FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
(Mark One)(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneFOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
orOR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File NumberFOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2543540
(State or other jurisdiction of(STATE OR OTHER JURISDICTION OF (I.R.S. Employer
Incorporation or organization) Identification Number)EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3847 EAST LOOP 820 SOUTH, FT. WORTH, TEXAS 76119
(Address of principal executive offices) (Zip code)(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) has filed all reports
required to by filed by SectionHAS FILED ALL REPORTS
REQUIRED TO BY FILED BY SECTION 13 or 15(d) of the Securities Exchange Act ofOR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 during the precedingDURING THE PRECEDING 12 months (or for such shorter period that the
registrant was required to file such reports)MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), andAND (2) has been subject to such
filing requirements for the pastHAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 days.
YesDAYS.
YES X No
Indicate by check mark whether the registrant is an accelerated filer.
Yes No 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 August 6,NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER.
YES_____ NO__X___
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS SHARES OUTSTANDING AS
OF OCTOBER 29, 2004
Common Stock, par value- -------------------------------------------- ----------------------
COMMON STOCK, PAR VALUE $.0024 per share 10,560,661
1PER SHARE 10,554,711
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Operations
Three and six months ended June 30, 2004 and 2003 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2004 and 2003 5
Consolidated Statements of Stockholders' Equity
Six months ended 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. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 3
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES 18
ITEM 6. EXHIBITS 18
SIGNATURES 19
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
SEPTEMBER 30, DECEMBER 31,
JUNE 30, DECEMBER 31,
2004 2003
------------(UNAUDITED)
-------------- --------------
ASSETS
CURRENT ASSETS:
CashCASH $ 1,181,6041,328,052 $ 1,728,344
Accounts receivable-trade, net of allowance for doubtful accounts of
$107,000 andACCOUNTS RECEIVABLE-TRADE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS OF
$61,000 AND $31,000 inIN 2004 andAND 2003, respectively 2,695,997RESPECTIVELY 2,242,548 1,828,738
Inventory 12,189,111INVENTORY 12,880,245 11,079,893
Prepaid income taxes 4,388PREPAID INCOME TAXES 14,357 206,023
Deferred income taxes 199,368DEFERRED INCOME TAXES 199,881 134,312
Other current assets 808,784OTHER CURRENT ASSETS 608,857 702,236
------------ -------------- Total current assets 17,079,252--------------
TOTAL CURRENT ASSETS 117,273,940 15,679,546
--------------------------- --------------
PROPERTY AND EQUIPMENT, at cost 5,738,042AT COST 5,882,044 5,574,992
Less accumulated depreciation and amortization (3,893,754)LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (3,992,857) (3,669,099)
--------------------------- --------------
Property and equipment, net 1,844,288PROPERTY AND EQUIPMENT, NET 1,889,187 1,905,893
GOODWILL, net of accumulated amortization of $755,000 andNET OF ACCUMULATED AMORTIZATION OF $762,000 AND $758,000
inIN 2004 andAND 2003, respectively 729,390RESPECTIVELY 737,543 704,235
OTHER INTANGIBLES, net of accumulated amortization of $192,000 andNET OF ACCUMULATED AMORTIZATION OF $206,000 AND $164,000
inIN 2004 andAND 2003, respectively 425,503RESPECTIVELY 416,231 432,549
OTHER ASSETS 323,896324,796 336,183
--------------------------- --------------
$20,402,329$ 20,641,696 $ 19,058,406
=========================== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payableACCOUNTS PAYABLE $ 1,888,0531,632,357 $ 1,545,079
Accrued expenses and other liabilities 1,102,728ACCRUED EXPENSES AND OTHER LIABILITIES 1,178,921 1,000,427
Notes payable and current maturities of long-term debtNOTES PAYABLE AND CURRENT MATURITIES OF LONG-TERM DEBT - 1,134
--------------------------- --------------
Total current liabilities 2,990,781TOTAL CURRENT LIABILITIES 2,811,278 2,546,640
--------------------------- --------------
DEFERRED INCOME TAXES 207,947288,617 209,289
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 1,100,000NET OF CURRENT MATURITIES 1,006,821 1,792,984
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock,PREFERRED STOCK, $0.10 par value;PAR VALUE; 20,000 shares authorized,
none issued or outstandingSHARES AUTHORIZED,
NONE ISSUED OR OUTSTANDING - -
Common stock,COMMON STOCK, $0.0024 par value;PAR VALUE; 25,000,000 shares authorized,SHARES AUTHORIZED,
10,560,661 andAND 10,487,961 shares issued and outstanding inSHARES ISSUED IN 2004 andAND 2003, respectivelyRESPECTIVELY;
10,555,153 AND 10,487,961 SHARES OUTSTANDING IN 2004 AND 2003, RESPECTIVELY 25,345 25,171
Paid-in capitalPAID-IN CAPITAL 4,796,999 4,673,158
Retained earnings 11,291,897RETAINED EARNINGS 11,719,282 9,804,719
Less: notes receivable secured by common stockLESS: NOTES RECEIVABLE SECURED BY COMMON STOCK (15,000) (20,000)
Accumulated other comprehensive loss 4,360LESS: TREASURY STOCK, 5,508 SHARES, AT COST (23,960) -
ACCUMULATED OTHER COMPREHENSIVE LOSS 32,314 26,445
--------------------------- --------------
Total stockholders' equity 16,103,601TOTAL STOCKHOLDERS' EQUITY 16,534,980 14,509,493
--------------------------- --------------
$20,402,329$ 20,641,696 $ 19,058,406
=========================== ==============
The accompanying notes are an integral part of these financial statements.
3THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
THE LEATHER FACTORY, INCINC.
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(UNAUDITED)
THREE AND SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003
THREE MONTHS SIXNINE MONTHS
2004 2003 2004 2003
-------------- ------------- ----------- ----------- ----------------------- ------------
NET SALES $ 10,959,813 $10,460,675 $23,140,689 $21,020,76010,580,074 $ 10,119,070 $33,720,764 $31,139,830
COST OF SALES 4,978,754 4,739,621 10,434,717 9,654,2024,640,641 4,529,258 15,075,359 14,183,460
-------------- ------------- ----------- ----------- -----------
Gross profit 5,981,059 5,721,054 12,705,972 11,366,558------------ ------------
GROSS PROFIT 5,939,433 5,589,812 18,645,405 16,956,370
OPERATING EXPENSES 5,127,223 4,566,590 10,405,002 9,096,4225,164,190 4,672,820 15,569,191 13,769,241
-------------- ------------- ----------- ----------- ----------------------- ------------
INCOME FROM OPERATIONS 853,836 1,154,464 2,300,970 2,270,136775,243 916,992 3,076,214 3,187,129
OTHER INCOME (EXPENSE):
Interest expense (12,471) (70,468) (26,109) (133,820)
Other, net (25,353) 43,705 (27,089) 74,523INTEREST EXPENSE (14,910) (40,735) (41,019) (174,555)
OTHER, NET 30,600 (6,089) 3,509 68,433
-------------- ------------- ----------- ----------- -----------
Total other income (expense) (37,824) (26,763) (53,198) (59,297)------------ ------------
TOTAL OTHER INCOME (EXPENSE) 15,690 (46,824) (37,510) (106,122)
-------------- ------------- ----------- ----------- ----------------------- ------------
INCOME BEFORE INCOME TAXES 816,012 1,127,701 2,247,772 2,210,839790,933 870,168 3,038,704 3,081,007
PROVISION FOR INCOME TAXES 299,799 348,997 760,594 657,617363,548 268,488 1,124,141 926,105
-------------- ------------- ----------- ----------- ----------------------- ------------
NET INCOME $ 516,213427,385 $ 778,704601,680 $ 1,487,1781,914,563 $ 1,553,2222,154,902
============== ============= =========== =========== ======================= ============
NET INCOME PER COMMON SHARE-BASIC $ 0.050.04 $ 0.080.06 $ 0.140.18 $ 0.150.21
============== ============= =========== =========== ======================= ============
NET INCOME PER COMMON SHARE-DILUTED $ 0.050.04 $ 0.070.06 $ 0.140.17 $ 0.140.20
============== ============= =========== =========== ======================= ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 10,553,243 10,234,054 10,530,119 10,205,900
Diluted 11,006,638 10,805,019 11,011,525 10,802,677BASIC 10,560,661 10,394,374 10,540,374 10,269,415
DILUTED 10,931,940 10,902,794 10,986,541 10,840,764
The accompanying notes are an integral part of these financial statements.
4THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
THE LEATHER FACTORY, INCINC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net incomeNET INCOME $ 1,487,1781,914,563 $ 1,553,222
Adjustments to reconcile net income to net
cash (used in) provided by operating activities-
Depreciation2,154,902
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES-
DEPRECIATION & amortization 252,701 275,127
Loss on disposal of assetsAMORTIZATION 366,077 397,959
LOSS ON DISPOSAL OF ASSETS - 9,372
Deferred income taxes (66,398) 47,818
Other (19,240) 7,843
Net changes in assets and liabilities:
Accounts receivable-trade, net (867,259) (882,519)
Inventory (1,064,766) 531,217
Income taxes 201,635 50,479
Other current assets (106,548) (86,169)
Accounts payable 342,974 (280,681)
Accrued expenses and other liabilities 102,301 (1,652,021)DEFERRED INCOME TAXES 13,759 59,508
OTHER 3,137 14,960
NET CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE-TRADE, NET (413,809) (390,808)
INVENTORY (1,739,977) 1,074,217
INCOME TAXES 191,666 2,936
OTHER CURRENT ASSETS 93,380 (37,153)
ACCOUNTS PAYABLE 87,279 (162,618)
ACCRUED EXPENSES AND OTHER LIABILITIES 178,494 (1,538,342)
------------ ------------
Total adjustments (1,224,599) (1,979,534)TOTAL ADJUSTMENTS (1,219,995) (569,969)
------------ ------------
Net cash (used in) provided by operating activities 262,578 (426,312)NET CASH PROVIDED BY OPERATING ACTIVITIES 694,568 1,584,933
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (131,050) (270,377)
Payments in connection with businesses acquired (125,452)PURCHASE OF PROPERTY AND EQUIPMENT (267,552) (326,284)
PAYMENTS IN CONNECTION WITH BUSINESSES ACQUIRED (156,454) -
Proceeds from sale of assetsPROCEEDS FROM SALE OF ASSETS - 6,217
Increase in other assets 12,287 (16,966)INCREASE IN OTHER ASSETS 11,387 (22,305)
------------ ------------
Net cash used in investing activities (244,215) (281,126)NET CASH USED IN INVESTING ACTIVITIES (412,619) (342,372)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (692,684) 550,201
Payments on notes payable and long-term debtNET DECREASE IN REVOLVING CREDIT LOANS (786,162) (1,544,417)
PAYMENTS ON NOTES PAYABLE AND LONG-TERM DEBT - (4,878)
DECREASE IN CASH RESTRICTED FOR PAYMENT ON REVOLVING CREDIT FACILITY (1,134) (3,226)
Decrease in cash restricted for payment on revolving credit facility - 83,718
Payments received on notes secured by common stock43,685
PAYMENTS RECEIVED ON NOTES SECURED BY COMMON STOCK 5,000 24,003
Proceeds from issuance of common stockREPURCHASE OF COMMON STOCK (TREASURY STOCK) (23,960) -
PROCEEDS FROM ISSUANCE OF COMMON STOCK 124,015 111,806325,688
------------ ------------
Net cash provided by (used in) financing activities (565,103) 766,502NET CASH USED IN FINANCING ACTIVITIES (682,241) (1,155,919)
------------ ------------
NET CHANGE IN CASH (546,740) 59,064(400,292) 86,642
CASH, beginning of periodBEGINNING OF PERIOD 1,728,344 101,557
------------ ------------
CASH, end of periodEND OF PERIOD $ 1,181,6041,328,052 $ 160,621188,199
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the periodINTEREST PAID DURING THE PERIOD $ 29,63943,960 $ 131,122
Income taxes paid during the period, net of (refunds) 577,678 512,151178,558
INCOME TAXES PAID DURING THE PERIOD, NET OF (REFUNDS) 848,427 809,602
The accompanying notes are an integral part of these financial statements.
5THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
THE LEATHER FACTORY, INCINC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2004 AND 2003
COMPREHENSIVETREASURY
NUMBER OF SHARES PAR VALUE PAID-IN CAPITAL RETAINED EARNINGSSTOCK
----------------- ------------------------- ---------------- ---------------------------
BALANCE, DecemberDECEMBER 31, 2002 10,149,961 $ 24,360 $ 4,163,901 $ 7,064,345
Payments on notes receivable-secured by common stock-
PAYMENTS ON NOTES RECEIVABLE
SECURED BY COMMON STOCK - - - -
Shares issuedSHARES ISSUED - stock options exercised 120,500 289 111,517WARRANTS AND
EMPLOYEE STOCK OPTIONS EXERCISED 320,500 769 198,537 -
Warrants to acquireWARRANTS TO ACQUIRE 100,000
shares of common stock issuedSHARES OF COMMON STOCK ISSUED - - 126,381 -
Net incomeNET INCOME - - - 1,553,222
Translation adjustment-
TRANSLATION ADJUSTMENT - - - -
----------------- ------------------------- ---------------- ---------------------------
BALANCE, JuneSEPTEMBER 30, 2003 10,270,46110,470,461 $ 24,64925,129 $ 4,401,799 $ 8,617,5674,488,819 -
================= ======================== ================ ===========================
BALANCE, DecemberDECEMBER 31, 2003 10,487,961 $ 25,171 $ 4,673,158 $ 9,804,719
Payments on notes receivable-secured by common stock-
PAYMENTS ON NOTES RECEIVABLE
SECURED BY COMMON STOCK - - - -
Shares issuedSHARES ISSUED - stock options exercisedSTOCK OPTIONS EXERCISED 72,700 174 74,896 -
Warrants to acquireWARRANTS TO ACQUIRE 50,000
shares of common stock issuedSHARES OF COMMON STOCK ISSUED - - 48,945 -
Net incomePURCHASE OF TREASURY STOCK - - - 1,487,178
Translation adjustment$(23,960)
NET INCOME - - - -
TRANSLATION ADJUSTMENT - - - -
----------------- ------------------------- ---------------- --------------------------
BALANCE, JuneSEPTEMBER 30, 2004 10,560,661 $ 25,345 $ 4,796,999 $ 11,291,897$(23,960)
================= ======================== ================ ==========================
NOTES RECEIVABLE ACCUMULATED OTHER
RETAINED SECURED BY CUMULATIVE COMPREHENSIVE
EARNINGS COMMON STOCK INCOME (LOSS) TOTAL INCOME (LOSS)INC(LOSS)
---------- ---------------- ----------------------------------- ----------- ---------------------------
BALANCE, DecemberDECEMBER 31, 2002 $7,064,345 $ (44,003) $ (38,541) $11,170,062
Payments on notes receivable-secured by common stockPAYMENTS ON NOTES RECEIVABLE
SECURED BY COMMON STOCK - 24,003 - 24,003
Shares issuedSHARES ISSUED - stock options exercisedWARRANTS AND
EMPLOYEE STOCK OPTIONS EXERCISED - - 111,806
Warrants to acquire- 199,306
WARRANTS TO ACQUIRE 100,000
shares of common stock issuedSHARES OF COMMON STOCK ISSUED - - - 126,381
Net incomeNET INCOME 2,154,902 - - 1,553,2222,154,902 $ 1,553,222
Translation adjustment2,154,902
TRANSLATION ADJUSTMENT - 21,751 21,751 21,751- 28,739 28,739 28,739
---------- ---------------- ----------------------------------- ----------- -------------
BALANCE, JuneSEPTEMBER 30, 2003 $9,219,247 $ (20,000) $ (9,802) $13,703,393
========== ================ ================= ===========
COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 $ (20,000) $ (16,790) $13,007,225
================ ==================2,183,641
============
--------------
Comprehensive income for the six months ended June 30,BALANCE, DECEMBER 31, 2003 $ 1,574,973
==============
BALANCE, December 31, 2003$9,804,719 $ (20,000) $ 26,445 $14,509,493
Payments on notes receivable=secured by common stockPAYMENTS ON NOTES RECEIVABLE
SECURED BY COMMON STOCK - 5,000 - 5,000
Shares issued = stock options exercisedSHARES ISSUED - STOCK OPTIONS
EXERCISED - - - 75,070
Warrants to acquireWARRANTS TO ACQUIRE 50,000
shares of common stock issuedSHARES OF COMMON STOCK ISSUED - - - 48,945
Net incomePURCHASE OF TREASURY STOCK - - 1,487,178- (23,960)
NET INCOME 1,914,563 - - 1,914,563 $ 1,487,178
Translation adjustment1,914,563
TRANSLATION ADJUSTMENT - (22,085) (22,085) (22,085)- 5,869 5,869 5,869
---------- ---------------- ----------------------------------- ----------- ------------
BALANCE, JuneSEPTEMBER 30, 2004 $11,719,282 $ (15,000) $ 32,314 $16,534,980
========== ================ ================= ===========
COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 $ (15,000) $ 4,360 $16,103,601
================ ==================1,920,432
============ --------------
Comprehensive income for the six months ended June 30, 2004 $ 1,465,093
==============
The accompanying notes are an integral part of these financial statements.
6THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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 JuneIN THE OPINION OF MANAGEMENT, THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS
FOR THE LEATHER FACTORY, INC. AND ITS CONSOLIDATED SUBSIDIARIES (THE "COMPANY"
OR "TLF") CONTAIN ALL ADJUSTMENTS (CONSISTING OF NORMAL RECURRING ADJUSTMENTS)
NECESSARY TO PRESENT FAIRLY ITS FINANCIAL POSITION AS OF SEPTEMBER 30, 2004 and DecemberAND
DECEMBER 31, 2003, and its results of operations and cash flows for the three and six-month periods
ended JuneAND ITS RESULTS OF OPERATIONS AND CASH FLOWS FOR THE THREE
AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 andAND 2003. Operating results for the three and six-month
periods ended JuneOPERATING RESULTS FOR
THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending DecemberARE 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
FormTHESE 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 DecemberFOR 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: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
JUNESEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
Finished goods held for sale------------ ------------
FINISHED GOODS HELD FOR SALE. . . $ 11,145,27111,800,258 $ 9,902,140
Raw materials and work in process 1,043,840RAW MATERIALS AND WORK IN PROCESS 1,079,987 1,177,753
------------- ------------------------- ------------
$ 12,189,11112,880,245 $ 11,079,893
============= ========================= ============
Goodwill and Other Intangibles
Statement of Financial Accounting StandardsGOODWILL AND OTHER INTANGIBLES
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") No.NO. 142, "Goodwill and
Other Intangible Assets,"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 DecemberPRESCRIBES 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 ofMANAGEMENT DETERMINED THAT THE PRESENT VALUE OF THE
DISCOUNTED ESTIMATED FUTURE CASH FLOWS OF THE STORES ASSOCIATED WITH THE
GOODWILL IS SUFFICIENT TO SUPPORT THEIR RESPECTIVE GOODWILL BALANCES. NO
INDICATORS OF IMPAIRMENT WERE IDENTIFIED DURING THE FIRST NINE MONTHS OF 2004.
Other intangibles consist of the following:OTHER INTANGIBLES CONSIST OF THE FOLLOWING:
AS OF JUNESEPTEMBER 30, 2004 AS OF DECEMBER 31, 2003
------------------------------------- --------------------------------- ---------------------------------
ACCUMULATED ACCUMULATED
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
---------------------- ------------ -------- --------- ------------ --------
------------- --------
Trademarks, CopyrightsTRADEMARKS, COPYRIGHTS $ 544,369 $ 156,366 $388,003 $544,369165,538 $378,831 $ 544,369 $ 138,320 $406,049
Non=Compete Agreements 73,000 35,500 37,500NON-COMPETE AGREEMENTS 78,000 40,600 37,400 52,000 25,500 26,500
---------------------- ------------ -------- -------- ---------------------- ------------ --------
$ 617,369622,369 $ 191,866 $425,503 $596,369206,138 $416,231 $ 596,369 $ 163,820 $432,549
====================== ============ ======== ======== ======================= ============ ========
7
The Company recorded amortization expense of $28,046 during the first six months
ofTHE COMPANY RECORDED AMORTIZATION EXPENSE OF $42,318 DURING THE FIRST NINE
MONTHS OF 2004 compared to $38,256 during the first half ofCOMPARED TO $39,161 DURING THE FIRST NINE MONTHS OF 2003. The Company has no
intangible assets not subject to amortization underTHE
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:BASED ON THE CURRENT AMOUNT OF INTANGIBLE ASSETS SUBJECT TO AMORTIZATION, THE
ESTIMATED AMORTIZATION EXPENSE FOR EACH OF THE SUCCEEDING FIVE YEARS IS AS
FOLLOWS:
ROBERTS,
LEATHER FACTORYFACTORY. TANDY LEATHER ROBERTS, CUSHMAN TOTAL
---------------- ------------- ------------------------------ -------- -------
2004 $ 5,954 $ 54,00441,670 $ 0 $59,958$47,624
2005 5,954 38,00433,004 0 43,95838,958
2006 5,954 37,33732,337 0 43,29138,291
2007 5,954 36,50431,837 0 42,45837,791
2008 5,954 33,33730,337 0 39,29136,291
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 JanuaryREVENUE RECOGNITION
THE COMPANY'S SALES GENERALLY OCCUR VIA TWO METHODS: (1) AT THE COUNTER IN THE
COMPANY'S 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. THE COMPANY'S
SHIPPING TERMS ARE FOB SHIPPING POINT.
THE COMPANY'S OFFERS AN UNCONDITIONAL SATISFACTION GUARANTEE TO ITS CUSTOMERS
AND ACCEPTS ALL PRODUCT RETURNS. 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) issuedTHE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED FIN
46, "Consolidation of Variable Interest Entities (VIE's)"CONSOLIDATION OF VARIABLE INTEREST ENTITIES (VIE'S)," an Interpretation of
Accounting Research Bulletin No.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 DecemberREQUIRES CERTAIN VARIABLE INTEREST
ENTITIES 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, theTHE FASB issuedISSUED FIN 46R (revised
December(REVISED DECEMBER
2003) which delayed the application ofWHICH DELAYED THE APPLICATION OF FIN 46 toTO TLF until the interim
period ended MarchUNTIL 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.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.
2. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to its directors and employees
using the intrinsic value method prescribed byTHE COMPANY ACCOUNTS FOR STOCK OPTIONS GRANTED TO ITS DIRECTORS AND EMPLOYEES
USING THE INTRINSIC VALUE METHOD PRESCRIBED BY APB No.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 theWHICH 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 JuneFAIR VALUE APPROACH, THE COMPANY'S NET INCOME AND NET INCOME
PER COMMON SHARE FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 andAND
2003, on a
pro forma basis, would have been as follows:
8
ON A PRO FORMA BASIS, WOULD HAVE BEEN AS FOLLOWS:
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ---------- ----------
Net income, as reportedNET INCOME, AS REPORTED $ 516,213427,385 $ 778,704 $1,487,178 $1,553,222
Add: Stock-based compensation expense
included in reported net income601,680 $1,914,563 $2,154,902
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 40,533DEDUCT: STOCK-BASED COMPENSATION EXPENSE
DETERMINED UNDER FAIR VALUE METHOD 29,361 24,546 88,083 73,639
------------ ------------ ---------- ----------
Net income, pro formaNET INCOME, PRO FORMA $ 489,068398,024 $ 758,438 $1,432,888 $1,512,689
============ ============ ========== ==========
Net income per share:
Basic577,134 $1,826,480 $2,081,263
------------ ------------ ---------- ----------
NET INCOME PER SHARE:
BASIC - as reportedAS REPORTED $ 0.04 $ 0.06 $ 0.18 $ O.21
BASIC - PRO FORMA $ 0.04 $ 0.06 $ 0.17 $ 0.20
DILUTED - AS REPORTED $ 0.04 $ 0.06 $ 0.17 $ 0.20
DILUTED - PRO FORMA $ 0.04 $ 0.05 $ 0.080.17 $ 0.14 $ 0.15
Basic - pro forma $ 0.05 $ 0.07 $ 0.14 $ 0.15
Diluted - as reported $ 0.05 $ 0.07 $ 0.14 $ 0.14
Diluted - pro forma $ 0.04 $ 0.07 $ 0.13 $ 0.140.19
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 ofTHE 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 3.375% AND 3.125% and 2.62% forFOR 2004 andAND 2003,
respectively; dividend yields ofRESPECTIVELY; DIVIDEND YIELDS OF 0% for both periods; volatility factors of .696
forFOR BOTH PERIODS; VOLATILITY FACTORS OF .364
FOR 2004 and .725 forAND .706 FOR 2003; and an expected life of the valued options of 5
years.AND AN EXPECTED LIFE OF THE VALUED OPTIONS OF THREE
TO FIVE YEARS.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
shareTHE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER
SHARE ("EPS"):
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNE
SEPTEMBER 30, JUNESEPTEMBER 30,
2004 2003 2004 2003
----------- -----------
NUMERATOR:
NET INCOME $ 427,385 $ 601,680 $ 1,914,563 $ 2,154,902
------------------- ------------------ ----------- -----------
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE 427,385 601,680 1,914,563 2,154,902
------------------- ------------------ ----------- -----------
DENOMINATOR:
WEIGHTED-AVERAGE SHARES OUTSTANDING-BASIC 10,560,661 10,394,374 10,540,374 10,269,415
EFFECT OF DILUTIVE SECURITIES:
STOCK OPTIONS 352,595 422,000 413,576 425,818
WARRANTS 18,684 86,420 32,591 145,531
------------------- ------------------ ----------- -----------
DILUTIVE POTENTIAL COMMON SHARES 371,279 508,420 446,167 571,349
------------------- ------------------ ----------- -----------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE-
WEIGHTED-AVERAGE SHARES 10,931,940 10,902,794 10,986,541 10,840,764
------------------- ------------------ ----------- -----------
BASIC EARNINGS PER SHARE $ 0.04 $ 0.06 $ 0.18 $ 0.21
=================== ================== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.06 $ 0.17 $ 0.20
=================== ================== =========== ===========
THE NET EFFECT OF CONVERTING STOCK OPTIONS TO PURCHASE 825,200 AND 924,700
SHARES OF COMMON STOCK AT OPTION PRICES LESS THAN THE AVERAGE MARKET PRICES HAS
BEEN INCLUDED IN THE COMPUTATIONS OF DILUTED EPS FOR THE PERIODS ENDED SEPTEMBER
30, 2004 AND 2003, RESPECTIVELY.
4. SEGMENT INFORMATION
THE COMPANY IDENTIFIES ITS SEGMENTS BASED ON THE ACTIVITIES OF THREE DISTINCT
BUSINESSES:
A. THE LEATHER FACTORY, WHICH SELLS PRIMARILY TO WHOLESALE CUSTOMERS THROUGH
A CHAIN OF WHOLESALE CENTERS LOCATED IN THE UNITED STATES AND CANADA;
B. TANDY LEATHER COMPANY, WHICH SELLS PRIMARILY TO RETAIL CUSTOMERS THROUGH
A CHAIN OF RETAIL STORES LOCATED IN THE UNITED STATES; AND
C. ROBERTS, CUSHMAN & 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.
LEATHER TANDY ROBERTS,
FACTORY LEATHER CUSHMAN TOTAL
----------- ---------- ---------- ------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
NET SALES $ 7,067,483 $3,053,712 $ 458,879 $10,580,074
GROSS PROFIT 3,861,917 1,934,296 143,220 5,939,433
OPERATING EARNINGS 583,253 168,459 23,531 775,243
INTEREST EXPENSE 14,910 - - 14,910
OTHER, NET (28,995) (1,605) - (30,600)
INCOME BEFORE INCOME TAXES 597,338 170,064 23,531 790,933
DEPRECIATION AND AMORTIZATION 79,937 30,724 2,715 113,376
FIXED ASSET ADDITIONS . 66,883 67,752 1,867 136,502
TOTAL ASSETS $16,399,199 $3,399,499 $ 842,998 $20,641,696
----------- ---------- ---------- ------------
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
NET SALES $ 7,372,159 $2,334,127 $ 412,784 $10,119,070
GROSS PROFIT 3,996,866 1,475,312 117,634 5,589,812
OPERATING EARNINGS 784,322 117,514 15,156 916,992
INTEREST EXPENSE (40,735) - - (40,735)
OTHER, NET (6,315) 226 - (6,089)
INCOME BEFORE INCOME TAXES 737,272 117,740 15,156 870,168
DEPRECIATION AND AMORTIZATION 99,489 20,978 2,365 122,832
FIXED ASSET ADDITIONS 33,230 21,300 1,377 55,907
TOTAL ASSETS $15,300,407 $2,802,218 $ 904,582 $19,007,207
----------- ---------- ---------- ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
NET SALES $22,934,369 $9,193,196 $1,593,199 $33,720,764
GROSS PROFIT 12,416,110 5,709,563 519,732 18,645,405
OPERATING EARNINGS 2,306,807 660,782 108,625 3,076,214
INTEREST EXPENSE 41,019 - - 41,019
OTHER, NET (996) (2,513) - (3,509)
INCOME BEFORE INCOME TAXES 2,266,784 663,295 108,625 3,038,704
DEPRECIATION AND AMORTIZATION 275,216 83,693 7,168 366,077
FIXED ASSET ADDITIONS 114,592 143,143 9,817 267,552
TOTAL ASSETS $16,399,199 $3,399,499 $ 842,998 $20,641,696
----------- ---------- ---------- ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
NET SALES $23,375,158 $6,312,145 $1,452,527 $31,139,830
GROSS PROFIT 12,447,180 3,981,715 497,475 16,956,370
OPERATING EARNINGS 2,626,394 430,737 129,998 3,187,129
INTEREST EXPENSE (174,555) - - (174,555)
OTHER, NET 68,064 369 - 68,433
INCOME BEFORE INCOME TAXES 2,519,903 431,106 129,998 3,081,007
DEPRECIATION AND AMORTIZATION 335,184 55,064 7,711 397,959
FIXED ASSET ADDITIONS 201,862 122,189 2,233 326,284
TOTAL ASSETS $15,300,407 $2,802,218 $ 904,582 $19,007,207
----------- ---------- ---------- ------------
NET SALES FOR GEOGRAPHIC AREAS WERE AS FOLLOWS:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---------- ---------------------- ------------ ----------- -----------
Numerator:
Net incomeUNITED STATES . . . $ 516,2139,729,500 $ 778,704 $ 1,487,178 $ 1,553,222
---------- ----------9,456,440 $31,213,487 $29,038,861
ALL OTHER COUNTRIES 850,574 662,630 2,507,277 2,100,969
------------ ------------ ----------- -----------
Numerator for basic and diluted earnings per share 516,213 778,704 1,487,178 1,553,222
Denominator:
Weighted-average shares outstanding-basic 10,553,243 10,234,054 10,530,119 10,205,900
Effect of dilutive securities:
Stock options 416,580 398,684 441,999 423,109
Warrants 36,815 172,281 39,407 173,668
---------- ---------- ----------- -----------
Dilutive potential common shares 453,395 570,965 481,406 596,777
---------- ---------- ----------- -----------
Denominator for diluted earnings per share:
Weighted-average shares 11,006,638 10,805,019 11,011,525 10,802,677
========== ========== =========== ===========
Basic earnings per share $ 0.0510,580,074 $ 0.08 $ 0.14 $ 0.15
========== ========== =========== ===========
Diluted earnings per share $ 0.05 $ 0.07 $ 0.14 $ 0.14
========== ==========10,119,070 $33,720,764 $31,139,830
============ ============ =========== ===========
The net effect of converting stock options to purchase 637,500 and 684,700
shares of common stock at option prices less than the average market prices has
been included in the computations of diluted EPS for the three and six months
ended JuneGEOGRAPHIC SALES INFORMATION IS BASED ON THE LOCATION OF THE CUSTOMER. NET
SALES FROM NO SINGLE FOREIGN COUNTRY WAS MATERIAL TO THE COMPANY'S CONSOLIDATED
NET SALES FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 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, which sells primarily to wholesale customers through
a chain of 30 wholesale centers located in the United States and Canada;
b. Tandy Leather Company, which sells primarily to retail customers through
a chain of retail stores located in the United States; and
c. Roberts, Cushman & 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.
LEATHER FACTORY TANDY LEATHER ROBERTS,CUSHMAN TOTAL
--------------- ------------- --------------- ------------
FOR THE QUARTER ENDED JUNE 30, 2004
Net sales $ 7,423,795 $ 2,972,746 $ 563,272 $10,959,813
Gross profit 3,978,355 1,848,618 154,086 5,981,059
Operating earnings 645,146 190,756 17,934 853,836
Interest expense (12,471) - - (12,471)
Other, net (26,196) 843 - (25,353)
------------
Income before income taxes 606,479 191,599 17,934 816,012
------------
Depreciation and amortization 93,351 27,716 2,216 123,283
Fixed asset additions 7,972 37,348 3,615 48,935
Total assets $ 16,224,401 $ 3,248,015 $ 929,913 $20,402,329
--------------- ------------- ---------------- ------------
FOR THE QUARTER ENDED JUNE 30, 2003
Net sales $ 7,801,742 $ 2,113,479 $ 545,454 $10,460,675
Gross profit 4,182,812 1,325,072 213,170 5,721,054
Operating earnings 918,434 166,230 69,800 1,154,464
Interest expense (70,468) - - (70,468)
Other, net 43,091 614 - 43,705
------------
Income before income taxes 891,057 166,844 69,800 1,127,701
------------
Depreciation and amortization 129,328 18,247 2,521 150,096
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) - - (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 $ 16,224,401 $ 3,248,015 $ 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
--------------- ------------- ---------------- ------------
Net sales for geographic areas were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
United States $ 10,198,130 $ 9,711,785 $21,483,986 $19,582,421
All other countries 761,683 748,890 1,656,703 1,438,339
------------ ----------- ----------- -----------
$ 10,959,813 $10,460,675 $23,140,689 $21,020,760
============ =========== =========== ===========
Geographic sales information is based on the location of the customer. Net
sales from no single foreign country was material to the Company's consolidated
net sales for the three and six month periods ended June 30, 2004 andAND
2003. The
Company does not have any significant long-lived assets outside of the United
States.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 symbolWE ARE 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, CushmanOUR COMPANY IS MANAGED ON A BUSINESS ENTITY
BASIS, WITH THOSE BUSINESSES BEING THE LEATHER FACTORY, TANDY LEATHER COMPANY,
AND ROBERTS, CUSHMAN & Company, Inc. ("Cushman"). See NoteCOMPANY, INC. 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 inTO THE CONSOLIDATED FINANCIAL
STATEMENTS FOR ADDITIONAL INFORMATION CONCERNING OUR BUSINESS SEGMENTS, AS WELL
AS OUR FOREIGN OPERATIONS.
LEATHER FACTORY, FOUNDED IN 1980, 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 centers located throughout
the United States and Canada.
Tandy Leather, founded inDISTRIBUTES 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 THIRTY COMPANY-OWNED WHOLESALE CENTERS LOCATED
THROUGHOUT NORTH AMERICA AND ONE COMPANY-OWNED RETAIL STORE LOCATED IN CANADA.
TANDY LEATHER, FOUNDED IN 1919, is the best-known supplier of leather and
related supplies used in the leathercraft industry. Products include quality
tools, leather, accessories, kits and teaching materials. In earlyIS THE BEST-KNOWN SUPPLIER OF LEATHER AND
RELATED SUPPLIES USED IN THE LEATHERCRAFT INDUSTRY. PRODUCTS INCLUDE QUALITY
TOOLS, LEATHER, ACCESSORIES, KITS AND TEACHING MATERIALS. IN EARLY 2002, we
initiated a plan to expand Tandy by opening retail stores. As of JuneWE
INITIATED A PLAN TO EXPAND TANDY BY OPENING RETAIL STORES. AS OF SEPTEMBER 30,
2004 we have opened 32 Tandy Leather retail stores located throughout the United
States.
Cushman, whose origins date back to the mid-1800s, custom designs and
manufactures a product line of decorative hat trims for headwear manufacturers.WE HAVE OPENED THIRTY-SIX TANDY LEATHER RETAIL STORES LOCATED THROUGHOUT
THE UNITED STATES.
ROBERTS, CUSHMAN, WHOSE ORIGINS DATE BACK TO THE 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 "ItemDESCRIPTION OF OUR 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 FormMANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" IN OUR ANNUAL REPORT ON FORM 10-K for the year ended
DecemberFOR THE YEAR ENDED DECEMBER 31,
2003.
FORWARD-LOOKING STATEMENTS
- ---------------------------
CERTAIN STATEMENTS CONTAINED IN THIS REPORT AND OTHER MATERIALS WE FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION, AS WELL AS INFORMATION INCLUDED IN ORAL
STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY US, OTHER THAN
STATEMENTS OF HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS
GENERALLY ARE ACCOMPANIED BY WORDS SUCH AS "MAY," "WILL," "COULD," "SHOULD,"
"ANTICIPATE," "BELIEVE," "BUDGETED," "EXPECT," "INTEND," "PLAN," "PROJECT,"
"POTENTIAL," "ESTIMATE," "CONTINUE," OR "FUTURE" OR THE NEGATIVE, OTHER
VARIATIONS THEREOF OR OTHER OR SIMILAR STATEMENTS. 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 WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SUGGESTED
BY THE FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHER THINGS:
WE MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE OPENING OF TANDY
LEATHER RETAIL STORES OR WE MAY BE UNABLE TO OBTAIN SUFFICIENT NEW LOCATIONS ON
ACCEPTABLE TERMS TO MEET OUR GROWTH PLANS. ALSO, OTHER RETAIL INITIATIVES MAY
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 SEPTEMBER
30, 2004, WE HAVE ADDED THIRTY-SIX 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.
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 NINE 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
OUR 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 OUR BUSINESS. 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 ECONOMY DOWNTURN 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 OF THE ECONOMIC CONDITION
IN THE UNITED STATES OR INTERNATIONALLY IS LIKELY TO LIMIT OR DECREASE OUR
PROFITS.
IN ADDITION, TERRORISM OR THE THREAT OF TERRORIST ATTACKS IN THE UNITED STATES
OR AGAINST UNITED STATES INTERESTS ABROAD COULD CAUSE CONSUMER BUYING HABITS TO
CHANGE AND DECREASE OUR SALES. WE BELIEVE THAT MAJOR DISRUPTIONS (SUCH AS
TERRORIST ATTACKS) COULD REDUCE CONSUMER SPENDING, PARTICULARLY PURCHASES OF
NON-ESSENTIAL PRODUCTS SUCH AS 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.
WE ASSUME NO OBLIGATION TO UPDATE OR OTHERWISE REVISE OUR FORWARD-LOOKING
STATEMENTS EVEN IF EXPERIENCE OR FUTURE CHANGES MAKE IT CLEAR THAT ANY PROJECTED
RESULTS, EXPRESS OR IMPLIED, WILL NOT BE REALIZED.
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 JuneTHE FOLLOWING TABLES PRESENT SELECTED FINANCIAL DATA ON THE OPERATING RESULTS OF
EACH OF OUR THREE SEGMENTS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30,
2004 andAND 2003:
QUARTER ENDED JUNESEPTEMBER 30, 2004 QUARTER ENDED JUNESEPTEMBER 30, 2003
-------------------------- ---------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
------------- ---------- ----------- ----------------------- --------
Leather Factory. $ 7,067,483 $ 583,253 $ 7,372,159 $784,322
Tandy 3,053,712 168,459 2,334,127 117,514
Roberts, Cushman 458,879 23,531 412,784 15,156
------------- ----------- ------------- --------
Total Operations $ 10,580,074 $ 775,243 $ 10,119,070 $916,992
============= ============ ============= ========
NINE MONTHS ENDED SEPTEMBER 30, 2004 NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------ ------------------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
------------ ----------- ------------ ----------
Leather FactoryFactory. $ 7,423,79522,934,369 $ 645,1462,306,807 $ 7,801,742 $ 918,43423,375,158 $2,626,394
Tandy 2,972,746 190,756 2,113,479 166,2309,193,196 660,782 6,312,145 430,737
Roberts, Cushman 563,272 17,934 545,454 69,800
------------- ----------1,593,199 108,625 1,452,527 129,998
------------ ----------- ------------ ----------
Total Operations $ 10,959,81333,720,764 $ 853,836 $10,460,675 $1,154,464
============= ==========3,076,214 $ 31,139,830 $3,187,129
============ =========== ==========
SIX MONTHS ENDED JUNE 30, 2004 SIX MONTHS ENDED JUNE 30, 2003
------------------------------ ------------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
------------- ---------- ----------- ----------
Leather Factory $ 15,866,885 $ 1,718,178 $16,003,000 $1,842,071
Tandy 6,139,484 492,322 3,978,018 313,223
Cushman 1,134,320 90,470 1,039,742 114,842
------------- ---------- ----------- ----------
Total Operations $ 23,140,689 $ 2,300,970 $21,020,760 $2,270,136
============= ========== ======================= ==========
10
Consolidated net sales for the quarter ended JuneSeptember 30, 2004 increased
$499,000,$461,000, or 4.8%4.6%, compared to the same period in 2003. Tandy Leather
contributed $859,000$720,000 and Roberts, Cushman recorded a gain of $18,000.$46,000. Leather
Factory's sales were down $378,000.$305,000. Operating income on a consolidated basis
for the quarter ended JuneSeptember 30, 2004 was down 26%15% or $300,000 over$141,000 compared with
the secondthird quarter of 2003.
Consolidated net sales for the sixnine months ended JuneSeptember 30, 2004 increased
$2.1$2.6 million, or 10%8.3%, compared to the same period in 2003. Tandy Leather
contributed $2.2$2.9 million of the sales gain while Roberts, Cushman added
$95,000.$141,000. Leather Factory's 2004 sales were down $136,000$440,000 from those of a year
ago. Operating income on a consolidated basis for the sixnine months ended
JuneSeptember 30, 2004 was up 1.4%down 3.5% or $31,000$111,000 over last year.
The following table shows in comparative form our consolidated net income for
the secondthird quarter and sixnine months ended JuneSeptember 30, 2004 and 2003:
QUARTER ENDED 09/30/04 QUARTER ENDED 06/30/04 06/09/30/03 % CHANGE
------------- ----------------------------------- ---------------------- --------
Net income $ 516,213427,385 $ 778,704 (33.7%601,680 (28.9%)
============= =================================== ====================== ========
SIXNINE MONTHS ENDED SIX MONTHSNINE MONTHES ENDED
06/09/30/04 06/09/30/03 % CHANGE
------------- ----------------------------------- ---------------------- --------
Net income $ 1,487,1781,914,563 $ 1,553,222 (4.2%2,154,902 (11.2%)
============= =================================== ====================== ========
LEATHER FACTORY OPERATIONS
Net sales from Leather Factory's 30 wholesale centers decreased 4.8%4.1% for the secondthird
quarter of 2004 compared to the sale period in 2003 as follows:
QUARTER ENDED
06/09/30/04 06/09/30/03 $ CHANGE % CHANGE
---------- ---------- ---------- --------- --------
Sales, excluding NATIONAL ACCOUNTS $6,223,275 $5,952,823$5,910,887 $5,862,053 $ 270,452 4.5%48,834 1.0%
NATIONAL ACCOUNT sales 1,200,520 1,848,919 (648,399) (35.1)1,156,596 1,510,106 (353,510) (23.4)%
---------- ---------- ---------- --------- --------
Total sales $7,423,795 $7,801,742 $(377,947) (4.8)$7,067,483 $7,372,159 $(304,676) (4.1)%
========== ========== ========== =========
As shown by the table above, the Leather Factory wholesale centers, excluding
the impact of the NATIONAL ACCOUNT customer group, achieved a modest sales gain.
We recorded sales gains totaling $157,000 in our WHOLESALE and MANUFACTURERS
customer groups but those gains were partially offset by a sales decline to our
RETAIL and INSTITUTION customer groups of $110,000. We believe the decline in
these customer categories is primarily due to the continued expansion of Tandy
Leather into the market. Sales to our NATIONAL ACCOUNTS continue to decline
this year compared to last year as discussed in previous filings. We still
believe that these decreases are temporary but do not expect to see any
significant improvement in these sales until 2005.
The following table presents Leather Factory's sales mix by customer categories
for the quarters ended September 30, 2004 and 2003:
QUARTER ENDED
--------------------
CUSTOMER GROUP 9/30/04 9/30/03
- ------------------------------------------------------------------------------------- --------- --------
RETAIL (end users, consumers, individuals) 22% 22%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 7 7
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 48 45
NATIONAL ACCOUNTS 15 20
MANUFACTURERS 8 6
--------- --------
100% 100%
========= ========
Operating income for Leather Factory decreased $201,000 for the third quarter
compared to 2003, a decline of 25%. Gross profit margins improved slightly to
54.6% for the current quarter compared to 54.2% a year ago. The decrease in
sales resulted in a decline in gross profit dollars of $135,000. Operating
expenses increased $66,000, or 2.1%, in the third quarter of 2004. The cost of
health care benefits for employees continues to rise and accounted for $130,000
in additional expenses over last year. In addition, we incurred approximately
$50,000 in fees related to Sarbanes-Oxley 404 compliance during the current
quarter. These additional expenses were offset somewhat by decreases in other
areas, such as telephone and utilities ($12,000), bad debts ($92,000), and
miscellaneous fees ($10,000).
Net sales for the nine months ended September 30, 2004 decreased less than 1%
from the same period in 2003 as follows:
NINE MONTHS ENDED
09/30/04 09/30/03 $ CHANGE % CHANGE
----------- ----------- ------------ ---------
Sales, excluding NATIONAL ACCOUNTS $18,645,805 $17,904,519 $ 741,286 4.1%
NATIONAL ACCOUNT sales 4,288,564 5,470,639 (1,182,075) (21.6)%
----------- ----------- ------------ ---------
Total sales $22,934,369 $23,375,158 $ (440,789) (1.9)%
=========== =========== ============ =========
The Leather Factory wholesale centers achieved solid sales gains, excluding the
impact of the NATIONAL ACCOUNT customer group. The 4.5% increase4.1% sales growth is
at the upper end ofconsistent with management's expectations forof 2 to 4% annually. Similar to that
of the third quarter, we recorded sales growth of 2-4%. Salesgains to our WHOLESALE and MANUFACTURER
customer group continues its positive
momentum as we are still benefiting from the advertising initiatives put in
place in late 2003.groups of approximately $785,000 but those gains were offset slightly
by sales declines to our RETAIL and INSTITUTION customers of $45,000. Sales to
our NATIONAL ACCOUNTS were down significantly in
the second quarter of 2004 and were also down infor the first quarternine months of this year.
Although there can be no assurance, we are optimistic that these decreases are
only temporary. For example, we understand that thereyear have been lower
than expectations. We are working on the development of 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,products to
present to these customers. Assuming these new products are well-received when
presented, we maywould still not expect to see any significant improvement in these sales
until the fourth quarter of 2004 or later. We are currently redesigningpositive impact to 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 June 30, 2004 and 2003:
QUARTER ENDED
CUSTOMER GROUP 06/30/04 06/30/03
- -------------- -------- --------
RETAIL (end users, consumers, individuals) 21% 19%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc) 9 10
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc) 45 39
NATIONAL ACCOUNTS 18 24
MANUFACTURERS 7 8
-------- --------
100% 100%
======== ========
group until some time in 2005.
Operating income for Leather Factory decreased $273,000$320,000 for the second quarternine months
ended September 30, 2004 compared to 2003, a decline of 30%12%. Gross profit
margins remained steadyimproved from 53.4% 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 ofSeptember 30, 2003 to 54.1% at September 30,
2004. The cost of health insurance
benefits for employees accountedcare is up $330,000 for the majorityfirst nine months of 2004
compared to that of the increase over last
year. Management is cautiously optimistic withsame period in 2003 which accounts for the progressdecrease in
operating income. We continue to analyze options to control health care costs,
such as increasing the employees' contribution, modifying benefits, or other
similar measures. However, even if we have made to
contain our operating expenses during the quarter. However, our success is
somewhat clouded by the sales loss as the percentage of operating expenses to
sales appearsimplement these strategies, we still
expect health care to be high. A large number of expenses actually decreased this
quarter compareda significant expense to a year ago.
11
the company.
TANDY LEATHER OPERATIONS
The Tandy Leather retail store chain has grown from 22twenty-six stores at
JuneSeptember 30, 2003 to 32thirty-six a year later. Net sales for Tandy were up
approximately 41% for the secondthird quarter of 2004 over the same quarter last year.
QTR ENDED QTR ENDED
$ INCR9/30/04 9/30/03 $INCR (DECR) % INCR
6/30/04 6/30/03 (DECR) (DECR)INCR(DECR)
---------- ---------- -------- ------------------- ------------
Same store sales (22(24 stores) $2,306,231 $2,112,150 $194,081 9.2%$2,323,564 $2,269,179 $ 54,385 2.4%
New or acquired store sales (10(12 stores) 666,515 - 666,515730,148 62,404 667,744 ***
Closed store (order fulfillment house)house - 1,329 (1,329)2,544 (2,544) (100.0)
---------- ---------- -------- ------------------- ------------
Total sales $2,972,746 $2,113,479 $859,267 40.7%$3,053,712 $2,334,127 $ 719,585 30.8%
========== ========== ========= =================== ============
Sales in the currentthird quarter showed healthy growth. The "same stores"older stores continue to
post strong gains.sales gains despite the fact that they are competing against the dozen new
stores. Average sales per month for stores that have been open for at least six
months as of JuneSeptember 30, 2004 is $36,000,$33,000, which continues to beat our internal
expectations of $30,000 per month per store.
The following table presents Tandy Leather's sales mix by customer categories
for the quarters ended JuneSeptember 30, 2004 and 2003:
QUARTER ENDED
------------------
CUSTOMER GROUP 06/09/30/04 06/09/30/03
- --------------------------------------------------------------------------------------------------- -------- --------
RETAIL (end users, consumers, individuals) 68% 67%70% 72%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc) 10 10etc.) 7 7
WHOLESALE (resellers(reseller & distributors, saddle & tack shops,stores, authorized dealers, etc) 22etc.) 23 20
NATIONAL ACCOUNTS * *
MANUFACTURERS * *1
-------- --------
100% 100%
======== ========
* less than 1%
SecondThird quarter operating income for Tandy Leather increased $25,000$51,000 or 15%43% over
operating income in last year's secondthird quarter. Gross profit margins declined
0.5%improved
minimally from 62.7%63.2% to 62.2%63.3% for the quarter. Operating expenses in the
current quarter were $400,000 higher than last year's quarter, although as a
percentage of sales, operating expenses dropped from 58.2% last year to 57.8%
this year. Expenses incurred this quarter related to stores open now that did
not exist at September 2003, including such expenses as personnel, rents,
utilities, etc., totaled approximately $310,000. Additionally, manager bonuses
are up approximately $30,000 in the third quarter 2004 compared to the third
quarter 2003 due primarilyto the increase in operating profit at the store level.
Finally, advertising and marketing expenses increased $50,000 compared to the
same period in 2003 as the result of the new stores.
Net sales for Tandy Leather were up approximately 46% for the first nine months
of 2004 over the same period last year. New stores are defined as those that
were operated less than half of the comparable period in the prior year.
Specifically, stores that opened in May 2003 or later are classified as new
stores in the following table:
NINE MONTHS ENDED NINE MONTHS ENDED
9/30/04 9/30/03 $INCR (DECR) % INCR(DECR)
------------------ ------------------ ------------ ------------
Same store sales (20 stores) $ 6,380,603 $ 5,914,463 $ 466,140 7.9%
New or acquired store sales (16 stores) 2,812,593 392,750 2,419,843 ***
Closed store (order fulfillment center) - 4,932 (4,932) (100.0)
------------------ ------------------ ------------ ------------
Total sales $ 9,193,196 $ 6,312,145 $ 2,881,051 45.6%
================== ================== ============ ============
Operating income for the nine months ended September 30, 2004 increased $230,000
or 53% over operating income in last year's comparable period. Gross profit
margins declined from 63.1% to 62.1% due to limitations in increasing selling pricesprice
increases 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. 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 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%54.9% of sales in
the current quarterfirst nine months of 2004 compared to 54.8%56.3% 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 overperiod last year.
ROBERTS, CUSHMAN OPERATIONS
Net sales for Roberts, Cushman increased $18,000$46,000 for the secondthird quarter of 2004
over the secondthird quarter of 2003 and operating income increased $8,000. Gross
profit margins improved from 28.5% to 31.2%. The volume of orders from hat
manufacturers continued its positive momentum during the quarter which resulted
in the sales increase. We have been able to adjust our selling prices slightly
which contributed to the improvement in our gross profit margin this quarter.
Operating expenses increased $17,000 for the quarter due to an increase in
employee benefits ($10,000), additional bonuses accrued for employees ($3,000)
and sales commissions ($3,000).
Net sales for Roberts, Cushman increased $140,000 for the first nine months of
2004 over the first nine months of 2003, although operating income decreased
$52,000. The
increase in sales is the result of$21,000. We are experiencing an increase in orders from hat manufacturers.
However,manufacturers which
accounts for the sales mix is more heavily weighted towardincrease. Gross profit margins decreased from 34.2% at
September 30, 2004 to 32.6% at September 30, 2004. We have been slow to pass
cost increases on to our customers which explains the productiondecline in gross margins.
However, we began to remedy that situation late in the third quarter in an
attempt to stabilize our margins. Operating expenses increased $43,000 during
the first nine months 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,2004 primarily due to the nature of this business, samples are madean increase in salaries 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 productionbonuses ($13,000), as well as health care and that cost increase cannot be passed on to the
customer, our gross profit margin will decrease. We experienced this during the
second quarter due to 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 expenses decreased $7,000 for the quarter.other benefits ($30,000).
OTHER EXPENSES
Interest expense in the secondthird quarter of 2004 was $12,000,$15,000, down from $70,000$41,000 in
the secondthird quarter of 2003. The decrease was attributable to the decreasecontinued
reduction in our debt balance. Interest expense in the first nine months of
2004 was $41,000, down from $175,000 in the first nine months of 2003. Our
average debt balance for the first sixnine months of 2004 towas $1.4 million,
compared to $4.5$3.0 million for the first sixnine 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
- ---------------------------------------------------------
On our consolidated balance sheet, total assets increased from $19.0 million at
year-end 2003 to $20.4$20.6 million at JuneSeptember 30, 2004. An increase in inventory
of $1.1$1.8 million and accounts receivable of $867,000$414,000 accounted for the increase
in total assets, partially offset by a decrease in cash of $546,000.$400,000 and a
reduction in prepaid income taxes of $190,000. Total stockholders' equity
increased from $14.5 million at December 31, 2003 to $16.1$16.5 million at JuneSeptember
30, 2004. The increase in equity is attributable to the earnings in the first
halfnine months of the year.
Our investment in inventory was $12.2$12.9 million at JuneSeptember 30, 2004 compared to
$11.1 million at December 31, 2003. Inventory turnover increased to an
annualized rate of 3.983.75 times during the first sixnine months of 2004, an
improvement from 3.523.41 times for the first half ofcomparable period in 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 Annual Report on 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. Our
inventory at JuneSeptember 30, 2004 was within 5% of our internal optimal targets.
Credit sales increased in the first sixnine months of 2004, and the Company'sour investment in
accounts receivable was $2.7$2.2 million at JuneSeptember 30, 2004, up $867,000$414,000 from
$1.8 million at year-end 2003. Consolidated average days to collect accounts
improved slightly overremained virtually unchanged for the first halfnine months of 2003 from 43.32004 (41.2 days)
compared to 41.0 days to 42.8
days.for the same period in 2003. Roberts, Cushman posted the
most improvement in average days to collect accounts, from 68.272.3 days to 51.146.2
days outstanding. Tandy Leather's days outstanding decreased in the first half of 2004 compared to 2003, from 43.739.2 in 2003
to 41.136.1 days in 2004, while Leather Factory's days outstanding increased from
40.237.4 days in 2003 to 41.740.9 days in 2004.
Accounts payable increased $343,000$87,000 to $1.9$1.6 million at the end of the secondthird
quarter due primarily to the increase in inventory purchases during the period.compared with December 31, 2003. Accrued expenses and other liabilities
increased $102,000,$178,000, from $1.0 million at December 31, 2003 to $1.1$1.2 million at
JuneSeptember 30, 2004.
At JuneSeptember 30, 2004, our ratio of debt to equity was 0.07,0.06, an improvement from
December 31, 2003 at which time the debt-to-equity ratio was 0.12. Our current
ratio fell to 5.71remained steady at June6.17 at September 30, 2004, from 6.16 at the end of
2003.
During the first halfthee quarters of 2004, cash flows provided by operating
activities was $263,000.$694,000. Net income, reduced by the increase in inventory from
year-end to JuneSeptember 30, 2004, accounted for the majority of the cash flow.
Cash flows used in investing activities totaled $244,000.$413,000. Capital expenditures
for the first sixnine months of 2004 totaled $131,000.$267,000. The asset purchases of the
Syracuse, NY, and
St. Louis, MO, and Santa Fe, NM Tandy Leather retail stores
required $125,000.$156,000. Cash flows used by financing activities was $565,000$682,000 during
the first halfthree quarters of 2004. The funds were primarily used to reduce the
principal balance of our revolving credit facility.
At December 31, 2003, our bank debt totaled $1.8 million. At JuneSeptember 30,
2004, the balance was $1.1$1.0 million, a decrease of 39%44% in the first sixnine months
of 2004. From JuneIn the twelve months ended September 30, 2003,2004, we have repaid $3.7$1.7
million on our bank debt. We will continue to repay our bank debt as quickly
as is practical without compromising our operations and expansion plans.
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 credit is based on the
level of our accounts receivable and inventory. At JuneSeptember 30, 2004, the
available, unused portion of the credit facility was approximately $3.9$4.0 million.
13
FORWARD-LOOKING STATEMENTS
- ---------------------------
This report (particularly Items 2, 3 and 4 of this 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 which could cause actual
results to differ materially from those suggested by the forward-looking
statements include, among other things:
We may fail to realize the anticipated benefits of the opening of Tandy
Leather retail stores or we may be unable to obtain sufficient new locations on
acceptable terms to meet our growth plans. Also, other retail initiatives may
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 of the economic slump is
likely to limit or decrease our profits.
In addition, terrorism or the threat of terrorist attacks in the United States
or against U.S. interests abroad could cause consumer buying habits to change
and decrease our sales. We believe that major disruptions (such as terrorist
attacks) could reduce consumer spending, particularly purchases of non-essential
products such as 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.
The Company does not intend to update forward-looking statements.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For disclosures about market risk affecting the Company,our 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
believesWe believe
that itsour exposure to market risks has not changed significantly since December
31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
At the end of the secondthird 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, the Company'sas of September 30, 2004,
our disclosure controls and procedures offer reasonable assurance that the
information required to be disclosed by the
Companyus in the reports it fileswe file 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'sour
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'sour disclosure controls and procedures or the our 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. SUBMISSION2. CHANGES IN SECURITIES, USE OF MATTERS TO A VOTEPROCEEDS AND ISSUER PURCHASE OF SECURITY HOLDERS
On May 26, 2004, the Annual Meeting of the Stockholders of the Company was held
in the Hall of Fame Room at the Wyndham Hotel, Arlington, Texas to consider and
act 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 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 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 taken there.
15
ITEM 5. OTHER INFORMATIONEQUITY
SECURITIES
In an effort to reduce our administrative and compliance costs for stockholders
who only have a small investment in the Company,our common stock, 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 terminatesterminated on
AugustSeptember 30, 2004, unless sooner terminated by the
Company. At June 30, 2004 we had approximately 300 registered stockholders who
held fewer than 1002004. As of that date, 5,508 shares of our common stock and another 200 stockholders who
held less than 100 shares in brokerage accounts.
In addition to benefitinghad been
repurchased by us.
The following table sets forth the Company, we believemonthly repurchase of common stock for the
period covered by 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------report:
EXHIBIT
TOTAL NUMBER EXHIBIT
- -------- -------
31.1 13a-4(a) Certification by Wray Thompson, ChairmanOF SHARES MAXIMUM NUMBER OF
TOTAL NUMBER OF AVERAGE PRICE PURCHASED AS PART OF SHARES THAT MAY YET BE
SHARES PURCHASED (1) PAID PER SHARE PUBLICLY ANNOUNCED PURCHASED UNDER THE
PLANS OR PROGRAMS (2) PLANS OR PROGRAMS (2)
-------------------- --------------- --------------------- ----------------------
JULY 1-31, 2004 0 $ 4.35 0 5,950
AUGUST 1-31, 2004 2,853 $ 4.35 2,853 3,097
SEPTEMBER 1-30, 2004 2,655 $ 4.35 2,655 442
(1) The total number of shares purchased includes all repurchases made during the
Boardperiods indicated. All repurchases were made as part of a publicly announced plan.
(2) These publicly announced plans or programs consist of The Leather Factory's Odd-Lot
Purchase Program. This program was announced on July 1, 2004 and Chief Executive Officer
31.2 13a-4(a) Certification by Shannon L Greene, Chief Financial Officer and Treasurer
32 Certification Pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002expired on September
30, 2004.
(b) ReportsITEM 6. EXHIBITS
Exhibits
- --------
3.1 Certificate of Incorporation of The Leather Factory, Inc., filed as
Exhibit 3.1 to the Registration Statement on Form SB-2 of The Leather Factory,
Inc. (Commission File No. 33-81132) filed with the Securities and Exchange
Commission on July 5, 1994, and incorporated by reference herein.
3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the
Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission
File No. 33-81132) filed with the Securities and Exchange Commission on July 5,
1994, and incorporated by reference herein.
4.1 Financial Advisor's Warrant Agreement, dated February 12, 2003,
between The Leather Factory, Inc. and Westminster Securities Corporation filed
as Exhibit 4.1 to Form 10-Q filed by The Leather Factory, Inc. with the
Securities and Exchange Commission on May 14, 2003, and incorporated by
reference herein.
4.2 Capital Markets Services Engagement Agreement, dated February 12,
2003, between The Leather Factory, Inc. and Westminster Securities Corporation
filed as Exhibit 4.2 to Form 10-Q filed by The Leather Factory, Inc. with the
Securities and Exchange Commission on May 14, 2003, and incorporated by
reference herein.
10.1 Credit Agreement, dated as of November 3, 2003, made by and among
The Leather Factory, Inc., a Delaware corporation; Roberts, Cushman & Company,
Inc., a New York corporation; Hi-Line Leather & Manufacturing Company, a
California corporation, The Leather Factory of Nevada Investments, Inc., a
Nevada corporation, The Leather Factory, Inc., a Nevada corporation; The Leather
Factory, L.P., a Texas limited partnership; The Leather Factory, Inc., an
Arizona corporation; Tandy Leather Company Investments, Inc., a Nevada
corporation; Tandy Leather Company, Inc., a Nevada corporation; Tandy Leather
Company, L.P., a Texas limited partnership; and Wells Fargo Bank Texas, National
Association filed as Exhibit 10.1 to the Current Report on Form 8-K ----------------------
On April 28, 2004,of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on November 7, 2003 and incorporated by reference
herein.
10.2 Revolving Line of Credit Note, dated November 3, 2003, in the
principal amount of up to $6,000,000.00 given by The Leather Factory, Inc., a
Delaware corporation; Roberts, Cushman & Company, Inc., a New York corporation;
Hi-Line Leather & Manufacturing Company, a California corporation, The Leather
Factory of Nevada Investments, Inc., a Nevada corporation, The Leather Factory,
Inc., a Nevada corporation; The Leather Factory, L.P., a Texas limited
partnership; The Leather Factory, Inc., an Arizona corporation; Tandy Leather
Company Investments, Inc., a Nevada corporation; Tandy Leather Company, Inc., a
Nevada corporation; Tandy Leather Company, L.P., a Texas limited partnership, as
borrowers, payable to the order of Wells Fargo Bank Texas, National Association
filed a reportas Exhibit 10.2 to the Current Report on Form 8-K in which we furnished
under Items 7 and 12 the press release entitled "Theof The Leather Factory,
Expects Net
Income Up 25% forInc. (Commission File No. 1-12368) filed with the Securities and Exchange
Commission on November 7, 2003 and incorporated by reference herein.
10.3 First Quarter 2004" relatingAmendment to certain preliminary financial
information forCredit Agreement, dated as of November 26,
2003, made by and among The Leather Factory, Inc., a Delaware corporation;
Roberts, Cushman & Company, Inc., a New York corporation; Hi-Line Leather &
Manufacturing Company, a California corporation, The Leather Factory of Nevada
Investments, Inc., a Nevada corporation, The Leather Factory, Inc., a Nevada
corporation; The Leather Factory, L.P., a Texas limited partnership; The Leather
Factory, Inc., an Arizona corporation; Tandy Leather Company Investments, Inc.,
a Nevada corporation; Tandy Leather Company, Inc., a Nevada corporation; Tandy
Leather Company, L.P., a Texas limited partnership; and Wells Fargo Bank,
National Association, successor by merger to Wells Fargo Bank Texas, National
Association filed as Exhibit 10.3 to the quarter endedAnnual Report on Form 10-K of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on March 31, 2004.
On April 29, 2004 and incorporated by reference herein.
10.4 First Modification to Promissory Note, dated as of November 26,
2003, made by and among The Leather Factory, Inc., a Delaware corporation;
Roberts, Cushman & Company, Inc., a New York corporation; Hi-Line Leather &
Manufacturing Company, a California corporation, The Leather Factory of Nevada
Investments, Inc., a Nevada corporation, The Leather Factory, Inc., a Nevada
corporation; The Leather Factory, L.P., a Texas limited partnership; The Leather
Factory, Inc., an Arizona corporation; Tandy Leather Company Investments, Inc.,
a Nevada corporation; Tandy Leather Company, Inc., a Nevada corporation; Tandy
Leather Company, L.P., a Texas Limited partnership; and Wells Fargo Bank,
National Association, successor by merger to Wells Fargo Bank Texas, National
Association filed as Exhibit 10.4 to the Annual Report on Form 10-K of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on March 29, 2004 and incorporated by reference herein.
10.5 Asset Purchase Agreement dated November 30, 2000, by Tandy Leather
Company, Inc. (f/k/a Leather Tan Acquisition, Inc.), a Texas corporation, TLC
Direct, Inc., a Texas corporation, and Tandy Leather Dealer, Inc., a Texas
corporation, filed a reportas Exhibit No. 2.1 to the Current Report on Form 8-K in which we furnished
under Items 7 and 12 the press release entitled "Theof The
Leather Factory, Reports 1st
QuarterInc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on December 15, 2000, and incorporated herein by
reference.
10.6 Credit Agreement, dated as of October 6, 2004, Results - Net Income up 25% on Record Revenues" relatingmade by and among
The Leather Factory, Inc., a Delaware corporation, and Bank One, National
Association filed as Exhibit 10.1 to the resultsCurrent Report on Form 8-K of our first quarter ended March 31, 2004.The
Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on November 5, 2004 and incorporated by reference
herein.
10.7 Line of Credit Note, dated October 6, 2004, in the principal
amount of up to $3,000,000 given by The Leather Factory, Inc., a Delaware
corporation as borrower, payable to the order of Bank One, National Association
filed as Exhibit 10.2 to the Current Report on Form 8-K of The Leather Factory,
Inc. (Commission File No. 1-12368) filed with the Securities and Exchange
Commission on November 5, 2004 and incorporated by reference herein.
31.1* 13a-14(a) Certification by Wray Thompson, Chairman of the Board
and Chief Executive Officer.
31.2* 13a-14(a) Certification by Shannon L. Greene, Chief Financial
Officer and Treasurer.
32* Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
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,November 12, 2004 By: /s/ Wray Thompson
--------------------
Wray Thompson
Chairman and Chief Executive Officer
Date: August 9,November 12, 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-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 secondthird 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,November 12, 2004
/s/ Wray Thompson
-------------------
Wray Thompson
Chairman 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-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 secondthird 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,November 12, 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 JuneSeptember 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,November 12, 2004 By: /s/ Wray Thompson
-------------------
WRAY THOMPSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
August 9,November 12, 2004 By: /s/ Shannon L. Greene
------------------------
SHANNON L. GREENE
CHIEF FINANCIAL OFFICER AND TREASURER
19