FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2543540
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
3847 EAST LOOP 820 SOUTH, FT. WORTH, TEXAS 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer.
Yes No 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 May 10, 2004
Common Stock, par value $.0024 per share 10,555,661
THE LEATHER FACTORY, INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Income
Three months ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2004 and 2003 5
Consolidated Statements of Stockholders' Equity
Three months ended March 31, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 5. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,678,607 $ 1,728,344
Accounts receivable-trade, net of allowance for doubtful accounts
of $63,000 and $31,000 in 2004 and 2003, respectively 3,055,545 1,828,738
Inventory 11,392,312 11,079,893
Prepaid income taxes - 206,023
Deferred income taxes 161,674 134,312
Other current assets 1,054,036 702,236
------------ --------------
Total current assets 17,342,174 15,679,546
------------ --------------
PROPERTY AND EQUIPMENT, at cost 5,689,106 5,574,992
Less-accumulated depreciation and amortization (3,784,460) (3,669,099)
------------ --------------
Property and equipment, net 1,904,646 1,905,893
------------ --------------
GOODWILL, net of accumulated amortization of $757,000 and
$758,000 in 2004 and 2003, respectively 731,094 704,235
OTHER INTANGIBLES, net of accumulated amortization of
$178,000 and $164,000, in 2004 and 2003, respectively 439,493 432,549
OTHER assets 322,107 336,183
------------ --------------
$20,739,514 $ 19,058,406
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,355,092 $ 1,545,079
Accrued expenses and other liabilities 1,113,237 1,000,427
Income taxes payable 229,631 -
Notes payable and current maturities of long-term debt - 1,134
------------ --------------
Total current liabilities 3,697,960 2,546,640
------------ --------------
DEFERRED INCOME TAXES 216,877 209,289
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 1,267,984 1,792,984
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized,
none issued or outstanding - -
Common stock, $0.0024 par value; 25,000,000 shares authorized, 10,525,661 and
10,487,961 shares issued and outstanding at 2004 and 2003, respectively 25,261 25,171
Paid-in capital 4,755,208 4,673,158
Retained earnings 10,775,685 9,804,719
Less: Notes receivable - secured by common stock (15,000) (20,000)
Accumulated other comprehensive income 15,539 26,445
------------ --------------
Total stockholders' equity 15,556,693 14,509,493
------------ --------------
$20,739,514 $ 19,058,406
============ ==============
The accompanying notes are an integral part of these financial statements.
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
----------- -----------
NET SALES $12,180,877 $10,560,085
COST OF SALES 5,455,964 4,914,581
----------- -----------
Gross profit 6,724,913 5,645,504
OPERATING EXPENSES 5,277,778 4,529,832
----------- -----------
INCOME FROM OPERATIONS 1,447,135 1,115,672
OTHER EXPENSE:
Interest expense 13,638 63,352
Other, net 1,737 (30,818)
----------- -----------
Total other expense 15,375 32,534
----------- -----------
INCOME BEFORE INCOME TAXES 1,431,760 1,083,138
PROVISION FOR INCOME TAXES 460,794 308,620
----------- -----------
NET INCOME $ 970,966 $ 774,518
=========== ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.09 $ 0.08
=========== ===========
NET INCOME PER COMMON SHARE - DILUTED $ 0.09 $ 0.07
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 10,506,995 10,177,433
Diluted 11,011,122 10,793,464
The accompanying notes are an integral part of these financial statements.
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 970,966 $ 774,518
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation & amortization 129,418 125,031
Loss on disposal of assets - 9,371
Deferred income taxes (19,774) 24,479
Other (9,766) 10,609
Net changes in assets and liabilities:
Accounts receivable-trade, net (1,226,807) (829,103)
Inventory (267,966) 22,759
Income taxes 435,654 187,386
Other current assets (351,800) (352,038)
Accounts payable 810,013 (90,543)
Accrued expenses and other liabilities 112,810 (1,507,392)
----------- ------------
Total adjustments (388,218) (2,399,441)
----------- ------------
Net cash provided by (used in) operating activities 582,748 (1,624,923)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (82,115) (93,972)
Payments in connection with businesses acquired (125,452) -
Proceeds from sale of assets - 6,217
Increase in other assets 14,076 (17,197)
----------- ------------
Net cash used in investing activities (193,491) (104,952)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (525,000) 1,597,065
Payments on notes payable and long-term debt (1,134) (1,600)
Decrease in cash restricted for payment on revolving credit facility - 90,186
Payments received on notes secured by common stock 5,000 -
Proceeds from issuance of common stock 82,140 47,655
----------- ------------
Net cash provided by (used in) financing activities (438,994) 1,733,306
----------- ------------
NET CHANGE IN CASH (49,737) 3,431
CASH, beginning of period 1,728,344 101,557
----------- ------------
CASH, end of period $ 1,678,607 $ 104,988
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 16,205 $ 59,930
Income taxes paid during the period, net of (refunds) 44,914 41,620
The accompanying notes are an integral part of these financial statements.
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
NUMBER OF SHARES PAR VALUE PAID-IN CAPITAL RETAINED EARNINGS
----------------- ---------- ---------------- -----------------
BALANCE, December 31, 2002 10,149,961 $ 24,360 $ 4,163,901 $ 7,064,345
Payments on notes receivable-secured by common stock - - - -
Shares issued - stock options exercised 62,500 150 47,506 -
Net Income - - - 774 518
Translation adjustment - - - -
----------------- ---------- ---------------- ----------------
BALANCE, March 31, 2003 10,212,461 $ 24,510 $ 4,211,407 $ 7,838,863
================= ========== ================ ================
BALANCE, December 31, 2003 10,487,961 $ 25,171 $ 4,673,158 $ 9,804,719
Payments on notes receivable-secured by common stock - - - -
Shares issued - stock options exercised 37,700 90 82,050 -
Net Income - - - -
Translation adjustment - - - -
----------------- ---------- ---------------- ----------------
BALANCE, March 31, 2004 10,525,661 $ 25,261 $ 4,755,208 $ 10,775,685
================= ========== ================ ================
NOTES RECEIVABLE ACCUMULATED OTHER COMPREHENSIVE
SECURED BY COMMON STK CUMULATIVE INC(LOSS) TOTAL INCOME (LOSS)
--------------------- -------------------- ----------- ------------
BALANCE, December 31, 2002 $ (44,003) $ (38,541) $11,170,062
Payments on notes receivable-secured by common stock - - -
Shares issued - stock options exercised - - 47,656
Net Income - - 774,518 $ 774,518
Translation adjustment - 10,609 10,609 10,609
--------------------- -------------------- ----------- ------------
BALANCE, March 31, 2003 $ (44,003) $ (27,932) $12,002,845
===================== ==================== ===========
Comprehensive income for the three months ended March 31, 2003 $ 785,127
===========
NOTES RECEIVABLE ACCUMULATED OTHER COMPREHENSIVE
SECURED BY COMMON STK CUMULATIVE INC(LOSS) TOTAL INCOME (LOSS)
--------------------- -------------------- ----------- ------------
BALANCE, December 31, 2003 $ (20,000) $ 26,445 $14,509,493
Payments on notes receivable-secured by common stock 5,000 - 5,000
Shares issued - stock options exercised - - 82,140
Net Income - - 970,966 $ 970,966
Translation adjustment - (10,906) (10,906) (10,609)
--------------------- -------------------- ----------- ------------
BALANCE, March 31, 2004 $ (15,000) $ 15,539 $15,556,693
===================== ==================== ===========
Comprehensive income for the three months ended March 31, 2004 $ 960,060
===========
The accompanying notes are an integral part of these financial statements.
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying consolidated financial statements
for The Leather Factory, Inc. and its consolidated subsidiaries (TLF) contain
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly its financial position as of March 31, 2004 and December 31,
2003, and its results of operations and cash flows for the three-month periods
ended March 31, 2004 and 2003. Operating results for the three-month period
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in our Annual Report on Form 10-K for
the year ended December 31, 2003.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46,
"Consolidation of Variable Interest Entities (VIE's)," an Interpretation of
Accounting Research Bulletin No. 51. FIN 46 requires certain variable interest
entities (VIEs) to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN 46R (revised
December 2003) which delayed the application of FIN 46 to TLF until the interim
period ended March 31, 2004, and provides additional technical clarifications to
implementation issues. The application of this interpretation did not have a
material impact on the Company's consolidated financial statements for the
quarter.
Revenue Recognition
Our sales generally occur via two methods: (1) at the counter in our stores and
(2) shipment by common carrier. Sales at the counter are recorded and title
passes as transactions occur. Otherwise, sales are recorded and title passes
when the merchandise is shipped to the customer. Our shipping terms are FOB
shipping point.
We offer an unconditional satisfaction guarantee to our customers and accept all
product returns. Net sales represent gross sales less negotiated price
allowances, product returns, and allowances for defective merchandise.
Inventory
Inventory is stated at the lower of cost or market and is accounted for on the
"first in, first out" method. In addition, the value of inventory is
periodically reduced for slow-moving or obsolete inventory based on management's
review of items on hand compared to their estimated future demand. The
components of inventory consist of the following:
AS OF
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
Finished goods held for sale. . . $10,323,322 $ 9,902,140
Raw materials and work in process 1,068,990 1,177,753
----------- -----------
$11,392,312 $11,079,893
=========== ===========
Goodwill and Other Intangibles
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," prescribes a two-phase process for impairment testing
of goodwill, which is performed once annually, absent indicators of impairment
during the interim. The first phase screens for impairment, while the second
phase (if necessary) measures the impairment. The Company has elected to
perform the annual analysis during the fourth calendar quarter of each year. As
of December 31, 2003, management determined that the present value of the
discounted estimated future cash flows of the stores associated with the
goodwill is sufficient to support their respective goodwill balances. No
indicators of impairment were identified during the first quarter of 2004.
Other intangibles consist of the following:
AS OF MARCH 31, 2004 AS OF DECEMBER 31, 2003
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
----------- ------------ ---------- ----------- ------------ ----------
Trademarks, Copyrights $ 544,369 $ 147,393 $ 396,976 $ 544,369 $ 138,320 $ 406,049
Non-Compete Agreements 73,000 30,483 42,517 52,000 25,500 26,500
----------- ------------ ---------- ----------- ------------ ----------
$ 617,369 $ 177,876 $ 439,493 $ 596,369 $ 163,820 $ 432,549
=========== ============ ========== =========== ============ ==========
The Company recorded amortization expense of $14,056 during the first quarter of
2004 compared to $12,740 during the first quarter of 2003. The Company has no
intangible assets not subject to amortization under SFAS 142. Based on the
current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the succeeding 5 years is as follows:
ROBERTS,
LEATHER FACTORY TANDY LEATHER CUSHMAN TOTAL
--------------- ------------- ------- -------
2004 $ 5,954 $ 54,004 $ 0 $59,958
2005 5,954 38,004 0 43,958
2006 5,954 37,337 0 43,291
2007 5,954 36,504 0 42,458
2008 5,954 33,337 0 39,291
2. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to its directors and employees
using the intrinsic value method prescribed by APB No. 25 which requires
compensation expense be recognized for stock options when the quoted market
price of the Company's common stock on the date of grant exceeds the option's
exercise price. No compensation cost has been reflected in net income for the
granting of director and employee stock options as all options granted had an
exercise price equal to the quoted market price of the Company's common stock on
the date the options were granted.
Had compensation cost for the Company's stock options been determined consistent
with the SFAS 123 fair value approach, the Company's net income and net income
per common share for the three months ended March 31, 2004 and 2003, on a pro
forma basis, would have been as follows:
2004 2003
-------- --------
Net income, as reported $970,966 $774,518
Add: Stock-based compensation expense included in reported net income - -
Deduct: Stock-based compensation expense determined under fair value method 27,145 20,266
-------- --------
Net income, pro forma $943,821 $754,252
-------- --------
Net income per share:
Basic - as reported $ 0.09 $ 0.08
Basic - pro forma $ 0.09 $ 0.07
Diluted - as reported $ 0.09 $ 0.07
Diluted - pro forma $ 0.09 $ 0.07
The fair values of stock options granted were estimated on the dates of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 3.125% and 3.00% for 2004 and 2003,
respectively; dividend yields of 0% for both periods; volatility factors of .696
for 2004 and .725 for 2003; and an expected life of the valued options of 5
years.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
THREE MONTHS ENDED MARCH 31,
2004 2003
----------- -----------
Net income $ 970,966 $ 774,518
----------- -----------
Numerator for basic and diluted earnings per share 970,966 774,518
Denominator for basic earnings per share -
weighted-average shares 10,506,995 10,177,433
Effect of dilutive securities:
Stock options 462,562 442,884
Warrants 41,565 173,147
----------- -----------
Dilutive potential common shares 504,127 616,031
----------- -----------
Denominator for diluted earnings per share -
weighted-average shares 11,011,122 10,793,464
=========== ===========
Basic earnings per share $ 0.09 $ 0.08
=========== ===========
Diluted earnings per share $ 0.09 $ 0.07
=========== ===========
The net effect of converting stock options and warrants to purchase 825,200 and
747,200 shares of common stock at exercise prices less than the average market
prices has been included in the computations of diluted EPS for the quarter
ended March 31, 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 30 outlet stores 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.
THE LEATHER FACTORY TANDY LEATHER COMPANY ROBERTS, CUSHMAN & CO TOTAL
------------------------------------------------------------------------------------
FOR THE QUARTER ENDED MARCH 31, 2004
Net sales $ 8,443,091 $ 3,166,738 $ 571,048 $12,180,877
Gross profit 4,575,838 1,926,649 222,426 6,724,913
Operating earnings 1,078,409 301,567 67,159 1,447,135
Interest expense (13,638) - - (13,638)
Other, net (1,803) 66 - (1,737)
Income before income taxes 1,062,968 301,633 67,159 1,431,760
Depreciation and amortization 102,028 25,153 2,237 129,418
Fixed asset additions 39,737 38,043 4,335 82,115
Total assets $ 16,731,246 $ 3,079,605 $ 928,663 $20,739,514
------------------------------------------------------------------------------------
FOR THE QUARTER ENDED MARCH 31, 2003
Net sales $ 8,201,258 $ 1,864,539 $ 494,288 $10,560,085
Gross profit 4,297,502 1,181,332 166,670 5,645,504
Operating earnings 923,637 146,993 45,042 1,115,672
Interest expense (63,352) - - (63,352)
Other, net 31,290 (472) - 30,818
Income before income taxes 891,575 146,521 45,042 1,083,138
Depreciation and amortization 106,367 15,839 2,825 125,031
Fixed asset additions 39,497 54,475 - 93,972
Total assets $ 17,364,513 $ 2,447,611 $ 845,938 $20,658,062
------------------------------------------------------------------------------------
Net sales for geographic areas were as follows:
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
--------------- ---------------
United States $ 11,285,857 $ 9,870,636
All other countries 895,020 689,449
--------------- ---------------
$ 12,180,877 $ 10,560,085
=============== ===============
Geographic sales information is based on the location of the customer. No
single foreign country accounted for any material amount of the Company's
consolidated net sales for the three-month periods ended March 31, 2004 and
2003. The Company does not have any significant long-lived assets outside of
the United States.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The Leather Factory, Inc. ("TLF" or the "Company") is a Delaware corporation
whose common stock trades on the American Stock Exchange under the symbol "TLF".
The Company is managed on a business entity basis, with those businesses being
The Leather Factory ("Leather Factory"), Tandy Leather Company ("Tandy" or
"Tandy Leather"), and Roberts, Cushman & Company, Inc. ("Cushman"). See Note 4
to the Consolidated Financial Statements for additional information concerning
the Company's segments, as well as its foreign operations.
Leather Factory, founded in 1980 by Wray Thompson and Ron Morgan, distributes
leather and related products, including leatherworking tools, buckles and
adornments for belts, leather dyes and finishes, saddle and tack hardware, and
do-it-yourself kits. The products are sold primarily through 30 company-owned
outlets located throughout the United States and Canada.
Tandy Leather is the oldest and best-known supplier of leather and related
supplies used in the leathercraft industry. From its founding in 1919, Tandy
has been the primary leathercraft resource worldwide. Products include quality
tools, leather, accessories, kits and teaching materials. In early 2002, we
initiated a plan to expand Tandy Leather by opening retail stores. As of April
15, 2004, we have opened 30 Tandy Leather retail stores located throughout the
United States.
Cushman, whose origins date back to the mid-1800's, custom designs and
manufactures a product line of decorative hat trims for headwear manufacturers.
CRITICAL ACCOUNTING POLICIES
A description of the Company's critical accounting policies appears in "Item 2.
Management's Discussions and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
RESULTS OF OPERATIONS
-----------------------
The following tables present selected financial data of each of the Company's
three segments for the quarters ended March 31, 2004 and 2003:
QUARTER ENDED MARCH 31, 2004 QUARTER ENDED MARCH 31, 2003
------------------------------ -----------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
---------------- ------------- --------------- ------------
Leather Factory. $ 8,443,091 $ 1,078,409 $ 8,201,258 $ 923,637
Tandy 3,166,738 301,567 1,864,539 146,993
Cushman 571,048 67,160 494,288 45,042
---------------- ------------- --------------- ------------
Total Operations $ 12,180,877 $ 1,447,135 $ 10,560,085 $ 1,115,672
================ ============= =============== ============
Consolidated net sales for the quarter ended March 31, 2004 increased $1.6
million, or 15.4%, compared to the same period in 2003. Leather Factory
contributed $242,000 to the increase, Tandy contributed $1.3 million and Cushman
recorded a sales increase of $77,000. Operating income on a consolidated basis
for the quarter ended March 31, 2004 was up 29.7% or $331,000 over the first
quarter of 2003.
The following table shows in comparative form our consolidated net income for
the first quarters of 2004 and 2003:
2004 2003 % CHANGE
-------- -------- --------
Net income $970,966 $774,518 25.4%
While our Leather Factory operation recorded 69.3% of our sales in the quarter,
the continued growth and expansion of the Tandy Leather retail operation is
responsible for the majority of the improvement in our consolidated net income.
LEATHER FACTORY OPERATIONS
Net sales from Leather Factory's 30 wholesale centers increased 2.95%, or
$242,000, for the first quarter of 2004.
The following table presents TLF's sales mix by customer categories for the
quarters ended March 31, 2004 and 2003:
QUARTER ENDED
CUSTOMER GROUP 3/31/04 3/31/03
-------------- ------- -------
RETAIL (end users, consumers, individuals) 23% 23%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 7% 8%
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 45% 42%
NATIONAL ACCOUNTS 19% 21%
MANUFACTURERS 6% 6%
------- -------
100% 100%
======= =======
Our biggest sales gains were in our WHOLESALE and MANUFACTURER customer groups.
We believe that in both cases, new advertising programs begun in the second half
of 2003 contributed to these gains. Sales to our small business customers (part
of our WHOLESALE group) were up approximately 30% over sales to that same
customer group a year ago. Sales to small manufacturers were up 11% from last
year. Although the percent of national account sales decreased in the first
quarter of 2004 compared to that same quarter in 2003, we renewed two of our
large accounts during the first quarter. We anticipate that these renewals will
produce increased sales for our NATIONAL ACCOUNT customer group later in 2004.
Operating income for Leather Factory increased $155,000 for the current quarter
compared to 2003, an improvement of 16.7%. Operating expenses as a percentage
of sales were 41.4%, slightly higher ($120,000) than our target of 40% of sales.
Advertising and marketing expenses were up slightly this quarter ($55,000) due
to expanding direct mail programs in an attempt to increase market awareness and
target new customer sub-groups. We also increased our bad debt reserve by
$32,000 to $63,000 at the end of the first quarter, as a result of a few
customer accounts whose collectability appears questionable.
TANDY LEATHER OPERATIONS
The Tandy Leather retail store chain has grown from 19 stores at March 31, 2003
to 29 a year later. Net sales for Tandy Leather were up approximately 70% for
the first quarter of 2004 over the same quarter last year.
QTR ENDED QTR ENDED $ INCR % INCR
3/31/04 3/31/03 (DECR) (DECR)
---------- ---------- ----------- --------
Same (existing) store sales $1,832,591 $1,806,293 $ 26,298 1.46%
New store sales 1,334,147 57,187 1,276,960 N/A
Order fulfillment house - closed - 1,059 (1,059) (100.00)
---------- ---------- ----------- --------
Total sales $3,166,738 $1,864,539 $1,302,199 69.84%
========== ========== ========== ========
A store is categorized as "new" if it was operating less than half of the
comparable period in the prior year. In the above table, the sales amount for
"new store sales" for the quarter ended March 31, 2003 represents the sales from
the four stores opened in February and March 2003.
Sales in the current quarter were solid - although as the table above indicates,
our existing stores did not produce as strongly as we expected. The results are
uneven, with existing stores reporting sales gains ranging from 4% to 48% for
the quarter. We produced and mailed a sales flyer in a new format during the
quarter that failed to produce the sales that we expected. We have gone back to
our more traditional format for sales flyers, expecting it to produce more
customer interest. The retail stores that are at least three months old are
averaging approximately $38,000 in sales per month.
The following table presents Tandy Leather's sales mix by customer categories
for the quarters ended March 31, 2004 and 2003:
QUARTER ENDED
CUSTOMER GROUP 3/31/04 3/31/03
-------------- ------- -------
RETAIL (end users, consumers, individuals) 74% 72%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 4% 4%
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 20% 23%
NATIONAL ACCOUNTS - -
MANUFACTURERS 2% 1%
------- -------
100% 100%
======= =======
Operating income as a percentage of sales increased from 7.9% in the first
quarter of 2003 to 9.5% in the first quarter of 2004. Our gross margin
decreased from 63.4% to 60.8% due to an increase in leather sales at the Tandy
stores during the current quarter. As discussed in previous filings, leather is
our lowest gross margin category. We offset that low margin by the other
products that we sell. Operating expenses as a percentage of sales decreased
from 55.5% to 51.3% due primarily to the increase in leverage obtained as a
result of the significant sales increase.
ROBERTS, CUSHMAN OPERATIONS
Net sales for Cushman increased $77,000 or 15.5% for the first quarter of 2004,
and improved its gross profit margin from 34% to 39%. Operating income for
Cushman increased $22,000 or 49.1%. We eliminated one management position in
the operation at the beginning of 2004, which contributed to the improvement in
operating income.
COSTS AND EXPENSES
Our consolidated gross profit as a percent of net sales increased to 55.2% for
the first quarter of 2004, compared with 53.5% for the same period in 2003.
Operating expenses ($5.3 million) were 43.3% of net sales in the first quarter
of 2004, compared with $4.5 million, or 42.9% of net sales in the first three
months of 2003.
Interest expense in the first quarter of 2004 ($14,000) was down 78.5% from the
first quarter of 2003 ($63,000) due to the decrease in the outstanding debt
balance.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
---------------------------------------------------------
There was a slight change (approximately 9%) in our consolidated total assets
from December 31, 2003 to March 31, 2004, increasing from $19.0 million at
year-end to $20.7 million at March 31. Our accounts receivable accounted for
the majority of the increase. Total stockholders' equity increased from $14.5
million at December 31, 2003 to $15.5 million at March 31, 2004. Most of the
increase was from earnings in the first quarter of this year. The Company's
current ratio fell slightly from 6.16 at December 31, 2003 to 4.69 at March 31,
2004.
Inventory increased by $312,000 at March 31, 2004 from year-end 2003. Inventory
turnover increased to an annualized rate of 4.34 times during the first quarter
of 2004, from 3.47 times for the first quarter of 2003 and 3.51 times for all of
2003. We compute our inventory turns as sales divided by average inventory.
Inventory management is a significant factor in our financial position. We
strive to maintain the optimal amount of inventory throughout the system in
order to fill customer orders timely without tying up too much working capital.
We are pleased with our achievement in this area as of the end of the quarter
and continue to monitor our inventory levels in order to maximize optimum
availability.
The Company's investment in accounts receivable was $3.1 million at March 31,
2004, up $1.2 million from $1.8 million at year-end 2003. This is a result of
an increase in credit sales to our national accounts during the quarter ended
March 31, 2004 as compared to that of the quarter ended December 31, 2003. The
average days to collect accounts slowed slightly over the first quarter of 2003
from 45.0 days to 47.2 days. Cushman posted the most improvement in average
days to collect accounts, from 66.7 days in 2003 to 50.1 days for the first
quarter of 2004, respectively. Leather Factory and Tandy Leather's days to
collect were 44.7 and 39.0 days in the first quarter of 2004 compared to 41.1
and 39.6 days in the first quarter of 2003, respectively.
Accounts payable increased $810,000 to $2.4 million at the end of the first
quarter, due primarily to the increase in inventory purchases to support the
increased sales and the negotiations with some vendors for longer payment terms.
Accrued expenses and other liabilities increased $113,000.
During the first quarter of 2004, cash flow provided by operating activities was
$583,000. The net income generated for the quarter and the increase in accounts
payable contributed to the cash flow, offset somewhat by the increase in
accounts receivable. Cash flow used in investing activities totaled $193,000.
$125,000 of this was for the assets purchases of the Syracuse, NY and St. Louis,
MO Tandy Leather retail stores. Equipment purchased during the quarter totaled
$82,000. Most of the equipment purchased was for the new Tandy Leather stores.
Cash flow used by financing activities was $439,000, consisting of payments on
our revolving credit facility during the quarter totaling $525,000, offset
primarily by stock option exercises by employees.
At March 31, 2003, our bank debt totaled $5.8 million. At March 31, 2004, the
balance was $1.3 million, a decrease of 77%.
We expect to fund our operating and liquidity needs as well as our current
expansion of Tandy Leather's retail store chain from a combination of current
cash balances, internally generated funds and our revolving credit facility with
Wells Fargo, which is based upon the level of the our accounts receivable and
inventory. At March 31, 2004, the available and unused portion of the credit
facility was approximately $3.7 million.
FORWARD-LOOKING STATEMENTS
---------------------------
This report (particularly this Item 2) contains forward-looking statements of
management. In general, these are predictions or suggestions of future events
and statements or expectations of future trends or occurrences. There are
certain important risks that could cause results to differ materially from those
anticipated by some of the forward-looking statements. Some, but not all, of the
important risks that could cause actual results to differ materially from those
suggested by the forward-looking statements include, among other things:
- We might fail to realize the anticipated benefits of the opening of Tandy
Leather retail stores or we might be unable to obtain sufficient new locations
on acceptable terms to meet our growth plans. Also, other retail initiatives
might not be successful.
- Political considerations here and abroad could disrupt our sources of
supplies from abroad or affect the prices we pay for goods.
- Continued involvement by the United States in war and other military
operations in the Middle East and other areas abroad could disrupt international
trade and affect the Company's inventory sources.
- The recent slump in the economy in the United States, as well as abroad,
may cause our sales to decrease or not to increase or adversely affect the
prices charged for our products. Also, hostilities, terrorism or other events
could worsen this condition.
- As a result of the on-going threat of terrorist attacks on the United
States, consumer buying habits could change and decrease our sales.
- Livestock diseases such as mad cow could reduce the availability of hides
and leathers or increase their cost. Also, the prices of hides and leathers
fluctuate in normal times, and these fluctuations can affect the Company.
- If, for whatever reason, the costs of our raw materials and inventory
increase, we may not be able to pass those costs on to our customers,
particularly if the economy has not recovered from its downturn.
- Other factors could cause either fluctuations in buying patterns or
possible negative trends in the craft and western retail markets. In addition,
our customers may change their preferences to products other than ours, or they
may not accept new products as we introduce them.
- Tax or interest rates might increase. In particular, interest rates are
likely to increase at some point from their present low levels. These increases
will increase our costs of borrowing funds as needed in our business.
- Any change in the commercial banking environment may affect us and our
ability to borrow capital as needed.
- Other uncertainties, which are difficult to predict and many of which are
beyond the control of the Company, may occur as well.
The Company does not intend to update forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For disclosures about market risk affecting the Company, see Item 7A
"Quantitative and Qualitative Disclosures About Market Risk" in our Annual
Report on Form 10-K for our fiscal year ended December 31, 2003. The Company
believes that its exposure to market risks has not changed significantly since
December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
At the end of the first 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, as of March 31, 2004, the
Company's disclosure controls and procedures offer reasonable assurance that the
information required to be disclosed by the Company in the reports it files
under the Exchange Act is recorded, processed, summarized, and reported within
the time period specified in the results and forms adopted by the Securities and
Exchange Commission.
During the period covered by this report, there has been no change in the
Company's internal controls over financial reporting that materially affected,
or is reasonably likely to materially affect, these controls.
Limitations on the Effectiveness of Controls. Our management, including the
President, Chief Executive Officer and Chief Financial Officer, does not expect
that the Company's disclosure controls and procedures or the Company's internal
controls will prevent all error and all fraud. A well conceived and operating
control system is based in part upon certain assumptions about the likelihood of
future events and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
PART II. OTHER INFORMATION
ITEM 5. CHANGES IN SECURITIES
On February 24, 2004, the Company entered into a Capital Markets Services
Engagement Agreement ("Services Agreement") with Westminster Securities
Corporation ("Westminster"), a member firm of the New York Stock Exchange.
Under the Services Agreement, Westminster agreed to provide the Company with
capital market services, including corporate finance advisory services, research
services, and sales and trading services.
For the services to be provided during the two-year term of the Services
Agreement, the Company agreed to pay $4,000 per month during the contract's
term. Also, the Company issued to Westminster and certain named employees
warrants to purchase 50,000 shares of the Company's common stock at an exercise
price of $5.00 per share, subject to adjustment for certain issuances at a per
share price below $5.00 that might occur during the five-year term of the
warrants.
The issuance of the warrants was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 4(2) of that act. The related
Financial Advisor's Warrant Agreement, dated as of February 24, 2004, contained
representations as to investment intent and restrictions on transfer. Also the
warrant certificates contain prominent legends stating the restrictions on
transfer.
In addition, the Financial Advisor's Warrant Agreement grants demand and
piggyback registration rights to the holders of the warrants to facilitate
resale of the Company's common stock upon exercise of the warrants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
EXHIBIT
NUMBER EXHIBIT
------- --------------------------------------------------------------------------------------------------------------------------
4.1* Financial Advisor's Warrant Agreement, dated February 24, 2004, between The Leather Factory, Inc. and Westminster
Securities Corporation
4.2* Capital Markets Services Engagement Agreement, dated February 24, 2004, between The Leather Factory, Inc. and Westminster
Securities Corporation
31.1** 13a-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
32.1* Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Previously filed
** Attached to this filing
(b) Reports on Form 8-K
----------------------
On March 9, 2004, the Company filed a report on Form 8-K in which we furnished
under Items 7 and 12.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: October 29, 2004 By: /s/ Wray Thompson
Wray Thompson
Chairman of the Board and
Chief Executive Officer
Date: October 29, 2004 By: /s/Shannon L. Greene
Shannon L. Greene
Chief Financial Officer and Treasurer
(Chief Accounting Officer)
EXHIBIT 31.1
RULE 13A-14(A) CERTIFICATION
I, WRAY THOMPSON, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of The Leather Factory,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) [language intentionally omitted SEC
Rel. 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 first 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: October 29, 2004 /s/ Wray Thompson
Wray Thompson
President and Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
RULE 13A-14(A) CERTIFICATION
I, SHANNON L. GREENE, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of The Leather Factory,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) [language intentionally omitted SEC
Rel. 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 first 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: October 29, 2004 /s/ Shannon L. Greene
Shannon L. Greene
Chief Financial Officer and Treasurer
(principal financial and accounting officer)