FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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.
Shares outstanding as
Class Of May 12, 2003
- ------------------------------ ---------------------
Common Stock, par value $.0024 per share 10,212,461
1
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations
Three months ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002 5
Consolidated Statements of Stockholders' Equity
Three months ended March 31, 2002 and 2002 6
Notes to Consolidated Financial Statements 7
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
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104,988 $ 101,557
Cash restricted for payment on revolving credit facility . . . . . . . . . . . 463,653 553,839
Accounts receivable-trade, net of allowance for doubtful accounts
of $45,000 and $78,000 in 2003 and 2002, respectively. . . . . . . . . . . 2,767,801 1,938,698
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,672,585 12,695,344
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 55,644
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,017 159,090
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,024,155 672,117
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,188,199 16,176,289
------------ --------------
PROPERTY AND EQUIPMENT, at cost. . . . . . . . . . . . . . . . . . . . . . . . . 5,285,532 5,321,749
Less-accumulated depreciation and amortization . . . . . . . . . . . . . . . . (3,305,396) (3,301,898)
------------ --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . 1,980,136 2,019,851
------------ --------------
GOODWILL, net of accumulated amortization of $734,000
in 2003 and 2002, respectively . . . . . . . . . . . . . . . . . . . . . . . . 692,292 686,484
OTHER INTANGIBLES, net of accumulated amortization of
$126,000 and $113,000, in 2003 and 2002, respectively. . . . . . . . . . . . . 470,768 483,507
OTHER assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,667 309,471
------------ --------------
$20,658,062 $ 19,675,602
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,504,365 $ 1,594,909
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . 995,939 2,503,331
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,743 -
Notes payable and current maturities of long-term debt . . . . . . . . . . . . 5,816,689 4,218,968
------------ --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 8,448,736 8,317,208
------------ --------------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,481 186,076
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities. . . . . . . . . . . - 2,256
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, 10,212,461 and
10,149,961 shares issued and outstanding at 2001 and 2002, respectively. . 24,510 24,360
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,211,407 4,163,901
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,838,863 7,064,345
Less: Notes receivable - secured by common stock . . . . . . . . . . . . . . . (44,003) (44,003)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . (27,932) (38,541)
------------ --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 12,002,845 11,170,062
------------ --------------
$20,658,062 $ 19,675,602
============ ==============
The accompanying notes are an integral part of these financial statements.
3
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
------------ ------------
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,560,085 $10,203,951
COST OF SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,914,581 4,835,356
------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 5,645,504 5,368,595
OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 4,529,832 4,175,136
------------ ------------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 1,115,672 1,193,459
OTHER EXPENSE:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 63,352 89,869
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,818) 16,355
------------ ------------
Total other expense. . . . . . . . . . . . . . . . . . . . . . . 32,534 106,224
------------ ------------
INCOME BEFORE INCOME TAXES and CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE. . . . . . . . . . . . . . . . . . . . . . 1,083,138 1,087,235
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 308,620 327,930
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE. . . . . . . . . . . . . . . . . . . . . . . 774,518 759,305
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . - (4,008,831)
------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . $ 774,518 $(3,249,526)
============ ============
NET INCOME PER COMMON SHARE - BASIC:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. $ 0.08 $ 0.08
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET . . . . . - (0.40)
------------ ------------
NET INCOME PER COMMON SHARE. . . . . . . . . . . . . . . . . . . . $ 0.08 $ (0.32)
============ ============
NET INCOME PER COMMON SHARE - ASSUMING DILUTION:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. $ 0.07 $ 0.07
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET . . . . . - (0.37)
------------ ------------
NET INCOME PER COMMON SHARE - DILUTED. . . . . . . . . . . . . . . $ 0.07 $ (0.30)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,177,433 10,001,717
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,793,464 10,731,713
The accompanying notes are an integral part of these financial statements.
4
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 774,518 $(3,249,526)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation & amortization. . . . . . . . . . . . . . . . . . . . 125,031 122,993
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . 9,371 -
Amortization of deferred financing costs . . . . . . . . . . . . . - 37,038
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 24,479 (36,290)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,609 (3,340)
Cumulative effect of change in accounting principle. . . . . . . . - 4,008,831
Net changes in assets and liabilities:
Accounts receivable-trade, net . . . . . . . . . . . . . . . . . (829,103) (444,920)
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,759 878,308
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 187,386 334,734
Other current assets . . . . . . . . . . . . . . . . . . . . . . (352,038) (465,286)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (90,543) 244,169
Accrued expenses and other liabilities . . . . . . . . . . . . . (1,507,392) (54,597)
------------ ------------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . (2,399,441) 4,621,640
------------ ------------
Net cash provided by (used in) operating activities . . . . . . . (1,624,923) 1,372,114
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . . . . . . (93,972) (97,622)
Payments in connection with businesses acquired . . . . . . . . . . . - (227,747)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . . . . 6,217 -
Increase in other assets. . . . . . . . . . . . . . . . . . . . . . . (17,197) (421)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . (104,952) (325,790)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans . . . . . . . . . . 1,597,065 (1,521,777)
Payments on notes payable and long-term debt. . . . . . . . . . . . . (1,600) (19,643)
Decrease in cash restricted for payment on revolving credit facility. 90,186 145,648
Payments received on notes secured by common stock. . . . . . . . . . - 20,736
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . 47,655 13,125
------------ ------------
Net cash provided by (used in) financing activities . . . . . . . 1,733,306 (1,361,911)
------------ ------------
NET CHANGE IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,431 (315,587)
CASH, beginning of period . . . . . . . . . . . . . . . . . . . . . . . 101,557 409,040
------------ ------------
CASH, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104,988 $ 93,453
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period . . . . . . . . . . . . . . . . . . . $ 56,930 $ 59,283
Income taxes paid during the period, net of (refunds) . . . . . . . . 41,620 25,172
The accompanying notes are an integral part of these financial statements.
5
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Common Stock
---------------------------------
Number Par Paid-in
of shares value capital
-------------- ------------------ ------------------
BALANCE, December 31, 2001 . . . . . . . . . . . . . . . . . . . 9,991,161 $ 23,979 $ 4,030,508
Payments on notes receivable -
secured by common stock . . . . . . . . . . . . . . . . . - - -
Shares issued - employee
stock options exercised . . . . . . . . . . . . . . . . . 20,000 48 13,077
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
Translation adjustment . . . . . . . . . . . . . . . . . . . . - - -
-------------- ------------------ ------------------
BALANCE, March 31, 2002. . . . . . . . . . . . . . . . . . . . . 10,011,161 $ 24,027 $ 4,043,585
============== ================== ==================
BALANCE, December 31, 2002 . . . . . . . . . . . . . . . . . . . 10,149,961 $ 24,360 $ 4,163,901
Shares issued - employee
stock options exercised . . . . . . . . . . . . . . . . . 62,500 150 47,506
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
Translation adjustment . . . . . . . . . . . . . . . . . . . . - - -
-------------- ------------------ ------------------
BALANCE, March 31, 2003. . . . . . . . . . . . . . . . . . . . . 10,212,461 $ 24,510 $ 4,211,407
============== ================== ==================
Notes Accumulated
receivable Other
Retained - secured by Cumulative Comprehensive
earnings common stock Loss Total Income (Loss)
------------ -------------- ------------ --------------- -------------
BALANCE, December 31, 2001 . . . . . . . . $ 8,478,187 $ (71,939) $ (37,064) $ 12,423,671
Payments on notes receivable -
secured by common stock . . . . . . - 20,736 - 20,736
Shares issued - employee
stock options exercised . . . . . . . - - - 13,125
Net loss . . . . . . . . . . . . . . . . .(3,249,526) - - (3,249,526) $(3,249,526)
Translation adjustment . . . . . . . . . . - - (3,340) (3,340) (3,340)
------------ -------------- ------------ --------------- -----------
BALANCE, March 31, 2002. . . . . . . . . ..$ 5,228,661 $ (51,203) $ (40,404) $ 9,204,666
============ ============== ============ ===============
Comprehensive loss for the three months ended March 31, 2002 $(3,252,866)
============
BALANCE, December 31, 2002 . . . . . . . .$ 7,064,345 $ (44,003) $ (38,541) $ 11,170,062
Shares issued - employee
stock options exercised . . . . . . - - - 47,656
Net income . . . . . . . . . . . . . . . 774,518 - - 774,518 $ 774,518
Translation adjustment . . . . . . . - - 10,609 10,609 10,609
------------ -------------- ------------ --------------- -----------
BALANCE, March 31, 2003. . . . . . . . $ 7,838,863 $ (44,003) $ (27,932) $ 12,002,845
============ ============== ============ ===============
Comprehensive income for the three months ended March 31, 2003 $ 785,127
============
The accompanying notes are an integral part of these financial statements.
6
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 necessary to present fairly its financial position as of March
31, 2003 and December 31, 2002, and its results of operations and cash flows for
the three-month periods ended March 31, 2003 and 2002. Certain
reclassifications have been made to prior year amounts in order to conform to
the current year presentation. Operating results for the three-month period
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
and accompanying notes included in our Annual Report on Form 10-K for the year
ended December 31, 2002.
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 December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement 123, ("SFAS 148"). SFAS 148 amends SFAS No.123, Accounting for
Stock-Based Compensation, ("SFAS 123"), to provide alternative transition
methods for an entity's voluntary change in their accounting for stock-based
compensation from the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB No. 25")
and related interpretations to the fair value method under SFAS 123. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require disclosure of the pro forma effects of using the fair value method of
accounting for stock-based compensation in interim as well as annual financial
statements. The Company currently accounts for its stock-based compensation
using the intrinsic value method as prescribed by APB No. 25. The disclosure
provisions of SFAS No. 148 were adopted on December 31, 2002 and are discussed
in Note 2.
Revenue Recognition
The Company recognizes revenue for over-the-counter sales as transactions occur
and other sales upon shipment of product provided that there are no significant
post-delivery obligations to the customer and collection is reasonably assured,
which generally occurs upon shipment. 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.
7
The components of inventory consist of the following:
AS OF
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
Finished goods held for sale $11,447,127 $11,693,868
Raw materials and work in process 1,225,458 1,001,476
----------- -----------
$12,672,585 $12,695,344
=========== ===========
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.
The first phase screens for impairment, while the second phase (if necessary)
measures the impairment. As a result of SFAS 142, we incurred an impairment
write-down in the first quarter of 2002 of our investment in our subsidiary,
Roberts, Cushman & Company, Inc., in the amount of $4.0 million. The remaining
goodwill on our balance sheet is analyzed by management periodically to
determine the appropriateness of its carry value. We have elected to perform
our annual analysis during the fourth calendar quarter of each year. As of
December 31, 2002, 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 2003.
Other intangibles consist of the following:
AS OF MARCH 31, 2003 AS OF DECEMBER 31, 2002
-------------------------------------- ----------------------------------
ACCUMULATED ACCUMULATED
GROSS AMORTIZATION NET GROSS AMORTIZATION NET
--------- ------------- ----------- --------- ------------ --------
Trademarks, Copyrights $544,369 $111,101 $433,268 $544,369 $102,029 $442,340
Non-Compete Agreements 52,000 14,500 37,500 52,000 10,833 41,167
--------- ------------- ----------- --------- ---------- --------
$596,369 $125,601 $470,768 $596,369 $112,862 $483,507
========= ============= =========== ========= ========== ========
The Company recorded amortization expense of $12,740 during the first quarter of
2003 compared to $11,352 during the first quarter of 2002. 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:
ROBERTS
LEATHER FACTORY TANDY LEATHER CUSHMAN TOTAL
---------------- -------------- -------- -------
2003 $5,918 $45,004 $0 $50,922
2004 5,918 45,004 0 50,922
2005 5,918 35,004 0 40,922
2006 5,918 34,337 0 40,255
2007 5,918 33,504 0 39,422
8
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, 2003 and 2002, on a pro
forma basis, would have been as follows:
2003 2002
-------- ------------
Net income (loss), as reported $774,518 $(3,249,526)
Add: Stock-based compensation expense included in reported net income (loss) - -
Deduct: Stock-based compensation expense determined under fair value method 20,266 25,905
-------- ------------
Net income (loss), pro forma $754,252 $(3,275,431)
======== ============
Net income (loss) per share:
Basic - as reported $0.08 $(0.32)
Basic - pro forma $0.07 $(0.33)
Diluted - as reported $0.07 $(0.30)
Diluted - pro forma $0.07 $(0.31)
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 3.00% for both periods; dividend yields
of 0% for both periods; volatility factors of .725 for 2003 and .736 for 2002;
and an expected life of the valued options of 5 years.
9
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
Net income (loss) . . . . . . . . . . . . . . . . . $ 774,518 $(3,249,526)
----------- ------------
Numerator for basic and diluted earnings per share. 774,518 (3,249,526)
Denominator for basic earnings per share -
Weighted-average shares . . . . . . . . . . . . . 10,177,433 10,001,717
Effect of dilutive securities:
Stock options . . . . . . . . . . . . . . . . . . 442,884 482,800
Warrants. . . . . . . . . . . . . . . . . . . . . 173,147 247,196
----------- ------------
Dilutive potential common shares. . . . . . . . . . 616,031 729,996
----------- ------------
Denominator for diluted earnings per share -
weighted-average shares . . . . . . . . . . . . . 10,793,464 10,731,713
=========== ============
Basic earnings (loss) per share . . . . . . . . . $ 0.08 $ (0.32)
=========== ============
Diluted earnings (loss) per share . . . . . . . . $ 0.07 $ (0.30)
=========== ============
The net effect of converting stock options to purchase 747,200 and 844,000
shares of common stock at option prices less than the average market prices has
been included in the computations of diluted EPS for the quarter ended March 31,
2003 and 2002, 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.
10
THE LEATHER FACTORY TANDY LEATHER COMPANY ROBERTS, CUSHMAN & CO TOTAL
------------------- --------------------- --------------------- -----------
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
----------- --------------- -------------- -----------
FOR THE QUARTER ENDED MARCH 31, 2002
Net sales $ 7,824,517 $ 1,877,874 $ 501,560 $ 10,203,951
Gross profit 4,126,872 1,073,579 168,144 5,368,595
Operating earnings 975,727 141,501 76,231 1,193,459
Interest expense (89,655) (214) - (89,869)
Other, net (15,854) (501) - (16,355)
------------
Income before income taxes
& change in accounting principle 870,218 140,786 76,231 1,087,235
------------
Depreciation and amortization 132,946 23,703 3,382 160,031
Fixed asset additions 71,529 25,513 580 97,622
Total assets $ 11,928,363 $ 2,530,336 $ 854,585 $ 15,313,284
------------ ------------ ---------- ------------
Net sales for geographic areas were as follows:
THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
--------------- --------------
United States $9,870,636 $9,662,434
All other countries 689,449 541,517
--------------- --------------
$10,560,085 $10,203,951
=============== ==============
Geographic sales information is based on the location of the customer. Net
sales from no single foreign country was material to the Company's consolidated
net sales for the three-month periods ended March 31, 2003 and 2002. The
Company does not have any significant long-lived assets outside of the United
States.
11
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 world wide. Products include quality
tools, leather, accessories, kits and teaching materials. In early 2002, we
initiated a plan to expand Tandy by opening retail stores. As of April 30,
2003, we have opened 20 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, 2002.
RESULTS OF OPERATIONS
The following tables present selected financial data of each of the Company's
three segments for the quarters ended March 31, 2003 and 2002:
QUARTER ENDED MARCH 31, 2003 QUARTER ENDED MARCH 31, 2002
---------------------------- ----------------------------
OPERATING OPERATING
SALES INCOME SALES INCOME
---------- ----------- ----------- ----------
Leather Factory $8,201,258 $ 923,637 $ 7,824,517 $ 975,727
Tandy 1,864,539 146,993 1,877,874 141,501
Cushman 494,288 45,042 501,560 76,231
----------- --------- ----------- ----------
Total Operations $10,560,085 $1,115,672 $10,203,951 $1,193,459
=========== ========== =========== ==========
Consolidated net sales for the quarter ended March 31, 2003 increased $356,000,
or 3.5%, compared to the same period in 2002. Leather Factory contributed
$377,000 to the increase while Tandy and Cushman recorded sales decreases of
$13,000 and $7,000, respectively. Operating income on a consolidated basis for
the quarter ended March 31, 2003 was down 6.5% or $78,000 over the first quarter
of 2002.
12
QUARTER QUARTER INCR
ENDED 3/31/03 ENDED 3/31/02 (DECR) % CHANGE
------------- ------------- ---------- --------
Same Store Sales $ 8,982,895 $8,473,695 $509,200 6.01%
New Store Sales 1,576,131 $27,688 $1,548,443 N/A
Closed Store Sales 1,059 1,702,568 (1,701,509) N/A
------------- ----------- ---------- --------
Total $10,560,085 $10,203,951 $356,134 3.49%
============= =========== ========== ========
Same store sales includes 29 Leather Factory stores, two Tandy stores, and
Cushman. New store sales includes one Leather Factory store and 17 Tandy
stores. Stores opened for less than half of the reporting period last year are
classified as new stores in the current reporting period. The closed store in
the table above was the Tandy order fulfillment house that was eliminated on
September 1, 2002.
LEATHER FACTORY OPERATIONS
Net sales from Leather Factory's 30 stores increased 4.81% for the first quarter
of 2003 as follows:
QTR ENDED QTR ENDED $ INCR % INCR
3/31/03 3/31/02 (DECR) (DECR)
---------- ---------- --------- --------
Same store sales (29 stores) . . . . . . . . $8,085,989 $7,693,515 $ 392,474 5.10%
New store sales (1 store). . . . . . . . . . 115,269 - 115,269 ***
"Transferred to Tandy" store sales (1 store) - 131,002 (131,002) (100.0%)
---------- ---------- --------- --------
Total sales. . . . . . . . . . . . . . . . . $8,201,258 $7,824,517 $ 376,741 4.81%
========== ========== ========= ========
The following table presents TLF's sales mix by customer categories for the
quarters ended March 31, 2003 and 2002:
QUARTER ENDED
CUSTOMER GROUP 3/31/03 3/31/02
- -------------- ------- -------
RETAIL (end users, consumers, individuals) 23% 21%
INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 7 7
WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, dealers, etc.) 31 32
CRAFT (craft stores (individually owned) and craftstore chains) 24 26
MIDAS (small manufacturers) 8 7
ASC (Authorized Sales Centers) 7 7
------- -------
100% 100%
======= =======
13
Our biggest sales gains were in our RETAIL and MIDAS customer groups. Our
retail sales were up approximately 18% over those same sales a year ago,
primarily the result of the additional sales generated by our Fort Worth
flagship store. This store is our only store in the U.S. that carries full
lines of both Leather Factory and Tandy Leather products. In addition, we
remodeled this store in late 2002 to accommodate and encourage more retail,
walk-in traffic. Our MIDAS sales increased approximately 28% over last year.
Due to the instability of the general economy, our small manufacturing customers
are trying to avoid committing large amounts of their cash for bulk purchases,
particularly on items that they normally import. Therefore, we have been able
to generate sales by providing merchandise in smaller quantities on a more
frequent basis to these manufacturers. These customers are willing to pay a
slightly higher price for goods from us in order to mange their cash flow.
Sales to our CRAFT customers were off slightly (approximately $100,000) due to
the timing of orders shipped around the end of the quarter.
Operating income for Leather Factory decreased $52,000 or 5.3% of sales for the
current quarter compared to 2002. Operating expenses as a percentage of sales
were 41.3%, off slightly ($93,000) from our target of 40% of sales. Our
insurance programs - particularly employee health benefits - have experienced
significant cost increases. Also, the Company's increased emphasis on investor
relations added to these expenses. We monitor these expenses closely in an
effort to optimize the value received by the Company. In computing net income
by segment, most of these administrative expenses are allocated to the Leather
Factory segment.
TANDY LEATHER OPERATIONS
Net sales for Tandy, which consisted of nineteen retail stores as of March 31,
2003, were down 0.71% for the first quarter of 2003 over the same quarter last
year, which consisted of two retail stores and the order fulfillment house, as
follows:
QTR ENDED QTR ENDED $INCR % INCR
3/31/03 3/31/02 (DECR) (DECR)
--------- --------- --------- -------
Same store sales (1 store) $216,478 $147,618 $68,860 46.65%
New store sales (17 stores) 1,460,862 27,688 1,433,174 ***
"Transferred from Leather Factory" store sales (1 store) 186,140 - 186,140 ***
Closed store (order fulfillment house) 1,059 1,702,568 (1,701,509) (100.00)
--------- --------- --------- --------
Total sales $1,864,539 $1,877,874 $(13,335) (0.71%)
========== ========== ========== ========
14
A store is categorized as "new" as long as it was opened 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, 2002 represents our Boise,
Idaho store sales in that period because that store was only open for one month
in the period (it was opened on March 1, 2002).
Sales in the current quarter were off slightly compared to a year ago - although
as the table above indicates, the comparison is retail stores to the order
fulfillment house. The single "same store" sales results are encouraging as
that store was opened for the entire quarter in both years. The "transferred"
store is producing strong gains as well - compared to the sales being generated
as a Leather Factory store a year ago. (See Leather Factory's table for last
year's sales amount.) The retail stores that are at least three months old are
averaging approximately $37,000 in sales per month, which is better than our
projections of $30,000 per month per store.
The following table presents Tandy's sales mix by customer categories for the
quarters ended March 31, 2003 and 2002:
QUARTER ENDED
CUSTOMER GROUP 3/31/03 3/31/02
- -------------- ----------- ---------
RETAIL (end users, consumers, individuals) 72% 61%
INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 5 12
WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, dealers, etc.) 19 11
CRAFT (craft stores (individually owned) and craftstore chains) - 1
MIDAS (small manufacturers) - -
ASC (Authorized Sales Centers) 4 15
----------- ---------
100% 100%
=========== =========
Operating income for Tandy increased marginally ($5,500) in the current quarter
due primarily to an increase in gross profit margin of approximately 6
percentage points but offset by an increase in operating expenses. Operating
expenses were 55% of sales in the current quarter compared to 50% in the same
quarter last year. Employee health costs contributed somewhat to the increase
(cost of health care is rising, plus there are more employees participating in
the benefit program this year). In addition, management's policy is to expense
store set-up costs (tables, shelving, displays, etc.) in the first month a store
generates sales, regardless of when in the month those sales begin. In the
first quarter of 2003, three of the five stores opened in the first quarter were
opened in the last 30 days of the quarter. Therefore, set-up costs were
incurred and included in operating expenses before the stores can generate
sufficient sales to offset these costs. Despite this conservative policy, new
Tandy stores continued the trend of generating profits in the second month in
which they are opened.
ROBERTS, CUSHMAN OPERATIONS
Net sales for Cushman decreased $7,300 for the first quarter of 2003, although a
slight improvement in gross profit margin (0.2%) was achieved. Operating income
for Cushman decreased $31,000 due to increases in insurance costs and bad debts.
A customer went out of business in the first quarter of 2003 owing Cushman
approximately $9,000. Despite the number of new customer inquiries Cushman is
receiving currently, management is monitoring its accounts closely in order to
avoid further uncollectible accounts.
OTHER EXPENSES
Interest expense in the first quarter of 2003 ($63,352) was down 29.5% from the
first quarter of 2992 ($89,869). This change was attributable to a reduction in
the interest rate for the first quarter of 2003 compared to the first quarter of
2002.
15
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
There was a slight change (less than 5%) in our consolidated balance sheet from
December 31, 2002 to March 31, 2003. Total assets increased from $19,675,602 at
year-end to $20,658,062 at March 31. Our accounts receivable accounted for the
majority of the increase. Total stockholders' equity increased from $11,170,062
at December 31, 2002 to $12,002,845 at March 31, 2003. Most of the increase was
from earnings in the first quarter of this year.
Inventory decreased minimally ($23,000) at March 31, 2003 from year-end 2002.
Inventory turnover decreased to an annualized rate of 3.47 times during the
first quarter of 2003, a slight slowdown from 3.93 times for the first quarter
of 2002 and 3.65 times for all of 2002. The slowdown in turns is due primarily
to the increased amounts of inventory at the end of 2002. We compute our
inventory turns as sales divided by average inventory. As we stated in our 2002
Form 10-K, our inventory was above normal and expected levels at the end of
2002, primarily due to our attempts to optimize that inventory during the West
Coast dock strike in the later part of the third quarter of 2002 and the
eventual unwinding of the backlog of shipments in the fourth quarter of 2002
after the strike ended. We reduced our inventory purchases considerably in the
first quarter of 2003 but do not expect to realize the effects of these
decreased purchases until the second quarter of 2003.
The Company's investment in accounts receivable was $2.8 million at March 31,
2003, up $829,000 from $1.9 million at year-end 2002. This is a result of an
increase in credit sales during the quarter ended March 31, 2003 as compared to
that of the quarter ended December 31, 2002. The average days to collect
accounts improved slightly over the first quarter of 2002 from 47.2 days to 43.6
days. Both Tandy and Leather Factory posted the most improvement in average
days to collect accounts, from 42.9 and 45.5 days in 2002 to 39.6 and 41.1 days
for the first quarter of 2003, respectively.
Accounts payable decreased $90,000 to $1.5 million at the end of the first
quarter, due primarily to the reduction in inventory purchases during the
period. Accrued expenses and other liabilities decreased $1.5 million, from
$2.5 million at December 31, 2002 to $1.0 million at March 31, 2003. The
majority of this decrease reflects the payment of store managers' bonuses in
March 2003. These bonus payments were funded with borrowings on the Company's
revolving credit facility. As a result, notes payable and current maturities of
long-term debt increased from $4,218,968 at the end of 2002 to $5,816,689 at
March 31, 2003.
The Company's current ratio fell slightly from 2.08 at December 31, 2002 to 2.03
at March 31, 2003. Generally accepted accounting principles ("GAAP") require
the Company's debt with Wells Fargo Bank Minnesota, N.A. ("Wells Fargo") to be
classified as short-term (even though the stated maturity is in November 2004)
because our credit agreement with Wells Fargo includes both a subjective
acceleration clause and a requirement to maintain an arrangement whereby cash
collections from our customers directly reduce the debt outstanding (Emerging
Issues Task Force Issue 95-22). If the accounting rules permitted this loan to
be report as long-term indebtedness, the Company's current ratio at March 31,
2003 would have been 6.52, a difference of 4.44. Management believes that
disclosure of the non-GAAP information aids the reader's understanding of the
Company's balance sheets.
During the first quarter of 2003, cash flows used in operating activities was
$1.6 million. The annual manager bonus payments accounted for the majority of
the operating cash used during the quarter. Cash flows used in investing
activities totaled $105,000, the majority of which was for the purchase of
equipment in the amount of $94,000. Most of the equipment purchased was for the
new Tandy stores opened during the quarter and computer equipment upgrades in
existing stores. Cash flows provided by financing activities was $1.7 million,
representing our net borrowings against our revolving credit facility during the
quarter.
We expect to fund our operating and liquidity needs as well as our current
expansion of Tandy'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, 2003, the available and unused portion of the credit
facility was approximately $1,351,000.
16
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 which could cause actual results to differ materially from those
suggested by the forward-looking statements include, among other things:
- - Involvement by the United States in war and other military operations in
the Middle East 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.
- - 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.
- - We might fail to realize the anticipated benefits of 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.
- - 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, 2002. The Company
believes that its exposure to market risks has not changed significantly since
December 31, 2002.
17
ITEM 4. CONTROLS AND PROCEDURES
(a) As of a date within ninety (90) days of the date of this report (the
"Evaluation Date"), 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-14 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon this
evaluation, they have concluded that, subject to the limitations on the
effectiveness of the controls described below, the Company's disclosure controls
and procedures are sufficiently effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness,
accuracy and completeness.
(b) There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation referred to above. No significant deficiencies or
material weaknesses in the Company's internal controls were observed.
Accordingly, no corrective actions were undertaken.
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 control system, no matter how
well conceived and operated, 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. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been or will be
detected.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On February 12, 2003, 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 one-year term of the Services
Agreement, the Company paid a $6,000 retainer fee and 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 100,000 shares of the Company's
common stock at an exercise price of $3.10 per share, subject to adjustment for
certain issuances at a per share price below $3.10 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 12, 2003, 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
18
(a) Exhibits
--------
EXHIBIT NUMBER EXHIBIT
- -------------- ------------------------------------------------------------------------
4.1 Financial Advisor's Warrant Agreement, dated February 12, 2003,
between The Leather Factory, Inc. and Westminster Securities
4.2 Capital Markets Services Engagement Agreement, dated February
12, 2003, between The Leather Factory, Inc. and Westminster
Securities Corporation
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On April 23, 2003, the Company filed a report on Form 8-K in which we furnished
under Item 9 the press release entitled "The Leather Factory Reports 1st Quarter
2003 Results" relating to the result of our first quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: May 12, 2003 By: /s/ Wray Thompson
-------------------
Wray Thompson
Chairman of the Board and
Chief Executive Officer
Date: May 12, 2003 By: /s/Shannon L. Greene
----------------------
Shannon L. Greene
Chief Financial Officer and
Treasurer (Chief Accounting Officer)
19
CERTIFICATIONS
I, Wray Thompson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Leather Factory,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidating
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report was prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on the required evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; 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; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Wray Thompson
-------------------
Wray Thompson
President and Chief Executive
Officer (principal executive officer)
********
20
I, Shannon L. Greene, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Leather Factory,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidating
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report was prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on the required evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; 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; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Shannon L. Greene
-------------------------
Shannon L. Greene
Chief Financial Officer and Treasurer
(principal financial and
accounting officer)
21
EXHIBIT 4.1
FINANCIAL ADVISOR'S WARRANT AGREEMENT dated as of February 12, 2003,
("Engagement Date") between THE LEATHER FACTORY, INC., a Delaware corporation
(the "Company"), and WESTMINSTER SECURITIES CORPORATION, a New York corporation
and its assignees or designees (hereinafter referred to variously as a "Holder"
or "Financial Advisor").
W I T N E S S E T H:
WHEREAS, the Financial Advisor has agreed pursuant to the Engagement Agreement
dated as of February 12, 2003 (the "Engagement Agreement"), between the
Financial Advisor and the Company, to act as financial advisor to the Company.
WHEREAS, pursuant to the Engagement Agreement, the Company agreed to issue
warrants to the Financial Advisor to purchase up to an aggregate of 100,000
shares of Common Stock (the "Financial Advisor's Warrants"); and
WHEREAS, the Financial Advisor's Warrants to be issued pursuant to this
Agreement will be issued to the Financial Advisor in consideration for, and as
part of the compensation in connection with, the Financial Advisor's services
pursuant to the Engagement Agreement.
NOW, THEREFORE, in consideration of the premises, the agreements herein set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. GRANT. The Financial Advisor is hereby granted the right to purchase, at any
time from the Engagement Date until 5:00 p.m., New York time, on February 12,
2008 (5 years from the Engagement Agreement), at which time the Financial
Advisor's Warrants expire, an aggregate of 100,000 shares of Common Stock,
subject to adjustment as provided in Section 11 hereof (the "Financial Advisor's
Securities"). Each Financial Advisor's Warrant shall entitle the holder thereof
to purchase one (1) share of common stock, no par value per share, of the
Company (the "Common Stock"), at an initial exercise price of $3.10 (as defined
in Section 9.3(e)) (the "Common Stock Exercise Price").
2. FINANCIAL ADVISOR'S WARRANT CERTIFICATES. The Financial Advisor's warrant
certificates (the "Warrant Certificates") delivered and to be delivered pursuant
to this Agreement shall be in the form set forth in Exhibit A, attached hereto
and made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. REGISTRATION OF WARRANT. The Financial Advisor's Warrants shall be numbered
and shall be registered on the books of the Company when issued.
4. EXERCISE OF FINANCIAL ADVISORS'S WARRANT.
4.1 METHOD OF EXERCISE. The Financial Advisor's Warrants initially are
exercisable at the Common Stock Exercise Price (subject to adjustment as
provided in Section 11 hereof) per Financial Advisor's Warrant set forth in
Section 8 hereof payable by certified or official bank check in New York
Clearing House funds. Upon surrender of a Financial Advisor's Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Common Stock Exercise Price for shares of Common
Stock purchased at the Company's principal offices presently located at 3827
East Loop 820 South, Fort Worth, Texas 76119 the registered holder of a
Financial Advisor's Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the shares of Common Stock
so purchased. The purchase rights represented by each Financial Advisor's
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares underlying the Financial
Advisor's Warrants) in increments of not less than 5,000 shares at one time. In
the case of the purchase of less than all of the shares purchasable under any
Financial Advisor's Warrant Certificate, the Company shall cancel said Financial
Advisor's Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Financial Advisor's Warrant Certificate of like tenor for the
balance of the shares purchasable thereunder.
4.2 CASHLESS EXERCISE. In addition to the right to exercise the Financial
Advisor's Warrant for cash pursuant to Section 4.1, Financial Advisor shall have
the right to exercise the Financial Advisor's Warrant (in whole but not in part)
by the surrender of the Financial Advisor's Warrant (with the annexed Form of
Election of Cashless Exercise) at the office of the Company at any time during
the term of the Financial Advisor's Warrant, into shares of Common Stock as
provided for in this Section 4.2. Upon exercise of this cashless exercise right,
Financial Advisor shall be entitled to receive that number of shares of Common
Stock of the Company equal to the quotient obtained by dividing [(A - B)(X)] by
(A), where:
(A) = the Market Price (as defined in Section 9.3(e)) of one share of
Common Stock on the date of exercise of the Financial Advisor's Warrant.
(B) = the Common Stock Exercise Price for one share of Common Stock
under the Financial Advisor's Warrant.
(X) = the number of Shares issuable upon exercise of the Financial Advisor's
Warrant.
If the above calculation results in a negative number, then no shares of Common
Stock shall be issued or issuable upon cashless exercise of the Financial
Advisor's Warrant.
Upon any cashless exercise of the Financial Advisor's Warrant, the Financial
Advisor shall be entitled to receive a certificate for the number of shares of
Common Stock determined under this Section 4.2.
5. ISSUANCE OF CERTIFICATES. Upon the exercise of the Financial Advisor's
Warrant, the issuance of certificates for securities, properties or rights
underlying such Financial Advisor's Warrant shall be made forthwith (and in any
event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 7 and 9 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
6. TRANSFER OF FINANCIAL ADVISORS'S WARRANT. The Financial Advisor's Warrant
shall be transferable only on the books of the Company maintained at its
principal office, where its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
Financial Advisor accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration of transfer, the Company shall
execute and deliver the new Financial Advisor's Warrant to the person entitled
thereto.
7. RESTRICTION ON TRANSFER OF FINANCIAL ADVISOR'S WARRANT. The Holder of a
Financial Advisor's Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Financial Advisor's Warrant is being acquired as an
investment and not with a view to the distribution thereof, and that the
Financial Advisor's Warrant may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for the term of the Financial
Advisor's Warrant, except to officers or affiliates of the Financial Advisor or
by operation of law.
8. EXERCISE PRICE AND NUMBER OF SECURITIES. Except as otherwise provided in
Section 11 hereof, each Financial Advisor's Warrant is exercisable to purchase
one share of Common Stock at an initial exercise price equal to the Common Stock
Exercise Price. The Common Stock Exercise Price, and the number of shares for
which the Financial Advisor's Warrant may be exercised shall be the price and
the number of shares which shall result from time to time from any and all
adjustments in accordance with the provisions of Section 11 hereof.
9. REGISTRATION RIGHTS.
9.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. Each Financial Advisor's
Warrant Certificate and each certificate representing securities issuable upon
exercise of the Financial Advisor's Warrant (collectively, the "Warrant Shares")
shall bear the following legend unless (i) such Financial Advisor's Warrant or
Warrant Shares are distributed to the public pursuant to a registration
statement filed under the Securities Act of 1933, as amended (the "Act"), or
(ii) the Company has received an opinion of counsel, in form and substance
reasonably satisfactory to counsel for the Company, that such legend is
unnecessary for any such certificate:
THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933 (THE "ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY
SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THE
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE FINANCIAL ADVISOR'S WARRANT
AGREEMENT REFERRED TO HEREIN.
9.2 PIGGYBACK REGISTRATION. If, at any time the Company proposes to
register any of its securities under the Act (other than in connection with a
merger or pursuant to Form S-4 or Form S-8), it will give written notice by
registered mail, at least twenty (20) days prior to the filing of each such
registration statement, to the Holders of the Financial Advisor's Warrants
and/or the Warrant Shares of its intention to do so. If any of the Holders of
the Financial Advisor's Warrants and/or Warrant Shares notify the Company within
ten (10) days after mailing of any such notice of its or their desire to include
any such securities in such proposed registration statement, the Company shall
afford such Holders of the Financial Advisor's Warrants and/or Warrant Shares
the opportunity to have any such Financial Advisor's Warrants and/or Warrant
Shares registered under such registration statement. In the event that the
managing underwriter for said offering advises the Company in writing that in
its opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
causing a diminution in the offering price or otherwise adversely affecting the
offering, the Company will include in such registration (a) FIRST, the
securities the Company proposes to sell, (b) SECOND, the securities held by the
entities that made the demand for registration, (c) THIRD, the Financial
Advisor's Warrants and/or Warrant Shares requested to be included in such
registration which in the opinion of such underwriter can be sold, PRO RATA
among the Holders of Financial Advisor's Warrants and/or Warrant Shares on the
basis of the number of Financial Advisor's Warrants and/or Warrant Shares
requested to be registered by such Holders, and (d) FOURTH, other securities
requested to be included in such registration.
Notwithstanding the provisions of this Section 9.2, the Company shall have the
right at any time after it shall have given written notice pursuant to this
Section 9.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to the
effective date thereof.
9.3 DEMAND REGISTRATION.
(a) At any time after the Engagement Date and expiring five (5) years
after the Engagement Date, the Holders of the Financial Advisor's Warrants
and/or Warrant Shares representing a "Majority" (as hereinafter defined in
Section 9.4(k) hereof) of the Financial Advisor's Warrants and/or Warrant
Shares shall have the right (which right is in addition to the registration
rights under Section 9.2 hereof), exercisable by written notice to the
Company, to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one occasion, a registration
statement and such other documents, including a prospectus, as may be
necessary in the opinion of both counsel for the Company and counsel for
the Holders, in order to comply with the provisions of the Act, so as to
permit a public offering and sale by such Holders and any other Holders of
the Financial Advisor's Warrant and/or Warrant Shares who notify the
Company within fifteen (15) days after the Company mails notice of such
request pursuant to Section 9.3(b) hereof (collectively, the "Requesting
Holders") of their respective Warrant Shares for the earlier of (i) six (6)
consecutive months or (ii) until the sale of all of the Warrant Shares
requested to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 9.3 by any Holder or Holders
representing a Majority of the Financial Advisor's Warrants and/or Warrant
Shares to all other registered Holders of the Financial Advisor's Warrants
and the Warrant Shares within ten (10) days from the date of the receipt of
any such registration request.
(c) Intentionally Omitted.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant
Shares within the time period specified in Section 9.4(a) hereof pursuant
to the written notice specified in Section 9.3(a) of the Holders of a
Majority of the Financial Advisor's Warrants and/or Warrant Shares, the
Company, at its option, may repurchase (i) any and all Warrant Shares at
the higher of the Market Price (as defined in Section 9.3(e)) per share of
Common Stock on (x) the date of the notice sent pursuant to Section 9.3(a)
or (y) the expiration of the period specified in Section 9.4(a) and (ii)
any and all Financial Advisor's Warrant at such Market Price less the
exercise price of such Financial Advisor's Warrant. Such repurchase shall
be in immediately available funds and shall close within two (2) days after
the later of (i) the expiration of the period specified in Section 9.4(a)
or (ii) the delivery of the written notice of election specified in this
Section 9.3(d).
(e) DEFINITION OF MARKET PRICE. As used herein, the phrase "Market
Price" at any date shall mean the fair value as determined in good faith by
the Company's Board of Directors; provided, however, that where there
exists a public market for the Company's Common Stock at the time of
Financial Advisor's exercise of this conversion right, the Market Price per
share of Common Stock shall be deemed to be the last reported sale price of
the Common Stock on the trading day before the Financial Advisor's Warrant,
with attached Notice of Conversion, are duly surrendered to the Company for
conversion thereof or, in case no such reported sale takes place on such
day, the average of the last reported closing sale prices for the last
three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the average closing sale price
as furnished by the NASD through The NASDAQ Stock Market, Inc. ("NASDAQ")
or similar organization if NASDAQ is no longer-reporting such information,
or if the Common Stock is not quoted on NASDAQ, the OTC Electronic Bulletin
Board, or as determined in good faith by resolution of the Board of
Directors of the Company, based on the best information available to it.
9.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In connection
with any registration under Sections 9.2 or 9.3 hereof, the Company covenants
and agrees as follows:
(a) The Company shall use its best efforts to file a registration statement
within sixty (60) days of receipt of any demand therefor, and to have any
registration statements declared effective at the earliest possible time, and
shall furnish each Holder desiring to sell Warrant Shares such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 9.2 and 9.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses (including those of the Company)
in connection with the registration statement filed pursuant to Section 9.3(c).
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Shares included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Shares to be
sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify each of the Underwriters contained in Section 7 of the
Engagement Agreement.
(e) Intentionally Omitted
(f) Nothing contained in this Agreement shall be construed as requiring the
Holder(s) to exercise their Financial Advisor's Warrant prior to the initial
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other than
the Warrant Shares to be included in any registration statement filed pursuant
to Section 9.3 hereof, or permit any other registration statement to be or
remain effective during the effectiveness of a registration statement filed
pursuant to Section 9.3 hereof, without the prior written consent of National
Securities Corporation or as otherwise required by the terms of any existing
registration rights granted prior to the date of this Agreement by the Company
to the holders of any of the Company's securities.
(h) For purposes of this Agreement, the term "Majority" in reference to the
Financial Advisor's Warrants or Warrant Shares, shall mean in excess of 50,000
of the then outstanding Financial Advisor's Warrants or Warrant Shares.
10. OBLIGATIONS OF HOLDERS. It shall be a condition precedent to the obligations
of the Company to take any action pursuant to SECTION 9 hereof that each of the
selling Holders shall:
(a) Furnish to the Company such information regarding themselves, the
Warrant Shares held by them, the intended method of sale or other disposition of
such securities, the identity of and compensation to be paid to any underwriters
proposed to be employed in connection with such sale or other disposition, and
such other information as may reasonably be required to effect the registration
of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus relating to the
Warrant Shares covered by a registration statement is required to be delivered
under the Act, of the happening of any event with respect to such selling Holder
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(c) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Engagement
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
11. ADJUSTMENTS TO COMMON STOCK EXERCISE PRICE. The Common Stock Exercise Price
in effect at any time shall be subject to adjustment from time to time only upon
the happening of the following events:
11.1 STOCK DIVIDEND, SUBDIVISION AND COMBINATION. In case the Company shall
(i) declare a dividend or make a distribution on its outstanding shares of
Common Stock in shares of Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Common Stock Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that it shall
equal the price determined by multiplying the Common Stock Exercise Price by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action. Such adjustment shall be made successively whenever any event listed
above shall occur.
11.2 DILUTIVE ISSUANCES. In the event the Company issues any shares of
Common Stock (or Common Stock equivalents) during the period from February 12,
2003 until a Financial Advisor's Warrant is exercised, the Company shall compute
the weighted average issuance price for all issuances during the period, and, if
the weighted average issuance price shall be less than $3.10, then the Common
Stock Exercise Price shall, for that exercise, be equal to the weighted average
issuance price for the period.
11.3 Intentionally Omitted
11.4 DEFINITION OF COMMON STOCK. For the purpose of this Agreement, the
term "Common Stock" shall mean (i) the class of stock designated as Common Stock
in the Articles of Incorporation of the Company as amended as of the date
hereof, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
11.5 MERGER OR CONSOLIDATION. In case of any consolidation of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding Common Stock), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of each Financial Advisor's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Financial Advisor's Warrant) to receive, upon exercise of
such Financial Advisor's Warrant, the kind and amount of shares of stock and
other securities and property receivable upon such consolidation or merger by a
holder of the number of shares of Common Stock for which such Financial
Advisor's Warrant might have been exercised immediately prior to such
consolidation or merger. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in this Section
11. The above provision of this subsection shall similarly apply to successive
consolidations or mergers.
11.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No adjustment of the
Common Stock Exercise Price shall be made:
(a) Upon the issuance or sale of the Financial Advisor's Warrant or
the Warrant Shares;
(b) Upon the issuance or sale of Common Stock (or any other Common
Stock equivalent) upon the direct or indirect conversion, exercise, or
exchange of any options, rights, warrants, or other securities or
indebtedness of the Company outstanding as of the date of this Agreement or
granted pursuant to any stock option plan of the Company in existence as of
the date of this Agreement, pursuant to the terms thereof; or
(c) If the amount of said adjustment shall be less than two cents
($0.02) per share, provided, however, that in such case any adjustment that
would otherwise be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall
amount to at least two cents ($0.02) per Financial Advisor's Warrant.
12. EXCHANGE AND REPLACEMENT OF FINANCIAL ADVISOR'S WARRANT CERTIFICATES. Each
Financial Advisor's Warrant Certificate is exchangeable, without expense, upon
the surrender thereof by the registered Holder at the principal executive office
of the Company for a new Financial Advisor's Warrant Certificate of like tenor
and date representing in the aggregate the right to purchase the same number of
Warrant Shares in such denominations as shall be designated by the Holder
thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of any Financial Advisor's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Financial Advisor's Warrant, if mutilated, the Company will make and deliver
a new Warrant Certificate of like tenor, in lieu thereof.
13. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to
issue certificates representing fractions of shares of Common Stock upon the
exercise of the Financial Advisor's Warrant, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
14. RESERVATION AND LISTING OF SECURITIES. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Financial Advisor's
Warrant, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. The Company will keep
a copy of this Agreement on file with every Transfer Agent for the Common Stock
and other securities of the Company issuable upon the exercise of the Financial
Advisor's Warrant. The Company will supply every such Transfer Agent with duly
executed stock and other certificates, as appropriate, for such purpose. The
Company covenants and agrees that, upon exercise of the Financial Advisor's
Warrant and payment of the Common Stock Exercise Price therefor, all shares of
Common Stock and other securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Financial Advisor's Warrant shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Financial Advisor's Warrant to be
listed (subject to official notice of issuance) on all securities exchanges on
which the Common Stock issued to the public in connection herewith may then be
listed and/or quoted on Nasdaq or the OTC Electronic Bulletin Board.
15. NOTICES TO FINANCIAL ADVISOR'S WARRANT HOLDERS. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Financial Advisor's Warrants and their exercise,
any of the following event shall occur:
(a) the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially all
of its property, assets and business as an entirety shall be proposed; then in
any one or more of said events, the Company shall give written notice of such
event at least fifteen (15) days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
16. NOTICES. All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made and sent when
delivered, mailed by registered or certified mail, return receipt requested, or
received via facsimile:
(a) if to the registered Holder of the Financial Advisor's Warrant, to the
address of such Holder as shown on the books of the Company; or
(b) if to the Company, to the address set forth in SECTION 4 hereof or to
such other address as the Company may designate by notice to the Holders.
17. SUPPLEMENTS; AMENDMENTS; ENTIRE AGREEMENT. This Agreement (including the
Engagement Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought. The Company and the Financial Advisor may from time to time
supplement or amend this Agreement without the approval of any holders of
Financial Advisor's Warrant Certificates (other than the Financial Advisor) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Financial Advisor may deem necessary or desirable and
which the Company and the Financial Advisor deem shall not adversely affect the
interests of the Holders of Financial Advisor's Warrant Certificates.
18. SUCCESSORS. All of the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
19. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements in any schedule,
exhibit or certificate or other instrument delivered by or on behalf of the
parties hereto, or in connection with the transactions contemplated by this
Agreement, shall be deemed to be representations and warranties hereunder.
Notwithstanding any investigations made by or on behalf of the parties to this
Agreement, all representations, warranties and agreements made by the parties to
this Agreement or pursuant hereto shall survive.
20. GOVERNING LAW. This Agreement and each Financial Advisor's Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
21. SEVERABILITY. If any provision of this Agreement shall be held to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
22. CAPTIONS. The caption headings of the Sections of this Agreement are for
convenience of reference only and are not intended, nor should they be construed
as, a part of this Agreement and shall be given no substantive effect.
23. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to
give to any person or corporation other than the Company and the Financial
Advisor and any other registered Holder(s) of the Financial Advisor's Warrant
Certificates or Warrant Shares any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole and exclusive
benefit of the Company and the Underwriters and any other Holder(s) of the
Financial Advisor's Warrant Certificates or Warrant Shares.
24. COUNTERPARTS. This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
ATTEST: THE LEATHER FACTORY, INC.
By: /s/ Ronald C. Morgan By: /s/ Shannon L. Greene
------------------------ -------------------------
Name: Mr. Ronald Morgan Name: Ms. Shannon Greene
Title: President Title: CFO
WESTMINSTER SECURITIES CORPORATION
By: /s/ John O'Shea
-----------------
Name: John O'Shea
Title: President
***********
22
EXHIBIT A
[FORM OF FINANCIAL ADVISOR'S WARRANT CERTIFICATE]
THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE
OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 (THE "ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT
(OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY
TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE FINANCIAL ADVISOR'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE FINANCIAL ADVISOR'S WARRANT
AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME BEFORE FEBRUARY 12, 2008
Financial Advisor's Warrant No.
Issuable for
100,000 Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that Westminster Securities Corporation,
a New York corporation, is the registered holder of Warrants to purchase
initially at any time from February 12, 2003 until 5:00 p.m., New York time on,
February 12, 2008 ("Expiration Date"), up to 100,000 shares of Common Stock, no
par value per share, of the Company (the "Common Stock"), at an exercise price
of $3.10 per share (the "Common Stock Exercise Price"), upon surrender of this
Financial Advisor's Warrant Certificate and payment of the Common Stock Exercise
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the Financial Advisor's Warrant Agreement dated as of
February 12, 2003 among the Company and Westminster Securities Corporation (the
"Warrant Agreement"). Payment of the Exercise Price shall be made either by
certified or official bank check in New York Clearing House funds payable to the
order of the Company or by surrender of the Financial Advisor's Warrant as
provided in the Warrant Agreement.
No Warrant may be exercised after 5:00 p.m., New York time, on the Expiration
Date, at which time all Financial Advisor's Warrant evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Financial Advisor's Warrant evidenced by this Warrant Certificate is part of
a duly authorized issue of Financial Advisor's Warrants issued pursuant to the
Warrant Agreement, which Warrant Agreement is hereby incorporated by reference
in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Financial
Advisor's Warrant.
The Warrant Agreement provides that upon the occurrence of certain events the
Exercise Price and the type and/or number of the Company's securities issuable
thereupon may, subject to certain conditions, be adjusted. In such event, the
Company will, at the request of the holder, issue a new Warrant Certificate
evidencing the adjustment in the Exercise Price and the number and/or type of
securities issuable upon the exercise of the Financial Advisor's Warrant;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant Certificate at
an office or agency of the Company, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Financial Advisor's Warrant shall be issued to the transferees in exchange for
this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Financial Advisor's Warrant evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such unexercised Financial Advisor's
Warrant.
In addition to the right of exercise, the holder shall have the right to make a
cashless exercise of this Warrant Certificate (in whole but not in part) by the
surrender of this Warrant Certificate (with the attached Form of Election to
Convert) at the office of the Company at any time during the duration of this
Warrant, into shares of Common Stock, as provided in the Warrant Agreement.
The Company may deem and treat the registered holder(s) hereof as the absolute
owner(s) of this Warrant Certificate (notwithstanding any notation of ownership
or other writing hereon made by anyone), for the purpose of any exercise hereof,
and of any distribution to the holder(s) hereof, and for all other purposes, and
the Company shall not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
This Warrant Certificate does not entitle any holder thereof to any of the
rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed.
Dated as of February 27, 2003.
ATTEST: THE LEATHER FACTORY, INC.
By:___________________________ By:_______________________________
Name: Name: Ms. Shannon Greene
Title: Title: CFO
23
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 4.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ shares of Common
Stock, and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of The
Leather Factory, Inc. (the "Company") in the amount of $_________, all in
accordance with the terms of Section 4.1 of the Financial Advisor's Warrant
Agreement dated as of February 12, 2003 among the Company and Westminster
Securities Corporation. The undersigned requests that a certificate for such
securities be registered in the name of ____________________, whose address is
__________________ and that such certificate to be delivered
to____________________ whose address is _______________________, and if said
number of shares shall not be all the shares purchasable hereunder, that a new
Warrant Certificate for the balance of the shares purchasable under the within
Warrant Certificate be registered in the name of the undersigned warrant holder
or his assignee as below indicated and delivered to the address stated below.
Dated:_____________________________
Signature:____________________________
(Signature must conform in all
respects to name of holder as specified
on the face of the Warrant Certificate.)
Address: ______________________________
______________________________
______________________________________
(Insert Social Security or Other Identifying
Number of Holder)
24
[FORM OF ASSIGNMENT]
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE
WARRANT CERTIFICATE.)
FOR VALUE RECEIVED ________________ hereby sells, assigns and transfers unto
(NAME OF TRANSFEREE) this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
________________, attorney, to transfer the within Warrant Certificate on the
books of the within-named Company, with full power of substitution.
Dated:_____________________
Signature:______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
Address: ______________________________
______________________________
______________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guaranteed:________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
25
[FORM OF ELECTION TO MAKE CASHLESS EXERCISE PURSUANT TO SECTION 4.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to exercise this Warrant Certificate
for ________ shares of Common Stock (assuming a Market Price calculated on the
basis of the last sale price for Common Stock on _________________, (the trading
day immediately preceding surrender of the Warrant Certificate and this Form of
Election to Make Cashless Exercise) of $_________), all in accordance with
Section 4.2 of the Financial Advisor's Warrant Agreement dated as of
February 12, 2003 between the Company and Westminster Securities Corporation.
The undersigned requests that a certificate for such securities be registered in
the name of ________________________, whose address is ________________________
and ________________________(attach separate sheet if necessary).
Dated:________________________
Signature:_____________________________
(Signature must conform in all
respects to name of holder as specified
on the face of the Warrant Certificate.)
Address:_______________________________
_______________________________
______________________________________
(Insert Social Security or Other Identifying
Number of Holder)
26
EXHIBIT 4.2
WESTMINSTER SECURITIES CORPORATION
MEMBER NEW YORK STOCK EXCHANGE
------------------------------
February 12, 2003
Ms. Shannon L. Greene
Chief Financial Officer
The Leather Factory, Inc.
3827 East Loop 820 South
Fort Worth, TX 76119
RE: CAPITAL MARKETS SERVICES ENGAGEMENT AGREEMENT
Dear Shannon,
This agreement ("Agreement") is made and entered into this 12th day of February,
2003 between The Leather Factory, Inc., a Delaware corporation (the "Company"),
and Westminster Securities Corporation, a registered broker/dealer
("Westminster"). Pursuant to this Agreement, Westminster will provide services
to the Company as set forth below:
1. PURPOSE
- -----------
Based on the terms set forth in this Agreement, the Company hereby retains
Westminster on an exclusive basis during the Engagement Period (as defined
herein) to provide various capital markets services as set forth herein. It is
understood and acknowledged by the parties that the value of Westminster's
advice is not measurable in any quantitative manner, and that Westminster shall
not be obligated to spend any specific amount of time performing duties
hereunder.
2. ENGAGEMENT PERIOD
- ----------------------
This Agreement shall commence on March 1, 2003 and terminate on February 29,
2004 (the "Engagement Period") unless extended by mutual written agreement of
Westminster and the Company or earlier terminated as provided for in sections 12
or 15 (b) hereof.
3. SERVICES
- ------------
Westminster may assist the Company by performing the various capital markets
services ("Capital Markets Services or Services") that are listed below. In
connection with Westminster providing such capital markets services to the
Company, the Company shall provide Westminster with any information that
Westminster deems appropriate. The Company hereby acknowledges that Westminster
will be using and relying on said information without independent verification
and that Westminster assumes no responsibility for the accuracy and completeness
of any information provided to it by the Company. In performance of these
duties, Westminster shall provide the Company with the benefits of its
commercially reasonable judgement and efforts.
A. SERVICES
------------
Westminster will provide the Company with the following Capital Markets
Services:
(a) Corporate Finance Advisory Services;
(1) Advise on financial forecasting model(s);
(2) Provide sponsorship to investors;
(3) Advise on investor communications and presentations;
(4) Advise on shareholder value strategy; and
(5) Advise on shareholder base and distribution
(b) Research Services - Publish and distribute research covering Company's
publicly-traded common shares. (All Investment Recommendations, Risk Ratings and
Target Prices included in such coverage to be determined solely by Westminster
Equity Research department.)
(c) Sales and Trading Services;
(1) Advise and assist with exchange specialist;
(2) Advise on and develop institutional sales;
(3) Provide institutional research sales calls;
(4) Advise and assist on shareholder data base information
and management;
(5) Advise and assist in block share transactions and
redistributions; and
(6) Advise and assist in restricted stock and ESOP matters
B. COMPENSATION
----------------
Upon execution of this Agreement, the Company shall pay Westminster and
initial retainer fee of $6000.00 and the following monthly fees on or before the
15th day of each month during the Engagement Period. Should a sale, merger or
other business combination of the Company occur, all sums shall be immediately
due and payable. Payment of engagement fees shall be as follows:
(1) Capital Markets Advisory Services - During the Engagement period,
the Company shall pay Westminster $4000 on the 15th of each month commencing
March, 2003
(2) Additionally, the Company shall issue Westminster warrants ("Warrants")
to purchase 100,000 shares of common stock of the Company which shall be
exercisable for a period of five years at an exercise price of $ 3.10 per share.
The Warrants shall contain customary terms, including, but not limited to,
demand and piggyback registration rights, anti-dilution and a cashless exercise
price.
The Company agrees to pay Westminster additional fees for any and all services
performed by Westminster at the request of the Company that are not specifically
included in the engagement as provided for in Section 3 of this Agreement. Such
additional fees shall be customary and mutually agreeable and shall be paid in
full by the Company on or before the 1st day of each month after which the
Company receives an invoice from Westminster.
4. ADDITIONAL SERVICES
- ------------------------
Should the Company desire Westminster to provide any service(s) not listed
above, the Company agrees to pay Westminster additional fees for any and all
Services performed by Westminster that are not specifically included in the
Engagement as provided for in Section 3 of this Agreement. Under the terms of
this Agreement, the Company and Westminster shall enter into an additional
engagement letter to be executed by the parties hereto at the commencement of
the additional service(s) to be rendered by Westminster
Such additional fees shall be customary and mutually agreeable and shall be
paid in full by the Company on or before the 1st day of each month after which
the Company receives an invoice from Westminster.
5. WESTMINSTER'S RIGHTS TO PARTICIPATE IN FUTURE OFFERINGS OF THE COMPANY.
- -----------------------------------------------------------------------------
The Company hereby grants to Westminster a right of first refusal to act as
placement agent or managing underwriter, as appropriate, during this engagement
and in any subsequent private placement or public offering of the Company's
securities for a period of twelve months (12) following the termination of the
Engagement Period. Westminster shall not be obligated to act as placement agent
or managing underwriter with respect to any such transaction. Any such
subsequent public offering or private placement shall be subject to an
additional engagement agreement executed by the parties hereto at the
commencement of services to be provided by Westminster.
6. MERGER/ACQUISITION SERVICES.
- ----------------------------------
During the Engagement Period, Westminster shall have the right of first refusal
to provide merger/acquisition advisory services to the Company. Westminster's
role and specific compensation with respect to the Company's consummation of an
acquisition of assets, merger or other similar business combination with
another business (a "Business Combination") or in assisting in an arrangement in
a different form than as set forth herein, such as contracts, licensing,
ventures or other business transaction (Business Transactions") during the
Engagement Period shall be set forth in an additional engagement letter to be
executed by the parties hereto at the commencement of services rendered by
Westminster for the Business Combination or Business Transaction. If the Company
consummates a Business Combination or Business Transaction during the Engagement
Period, then Westminster shall receive mutually agreed upon fees and other forms
of compensation as are customarily received by investment bankers in similar
transactions. This may include fees for such Business Combination, Business
Transactions, financing fees and/or fees for fairness opinion.
7. EXPENSES.
- -------------
The Company shall reimburse Westminster for any and all reasonable out-of-pocket
expenses incurred in connection with services provided to the Company under this
Agreement including, but not limited to travel, legal fees, printing, and other
expenses, incurred in connection with Westminster's providing the services
stated or contemplated herein. Westminster will not bear any of the Company's
legal, accounting, printing or other expenses in connection with any transaction
considered or consummated hereby. It also is understood that neither
Westminster, nor the directors, employees and agents of Westminster, will be
responsible for any fees or commissions payable to any finder or to any other
financial or other advisor utilized or retained by the Company. With the
exception of out of pocket expenses, Westminster shall obtain prior approval
from the Company. All expenses billed by Westminster to the Company will be
invoice to the Company and reimbursed on a monthly basis within ten days of
receipt. Upon execution of this Agreement, the Company will deposit $2000.00
with Westminster as a deposit for out of pocket expenses.
8. RELATIONSHIPS WITH OTHERS; CONFIDENTIAL INFORMATION.
- ------------------------------------------------------------
Westminster may utilize the fact of its engagement hereunder in a normal
tombstone advertising, news release or in accordance with standard industry
practice.
The Company acknowledges that Westminster or its affiliates are in the business
of providing investment banking, financial advisory and consulting services to
others. Nothing contained herein shall be construed to limit or restrict
Westminster in conducting such business with respect to others, or in rendering
such advice to others. In connection with the rendering of services hereunder,
Westminster has been or will be furnished with confidential information
concerning the Company including, but not limited to, financial statements and
information, cost and expense data, production data, trade secrets, marketing
and customer data, and such other information not generally obtained from public
or published information or trade sources. Such information shall be deemed
"Confidential Material" and, except as specifically provided herein, shall not
be disclosed by Westminster (except as used by Westminster to perform services
as contemplated by this Agreement) without prior written consent of the Company.
In the event it is required by applicable law or legal process to disclose any
of the Confidential Material, it is agreed that Westminster will deliver to the
Company prompt notice of such requirement prior to disclosure of same so as to
permit the Company an opportunity to seek an appropriate protective order and/or
waive compliance of this provision. If, in the absence of a protective order or
receipt of written waiver, Westminster is nonetheless, in the written opinion of
its counsel, compelled to disclose any Confidential Material, Westminster may do
so without liability hereunder provided that notice of such prospective
disclosure is delivered to the Company prior to actual disclosure. Following
the termination of this Agreement and a written request by the Company,
Westminster shall deliver to the Company all Confidential Material. This Section
shall survive the termination of this Agreement.
9. LIMITATION UPON THE USE OF ADVICE AND SERVICES.
- ----------------------------------------------------------
(a) The Company acknowledges that the advice (written or oral) rendered
by Westminster pursuant to this Agreement is intended solely for the benefit and
use of the Company in considering the matters to which this agreement relates,
and the Company agrees that such advice shall not be disclosed publicly or made
available to third parties without the prior written consent of Westminster.
Westminster may utilize the fact of its engagement hereunder in its normal
tombstone advertising or in accordance with standard industry practice. No
person or entity, other than the Company or any of its subsidiaries or directors
or officers of each of the foregoing, shall be entitled to make use of or rely
upon the advice Westminster to be given hereunder, and the Company shall not
transmit such advice to, or encourage or facilitate the use or reliance upon
such advice by others without the prior consent of Westminster.
(b) Research reports that may be prepared by research analysts at
Westminster will, when and if prepared, be done solely on the merits or judgment
of the research analysts of Westminster including but not limited to ratings,
price targets or other views expressed by the research analyst.
(c) Company hereby acknowledges that Westminster, for services rendered
under this Agreement, makes no commitment whatsoever to make a market in any of
the Company's securities on any stock exchange or in any electronic marketplace.
Any decision by Westminster to make a market in any of the Company's securities
shall be based solely on the independent judgment of Westminster's management,
employees, and agents.
(d) Use of the Westminster's name in annual reports or any other report of
the Company or releases by the Company must have the prior written approval of
Westminster unless the Company is required by law to include Westminster's name
in such annual reports, other report or release of the Company, in which event
Westminster will be furnished with copies of such annual reports or other
reports or releases using Westminster's name in advance of publication by the
Company, its affiliates or assigns.
10. LIMITATION OF LIABILITY.
- -------------------------------
In the absence of gross negligence or willful misconduct on the part of
Westminster, Westminster shall not be liable to the Company or to any officer,
director, employee, agent, representative, stockholder or creditor of the
Company for any action or omission of Westminster or any of its officers,
directors, employees, agents, representatives or stockholders in the course of,
or in connection with, rendering or performing any services contemplated hereby.
11. INDEMNIFICATION.
- ----------------------
The Company agrees to indemnify Westminster in accordance with the provisions of
Annex A hereto, which is incorporated by reference and made a part hereof.
12. TERMINATION.
- -----------------
This Engagement Letter may be terminated at any time during the Engagement
Period by Westminster upon five (5) days prior written notice to the Company, in
the event that Westminster becomes aware of (i) any change in the business or
operations of the Company which Westminster reasonably believes may adversely
affect Westminster's ability to render the services contemplated hereunder, (ii)
any misrepresentation by the Company with respect to its business operations,
assets, condition (financial or otherwise), results of operations or prospects
of the Company, or (iii) any breach by the Company of its obligations under this
Agreement.
Unless otherwise provided for herein, in the event of termination (i) this
Agreement shall become void, without liability on the part of Westminster or its
affiliates, directors, officers or stockholders, (ii) Westminster shall be
entitled to retain or receive compensation for services it has rendered,
including payment for expenses it has incurred up to the date of such
termination, or (iii) the Company's indemnification of Westminster pursuant to
Annex A shall remain in full force and effect.
13. DISCRETION.
- -----------------
Nothing contained herein shall require the Company to enter into any transaction
presented to it by Westminster, which decision shall be at the Company's sole
discretion.
14. SEVERABILITY.
- ------------------
Any term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
15. MISCELLANEOUS.
- -------------------
(a) Any notice or communication between parties hereto shall be
sufficiently given if sent by certified or registered mail, postage prepaid, or
faxed and confirmed if to the Company, addressed to it at 3827 East Loop 820
South, Fort Worth, TX 76119 or if to Westminster, addressed to it at Westminster
Securities Corporation, 100 Wall Street, 7th Floor, New York, NY 10005. Such
notice or other communication shall be deemed to be given on the date of
receipt.
(b) If Westminster shall cease to do business, the provisions hereof
relating to duties of Westminster and compensation by the Company as it applies
to Westminster shall thereupon cease to be in effect, except for the Company's
obligation of payment for services rendered prior thereto. This Agreement shall
survive any merger of, acquisition of, or acquisition by Westminster and after
any such merger or acquisition shall be binding upon the Company and the entity
surviving such merger, acquisition or similar transaction.
(c) This Agreement embodies the entire agreement and understanding between
the Company and Westminster and supersedes any and all negotiations, prior
discussions and preliminary and prior agreements and understandings related to
the subject matter hereof, and may be modified only by a written instrument duly
executed by each party.
(d) This Agreement has been duly authorized, executed and delivered by and
on behalf of the Company and Westminster.
(e) This Agreement shall be deemed made in New York. This Agreement and all
controversies arising from or relating to performance under this Agreement shall
be governed by and construed in accordance with the laws of the State of New
York, without giving effect to such state's rules concerning conflicts of law.
The Company hereby irrevocably consents to personal jurisdiction and venue
in any court of the State of New York or any Federal court sitting in the County
of New York for the purposes of any suit, action or other proceeding arising our
of this Agreement or any of the agreements or transactions contemplated hereby,
which is brought by or against the Company, and hereby agrees that all claims in
respect of any such suit, action or proceeding shall be heard and determined in
any such court. The Company hereby irrevocably consents to the service of
process of any of the aforementioned courts in any such suit, action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to the Company at its address set forth above, such service to
become effective ten (10) days after such mailing. Each of the Company (on its
own behalf and, to the extent permitted by applicable law, on behalf of its
shareholders) and Westminster hereby waive any right to trial by jury with
respect to any claim, proceeding, counterclaim or action arising out of this
Agreement then the prevailing party in such action or proceeding, whether or not
the action or proceeding proceeds to final judgment.
(f) There is no relationship of partnership, agency, employment, franchise
or joint venture between the parties. Neither party has the authority to bind
the other or incur any obligation on its behalf.
(g) The Company hereby acknowledges that Westminster is not a fiduciary of
the Company and that Westminster makes no representations or warranties
regarding Company's ability to secure financing, whether now or in the future.
(h) This Agreement and the rights hereunder may not be assigned by either
party (except by operation of law) and shall be binding upon and inure to the
benefit of the parties and their respective permitted successors, assigns and
legal representatives.
(i) No waiver, amendment or other modification of this Agreement shall be
effective unless in writing and signed by both parties. This Agreement may be
executed in counterparts, each of which together shall be considered a single
document.
(j) All amounts payable to Westminster by the Company hereunder which are
not paid with thirty (30) days of the dates payable shall accrue interest at a
rate of twelve (12%) per annum from the date due until paid.
If you are in agreement with the foregoing, please execute and return one copy
of this letter of intent to Westminster, along with a check or wire transfer
made payable to Westminster Securities Corporation in the amount of $12,000.00
in accordance with paragraphs three and seven above.
Sincerely,
WESTMINSTER SECURITIES CORPORATION
By: /s/ John O'Shea
-------------------
Name: John O'Shea
Title: President
By: /s/ Samuel M. Chase Jr.
-----------------------------
Name: Samuel M. Chase Jr.
Title: Managing Director
Agreed to and accepted this 13th day of February 2003.
THE LEATHER FACTORY, INC.
By: /s/ Shannon L. Greene
------------------------
Name: Ms. Shannon Greene
Title: Chief Financial Officer
27
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Leather Factory,
Inc. for the quarter ended March 31, 2003 as filed with the United States
Securities and Exchange Commission on the date hereof (the "Report"), Wray
Thompson, as Chairman and Chief Executive Officer, and Shannon L. Greene, as
Treasurer and Chief Financial Officer, each hereby certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
i. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
ii. The information contained in the Report fully presents, in all material
respects, the financial condition and results of operations of the Company.
May 13, 2003 By: /s/ Wray Thompson
-------------------
WRAY THOMPSON
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
May 13, 2003 By: /s/ Shannon L. Greene
------------------------
SHANNON L. GREENE
CHIEF FINANCIAL OFFICER AND TREASURER