Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
-------------------- -----------------
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3847 East Loop 820 South, Ft. Worth, Texas 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares outstanding as of August 14, 2000
- ------------------------------ ----------------------------------------
Common Stock, par value $.0024 9,873,161
per share
1
Forward-Looking Statements
--------------------------
The disclosures in this report contain forward-looking statements and
projections of management. There are certain important factors which could cause
results to differ materially than those anticipated by some of the
forward-looking statements. These factors are detailed from time to time in
TLF's reports filed with the Securities and Exchange Commission. See the
Company's 1999 Annual Report on Form 10-K for the most recent discussion of
these factors.
2
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 ................................. 4
Consolidated Statements of Income
Three and six months ended June 30, 2000 and 1999.................... 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999.............................. 6
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 2000 and 1999.............................. 7
Notes to Consolidated Financial Statements............................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Item 6. Exhibits and Reports on Form 8-K............................... 12
SIGNATURES................................................................ 13
EXHIBIT INDEX............................................................. 14
3
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 320,232 $ 134,465
Cash restricted for payment on revolving credit facility 273,764 317,904
Accounts receivable-trade, net of allowance for doubtful accounts
of $71,000 and $177,000 in 2000 and 1999, respectively 2,363,899 2,292,645
Inventory 8,480,597 8,807,963
Deferred income taxes 114,185 160,165
Other current assets 615,658 533,841
------------ ------------
Total current assets 12,168,335 12,246,983
------------ ------------
PROPERTY AND EQUIPMENT, at cost 3,210,600 3,143,594
Less-accumulated depreciation and amortization (2,333,920) (2,160,336)
------------ ------------
Property and equipment, net 876,680 983,258
GOODWILL, net of accumulated amortization of $1,262,000
and $1,160,000 in 2000 and 1999, respectively 4,660,999 4,767,885
OTHER INTANGIBLES, net of accumulated amortization of
$74,000 and $45,000, in 2000 and 1999, respectively 161,951 191,048
OTHER assets 31,144 31,601
------------ ------------
$ 17,899,109 $ 18,220,775
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,949,989 $ 1,805,918
Accrued expenses and other liabilities 924,018 978,969
Income taxes payable 130,740 474,262
Notes payable and current maturities of long-term debt 5,166,668 6,061,735
------------ ------------
Total current liabilities 8,171,415 9,320,884
------------ ------------
DEFERRED INCOME TAXES 83,037 97,780
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 73,813 121,686
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, 9,873,161 and 9,853,161 shares issued
and outstanding at 2000 and 1999, respectively 23,696 23,648
Paid-in capital 3,911,692 3,901,740
Retained earnings 5,807,770 4,930,434
Less: Notes receivable - secured by common stock (147,540) (153,416)
Accumulated other comprehensive loss (24,774) (21,981)
------------ ------------
Total stockholders' equity 9,570,844 8,680,425
------------ ------------
$ 17,899,109 $ 18,220,775
============ ============
The accompanying notes are an integral part of these financial statements.
4
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE and SIX MONTHS ENDED JUNE 30, 2000 and 1999
THREE MONTHS SIX MONTHS
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET SALES $ 7,602,405 $ 6,539,950 $ 15,007,962 $ 12,052,950
COST OF SALES 3,801,372 3,726,181 7,636,338 6,880,292
------------ ------------ ------------ ------------
Gross profit 3,801,033 2,813,769 7,371,624 5,172,658
OPERATING EXPENSES 2,818,907 2,584,039 5,597,296 4,822,555
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 982,126 229,730 1,774,328 350,103
OTHER EXPENSE:
Interest expense 144,905 168,027 314,100 397,894
Other, net 10,864 (15,063) 16,206 (14,381)
------------ ------------ ------------ ------------
Total other expense 155,769 152,964 330,306 383,513
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 826,357 76,766 1,444,022 (33,410)
PROVISION FOR INCOME TAXES 332,963 70,058 566,686 52,073
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 493,394 $ 6,708 $ 877,336 $ (85,483)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - Basic $ 0.05 $ -- $ 0.09 $ (0.01)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE--Assuming Dilution $ 0.05 $ -- $ 0.09 $ (0.01)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 and 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 877,336 $ (85,483)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation & amortization 300,974 271,815
Deferred financing costs 8,594 125,882
Deferred income taxes 31,237 (16,034)
Other (2,793) (142)
Net changes in assets and liabilities:
Accounts receivable-trade, net (71,253) (232,714)
Inventory 327,365 (366,899)
Income taxes (343,522) 137,660
Other current assets (81,817) (293,032)
Accounts payable 144,071 541,341
Accrued expenses and other liabilities (54,951) 78,381
----------- -----------
Total adjustments 257,905 246,258
----------- -----------
Net cash provided by operating activities 1,135,241 160,775
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (67,006) (393,251)
Other intangible costs 457 (8,174)
----------- -----------
Net cash used in investing activities (66,549) (401,425)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (747,872) 228,628
Proceeds from notes payable and long-term debt -- 217,494
Payments on notes payable and long-term debt (195,068) (226,268)
Decrease in cash restricted for payment on revolving credit facility 44,139 (187,793)
Payments received on notes secured by common stock 5,876 20,565
Proceeds from issuance of common stock 10,000 --
----------- -----------
Net cash (used in) provided by financing activities (882,925) 52,626
----------- -----------
NET INCREASE (DECREASE) IN CASH 185,767 (188,024)
CASH, beginning of period 134,465 510,399
----------- -----------
CASH, end of period $ 320,232 $ 322,375
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 311,348 $ 335,139
Income taxes paid during the period, net of (refunds) 878,623 (69,076)
The accompanying notes are an integral part of these financial statements.
6
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 and 1999
Common Stock Notes Accumulated
-------------------- receivable Other
Number Par Paid-in Retained - secured by Cumulative Comprehensive
Of shares value capital earnings common stock Loss Total Income (Loss)
----------- ------- ----------- ----------- ------------ ----------- ----------- -------------
BALANCE, December 31, 1998 9,853,161 $23,648 $ 3,901,740 $ 4,495,378 $ (224,750) $ (25,738) 8,170,278
Payments on notes receivable
- secured by common stock - - - - 20,565 - 20,565
Net Loss - - - (85,483) - - (85,483) (85,483)
Translation adjustment - - - - - (142) (142) (142)
----------- ------- ----------- ----------- ------------ ----------- -----------
BALANCE, June 30, 1999 9,853,161 $23,648 $ 3,901,740 $ 4,409,895 $ (204,185) $ (25,880) $ 8,105,218
=========== ======= =========== =========== ============ =========== ===========
-------------
Comprehensive loss for the six months ended June 30, 1999 $ (85,625)
=============
BALANCE, December 31, 1999 9,853,161 $23,648 $ 3,901,740 $ 4,930,434 $ (153,416) $ (21,981) 8,680,425
Payments on notes receivable
- secured by common stock - - - - 5,876 - 5,876
Shares issued - employee
Stock options exercised 20,000 48 9,952 - - - 10,000
Net Income - - - 877,336 - - 877,336 877,336
Translation adjustment - - - - - (2,793) (2,793) (2,793)
----------- ------- ----------- ----------- ------------ ----------- -----------
BALANCE, June 30, 2000 9,873,161 $23,696 $ 3,911,692 $ 5,807,770 $ (147,540) $ (24,774) $ 9,570,844
=========== ======= =========== =========== ============ =========== ===========
-------------
Comprehensive income for the six months ended June 30, 2000 $ 874,543
=============
The accompanying notes are an integral part of these financial statements.
7
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly its financial position as of June 30,
2000 and December 31, 1999, and the results of operations and cash flows for the
three and six month periods ended June 30, 2000 and 1999. The results of
operations for the three and six month periods are not necessarily indicative of
the results to be expected for the full fiscal year. The consolidated financial
statements should be read in conjunction with the financial statements and
disclosures contained in the Company's 1999 Annual Report on Form 10-K ("Annual
Report").
2. INVENTORY
The components of inventory consist of the following:
As of
---------------------------
June 30, December 31,
2000 1999
----------- -----------
Finished goods held for sale $ 7,389,640 $ 7,629,995
Raw materials and work in process 1,090,957 1,177,968
----------- -----------
$ 8,480,597 $ 8,807,963
=========== ===========
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- ------------
Numerator:
Net income (loss) $ 493,394 $ 6,708 $ 877,336 $ (85,483)
-------------- -------------- -------------- ------------
Numerator for basic and diluted earnings per share 493,394 6,708 877,366 (85,483)
Denominator:
Weighted-average shares outstanding-basic 9,873,161 9,853,161 9,866,458 9,853,161
Effect of dilutive securities:
Stock options 138,192 27,179 123,114 13,590
Warrants 176,074 - 168,145 -
-------------- -------------- -------------- ------------
Dilutive potential common shares 314,266 27,179 291,259 13,590
Denominator for diluted earnings per share-
weighted-average shares 10,187,427 9,880,340 10,157,717 9,866,751
============== ============== ============== ============
Basic earnings per share $ 0.05 $ - $ 0.09 $ (0.01)
============== ============== ============== ============
Diluted earnings per share $ 0.05 $ - $ 0.09 $ (0.01)
============== ============== ============== ============
Unexercised stock options owned by certain employees and directors to purchase
6,000 and 385,000 shares of common stock as of June 30, 2000 and 1999,
respectively, were not included in the computations of diluted earnings per
share ("EPS") because the options' exercise prices were greater than or equal to
the average market price of the common stock during the respective periods.
8
Warrants (see note 9 to consolidated financial statements in the Annual Report)
to acquire 100,000 shares of common stock were not included in the computations
of diluted EPS during the quarter ended June 30, 1999 because the exercise price
was greater than the average market price of the common stock.
The 13% convertible debt (see note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted earnings per share
at June 30, 1999 because the interest cost (net of tax) per assumed converted
share was more than basic earnings per share and, therefore, the effect would be
antidilutive.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
- -------
The Leather Factory, Inc. (the "Company") is the premier distributor of leather
and leathercraft products to over 40,000 customers ranging from the individual
hobbyist to large retail chains. Customer groups served include: wholesale
distributors, tack and saddle shops, shoe-findings customers, institutions,
prisons and prisoners, dealer stores, western stores, craft stores and craft
store chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers, and retailers. Our products are distributed primarily through 26
sales/distribution units in the United States and Canada or through our
subsidiary, Roberts, Cushman & Company, Inc. ("Cushman") in New York. Cushman
manufactures and distributes a related product line of hat trims in braids,
leather, and woven fabrics. We also carry a line of small finished leather
goods, including cigar cases, wallets and western accessories.
Results of Operations
- ---------------------
Income Statement Comparison
The following table sets forth, for the interim periods indicated, certain items
from the Company's Consolidated Statements of Income expressed as a percentage
of net sales and the increase (decrease) in dollars and percent from 1999 to
2000:
% of Net Sales
Three months ended
June 30, Change in $ and %
---------------------------------- ------------------------------------
2000 1999 $ Change % Change
---------------- -------------- ---------------- ----------------
Net sales 100.0% 100.0% $1,062,455 16.25%
Cost of sales 50.0 57.0 75,191 2.02
---------------- -------------- ----------------
Gross Profit 50.0 43.0 987,264 35.09
Operating expenses 37.1 39.5 234,868 9.09
---------------- -------------- ----------------
Income from operations 12.9 3.5 752,396 327.51
Interest expense and other 2.0 2.3 2,805 1.83
---------------- -------------- ----------------
Income (loss) before income taxes 10.9 1.2 749,591 976.46
Income tax provision (benefit) 4.4 1.1 262,905 N/A
---------------- -------------- ----------------
Net income (loss) 6.5% 0.1% $486,686 N/A
================ ============== ================
9
% of Net Sales
Six months ended
June 30, Change in $ and %
---------------------------------- ------------------------------------
2000 1999 $ Change % Change
---------------- -------------- ---------------- ----------------
Net sales 100.0% 100.0% $2,955,012 24.52%
Cost of sales 50.9 57.1 756,046 10.99
---------------- -------------- ----------------
Gross Profit 49.1 42.9 2,198,966 42.51
Operating expenses 37.3 40.1 774,741 16.06
---------------- -------------- ----------------
Income from operations 11.8 2.8 1,424,225 406.80
Interest expense and other 2.2 3.2 (53,207) (13.87)
---------------- -------------- ----------------
Income (loss) before income taxes 9.6 (0.4) 1,477,432 4422.13
Income tax provision (benefit) 3.8 0.4 514,613 N/A
---------------- -------------- ----------------
Net income (loss) 5.8% (0.8)% $962,819 N/A
================ ============== ================
Revenues
Sales continue to trend upwards, totaling $7.6 million for the second quarter of
2000 compared to $6.5 million for the second quarter of 1999. Our Authorized
Sales Center ("ASC") program, currently with 137 customers enrolled, continues
to produce strong sales each quarter, increasing $200,000 over last year's same
quarter. Our Austin, TX sales unit, which opened in July 1999, contributed sales
of $227,000 in the second quarter of 2000. Sales to our craft customers continue
to rise, accounting for approximately $285,000 of this quarter's sales increase
over second quarter 1999 sales. Our Canadian sales unit and Cushman, our
subsidiary in New York, are experiencing healthy sales gains, contributing a
combined second quarter sales increase of $188,000 over the same quarter 1999.
Our sales to retail customers increased $275,000 compared to last year's second
quarter totals as we continue to gain exposure to the retail market via our
direct mail advertising program.
Decreases in sales in the current quarter over the same quarter of 1999 occurred
in our institutional markets (prisons, prisoners, schools, hospitals) and our
export market. The decreases, however, were minimal (approximately $123,000) and
were offset by the increase of approximately the same amount in our small
manufacturers market.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 50.0% for the second quarter of
2000 as compared to 57.0% for the same quarter in 1999. This translates into
gross profit margins of 50.0% and 43.0% for the quarters ended June 30, 2000 and
1999, respectively. This improvement is primarily the result of more efficient
buying of merchandise and the sales mix (retail/wholesale). Our sales mix
continued to hold its 20%/80% mix in the second quarter of 2000, compared to a
15%/85% mix in the second quarter of 1999. Higher margin sales, along with more
cost effective buying, continues to produce higher profit margins overall.
Operating expenses were $235,000 higher in the second quarter of 2000 than in
the second quarter of 1999. As a percentage of sales however, they dropped 2.4%
from last year's totals. The main cause for the dollar increase is in our
advertising costs. The increase in our customer mailing list has resulted in a
significant increase in the number of advertising pieces being produced and
distributed. Management remains committed to controlling operating expenses and
believes that we continue to improve operating efficiency as the ratio of
operating expenses to revenues continues to decrease.
Other (Income) Expense
Other expenses remained virtually unchanged from 1999 (down 1.8%). Interest
costs are lower due to a decrease in outstanding debt. This decrease, however,
was offset by a decrease in interest income from 1999. The company received
approximately $17,000 of interest income on an income tax refund in the second
quarter of 1999.
10
Net Income
The Company reported net income of $493,000 for the second quarter of 2000
compared to net income of $7,000 for the same period a year ago. The significant
improvement was primarily due to higher gross profit margins earned on increased
retail sales and the lower cost of goods.
Capital Resources, Liquidity and Financial Condition
- ----------------------------------------------------
The primary sources of liquidity and capital resources during the second quarter
of 2000 were funds provided by operating activities in the amount of $980,000,
for a year-to-date total of $1,135,000. The largest portion of the operating
cash flow was applied to debt service and income taxes.
The Company's investment in accounts receivable was $2.4 million at June 30,
2000, virtually unchanged from $2.3 million at year-end 1999 as sales have held
relatively steady through the first half of the year. Inventory decreased
$327,000 to $8.5 million at June 30, 2000 from $8.8 million at year-end 1999.
Inventory turnover decreased to an annualized rate of 1.77 times during the
first half of 2000, which is slightly lower than the turnover of 1.89 times for
all of 1999. Management is working on the design and implementation of several
programs to reduce inventory levels without sacrificing customer satisfaction in
order to increase inventory turnover.
Accounts payable increased slightly (8.0%) from December 31, 1999 to $1.9
million at the end of the second quarter, due primarily to the increase in
inventory levels.
As previously disclosed, on November 22, 1999, the Company entered into a Credit
and Security Agreement with Wells Fargo Business Credit, Inc. ("WFBC"), pursuant
to which WFBC agreed to provide a credit facility of up to $8,650,000 in debt
(the "Credit Facility"). The Credit Facility has a three-year term and is made
up of a revolving credit facility and a $150,000 term note. The term note was
paid in full in May 2000.
The revolving credit facility with WFBC is based upon the level of the Company's
accounts receivable and inventory. At June 30, 2000 and December 31, 1999, the
available and unused portion of the credit facility was approximately $1,068,000
and $508,000, respectively.
The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current operations and the opening of any potential
new sales/distribution units. In 2000, the funding for the opening of any new
units is expected to be provided by operating leases, cash flows from operating
activities, and the Credit Facility.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's Credit Facility includes loans with interest rates that vary with
changes in the prime rate. We believe that an increase of one percentage point
in the prime rate would not have a material impact on the Company's future
earnings.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 24, 2000, the Annual Meeting of the Stockholders of the Company was held
in the Metropolitan Room at the Radisson Plaza Hotel, Fort Worth, Texas to
consider and act on the following matter:
(1) To elect the following individuals to serve as directors until the
Company's 2001 Annual Meeting of Stockholder or until their
successors are duly elected and qualified:
Joseph R. Mannes Anthony C. Morton
H.W. "Hub" Markwardt John Tittle, Jr.
Ronald C. Morgan Wray Thompson
Robin L. Morgan William M. Warren
11
As to item (1) above, the following table shows the votes cast for and against,
as well as those that abstained from voting, the election of these individuals
as directors of the Company:
For Against Abstaining
--- ------- ----------
Joseph R. Mannes 9,352,714 961 28,010
H.W. "Hub" Markwardt 9,352,714 961 28,010
Ronald C. Morton 9,350,929 2,746 28,010
Robin L. Morgan 9,352,714 961 28,010
Anthony C. Morton 9,352,714 961 28,010
John Tittle, Jr. 9,350,929 2,746 28,010
Wray Thompson 9,352,714 961 28,010
William M. Warren 9,352,714 961 28,010
The foregoing matters are described in detail in the Company's proxy statement
dated April 24, 2000, for the 2000 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
A list of exhibits required to be filed as part of this report is set forth in
the Exhibit Index, which immediately precedes such exhibits and is incorporated
herein by reference.
(b) Reports on Form 8-K - None.
-------------------
12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: August 14, 2000 By: /s/ Wray Thompson
---------------------------------
Wray Thompson
Chairman of the Board,
President, and
Chief Executive Officer
Date: August 14, 2000 By: /s/ Shannon L. Greene
---------------------------------
Shannon L. Greene
Chief Financial Officer and
Treasurer (Chief Accounting
Officer)
13
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
*27.1 Financial Data Schedule
- -------------------
*Filed herewith.
14