THE QUARTERLY PERIOD ENDED JUNE 30,MARCH 31, 2004
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30,March 31, 2004 and December 31, 2003 3
Consolidated Statements of OperationsIncome
Three and six months ended June 30,March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows
SixThree months ended June 30,March 31, 2004 and 2003 5
Consolidated Statements of Stockholders' Equity
SixThree months ended June 30,March 31, 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. Other InformationChanges in Securities 16
Item 6. Exhibits and Reports on Form 8-K 1617
SIGNATURES 1617
2
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2004 2003
JUNE 30, DECEMBER 31,
2004 2003
------------ --------------(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,181,6041,678,607 $ 1,728,344
Accounts receivable-trade, net of allowance for doubtful accounts
of $107,000$63,000 and $31,000 in 2004 and 2003, respectively 2,695,9973,055,545 1,828,738
Inventory 12,189,11111,392,312 11,079,893
Prepaid income taxes 4,388- 206,023
Deferred income taxes 199,368161,674 134,312
Other current assets 808,7841,054,036 702,236
------------ --------------
Total current assets 17,079,25217,342,174 15,679,546
------------ --------------
PROPERTY AND EQUIPMENT, at cost 5,738,0425,689,106 5,574,992
Less accumulatedLess-accumulated depreciation and amortization (3,893,754)(3,784,460) (3,669,099)
------------ --------------
Property and equipment, net 1,844,2881,904,646 1,905,893
------------ --------------
GOODWILL, net of accumulated amortization of $755,000$757,000 and
$758,000 in 2004 and 2003, respectively 729,390731,094 704,235
OTHER INTANGIBLES, net of accumulated amortization of
$192,000$178,000 and $164,000, in 2004 and 2003, respectively 425,503439,493 432,549
OTHER ASSETS 323,896assets 322,107 336,183
------------ --------------
$20,402,329$20,739,514 $ 19,058,406
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,888,0532,355,092 $ 1,545,079
Accrued expenses and other liabilities 1,102,7281,113,237 1,000,427
Income taxes payable 229,631 -
Notes payable and current maturities of long-term debt - 1,134
------------ --------------
Total current liabilities 2,990,7813,697,960 2,546,640
------------ --------------
DEFERRED INCOME TAXES 207,947216,877 209,289
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 1,100,0001,267,984 1,792,984
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,00020,000,000 shares authorized,
none issued or outstanding - -
Common stock, $0.0024 par value; 25,000,000 shares authorized, 10,560,66110,525,661 and
10,487,961 shares issued and outstanding inat 2004 and 2003, respectively 25,34525,261 25,171
Paid-in capital 4,796,9994,755,208 4,673,158
Retained earnings 11,291,89710,775,685 9,804,719
Less: notesNotes receivable - secured by common stock (15,000) (20,000)
Accumulated other comprehensive loss 4,360income 15,539 26,445
------------ --------------
Total stockholders' equity 16,103,60115,556,693 14,509,493
------------ --------------
$20,402,329$20,739,514 $ 19,058,406
============ ==============
The accompanying notes are an integral part of these financial statements.
3
THE LEATHER FACTORY, INCINC.
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2004 AND 2003
THREE MONTHS SIX MONTHS
2004 2003
2004 2003
------------- ----------- ----------- -----------
NET SALES $ 10,959,813 $10,460,675 $23,140,689 $21,020,760$12,180,877 $10,560,085
COST OF SALES 4,978,754 4,739,621 10,434,717 9,654,202
------------- -----------5,455,964 4,914,581
----------- -----------
Gross profit 5,981,059 5,721,054 12,705,972 11,366,5586,724,913 5,645,504
OPERATING EXPENSES 5,127,223 4,566,590 10,405,002 9,096,422
------------- -----------5,277,778 4,529,832
----------- -----------
INCOME FROM OPERATIONS 853,836 1,154,464 2,300,970 2,270,1361,447,135 1,115,672
OTHER INCOME (EXPENSE):EXPENSE:
Interest expense (12,471) (70,468) (26,109) (133,820)13,638 63,352
Other, net (25,353) 43,705 (27,089) 74,523
------------- -----------1,737 (30,818)
----------- -----------
Total other income (expense) (37,824) (26,763) (53,198) (59,297)
------------- -----------expense 15,375 32,534
----------- -----------
INCOME BEFORE INCOME TAXES 816,012 1,127,701 2,247,772 2,210,8391,431,760 1,083,138
PROVISION FOR INCOME TAXES 299,799 348,997 760,594 657,617
------------- -----------460,794 308,620
----------- -----------
NET INCOME $ 516,213970,966 $ 778,704 $ 1,487,178 $ 1,553,222
============= ===========774,518
=========== ===========
NET INCOME PER COMMON SHARE-BASICSHARE - BASIC $ 0.050.09 $ 0.08 $ 0.14 $ 0.15
============= ===========
=========== ===========
NET INCOME PER COMMON SHARE-DILUTEDSHARE - DILUTED $ 0.050.09 $ 0.07 $ 0.14 $ 0.14
============= ===========
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 10,553,243 10,234,054 10,530,119 10,205,90010,506,995 10,177,433
Diluted 11,006,638 10,805,019 11,011,525 10,802,67711,011,122 10,793,464
The accompanying notes are an integral part of these financial statements.
4
THE LEATHER FACTORY, INCINC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2004 AND 2003
2004 2003
----------- ------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,487,178970,966 $ 1,553,222774,518
Adjustments to reconcile net income to net
cash (used in) provided by operating activities-
Depreciation & amortization 252,701 275,127129,418 125,031
Loss on disposal of assets - 9,3729,371
Deferred income taxes (66,398) 47,818(19,774) 24,479
Other (19,240) 7,843(9,766) 10,609
Net changes in assets and liabilities:
Accounts receivable-trade, net (867,259) (882,519)(1,226,807) (829,103)
Inventory (1,064,766) 531,217(267,966) 22,759
Income taxes 201,635 50,479435,654 187,386
Other current assets (106,548) (86,169)(351,800) (352,038)
Accounts payable 342,974 (280,681)810,013 (90,543)
Accrued expenses and other liabilities 102,301 (1,652,021)
------------112,810 (1,507,392)
----------- ------------
Total adjustments (1,224,599) (1,979,534)
------------(388,218) (2,399,441)
----------- ------------
Net cash provided by (used in) provided by operating activities 262,578 (426,312)
------------ ------------582,748 (1,624,923)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (131,050) (270,377)(82,115) (93,972)
Payments in connection with businesses acquired (125,452) -
Proceeds from sale of assets - 6,217
Increase in other assets 12,287 (16,966)
------------14,076 (17,197)
----------- ------------
Net cash used in investing activities (244,215) (281,126)
------------ ------------(193,491) (104,952)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (692,684) 550,201(525,000) 1,597,065
Payments on notes payable and long-term debt (1,134) (3,226)(1,600)
Decrease in cash restricted for payment on revolving credit facility - 83,71890,186
Payments received on notes secured by common stock 5,000 24,003-
Proceeds from issuance of common stock 124,015 111,806
------------82,140 47,655
----------- ------------
Net cash provided by (used in) financing activities (565,103) 766,502
------------(438,994) 1,733,306
----------- ------------
NET CHANGE IN CASH (546,740) 59,064(49,737) 3,431
CASH, beginning of period 1,728,344 101,557
----------------------- ------------
CASH, end of period $ 1,181,6041,678,607 $ 160,621
============104,988
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 29,63916,205 $ 131,12259,930
Income taxes paid during the period, net of (refunds) 577,678 512,15144,914 41,620
The accompanying notes are an integral part of these financial statements.
5
THE LEATHER FACTORY, INCINC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 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 120,500 289 111,517 -
Warrants to acquire 100,000 shares of common stock issued - - 126,38162,500 150 47,506 -
Net incomeIncome - - - 1,553,222774 518
Translation adjustment - - - -
----------------- --------------------- ---------------- ----------------------------------
BALANCE, June 30,March 31, 2003 10,270,46110,212,461 $ 24,64924,510 $ 4,401,7994,211,407 $ 8,617,5677,838,863
================= ========== ================ ==================================
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 72,700 174 74,896 -
Warrants to acquire 50,000 shares of common stock issued - - 48,94537,700 90 82,050 -
Net incomeIncome - - - 1,487,178-
Translation adjustment - - - -
----------------- --------------------- ---------------- ---------------------------------
BALANCE, June 30,March 31, 2004 10,560,66110,525,661 $ 25,34525,261 $ 4,796,9994,755,208 $ 11,291,89710,775,685
================= ========== ================ =================================
NOTES RECEIVABLE ACCUMULATED OTHER COMPREHENSIVE
SECURED BY COMMON STK CUMULATIVE COMPREHENSIVE
COMMON STOCK INCOME (LOSS)INC(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 - - 111,806
Warrants to acquire 100,000 shares of common stock issued47,656
Net Income - - 126,381
Net income - - 1,553,222774,518 $ 1,553,222774,518
Translation adjustment - 21,751 21,751 21,751
---------------- ------------------10,609 10,609 10,609
--------------------- -------------------- ----------- ------------
BALANCE, June 30,March 31, 2003 $ (20,000)(44,003) $ (16,790) $13,007,225
================ ================== ============ --------------(27,932) $12,002,845
===================== ==================== ===========
Comprehensive income for the sixthree months ended June 30,March 31, 2003 $ 1,574,973
==============785,127
===========
NOTES RECEIVABLE ACCUMULATED OTHER COMPREHENSIVE
SECURED BY COMMON STK CUMULATIVE INC(LOSS) TOTAL INCOME (LOSS)
--------------------- -------------------- ----------- ------------
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 - - 75,070
Warrants to acquire 50,000 shares of common stock issued82,140
Net Income - - 48,945
Net income - - 1,487,178970,966 $ 1,487,178970,966
Translation adjustment - (22,085) (22,085) (22,085)
---------------- ------------------(10,906) (10,906) (10,609)
--------------------- -------------------- ----------- ------------
BALANCE, June 30,March 31, 2004 $ (15,000) $ 4,360 $16,103,601
================ ================== ============ --------------15,539 $15,556,693
===================== ==================== ===========
Comprehensive income for the sixthree months ended June 30,March 31, 2004 $ 1,465,093
==============960,060
===========
The accompanying notes are an integral part of these financial statements.
6
THE LEATHER FACTORY, INCINC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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 June 30,March 31, 2004 and December 31,
2003, and its results of operations and cash flows for the three and six-monththree-month periods
ended June 30,March 31, 2004 and 2003. Operating results for the three and six-month
periodsthree-month period
ended June 30,March 31, 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.statements for the
quarter.
Revenue Recognition
Our sales generally occur via two methods: (1) at the counter in our stores and
(2) shipment by common carrier. Sales at the counter are recorded and title
passes as transactions occur. Otherwise, sales are recorded and title passes
when the merchandise is shipped to the customer. Our shipping terms are FOB
shipping point.
We offer an unconditional satisfaction guarantee to our customers and accept all
product returns. 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, DECEMBER 31,
2004 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
=========== ===========
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
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 June 30,March 31, 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 $ 516,213 $ 778,704 $1,487,178 $1,553,222$970,966 $774,518
Add: Stock-based compensation expense included in reported net income - - - -
Deduct: Stock-based compensation expense determined under fair value method 27,145 20 266 54,290 40,533
------------ ------------ ---------- ----------20,266
-------- --------
Net income, pro forma $ 489,068 $ 758,438 $1,432,888 $1,512,689
============ ============ ========== ==========$943,821 $754,252
-------- --------
Net income per share:
Basic - as reported $ 0.050.09 $ 0.08 $ 0.14 $ 0.15
Basic - pro forma $ 0.050.09 $ 0.07 $ 0.14 $ 0.15
Diluted - as reported $ 0.050.09 $ 0.07 $ 0.14 $ 0.14
Diluted - pro forma $ 0.040.09 $ 0.07 $ 0.13 $ 0.14
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 2.62%3.00% 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,MARCH 31,
2004 2003
----------- -----------
2004 2003 2004 2003
---------- ---------- ----------- -----------
Numerator:
Net income $ 516,213970,966 $ 778,704 $ 1,487,178 $ 1,553,222
---------- ----------774,518
----------- -----------
Numerator for basic and diluted earnings per share 516,213 778,704 1,487,178 1,553,222
Denominator:
Weighted-average970,966 774,518
Denominator for basic earnings per share -
weighted-average shares outstanding-basic 10,553,243 10,234,054 10,530,119 10,205,90010,506,995 10,177,433
Effect of dilutive securities:
Stock options 416,580 398,684 441,999 423,109462,562 442,884
Warrants 36,815 172,281 39,407 173,668
---------- ----------41,565 173,147
----------- -----------
Dilutive potential common shares 453,395 570,965 481,406 596,777
---------- ----------504,127 616,031
----------- -----------
Denominator for diluted earnings per share:
Weighted-averageshare -
weighted-average shares 11,006,638 10,805,019 11,011,525 10,802,677
========== ==========11,011,122 10,793,464
=========== ===========
Basic earnings per share $ 0.050.09 $ 0.08 $ 0.14 $ 0.15
========== ==========
=========== ===========
Diluted earnings per share $ 0.050.09 $ 0.07 $ 0.14 $ 0.14
========== ==========
=========== ===========
The net effect of converting stock options and warrants to purchase 637,500825,200 and
684,700747,200 shares of common stock at optionexercise prices less than the average market
prices has been included in the computations of diluted EPS for the three and six monthsquarter
ended June 30,March 31, 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 wholesale centersoutlet stores located in the United States and Canada;
b. Tandy Leather Company,B. TANDY LEATHER COMPANY, which sells primarily to retail customers through
a chain of retail stores located in the United States; and
c. Roberts, CushmanC. ROBERTS, CUSHMAN & Company,COMPANY, manufacturer of decorative hat trims sold
directly to hat manufacturers and distributors.
The Company's reportable operating segments have been determined as separately
identifiable business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes.
THE LEATHER FACTORY TANDY LEATHER COMPANY ROBERTS,CUSHMAN & CO TOTAL
--------------- ------------- --------------- ------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30,MARCH 31, 2004
Net sales $ 7,423,7958,443,091 $ 2,972,7463,166,738 $ 563,272 $10,959,813571,048 $12,180,877
Gross profit 3,978,355 1,848,618 154,086 5,981,0594,575,838 1,926,649 222,426 6,724,913
Operating earnings 645,146 190,756 17,934 853,8361,078,409 301,567 67,159 1,447,135
Interest expense (12,471)(13,638) - - (12,471)(13,638)
Other, net (26,196) 843(1,803) 66 - (25,353)
------------(1,737)
Income before income taxes 606,479 191,599 17,934 816,012
------------1,062,968 301,633 67,159 1,431,760
Depreciation and amortization 93,351 27,716 2,216 123,283102,028 25,153 2,237 129,418
Fixed asset additions 7,972 37,348 3,615 48,93539,737 38,043 4,335 82,115
Total assets $ 16,224,40116,731,246 $ 3,248,0153,079,605 $ 929,913 $20,402,329
--------------- ------------- ---------------- ------------928,663 $20,739,514
------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30,MARCH 31, 2003
Net sales $ 7,801,7428,201,258 $ 2,113,4791,864,539 $ 545,454 $10,460,675494,288 $10,560,085
Gross profit 4,182,812 1,325,072 213,170 5,721,0544,297,502 1,181,332 166,670 5,645,504
Operating earnings 918,434 166,230 69,800 1,154,464923,637 146,993 45,042 1,115,672
Interest expense (70,468)(63,352) - - (70,468)(63,352)
Other, net 43,091 61431,290 (472) - 43,705
------------30,818
Income before income taxes 891,057 166,844 69,800 1,127,701
------------891,575 146,521 45,042 1,083,138
Depreciation and amortization 129,328 18,247 2,521 150,096106,367 15,839 2,825 125,031
Fixed asset additions 112,605 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)39,497 54,475 - - (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 7,950 131,05093,972
Total assets $ 16,224,40117,364,513 $ 3,248,0152,447,611 $ 929,913 $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
--------------- ------------- ---------------- ------------845,938 $20,658,062
------------------------------------------------------------------------------------
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 $ 10,198,13011,285,857 $ 9,711,785 $21,483,986 $19,582,4219,870,636
All other countries 761,683 748,890 1,656,703 1,438,339
------------ ----------- ----------- -----------895,020 689,449
--------------- ---------------
$ 10,959,813 $10,460,675 $23,140,689 $21,020,760
============ =========== =========== ===========12,180,877 $ 10,560,085
=============== ===============
Geographic sales information is based on the location of the customer. Net
sales from noNo
single foreign country wasaccounted for any material toamount of the Company's
consolidated net sales for the three and six monththree-month periods ended June 30,March 31, 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.
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
wholesale centersoutlets 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 June 30,April
15, 2004, we have opened 3230 Tandy Leather retail stores located throughout the
United States.
Cushman, whose origins date back to the mid-1800s,mid-1800's, custom designs and
manufactures a product line of decorative hat trims for headwear manufacturers.
CRITICAL ACCOUNTING POLICIES
A description of the Company's critical accounting policies appears in "Item 2.
Management's Discussions and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 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 June
30,March 31, 2004 and 2003:
QUARTER ENDED JUNE 30,MARCH 31, 2004 QUARTER ENDED JUNE 30,MARCH 31, 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 FactoryFactory. $ 15,866,8858,443,091 $ 1,718,178 $16,003,000 $1,842,0711,078,409 $ 8,201,258 $ 923,637
Tandy 6,139,484 492,322 3,978,018 313,2233,166,738 301,567 1,864,539 146,993
Cushman 1,134,320 90,470 1,039,742 114,842571,048 67,160 494,288 45,042
---------------- ------------- ---------- ----------- ------------------------- ------------
Total Operations $ 23,140,68912,180,877 $ 2,300,970 $21,020,760 $2,270,1361,447,135 $ 10,560,085 $ 1,115,672
================ ============= ========== =========== ========================= ============
10
Consolidated net sales for the quarter ended June 30,March 31, 2004 increased $499,000,$1.6
million, or 4.8%15.4%, compared to the same period in 2003. Leather Factory
contributed $242,000 to the increase, Tandy contributed $859,000$1.3 million and Cushman
recorded a gainsales increase of $18,000. Leather Factory's sales were down $378,000.$77,000. Operating income on a consolidated basis
for the quarter ended 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,March 31, 2004 was up 1.4%29.7% or $31,000$331,000 over last year.the first
quarter of 2003.
The following table shows in comparative form our consolidated net income for
the second quarter and six months ended June 30,first quarters of 2004 and 2003:
QUARTER ENDED QUARTER ENDED
06/30/04 06/30/032004 2003 % CHANGE
------------- --------------------- -------- --------
Net income $ 516,213 $ 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%)
============= ============= ========$970,966 $774,518 25.4%
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.
LEATHER FACTORY OPERATIONS
Net sales from Leather Factory's 30 wholesale centers decreased 4.8%increased 2.95%, or
$242,000, 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 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.2004.
The following table presents TLF's sales mix by customer categories for the
quarters ended June 30,March 31, 2004 and 2003:
QUARTER ENDED
CUSTOMER GROUP 06/30/3/31/04 06/30/3/31/03
- -------------- -------- --------------- -------
RETAIL (end users, consumers, individuals) 21% 19%23% 23%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc) 9 10etc.) 7% 8%
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc) 45 39etc.) 45% 42%
NATIONAL ACCOUNTS 18 2419% 21%
MANUFACTURERS 7 8
-------- --------6% 6%
------- -------
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 decreased $273,000increased $155,000 for the secondcurrent quarter
compared to 2003, a declinean improvement of 30%16.7%. 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 as a percentage
of sales were 41.4%, slightly higher ($120,000) than our target of 40% of sales.
Advertising and marketing expenses were up slightly this quarter ($55,000) due
to expanding direct mail programs in an attempt to increase market awareness and
target new customer sub-groups. We also increased $69,000, or 2.1%, inour bad debt reserve by
$32,000 to $63,000 at the second quarter of 2004. The cost of health insurance
benefits for employees accounted for the majorityend 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 lossfirst quarter, as the percentagea result of operating expenses to
salesa few
customer accounts whose collectability appears to be high. A large number of expenses actually decreased this
quarter compared to a year ago.
11
questionable.
TANDY LEATHER OPERATIONS
The Tandy Leather retail store chain has grown from 2219 stores at June 30,March 31, 2003
to 3229 a year later. Net sales for Tandy Leather were up approximately 41%70% for
the secondfirst quarter of 2004 over the same quarter last year.
QTR ENDED QTR ENDED $ INCR % INCR
6/30/3/31/04 6/30/3/31/03 (DECR) (DECR)
---------- ---------- ----------- --------
-------
Same (existing) store sales (22 stores) $2,306,231 $2,112,150 $194,081 9.2%$1,832,591 $1,806,293 $ 26,298 1.46%
New or acquired store sales (10 stores) 666,5151,334,147 57,187 1,276,960 N/A
Order fulfillment house - 666,515 ***
Closed store (order fulfillment house)closed - 1,329 (1,329) (100.0)1,059 (1,059) (100.00)
---------- ---------- ----------- -------- -------
Total sales $2,972,746 $2,113,479 $859,267 40.7%$3,166,738 $1,864,539 $1,302,199 69.84%
========== ========== ========= ================= ========
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 showed healthy growth.were solid - although as the table above indicates,
our existing stores did not produce as strongly as we expected. The "same stores" continueresults are
uneven, with existing stores reporting sales gains ranging from 4% to post strong gains. Average48% 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 are at least three months old are
averaging approximately $38,000 in sales per month for stores that have been open
for at least six months as of June 30, 2004 is $36,000, which continues to beat
our internal expectations of $30,000 per month per store.month.
The following table presents Tandy Leather's sales mix by customer categories
for the quarters ended June 30,March 31, 2004 and 2003:
QUARTER ENDED
CUSTOMER GROUP 06/30/3/31/04 06/30/3/31/03
- -------------- -------- --------------- -------
RETAIL (end users, consumers, individuals) 68% 67%74% 72%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc) 10 10etc.) 4% 4%
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc) 22 23etc.) 20% 23%
NATIONAL ACCOUNTS * *- -
MANUFACTURERS * *
-------- --------2% 1%
------- -------
100% 100%
======== ========
* less than 1%======= =======
SecondOperating income as a percentage of sales increased from 7.9% in the first
quarter operating income forof 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
Leather increased $25,000 or 15% over
operating incomestores during the current quarter. As discussed in last year's second quarter. Gross profit margins declined
0.5%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 62.7%55.5% to 62.2% for the quarter51.3% due primarily to limitationsthe increase in increasing selling prices to match cost increases. Tandy's selling prices are
set at the time the product catalog is produced. The latest catalog was
distributed in January 2004. Asleverage obtained as a
result it is difficult to initiate price
increases to customers until we distribute a new catalog. Historically, we
distribute our new catalog atof the beginning of each calendar year. However, due
to the cost 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% ofsignificant sales 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.increase.
ROBERTS, CUSHMAN OPERATIONS
Net sales for Cushman increased $18,000$77,000 or 15.5% for the secondfirst 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 product 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, ourimproved its gross profit margin will decrease.from 34% to 39%. Operating income for
Cushman increased $22,000 or 49.1%. We experienced this duringeliminated one management position in
the secondoperation 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% for
the first quarter due to fluctuationsof 2004, compared with 53.5% for the same period in metal prices, etc. and should have been
more aggressive with our vendors and customers to try to minimize the impact to
us.2003.
Operating expenses decreased $7,000 for($5.3 million) were 43.3% of net sales in the quarter.
OTHER EXPENSESfirst quarter
of 2004, compared with $4.5 million, or 42.9% of net sales in the first three
months of 2003.
Interest expense in the secondfirst quarter of 2004 ($14,000) was $12,000, down 78.5% from $70,000 in
the
secondfirst quarter of 2003. The decrease was attributable2003 ($63,000) due to the decrease in our averagethe outstanding debt
balance for the 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
balance.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------------------------------
OnThere was a slight change (approximately 9%) in our consolidated balance sheet, total assets
increasedfrom December 31, 2003 to March 31, 2004, increasing from $19.0 million at
year-end 2003 to $20.4$20.7 million at June 30, 2004. An increase in inventory of
$1.1 million andMarch 31. Our accounts receivable of $867,000 accounted for
the increase in
total assets, partially offset by a decrease in cashmajority of $546,000.the increase. Total stockholders' equity increased from $14.5
million at December 31, 2003 to $16.1$15.5 million at June 30,March 31, 2004. TheMost of the
increase in equity is attributable to thewas from earnings in the first halfquarter of thethis year. Our investment in inventory was $12.2 million at June 30, 2004 compared to $11.1
millionThe Company's
current ratio fell slightly from 6.16 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 3.984.34 times during the first six monthsquarter
of 2004, an improvement from 3.523.47 times for the first halfquarter of 2003 and 3.51 times for all of
2003. We compute our inventory turns as sales divided by average inventory.
As 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 inventoryInventory management is a significant factor in our financial position. OurWe
strive to maintain the optimal amount of inventory at June 30, 2004 was within 5%throughout 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 internal optimal targets.
Credit sales increasedinventory levels in the first six months of 2004, and theorder to maximize optimum
availability.
The Company's investment in accounts receivable was $2.7$3.1 million at June 30,March 31,
2004, up $867,000$1.2 million from $1.8 million at year-end 2003. ConsolidatedThis 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. The
average days to collect accounts improvedslowed slightly over the first halfquarter of 2003
from 43.345.0 days to 42.847.2 days. Cushman posted the most improvement in average
days to collect accounts, from 68.266.7 days in 2003 to 51.150.1 days outstanding.for the first
quarter of 2004, respectively. Leather Factory and Tandy Leather's days outstanding
decreasedto
collect were 44.7 and 39.0 days in the first halfquarter of 2004 compared to 2003, from 43.7 in 2003 to 41.1
and 39.6 days in 2004, while Leather Factory's days outstanding increased from 40.2 days
inthe first quarter of 2003, to 41.7 days in 2004.respectively.
Accounts payable increased $343,000$810,000 to $1.9$2.4 million at the end of the secondfirst
quarter, due primarily to the increase in inventory purchases duringto support the
period.increased sales and the negotiations with some vendors for longer payment terms.
Accrued expenses and other liabilities increased $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.$113,000.
During the first halfquarter of 2004, cash flowsflow provided by operating activities was
$263,000. Net$583,000. The net income reducedgenerated for the quarter and the increase in accounts
payable contributed to the cash flow, offset somewhat by the increase in
inventory from year-end to
June 30, 2004, accounted for the majority of the cash flow.accounts receivable. Cash flowsflow used in investing activities totaled $244,000. Capital expenditures$193,000.
$125,000 of this was for the first six
months of 2004 totaled $131,000. The assetassets purchases of the Syracuse, NY and St. Louis,
MO Tandy Leather retail stores required $125,000.stores. Equipment purchased during the quarter totaled
$82,000. Most of the equipment purchased was for the new Tandy Leather stores.
Cash flowsflow used by financing activities was $565,000 during the first half$439,000, consisting of 2004. The funds were
primarily used to reduce the principal balance ofpayments on
our revolving credit facility.facility during the quarter totaling $525,000, offset
primarily by stock option exercises by employees.
At DecemberMarch 31, 2003, our bank debt totaled $1.8$5.8 million. At June 30,March 31, 2004, the
balance was $1.1$1.3 million, a decrease of 39% in the first six months of 2004.
From June 30, 2003, we have repaid $3.7 million on our bank debt.77%.
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
our lender. The borrowing base on our revolving line of creditWells Fargo, which is based onupon the level of the our accounts receivable and
inventory. At June 30,March 31, 2004, the available and unused portion of the credit
facility was approximately $3.9$3.7 million.
13
FORWARD-LOOKING STATEMENTS
- ---------------------------
This report (particularly Items 2, 3 and 4 of this Part I)Item 2) contains forward-looking statements of
management. In general, these are predictions or suggestions of future events
and statements or expectations of future trends or occurrences. There are
certain important risks that could cause results to differ materially from those
anticipated by some of the forward-looking statements. Some, but not all, of the
important risks whichthat could cause actual results to differ materially from those
suggested by the forward-looking statements include, among other things:
- - We maymight fail to realize the anticipated benefits of the opening of Tandy
Leather retail stores or we maymight be unable to obtain sufficient new locations
on acceptable terms to meet our growth plans. Also, other retail initiatives
maymight 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.
Recently, 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- - As a result of the economic slump is
likely to limit or decrease our profits.
In addition, terrorism or theon-going threat of terrorist attacks inon the United
States, or against U.S. interests abroad could cause consumer buying habits tocould change and decrease our sales.
We believe that major disruptions (such- - Livestock diseases such as terrorist
attacks)mad cow could reduce consumer spending,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 purchases of non-essential
products such as ours.if the economy has not recovered from its downturn.
- - Other factors could cause either fluctuations in buying patterns or
possible negative trends in the craft and western retail markets. In addition,
our customers may change their preferences to products other than ours, or they
may not accept new products as we introduce them.
- - 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 RISK.RISK
For disclosures about market risk affecting the Company, see Item 7A
"Quantitative and Qualitative Disclosures About Market Risk" in our Annual
Report on Form 10-K for our fiscal year ended December 31, 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 secondfirst 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 and notwithstanding the limitations contained in the
final paragraph of this Item 4, they concluded that, subject to the limitations
described below,as of March 31, 2004, the
Company's disclosure controls and procedures offer reasonable assurance that the
information required to be disclosed by the Company in the reports it files
under the Exchange Act is recorded, processed, summarized, and reported within
the time periodsperiod specified in the rulesresults and forms adopted by the Securities and
Exchange Commission.
During the period covered by this report, there has been no significant change in the
Company's internal controls over financial reporting that materially affected,
or is reasonably likely to materially affect, these controls.
Limitations on the Effectiveness of Controls. Our management, including the
President, Chief Executive Officer and Chief Financial Officer, does not expect
that the Company's disclosure controls and procedures or the Company's internal
controls will prevent all error and all fraud. A well conceived and operatedoperating
control system is based in part upon certain assumptions about the likelihood of
future events and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS5. CHANGES IN SECURITIES
On May 26,February 24, 2004, the Annual MeetingCompany entered into a Capital Markets Services
Engagement Agreement ("Services Agreement") with Westminster Securities
Corporation ("Westminster"), a member firm of the StockholdersNew York Stock Exchange.
Under the Services Agreement, Westminster agreed to provide the Company with
capital market services, including corporate finance advisory services, research
services, and sales and trading services.
For the services to be provided during the two-year term of the Services
Agreement, the Company was held
inagreed to pay $4,000 per month during the Hall of Fame Room atcontract's
term. Also, the Wyndham Hotel, Arlington, TexasCompany issued to considerWestminster and act on the electioncertain named employees
warrants to purchase 50,000 shares of the following individualsCompany's common stock at an exercise
price of $5.00 per share, subject to serveadjustment 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 directors untilof 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 2005 Annual Meeting of Stockholders or until their successors are duly
elected and qualified:
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 votes cast for and against, as well as those that
abstained from voting, the election of these individuals as directorscommon stock upon exercise 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 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, our Board of Directors approved
an offer to purchase 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 share) to be the 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, we believe this offer will be beneficial
to investors with small holdings by allowing them the opportunity to sell their
shares without the expense of selling them in the market.warrants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
EXHIBIT
NUMBER EXHIBIT
- -------- ------- 31.1 13a-4(a)--------------------------------------------------------------------------------------------------------------------------
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-14(a) Certification by Wray Thompson, Chairman of the Board and Chief Executive Officer
31.2 13a-4(a)31.2** 13a-14(a) Certification by Shannon LL. Greene, Chief Financial Officer and Treasurer
3232.1* Certification Pursuant to 18 USCU.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Previously filed
** Attached to this filing
(b) Reports on Form 8-K
----------------------
On April 28,March 9, 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 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, 2004.12.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: August 9,October 29, 2004 By: /s/ Wray Thompson
--------------------
Wray Thompson
Chairman of the Board and
Chief Executive Officer
Date: August 9,October 29, 2004 By: /s/Shannon L. Greene
----------------------
Shannon L. Greene
Chief Financial Officer and Treasurer
(Chief Accounting Officer)
16
EXHIBIT 31.1
RULE 13A-4(A)13A-14(A) CERTIFICATION
I, WRAY THOMPSON, certify that:
1. I have reviewed this quarterly report on Form 10-Q10-Q/A 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 secondfirst 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: August 9,October 29, 2004 /s/ Wray Thompson
-------------------
Wray Thompson
ChairmanPresident and Chief Executive Officer
(principal executive officer)
17
EXHIBIT 31.2
RULE 13A-4(A)13A-14(A) CERTIFICATION
I, SHANNON L. GREENE, certify that:
1. I have reviewed this quarterly report on Form 10-Q10-Q/A 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 secondfirst 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: August 9,October 29, 2004 /s/ Shannon L. Greene
-------------------------
Shannon L. Greene
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
18
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 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.
August 9, 2004 By: /s/ Wray Thompson
-------------------
WRAY THOMPSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
August 9, 2004 By: /s/ Shannon L. Greene
------------------------
SHANNON L. GREENE
CHIEF FINANCIAL OFFICER AND TREASURER
19