FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 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 August 13, 2002
- -------------------------- ----------------------------------------
Common Stock, par value $.0024 per share 10,064,161
FORWARD-LOOKING STATEMENTS
- ---------------------------
This report (particularly Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations) 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:
- - Changes in the economic recovery in the United States, as well as abroad,
from a recent downturn may cause our sales to decrease or not to increase.
- - Favorable trends in the arts and crafts industry may slow or reverse.
- - Although the Company believes that it has fixed recent problems,
reoccurrence of problems with our websites could result in lost sales.
- - As a result of the terrorist activities on and after September 11, 2001,
consumer-buying habits could change and decrease our sales.
- - If terrorists choose to target livestock in the United States or abroad
for chemical, biological or other attacks, our sources of raw material and
inventory could decrease, or these items could become more expensive.
- - The prices of hides and leathers also fluctuate in normal times, and these
fluctuations can affect the Company.
- - If, for whatever reason, the costs of our raw materials and inventory
increase, we may not be able to pass those costs on to our customers,
particularly if the economy has not recovered from its downturn.
- - Other factors could cause either fluctuations in buying patterns or
possible negative trends in the craft and western retail markets. In addition,
our customers may change their preferences to products other than ours, or they
may not accept new products as we introduce them.
- - The Company currently buys in 22 countries around the world. War,
terrorism, changes in the internal affairs or international relations of these
countries (such as events that might affect their Most Favored Nation status
with the United States of America) and other uncertainties can disrupt our
purchases from abroad.
- - We might fail to realize the anticipated benefits of the acquisition of
the assets of Tandy Leather, the opening of Tandy Leather retail stores or other
retail initiatives might not be successful.
- - Tax or interest rates might increase. In particular, interest rates are
likely to increase at some point from their present low levels. These increases
will increase our costs of borrowing funds as needed in our business.
- - 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.
2
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Income
Three and six months ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . .8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . .17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
----------- --------------
(UNAUDITED)
----------- --------------
ASSETS
CURRENT ASSETS:
Cash $ 187,696 $ 409,040
Cash restricted for payment on revolving credit facility 454,531 491,729
Accounts receivable-trade, net of allowance for doubtful accounts
of $180,000 and $191,000 in 2002 and 2001, respectively 2,608,314 2,297,953
Inventory 9,543,495 9,054,269
Deferred income taxes 178,680 128,111
Other current assets 960,227 479,390
----------- -------------
Total current assets 13,932,943 12,860,492
----------- -------------
PROPERTY AND EQUIPMENT, at cost 4,448,856 4,201,368
Less-accumulated depreciation and amortization (3,078,024) (2,858,869)
---------- ----------
Property and equipment, net 1,370,832 1,342,499
GOODWILL, net of accumulated amortization of $738,000
and $1,583,000 in 2002 and 2001, respectively 611,724 4,535,412
OTHER INTANGIBLES, net of accumulated amortization of
$89,000 and $66,000, in 2002 and 2001, respectively 486,159 476,908
OTHER assets 298,993 333,012
----------- -----------
$16,700,651 $19,548,323
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,894,202 $ 1,303,596
Accrued expenses and other liabilities 1,261,558 1,171,152
Income taxes payable 57,511 52,662
Notes payable and current maturities of long-term debt 3,328,954 4,527,904
----------- ------------
Total current liabilities 6,542,225 7,055,314
----------- ------------
DEFERRED INCOME TAXES 82,354 61,647
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 5,552 7,691
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, 10,064,161 and 9,991,161 shares issued
and outstanding at 2002 and 2001, respectively 24,154 23,979
Paid-in capital 4,106,828 4,030,508
Retained earnings 6,020,708 8,478,187
Less: Notes receivable - secured by common stock (47,303) (71,939)
Accumulated other comprehensive loss (33,867) (37,064)
----------- ------------
Total stockholders' equity 10,070,520 12,423,671
----------- -----------
$16,700,651 $19,548,323
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
THREE MONTHS SIX MONTHS
------------ ----------
2002 2001 2002 2001
NET SALES $10,052,036 $9,359,893 $20,255,987 $18,732,506
COST OF SALES 4,616,410 4,381,098 9,451,766 8,869,495
---------- ---------- ----------- -----------
Gross profit 5,435,626 4,978,795 10,804,221 9,863,011
OPERATING EXPENSES 4,224,477 3,802,056 8,399,613 7,710,932
--------- --------- ---------- ---------
INCOME FROM OPERATIONS 1,211,149 1,176,739 2,404,608 2,152,079
OTHER EXPENSE:
Interest expense 47,442 124,614 137,311 273,207
Other, net 10,266 4,351 26,621 11,641
--------- --------- --------- ---------
Total other expense 57,708 128,965 163,932 284,848
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES and CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 1,153,441 1,047,774 2,240,676 1,867,231
PROVISION FOR INCOME TAXES 361,394 425,864 689,324 748,037
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 792,047 621,910 1,551,352 1,119,194
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF INCOME TAXES - - (4,008,831) -
----------- ---------- ----------- -----------
NET INCOME $ 792,047 $ 621,910 $(2,457,479) $ 1,119,194
=========== ========== =========== ===========
NET INCOME PER COMMON SHARE - BASIC:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ 0.08 $ 0.06 $ 0.15 $ 0.11
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET - - (0.40) -
----------- ---------- ----------- -----------
NET INCOME PER COMMON SHARE $ 0.08 $ 0.06 $ (0.25) $ 0.11
=========== ========== =========== ===========
NET INCOME PER COMMON SHARE - ASSUMING DILUTION:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ 0.07 $ 0.06 $ 0.14 $ 0.11
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET - - (0.37) -
----------- ---------- ----------- -----------
NET INCOME PER COMMON SHARE-DILUTED $ 0.07 $ 0.06 $ (0.23) $ 0.11
=========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
5
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $(2,457,479) $ 1,119,194
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation & amortization 242,534 360,862
Amortization of deferred financing costs 37,038 26,823
Other (30,743) (12,629)
Cumulative effect of change in accounting principle 4,008,831 -
Net changes in assets and liabilities:
Accounts receivable-trade, net (310,362) (469,559)
Inventory (390,018) 212,740
Income taxes 4,849 1,170
Other current assets (480,041) 102,209
Accounts payable 590,605 454,403
Accrued expenses and other liabilities 90,406 (345,430)
----------- ---------
Total adjustments 3,763,099 330,589
----------- ---------
Net cash provided by operating activities 1,305,620 1,449,783
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (232,810) (531,759)
Payments in connection with businesses acquired (227,747) -
Increase in other assets (3,648) (1,481)
----------- ----------
Net cash used in investing activities (464,205) (533,240)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in revolving credit loans (1,177,152) (1,188,008)
Proceeds from notes payable and long-term debt - 18,676
Payments on notes payable and long-term debt (23,936) (50,528)
Change in cash restricted for payment on revolving credit facility 37,198 (22,144)
Payments received on notes secured by common stock 24,636 15,633
Proceeds from issuance of common stock 76,495 75,974
---------- ----------
Net cash used in financing activities (1,062,759) (1,150,397)
---------- ----------
NET INCREASE (DECREASE) IN CASH (221,344) (233,854)
CASH, beginning of period 409,040 234,141
----------- ----------
CASH, end of period $ 187,696 $ 287
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 106,843 $ 250,536
Income taxes paid during the period, net of (refunds) $ 732,091 $ 571,601
The accompanying notes are an integral part of these financial statements.
6
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Common Stock Notes Accumulated
-------------------- Receivable Other
Number Par Paid-in Retained secured by Cumulative
of shares value capital Earnings common stock Loss
BALANCE, December 31, 2000 9,908,161 $23,780 $3,946,608 $ 6,471,754 $ (120,339) $ (26,166)
Payments on notes receivable -
secured by common stock - - - - 15,633 -
Shares issued - employee
Stock options exercised 73,000 175 75,799 - - -
Net Income - - - 1,119,194 - -
Translation adjustment - - - - - (4,050)
---------- ------- ---------- ----------- ------------- -----------
BALANCE, June 30, 2001 9,981,161 $23,955 $4,022,407 $ 7,590,948 $ (104,706) $ (30,216)
========== ======= ========== =========== ============= ===========
BALANCE, December 31, 2001 9,991,161 $23,979 $4,030,508 $ 8,478,187 $ (71,939) $ (37,064)
Payments on notes receivable -
secured by common stock - - - - 24,636 -
Shares issued - employee
Stock options exercised 73,000 175 76,320 - - -
Net Loss - - - (2,457,479) - -
Translation adjustment - - - - - 3,197
---------- ------- ---------- ----------- ------------- -----------
BALANCE, June 30, 2002 10,064,161 $24,154 $4,106,828 $ 6,020,708 $ (47,303) $ (33,867)
========== ======= ========== =========== ============= ===========
Comprehensive
Total Income (Loss)
BALANCE, December 31, 2000 $ 10,295,637
Payments on notes receivable -
secured by common stock 15,633
Shares issued - employee
Stock options exercised 75,974
Net Income 1,119,194 1,119,194
Translation adjustment (4,050) (4,050)
-------------- ----------
BALANCE, June 30, 2001 $ 11,502,388
==============
Comprehensive income for
the six months ended June 30, 2001 $1,115,144
==========
BALANCE, December 31, 2001 $ 12,423,671
Payments on notes receivable -
secured by common stock 24,636
Shares issued - employee
Stock options exercised 76,495
Net Loss (2,457,479) (2,457,479)
Translation adjustment 3,197 3,197
-------------- -----------
BALANCE, June 30, 2002 $ 10,070,520
==============
Comprehensive income for the
six months ended June 30, 2002 $(2,454,282)
===========
The accompanying notes are an integral part of these financial statements
7
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of those of a normal recurring
nature) considered necessary to present fairly its financial position as of June
30, 2002 and December 31, 2001, and the results of operations and cash flows for
the three and six month periods ended June 30, 2002 and 2001. The results of
operations for the three and six month periods are not necessarily indicative of
the results to be expected for the full fiscal year. The consolidated financial
statements should be read in conjunction with the financial statements and
disclosures contained in the Company's 2001 Annual Report on Form 10-K ("Annual
Report").
In June 2001, the FASB issued Statements of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. This standard requires
companies to stop amortizing goodwill and certain intangible assets with
indefinite useful lives. Instead, goodwill and intangible assets deemed to have
indefinite useful lives will be subject to an annual review of impairment. The
new standard was effective for The Leather Factory, Inc. ("TLF") in the first
quarter of 2002. Upon adoption of SFAS No. 142, TLF recorded a one-time,
noncash charge of approximately $4 million to reduce the carrying value of its
goodwill relating to its subsidiary, Roberts, Cushman & Co., Inc. This charge
is non-operational in nature and is reflected as a cumulative effect of an
accounting change in the accompanying consolidated statement of operations. For
additional discussion on the impact of adopting SFAS No. 142, see Note 5.
Certain reclassifications have been made to conform the 2001 financial
statements to the presentation in 2002. The reclassifications had no effect on
net income.
2. INVENTORY
The components of inventory consist of the following:
AS OF
-------------------------
JUNE 30, DECEMBER 31,
2002 2001
---------- -------------
Finished goods held for sale $8,631,280 $ 8,025,845
Raw materials and work in process 912,215 1,028,424
---------- -------------
$9,543,495 $ 9,054,269
========== =============
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ------------ -----------
Numerator:
Net income $ 792,047 $ 621,910 $(2,457,479) $ 1,119,194
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings per share 792,047 621,910 (2,457,479) 1,119,194
Denominator:
Weighted-average shares outstanding-basic 10,041,018 9,971,952 10,021,476 9,960,785
8
Effect of dilutive securities:
Stock options 503,871 159,819 496,061 126,122
Warrants 254,741 198,045 252,355 180,368
----------- ----------- ----------- -----------
Dilutive potential common shares 758,612 357,864 748,416 306,490
----------- ----------- ----------- -----------
Denominator for diluted earnings per share-
weighted-average shares 10,799,630 10,329,816 10,769,892 10,267,275
=========== ========== ========== ==========
Basic earnings per share $ 0.08 $ 0.06 $ (0.25) $ 0.11
=========== =========== =========== ===========
Diluted earnings per share $ 0.07 $ 0.06 $ (0.23) $ 0.11
=========== =========== =========== ===========
The net effect of converting stock options to purchase 1,126,000 and 688,000 of
common stock at option prices less than the average market prices has been
included in the computation of diluted EPS for the three and six month periods
ended June 30, 2002 and 2001, respectively.
4. SEGMENT INFORMATION
The Company identifies its segments based on the activities of three distinct
businesses: The Leather Factory, which sells product to both wholesale and
retail customers and consists of a chain of sales/distribution units located in
the United States and Canada; Tandy Leather Company, which sells product
throughout the United States via retail stores, the Internet and mail-order, and
internationally through authorized dealers; and Roberts, Cushman & Company,
which manufactures 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 TANDY LEATHER ROBERTS,
FACTORY COMPANY CUSHMAN & CO TOTAL
--------------- --------------- ------------- ------------
FOR THE QUARTER ENDED JUNE 30, 2002
Net Sales $ 7,700,422 $ 1,814,310 $ 537,304 $10,052,036
Gross Profit 4,175,742 1,079,238 180,646 5,435,626
Operating earnings 1,018,799 97,536 94,814 1,211,149
Interest expense (47,253) (189) - (47,442)
Other, net (10,134) (132) - (10,266)
-----------
Income before income taxes 961,412 97,215 94,814 1,153,441
-----------
Depreciation and amortization 88,219 28,159 3,163 119,541
Fixed asset additions 56,840 77,390 958 135,188
Total assets $ 12,912,434 $ 2,999,716 $ 788,501 $16,700,651
============== ============== ============= ===========
FOR THE QUARTER ENDED JUNE 30, 2001
Net Sales $ 7,015,765 $ 1,787,525 $ 556,603 $ 9,359,893
Gross Profit 3,783,271 1,003,657 191,867 4,978,795
Operating earnings 1,057,274 74,144 45,321 1,176,739
Interest expense (124,614) - - (124,614)
Other, net (4,074) (277) - (4,351)
------------
Income before income taxes 928,586 73,867 45,321 1,047,774
------------
Depreciation and amortization 125,691 18,723 38,190 182,604
Fixed asset additions 78,044 - 485 78,529
Total assets $ 11,970,568 $ 2,744,853 $ 5,066,000 $19,781,421
============== ============== ============= ===========
9
THE LEATHER TANDY LEATHER ROBERTS,
FACTORY COMPANY CUSHMAN & CO TOTAL
-------------- -------------- ------------- -----------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Net Sales $ 15,524,939 $ 3,692,183 $ 1,038,865 $20,255,987
Gross Profit 8,302,614 2,152,817 348,790 10,804,221
Operating earnings 1,994,526 239,037 171,045 2,404,608
Interest expense (136,908) (403) - (137,311)
Other, net (25,988) (633) - (26,621)
-----------
Income before income taxes 1,831,630 238,001 171,045 2,240,676
-----------
Depreciation and amortization 221,165 51,862 6,545 279,572
Fixed asset additions 128,369 102,903 1,538 232,810
Total assets $ 12,912,434 $ 2,999,716 $ 788,501 $16,700,651
============== ============== ============= ===========
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Net Sales $ 14,119,557 $ 3,562,641 $ 1,050,308 $18,732,506
Gross Profit 7,547,690 1,981,967 333,354 9,863,011
Operating earnings 2,060,975 54,481 36,623 2,152,079
Interest expense (273,207) - - (273,207)
Other, net (11,518) (123) - (11,641)
-----------
Income before income taxes 1,776,250 54,358 36,623 1,867,231
-----------
Depreciation and amortization 273,735 37,584 76,366 387,685
Fixed asset additions 358,120 172,434 1,205 531,759
Total assets $ 11,970,568 $ 2,744,853 $ 5,066,000 $19,781,421
============== ============== ============= ===========
Net sales for geographic areas was as follows:
QUARTER ENDED JUNE 30,
2002 2001
----------- -----------
United States $ 9,448,686 $ 8,719,941
All other countries 603,350 639,952
----------- -----------
$10,052,036 $ 9,359,893
=========== ===========
SIX MONTHS ENDED JUNE 30,
2002 2001
----------- -----------
United States $19,111,120 $17,516,958
All other countries 1,144,867 1,215,548
----------- -----------
$20,255,987 $18,732,506
=========== ===========
5. GOODWILL AND OTHER INTANGIBLES
As discussed in Note 1, in January 2002, the Company adopted SFAS 142, which
requires companies to stop amortizing goodwill and certain intangible assets
with indefinite lives. Instead, it requires that goodwill and intangible assets
deemed to have indefinite useful lives be reviewed for impairment upon adoption
(January 1, 2002) and annually thereafter.
Under SFAS 142, goodwill impairment is deemed to exist if the net book value of
a reporting unit exceeds its estimated fair value. The Company's reporting
units are generally the same as the operating segments identified in Note 4 -
Segment Information. The new methodology in SFAS 142 differs from the Company's
prior policy, which was permitted under earlier accounting standards, of using
undiscounted cash flows of the acquired asset to determine if goodwill is
recoverable.
10
Upon adoption of SFAS 142, the Company recorded a one-time, non-cash charge of
approximately $4 million in the first quarter of 2002 to reduce the carrying
value of its goodwill. This charge in non-operational in nature and is
reflected as a cumulative effect of an accounting change in the accompanying
consolidated statements of operations.
The SFAS 142 goodwill impairment is associated solely with goodwill resulting
from the acquisition of Roberts, Cushman & Co., Inc. ("Cushman") in 1995. The
current fair value of Cushman and its assets was estimated by an independent
third party using projected discounted future operating cash flows. The amount
of the impairment primarily reflects the decline in Cushman's sales since the
acquisition occurred.
A summary of changes in the Company's goodwill during the six month period ended
June 30, 2002 as follows:
JANUARY 1, ACQUISITIONS & JUNE 30,
2002 ADJUSTMENTS IMPAIRMENTS 2002
----------- -------------- ------------ --------
Leather Factory $ 332,630 $ 4,078 - $336,708
Tandy Leather 193,951 81,065 - 275,016
Roberts, Cushman 4,008,831 - $(4,008,831) -
----------- -------------- ------------ --------
Total $ 4,535,412 $ 85,143 $(4,008,831) $611,724
=========== ============== =========== ========
As of June 30, 2002 and December 31, 2001, the Company's intangible assts and
related accumulated amortization consisted of the following:
AS OF JUNE 30, 2002
-------------------
ACCUMULATED
GROSS AMORTIZATION NET
-------- ------------- --------
Trademarks, Copyrights $542,744 $ 83,919 $458,825
Non-Compete Agreements 32,000 4,666 27,334
-------- ------------- --------
$574,744 $ 88,585 $486,159
======== ============= ========
AS OF DECEMBER 31, 2001
-----------------------
ACCUMULATED
GROSS AMORTIZATION NET
-------- ------------- --------
Trademarks, Copyrights $542,744 $ 65,836 $476,908
======== ============= ========
The Company recorded amortization expense of $12,027 during the second quarter
of 2002 compared to $1,306 during the second quarter of 2001. 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 are as follows:
LEATHER TANDY
FACTORY LEATHER CUSHMAN TOTAL
-------- -------- -------- -------
2002 $ 5,836 $ 40,337 $ 0 $46,173
2003 5,809 41,004 0 46,813
2004 5,809 41,004 0 46,813
2005 5,809 31,004 0 36,813
2006 5,809 30,339 0 36,148
During 2002, the Company acquired the following intangible assets:
AMORTIZATION PERIOD
-------------------
Non-Compete Agreements $ 32,000 3 years
11
The 2001 results on a historical basis do not reflect the provision of SFAS 142.
Had the Company adopted SFAS 142 on January 1, 2001, the historical net income
and basic and diluted net income per common share would have been changed to the
adjusted amounts indicated below:
THREE MONTHS ENDED JUNE 30, 2001
-----------------------------------------------
EARNINGS PER EARNINGS PER
NET INCOME SHARE - BASIC SHARE - DILUTED
------------- -------------- ----------------
Reported net income $ 621,910 $ 0.06 $ 0.06
Addback goodwill amortization 61,002 0.01 0.01
------------- -------------- ----------------
Adjusted net income $ 682,912 $ 0.07 $ 0.07
============= ============== ================
SIX MONTHS ENDED JUNE 30, 2001
-----------------------------------------------
EARNINGS PER EARNINGS PER
NET INCOME SHARE - BASIC SHARE - DILUTED
------------- -------------- ----------------
Reported net income $ 1,119,194 $ 0.11 $ 0.11
Addback goodwill amortization 112,284 0.01 0.01
------------- -------------- ----------------
Adjusted net income $ 1,231,478 $ 0.12 $ 0.12
============= ============== ================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
- -------
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"), and
Roberts, Cushman & Company, Inc. ("Cushman"). See Note 4 to the Consolidated
Financial Statements for additional information concerning the Company's
segments.
Leather Factory, founded in 1980 by Wray Thompson and Ron Morgan, is the premier
distributor of leather products to customers worldwide. Products are
distributed primarily through 29 sales units located in twenty states and
Canada. Products include leather, leatherworking tools, buckles and adornments
for belts, leather dyes and finishes, shoe repair supplies, saddle and tack
hardware, and do-it-yourself kits.
Tandy, which was acquired in November 2000, is the most recognized supplier in
the leathercraft industry. From its founding in 1919, Tandy has been the primary
resource for leathercrafters world wide. Products include quality tools,
leather, accessories, kits and teaching materials and are distributed through
nine company-owned retail stores and its central distribution facility.
Cushman, whose origins date back to the mid-1800's, custom designs and
manufactures a product line of decorative hat trims for headwear manufacturers.
12
RESULTS OF OPERATIONS
---------------------
The following tables present selected financial data of each of the Company's
three segments:
QUARTER ENDED JUNE 30, 2002 QUARTER ENDED JUNE 30, 2001
--------------------------- ---------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
----------- ---------- ---------- ----------
Leather Factory $ 7,700,422 $1,018,799 $7,015,765 $1,057,274
Tandy 1,814,310 97,536 1,787,525 74,144
Cushman 537,304 94,814 556,603 45,321
----------- ---------- ---------- ----------
Total Operations $10,052,036 $1,211,149 $9,359,893 $1,176,739
=========== ========== ========== ==========
SIX MONTHS ENDED JUNE 30, 2002 SIX MONTHS ENDED JUNE 30, 2001
------------------------------ ------------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
----------- ---------- ----------- ----------
Leather Factory $15,524,939 $1,994,526 $14,119,557 $2,060,975
Tandy 3,692,183 239,037 3,562,641 54,481
Cushman 1,038,865 171,045 1,050,308 36,623
----------- ---------- ----------- ----------
Total Operations $20,255,987 $2,404,608 $18,732,506 $2,152,079
=========== ========== =========== ==========
Consolidated net sales for the quarter ended June 30, 2002 increased $692,000,
or 7.4%, compared to the same period in 2001. Leather Factory's sales
contributed $684,000 to the increase with gains in sales to retail customers and
small manufacturers. Tandy added $27,000 while Cushman's sales were down
$19,000. Operating income increased $34,000 for the quarter ended 2002 compared
to the quarter ended 2001. The increase in Tandy's operating income contributed
$23,000. Cushman contributed $49,000 to the increase while Leather Factory's
operating income was down $38,000.
Consolidated net sales for the six months ended June 30, 2002 increased
$1,523,000, or 8.1%, compared to the same period in 2001. Leather Factory
contributed $1,405,000 to the increase. Tandy added $129,000 in increased sales
and Cushman's sales were down $11,000. Operating income increased $252,000 for
the first half of 2002 over the first six months of 2001. Tandy's increased
operating income contributed $184,000; Cushman contributed $134,000 to the
increase while Leather Factory's operating income was down for the year by
$66,000.
% OF NET SALES
THREE MONTHS ENDED
JUNE 30, CHANGE IN $ AND %
------------------ --------------------
2002 2001 $CHANGE % CHANGE
------- ------- --------- ---------
Net sales 100.00% 100.00% $692,143 7.39%
Cost of sales 45.93 46.81 235,312 5.37
------ ------ ------- -----
Gross profit 54.07 53.19 456,831 9.18
Operating expenses 42.03 40.62 422,421 11.11
------ ------ ------- ------
Income from operations 12.04 12.57 34,410 2.92
Interest expense and other 0.57 1.38 (71,257) (55.25)
------ ------ ------- -------
Income before income taxes and cumulative effect of change in accounting principle 11.47 11.19 105,667 10.08
Income tax provision 3.60 4.55 (64,470) (15.14)
------ ------ ------- -------
Net income before cumulative effect of change in accounting principle 7.87 6.64 170,137 27.36
Cumulative effect of change in accounting principle - - - -
------ ------ ------- -------
Net income (loss) 7.87% 6.64% $170,137 27.36%
====== ====== ======== =======
13
% OF NET SALES
SIX MONTHS ENDED
JUNE 30, CHANGE IN $ AND %
----------------- -----------------------
2002 2001 $CHANGE % CHANGE
-------- ------- ------------ ---------
Net sales 100.00% 100.00% $ 1,523,481 8.13%
Cost of sales 46.66 47.35 582,271 6.56
-------- ------- ----------- ---------
Gross profit 53.34 52.65 941,210 9.54
Operating expenses 41.47 41.16 688,681 8.93
-------- ------- ----------- ---------
Income from operations 11.87 11.49 252,529 11.73
Interest expense and other 0.81 1.52 (120,916) (42.45)
-------- ------- ------------ ---------
Income before income taxes and cumulative effect of change in accounting principle 11.06 9.97 373,445 20.00
Income tax provision 3.40 3.99 (58,713) (7.85)
-------- ------- ------------ ---------
Net income before cumulative effect of change in accounting principle 7.66 5.98 432,158 38.61
Cumulative effect of change in accounting principle (19.79) - (4,008,831) N/A
-------- ------- ------------ ---------
Net income (loss) (12.13%) 5.98% $(3,576,673) (319.58%)
======== ======= =========== =========
LEATHER FACTORY OPERATIONS
Net sales from Leather Factory's 29 sales/distribution units increased 9.8% for
the second quarter of 2002. The two units opened in the third quarter of 2001
contributed 28.0% of the sales increase. Same store sales increased 7.0% over
the second quarter of 2001.
The following table presents TLF's sales mix by customer categories for the
quarters ended June 30, 2002 and 2001:
QUARTER ENDED
CUSTOMER GROUP 6/30/02 6/30/01
- -------------- ------- -------
RETAIL (end users, consumers, individuals) 18% 16%
INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 8% 10%
WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, dealers, etc.) 34% 34%
CRAFT (craft and fabric stores) 25% 28%
MIDAS (small manufacturers) 8% 5%
ASC (Authorized Sales Centers) 7% 7%
------- -------
100% 100%
======= =======
As the table indicates, Leather Factory's sales mix this quarter varied little
from the same quarter in 2001. Sales to all customer groups, with the exception
of institutional, increased in dollars over the second quarter of 2001. The
institutional business has been softer over the past six to nine months due
primarily to the additional security restrictions put in place at many prisons
after September 11th that have hindered purchases of hobbycrafts.
Operating income for Leather Factory decreased $38,600 or 3.6% of sales for the
current quarter compared to 2001. Operating expenses as a percentage of sales
were 41.0% compared to 38.8% a year ago. Personnel and related costs account
for the majority of the increase as the number of employees has increased 5%
over the past year. Increased advertising costs have also contributed to the
increase in operating expenses.
14
TANDY LEATHER OPERATIONS
Net sales for Tandy, which consisted of six retail stores and a central
distribution center as of June 30, 2002, increased 1.5% for the second quarter
of 2002 over the same quarter last year. The six retail stores opened so far
this year added $517,400 in sales while the central distribution center's sales
decreased by $490,600 for the quarter. This decrease reflects a policy decision
to distribute orders received by the central distribution center to the Tandy
retail stores. Management believes that this will speed delivery of goods with
lower freight charges and increased customer satisfaction and loyalty through
interaction with store personnel.
Effective April 1, 2002, a change of software allows Tandy to track its sales
mix in a similar fashion as that of Leather Factory. The following table
presents Tandy's sales mix by customer categories for the quarter ended June 30,
2002:
QUARTER ENDED
CUSTOMER GROUP 6/30/02
- -------------- -------------
RETAIL (end users, consumers, individuals) 57%
INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 17%
WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, dealers, etc.) 16%
CRAFT (craft and fabric stores) *
MIDAS (small manufacturers) 1%
ASC (Authorized Sales Centers) 9%
--------------
100%
==============
<FN>
* less than 1%
Tandy's institutional business is down, primarily as a result of the decrease in
orders from summer camps. We believe the decline is attributable to decreased
camp attendance by young campers in the wake of parental concerns about
traveling.
Operating income for Tandy increased $23,500 in the current quarter as a result
of an increase in gross profit margin of 3.65% or $75,500, offset somewhat by an
increase in operating expenses of $52,000. Tandy's operating expenses were
54.55% of sales for the quarter ended June 30, 2002 compared to 52.01% for the
same quarter last year. The increase is the result of the new stores opening
(resulting in a 40% increase in Tandy personnel, plus additional rents,
telephone service, etc.) that was partially offset by lower shipping costs. As
more retail stores are opened, we believe that "over the counter" sales will
increase as mail order sales decrease, thereby continuing the reduction of
freight costs to ship product to customers.
Tandy has opened (or has announced plans to open) retail stores in the following
locations during 2002:
City, State Month Opened Sq Footage
- ----------------------- ------------ ----------
Oklahoma City, Oklahoma January 2002 3,160
Boise, Idaho March 2002 1,800
Sacramento, California June 2002 1,600
Hartford, Connecticut May 2002 1,200
Salt Lake City, Utah June 2002 1,750
Fort Worth, Texas July 2002 3,000
Austin, Texas ** June 2002 3,800
Dallas, Texas August 2002 1,700
Albuquerque, New Mexico August 2002 1,764
Las Vegas, Nevada August 2002 1,350
<FN>
** converted from Leather Factory distribution unit
15
CUSHMAN OPERATIONS
Net sales for Cushman decreased $19,000 for the second quarter of 2002, a
reduction of 3.5%. The gross profit margin also dropped by slightly less than
1% for the quarter; however, the year-to-date margin is almost 2% higher than
last year. We made several one-time sales in the second quarter of 2001 at an
unusually high gross margin that were not repeated in the current quarter, thus
explaining the slight sales decrease and gross profit margin fluctuation this
quarter.
Operating income for Cushman increased $49,500. The adoption of SFAS 142
(eliminating the amortization of goodwill beginning in 2002) produced $30,000 of
the increase. Shipping decreased slightly due to the reduction in sales, and
personnel costs were down as well due to the slight decrease in the number of
employees for the quarter ended June 30, 2002 compared to June 30, 2001.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------------------------------
The change in accounting principle discussed above had significant effects on
our consolidated balance sheet at June 30, 2002. Total goodwill was reduced
from $4,535,412 at the end of 2001 to $611,724. This reduction was the
principal cause of the reduction in total assets from $19,548,323 at the end of
2001 to $16,700,651 at the end of the second quarter of 2002 (a reduction of
14.6%). Total stockholders' equity was reduced from $12,423,671 at December 31,
2001 to $10,070,520 at June 30, 2002 (a reduction of 18.9%). This reduction was
also attributable to the change in accounting principle, but the effect was
partially offset by operating results from the first half of this year.
The Company's investment in accounts receivable was $2.6 million at June 30,
2002, up $310,000 from $2.3 million at year-end 2001. The average days to
collect accounts improved from 46.4 days in the second quarter of 2001 to 44.3
days in the second quarter of 2002. Tandy's average days to collect experienced
the most improvement, from 55.8 days in 2001 to 38.9 days for the current
quarter of 2002.
Inventory increased $489,000 to $9.5 million at June 30, 2002 from $9.1 million
at year-end 2001. Inventory turnover increased to an annualized rate of 4.36
times for the first six months of 2002, an improvement over the turnover rate of
4.12 times for the first six months of 2001 and 4.08 times for all of 2001.
Other current assets increased $481,000 to $960,000 at June 30, 2002 from
$479,000 at year-end 2001 and consisted of the following:
June 30, December 31,
2002 2001
--------- -------------
Accounts receivable - employees $ 14,057 $ 40,550
Accounts receivable - other 91,763 29,546
Prepaid insurance 188,872 -
Prepaid expenses - advertising and other 478,399 349,242
Downpayments on Fort Worth remodel project 127,420 -
Other 59,716 60,052
--------- -------------
$ 960,227 $ 479,390
========= =============
The Fort Worth complex houses our corporate and administrative offices as well
as our central Leather Factory warehouse and factory, and Tandy's central
distribution center (call center and warehouse). We have negotiated a new
agreement with the landlord extending the lease term through March 2013. In
conjunction with the new agreement, we have begun a remodeling project to
consolidate Leather Factory and Tandy's warehouses, to relocate the factory in
closer proximity to the warehouse, and to remodel the Fort Worth Leather Factory
store into a more retail-oriented presentation. We estimate the total cost of
the project to be $500,000 to $600,000. As of June 30, 2002, we had paid
$127,420 as downpayments on renovations. The project is expected to be
completed by the end of 2002.
16
Notes payable and current maturities of long-term debt decreased from $4,527,904
at the end of 2001 to $3,328,954 at June 30, 2002. Accounts payable increased
$591,000 to $1.9 million at the end of the second quarter, due primarily to the
increase in inventory. The Company's current ratio improved from 1.82 at
December 31, 2001 to 2.13 at June 30, 2002.
The primary sources of liquidity and capital resources during the first half of
2002 were funds provided by operating activities in the amount of $1,305,000 and
the Company's Credit and Security Agreement with Wells Fargo Bank Minnesota,
N.A. ("Wells Fargo"). The Company used its operating cash flow and additional
funds on hand at the beginning of the quarter to pay down loan balances
($1,201,088), purchase equipment ($232,810), purchase the assets of two existing
leathercraft stores ($227,747).
Approximately 27% of the 2002 capital spending was for computer equipment,
software, and fixtures for the new Tandy retail stores, 17% was for Tandy's new
point-of-sale software, 16% was for inventory scanning equipment for the
existing Leather Factory stores, 26% was for various computer workstation and
software upgrades in existing locations and departments, and 14% was for various
furniture and fixtures.
The revolving credit facility with Wells Fargo is based upon the level of the
Company's accounts receivable and inventory. At June 30, 2002, the available
and unused portion of the credit facility was approximately $3,201,000.
The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current operations and the opening of any potential
new Tandy retail stores or Leather Factory sales/distribution units. In 2002,
the funding for the opening of any new locations is expected to be provided by
operating leases, cash flows from operating activities, and the revolving credit
facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's Credit Facility includes loans with interest rates that vary with
changes in the prime rate. An increase of one percentage point in the prime
rate would not have a material impact on the Company's future earnings.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2002, the Annual Meeting of the Stockholders of the Company was held
in the Superbowl 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 2003 Annual Meeting of Stockholders or until their successors are duly
elected and qualified:
Shannon L. Greene Michael A. Markwardt Anthony C. Morton
Joseph R. Mannes Robin L. Morgan Wray Thompson
H.W. "Hub" Markwardt Ronald C. Morgan William M. Warren
17
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 8,926,606 4,979 2,500
Joseph R. Mannes 8,926,606 4,979 2,500
H.W. "Hub" Markwardt 8,926,522 5,063 2,500
Michael A. Markwardt 8,926,606 4,979 2,500
Robin L. Morgan 8,926,522 5,063 2,500
Ronald C. Morgan 8,926,606 4,979 2,500
Anthony C. Morton 8,926,606 4,979 2,500
Wray Thompson 8,926,606 4,979 2,500
William M. Warren 8,926,606 4,979 2,500
The Company's proxy statement dated April 23, 2002, for the 2002 Annual Meeting
of Stockholders, provided detailed information about this meeting and the action
to be taken there.
ITEM 5. OTHER INFORMATION
On June 17, 2002, Wray Thompson, the Company's Chairman of the Board and Chief
Executive Officer, and Sally Thompson, his wife, entered into an Option
Agreement with Arlington National Bank, as Trustee of The Leather Factory, Inc.
Employee Stock Ownership Plan and Trust ("ESOP), pursuant to which the ESOP
trustee, in its discretion, may purchase from Mr. and Mrs. Thompson up to
200,000 shares of the Company's common stock at an exercise price equal to the
average of the closing trade price of the stock on the American Stock Exchange
over the previous seven days (disregarding days on which the exchange is not
open for trading); provided, however, the exercise price shall not exceed the
trade price for the Company's common stock for the second trade on the American
Stock Exchange on the day of exercise of the option. However, no shares will be
sold under the Option Agreement if the exercise price (computed in the manner
provided in the preceding sentence) is less than $2.75 per share.
The option term is for one year, but Mr. and Mrs. Thompson may terminate the
option after December 31, 2002 if the trustee has not purchased at least 75,000
shares pursuant to the Option Agreement. Earlier, Mr. Thompson filed an
amendment to his previously filed Schedule 13D disclosing this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
None
(b) Reports on Form 8-K
----------------------
None
18
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 13, 2002 By: /s/ Wray Thompson
-------------------
Wray Thompson
Chairman of the Board and
Chief Executive Officer
Date: August 13, 2002 By: /s/ Shannon L. Greene
------------------------
Shannon L. Greene
Chief Financial Officer and
Treasurer (Chief Accounting
Officer)
- -----------------------------------------------------------
CERTIFICATION
Pursuant to Section 906 of the Sarbane-Oxley Act of 2002 and only to the extent
required by that provision, the undersigned certify that this report fully
complies with the requirements of Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 and that all information contained in this
report fairly presents in all material respects the financial condition and
results of operations of the issuer.
Date: August 13, 2002
/s/ Wray Thompson
------------------
Wray Thompson, Chief Executive Officer
/s/ Shannon L. Greene
---------------------
Shannon L. Greene, Chief Financial Officer
- -----------------------------------------------------------
19