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, 2001
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 of
Class August 14, 2001
- ---------------------------------------- -------------------------------
Common Stock, par value $.0024 per share 9,981,161
Forward-Looking Statements
This report contains forward-looking statements of management. There
are certain important risks that could cause results to differ materially than
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,
o changes from anticipated levels of sales, whether due to future national or
regional economic and competitive conditions, including, but not limited
to, retail craft buying patterns, and possible negative trends in the craft
and western retail markets,
o failure to realized the anticipated benefits of the recent acquisition of
the assets of Tandy Leather,
o customer acceptance of existing and new products, or otherwise, pricing
pressures due to competitive industry conditions,
o increases in prices for leather (which is a world-wide commodity) and the
Company's inability to pass these increased costs on to customers,
o change in tax or interest rates,
o change in the commercial banking environment,
o problems with the importation of the products that the Company buys in 22
countries around the world, including, but not limited to, transportation
problems or changes in the political climate of the countries involved,
including the maintenance by these countries of Most Favored Nation status
with the United States of America, and
o other uncertainties, all of which are difficult to predict and many of
which are beyond the control of the Company.
The Company does not intend to update forward-looking statements.
2
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
-----------------
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000 .............................. 4
Consolidated Statements of Income
Three and six months ended June 30, 2001 and 2000 ............... 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000 ......................... 6
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 2001 and 2000 ......................... 7
Notes to Consolidated Financial Statements ....................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .............................................. 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........ 14
Item 6. Exhibits and Reports on Form 8-K ........................... 15
SIGNATURES.............................................................. 15
EXHIBIT INDEX.......................................................... 16
3
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THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30, December 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 287 $ 234,141
Cash restricted for payment on revolving credit facility 412,611 390,467
Accounts receivable-trade, net of allowance for doubtful accounts
of $344,000 and $338,000 in 2001 and 2000, respectively 2,661,556 2,191,996
Inventory 8,993,158 9,205,898
Deferred income taxes 137,688 130,802
Other current assets 607,877 710,085
------------ ------------
Total current assets 12,813,177 12,863,389
------------ ------------
PROPERTY AND EQUIPMENT, at cost 4,189,360 3,657,601
Less-accumulated depreciation and amortization (2,723,332) (2,494,732)
------------ ------------
Property and equipment, net 1,466,028 1,162,869
GOODWILL, net of accumulated amortization of $1,478,000
and $1,367,000 in 2001 and 2000, respectively 4,650,618 4,765,092
OTHER INTANGIBLES, net of accumulated amortization of
$146,000 and $100,000, in 2001 and 2000, respectively 571,036 615,647
OTHER assets 280,562 279,082
------------ ------------
$ 19,781,421 $ 19,686,079
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,614,312 $ 2,159,910
Accrued expenses and other liabilities 945,183 1,290,613
Income taxes payable 95,965 94,795
Notes payable and current maturities of long-term debt 4,541,022 5,759,626
------------ ------------
Total current liabilities 8,196,482 9,304,944
------------ ------------
DEFERRED INCOME TAXES 70,780 72,473
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 11,771 13,025
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, 9,981,161 and 9,908,161 shares issued
and outstanding at 2001 and 2000, respectively 23,955 23,780
Paid-in capital 4,022,407 3,946,608
Retained earnings 7,590,948 6,471,754
Less: Notes receivable - secured by common stock (104,706) (120,339)
Accumulated other comprehensive loss (30,216) (26,166)
------------ ------------
Total stockholders' equity 11,502,388 10,295,637
------------ ------------
$ 19,781,421 $ 19,686,079
============ ============
The accompanying notes are an integral part of these financial statements.
4
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THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE and SIX MONTHS ENDED JUNE 30, 2001 AND 2000
- --------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
2001 2000 2001 2000
----------- ----------- ----------- -----------
NET SALES $ 9,359,893 $ 7,602,405 $18,732,506 $15,007,962
COST OF SALES 4,381,098 3,801,372 8,869,495 7,636,338
----------- ----------- ----------- -----------
Gross profit 4,978,795 3,801,033 9,863,011 7,371,624
OPERATING EXPENSES 3,802,056 2,818,907 7,710,932 5,597,296
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,176,739 982,126 2,152,079 1,774,328
OTHER EXPENSE:
Interest expense 124,614 144,905 273,207 314,100
Other, net 4,351 10,864 11,641 16,206
----------- ----------- ----------- -----------
Total other expense 128,965 155,769 284,848 330,306
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,047,774 826,357 1,867,231 1,444,022
PROVISION FOR INCOME TAXES 425,864 332,963 748,037 566,686
----------- ----------- ----------- -----------
NET INCOME $ 621,910 $ 493,394 $ 1,119,194 $ 877,336
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE - Basic $ 0.06 $ 0.05 $ 0.11 $ 0.09
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE--Assuming Dilution $ 0.06 $ 0.05 $ 0.11 $ 0.09
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
5
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THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,119,194 $ 877,336
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation & amortization 360,862 300,974
Amortization of deferred financing costs 26,823 8,594
Other (12,629) 28,444
Net changes in assets and liabilities:
Accounts receivable-trade, net (469,559) (71,253)
Inventory 212,740 327,365
Income taxes 1,170 (343,522)
Other current assets 102,209 (81,817)
Accounts payable 454,403 144,071
Accrued expenses and other liabilities (345,430) (54,951)
----------- -----------
Total adjustments 330,589 257,905
----------- -----------
Net cash provided by operating activities 1,449,783 1,135,241
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (531,759) (67,006)
Increase in other assets (1,481) --
Other intangible costs -- 457
----------- -----------
Net cash used in investing activities (533,240) (66,549)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in revolving credit loans (1,188,008) (747,872)
Proceeds from notes payable and long-term debt 18,676 --
Payments on notes payable and long-term debt (50,528) (195,068)
Change in cash restricted for payment on revolving credit facility (22,144) 44,139
Payments received on notes secured by common stock 15,633 5,876
Proceeds from issuance of common stock 75,974 10,000
----------- -----------
Net cash used in financing activities (1,150,397) (882,925)
----------- -----------
NET INCREASE (DECREASE) IN CASH (233,854) 185,767
CASH, beginning of period 234,141 134,465
----------- -----------
CASH, end of period $ 287 $ 320,232
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 250,536 $ 311,348
Income taxes paid during the period, net of (refunds) $ 571,601 $ 878,623
The accompanying notes are an integral part of these financial statements.
6
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THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
- --------------------------------------------------------------------------------
Common Stock Notes Accumulated
--------------------------- receivable Other
Number Par Paid-in Retained - secured by Cumulative
of shares value capital Earnings common stock Loss
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 9,853,161 $ 23,648 $ 3,901,740 $ 4,930,434 $ (153,416) $ (21,981)
Payments on notes receivable -
secured by common stock -- -- -- -- 5,876 --
Shares issued - employee
Stock options exercised 20,000 48 9,952 -- -- --
Net Income -- -- -- 877,336 -- --
Translation adjustment -- -- -- -- -- (2,793)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2000 9,873,161 $ 23,696 $ 3,911,692 $ 5,807,770 $ (147,540) $ (24,774)
============ ============ ============ ============ ============ ============
BALANCE, December 31, 2000 9,908,161 $ 23,780 $ 3,946,608 $ 6,471,754 $ (120,339) $ (26,166)
Payments on notes receivable -
secured by common stock -- -- -- -- 15,633 --
Shares issued - employee
Stock options exercised 73,000 175 75,799 -- -- --
Net Income -- -- -- 1,119,194 -- --
Translation adjustment -- -- -- -- -- (4,050)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2001 9,981,161 $ 23,955 $ 4,022,407 $ 7,590,948 $ (104,706) $ (30,216)
============ ============ ============ ============ ============ ============
Comprehensive
Total Income (Loss)
------------ ------------
BALANCE, December 31, 1999 $ 8,680,425
Payments on notes receivable -
secured by common stock 5,876
Shares issued - employee
Stock options exercised 10,000
Net Income 877,336 877,336
Translation adjustment (2,793) (2,793)
------------
BALANCE, June 30, 2000 $ 9,570,844
============
------------
Comprehensive income for the six months ended June 30, 2000 $ 874,543
============
BALANCE, December 31, 2000 10,295,637
Payments on notes receivable -
secured by common stock 15,633
Shares issued - employee
Stock options exercised 75,974
Net Income 1,119,194 1,119,194
Translation adjustment (4,050) (4,050)
------------
BALANCE, June 30, 2001 $ 11,502,388
============
------------
Comprehensive income for the six months ended June 30, 2001 $ 1,115,144
============
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,
2001 and December 31, 2000, and the results of operations and cash flows for the
three and six month periods ended June 30, 2001 and 2000. 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 2000 Annual Report on Form 10-K ("Annual
Report").
Certain reclassifications have been made to conform the 2000 financial
statements to the presentation in 2001. The reclassifications had no effect on
net income.
2. INVENTORY
The components of inventory consist of the following:
As of
---------------------------------
June 30, December 31,
2001 2000
--------------- ---------------
Finished goods held for sale $ 7,860,718 $ 8,175,429
Raw materials and work in process 1,132,440 1,030,469
--------------- ---------------
$ 8,993,158 $ 9,205,898
=============== ===============
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Numerator:
Net income $ 621,910 $ 493,394 $ 1,119,194 $ 877,336
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings per share 621,910 493,394 1,119,194 877,336
Denominator:
Weighted-average shares outstanding-basic 9,971,952 9,873,161 9,960,785 9,866,458
Effect of dilutive securities:
Stock options 159,819 138,192 126,122 123,114
Warrants 198,045 176,074 180,368 168,145
----------- ----------- ----------- -----------
Dilutive potential common shares 357,864 314,266 306,490 291,259
Denominator for diluted earnings per share-
weighted-average shares 10,329,816 10,187,427 10,267,275 10,157,717
=========== =========== =========== ===========
Basic earnings per share $ 0.06 $ 0.05 $ 0.11 $ 0.09
=========== =========== =========== ===========
Diluted earnings per share $ 0.06 $ 0.05 $ 0.11 $ 0.09
=========== =========== =========== ===========
8
Unexercised stock options owned by certain employees and directors to purchase
6,000 shares of common stock as of June 30, 2001 and 2000, were not included in
the computations of diluted EPS because the options' exercise prices were
greater than or equal to the average market price of the common stock during the
period.
4. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for public companies relating to the
reporting of financial and descriptive information about their operating
segments in financial statements. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by chief operating decision makers in deciding how to
allocate resources and in accessing performance.
The Company identifies its segments based on the activities of three distinct
businesses: The Leather Factory, which sells product to both wholesale and
retail customers, consists of a chain of sales/distribution units located in the
United States and Canada; Tandy Leather Company, which sells product throughout
the United States via the Internet and mail-order, and internationally through
authorized dealers; and Roberts, Cushman & Company, which manufactures
decorative hat trims sold directly to hat manufactures and distributors.
The Company previously defined its operations as consisting of a single
reporting segment as provided for under the aggregation criteria of SFAS No.
131. During 2000, the Company revised its presentation of segment information to
reflect the Company initiative to establish strategic business units.
The Company's reportable operating segments have been determined as separately
identifiable business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes. The "Tandy Leather
Company" column contains operating results beginning after its November 30, 2000
acquisition.
The Leather Tandy Leather Roberts,
Factory Company Cushman & Co Total
------------ ------------ ------------ ------------
For the quarter ended June 30, 2001
Net Sales $ 7,015,764 $ 1,787,526 $ 556,603 $ 9,359,893
Gross Profit 3,783,271 1,003,657 191,867 4,978,795
Operating earnings 1,057,657 73,761 45,321 1,176,739
Interest expense (124,614)
Other, net (4,351)
------------
Income before income taxes 1,047,774
------------
Depreciation and amortization 129,066 18,723 38,190 185,979
Total assets $ 11,970,568 $ 2,744,853 $ 5,066,000 $ 19,781,421
------------ ------------ ------------ ------------
For the quarter ended June 30, 2000
Net Sales $ 6,908,984 -- $ 693,421 $ 7,602,405
Gross Profit 3,539,724 -- 261,309 3,801,033
Operating earnings 849,498 -- 132,628 982,126
Interest expense (144,905)
Other, net (10,864)
------------
Income before income taxes 826,357
------------
Depreciation and amortization 112,640 -- 38,486 151,126
Total assets $ 12,673,986 -- $ 5,225,123 $ 17,899,109
------------ ------------ ------------ ------------
9
The Leather Tandy Leather Roberts,
Factory Company Cushman & Co Total
------------ ------------ ------------ ------------
For the six months ended June 30, 2001
Net Sales $ 14,119,556 $ 3,562,642 $ 1,050,308 $ 18,732,506
Gross Profit 7,547,690 1,981,967 333,354 9,863,011
Operating earnings 2,061,359 54,097 36,623 2,152,079
Interest expense (273,207)
Other, net (11,641)
------------
Income before income taxes 1,867,231
------------
Depreciation and amortization 260,110 54,584 76,366 391,060
Total assets $ 11,970,568 $ 2,744,853 $ 5,066,000 $ 19,781,421
------------ ------------ ------------ ------------
For the six months ended June 30, 2000
Net Sales $ 13,756,529 -- $ 1,251,433 $ 15,007,962
Gross Profit 6,907,989 -- 463,635 7,371,624
Operating earnings 1,528,131 -- 246,197 1,774,328
Interest expense (314,100)
Other, net (16,206)
------------
Income before income taxes 1,444,022
------------
Depreciation and amortization 229,967 -- 77,636 307,603
Total assets $ 12,673,986 -- $ 5,225,123 $ 17,899,109
------------ ------------ ------------ ------------
Net sales for geographic areas was as follows: Quarter ended June 30,
2001 2000
----------- -----------
United States $ 8,719,941 $ 7,275,645
All other countries 639,952 326,760
----------- -----------
$ 9,359,893 $ 7,602,405
=========== ===========
Six months ended June 30,
2001 2000
----------- -----------
United States $17,516,958 $14,343,657
All other countries 1,215,548 664,305
----------- -----------
$18,732,506 $15,007,962
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
- -------
The Leather Factory, Inc. ("TLF" or the "Company") is a Delaware corporation
whose common stock trades on the American Stock Exchange under the symbol "TLF".
The Company is managed on a business entity basis, with those businesses being
TLF, Tandy Leather Company ("Tandy Leather"), and Roberts, Cushman & Company,
Inc. ("Cushman"). See Note 4 to the Consolidated Financial Statements for
additional information concerning the Company's segments.
TLF is an international wholesale manufacturer and distributor of a broad
product line of leather, leatherworking tools, buckles and other belt supplies,
shoe care and repair supplies, leather dyes and finishes, adornments for belts,
bags, and garments, saddle and tack hardware, and do-it-yourself leathercraft
kits. We also carry a product line of small finished leather goods such as cigar
cases, wallets and western accessories distributed under the name "Royal Crown
Custom Leather". Tandy Leather sells the same products as TLF. Roberts, Cushman
& Company, Inc. produces and sells a related product line of hat trims in
braids, leather and woven fabrics.
10
As previously disclosed, the Company acquired the operating assets of TLC
Direct, Inc. and Tandy Leather Dealer, Inc. (collectively called the "Sellers")
on November 30, 2000 to form Tandy Leather Company as a subsidiary of the
Company. The Sellers were subsidiaries of Tandycrafts, Inc. Further details
regarding the Tandy Leather acquisition, including the consideration paid, are
provided in Note 12 to the Consolidated Financial Statements contained in the
Company's 2000 Annual Report on Form 10-K and the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on December 15, 2000,
as amended on February 14, 2001.
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 2000 to
2001:
% of Net Sales
Three months ended
June 30, Change in $ and %
----------------------------- -----------------------------
2001 2000 $ Change % Change
------------- ------------ ------------- ------------
Net sales 100.0% 100.0% $1,757,489 23.12%
Cost of sales 46.8 50.0 579,727 15.25
------------- ------------ -------------
Gross Profit 53.2 50.0 1,177,762 30.99
Operating expenses 40.6 37.1 983,148 34.88
------------- ------------ -------------
Income from operations 12.6 12.9 194,614 19.82
Interest expense and other 1.4 2.0 (26,804) (17.21)
------------- ------------ -------------
Income before income taxes 11.2 10.9 221,418 26.79
Income tax provision 4.6 4.4 92,902 27.90
------------- ------------ -------------
Net income 6.6% 6.5% $ 128,516 26.05
============= ============ =============
% of Net Sales
Six months ended
June 30, Change in $ and %
----------------------------- -----------------------------
2001 2000 $ Change % Change
------------- ------------ ------------- ------------
Net sales 100.0% 100.0% $3,724,544 24.82%
Cost of sales 47.3 50.9 1,233,157 16.15
------------- ------------ -------------
Gross Profit 52.7 49.1 2,491,386 33.80
Operating expenses 41.3 37.3 2,113,636 37.76
------------- ------------ -------------
Income from operations 11.4 11.8 377,750 21.29
Interest expense and other 1.4 2.2 (45,458) (13.76)
------------- ------------ -------------
Income before income taxes 10.0 9.6 423,208 29.31
Income tax provision 4.0 3.8 181,350 32.00
------------- ------------ -------------
Net income 6.0% 5.8% $ 241,858 27.57
============= ============ =============
11
Revenues
The Company produced another quarter of strong sales, totaling $9.4 million for
the second quarter of 2001 compared to $7.6 million for the second quarter of
2000. Tandy Leather's sales of $1.8 million accounted for the increase. TLF
retail sales appeared virtually flat for the current quarter, compared to second
quarter 2000 retail sales. We believe that the primary reason for the lack of
growth is due to the timing of the release of our annual catalog, which
historically generates strong retail sales upon its release. In 2000, our
catalog was distributed in April; in 2001, our catalog was released in July. As
a result, the 2nd quarter 2001 sales (with no new catalog) is being compared to
2nd quarter 2000 sales (with a new catalog). Based on our history, we anticipate
strong gains in our 3rd quarter 2001 retail sales to compensate for the 2nd
quarter's lack of growth.
Our craft sales continue to show promising growth as we continue through 2001.
Current quarter sales increased 52% over sales in the second quarter a year ago.
Leather continues to gain popularity in the craft market and we have expanded
our craft programs with new products to our largest craft customers. Our
Authorized Sales Center ("ASC") program continues its growth in the current
quarter with an 11% increase over this same category a year ago. Our
institutional sales (prisons, prisoners, schools, hospitals) have suffered
somewhat in the second quarter, particularly in Texas. Following a major escape,
Texas suspended all hobbycrafts sales to its prisons throughout most of 2001. We
are beginning to see this suspension being lifted in some of the prisons in the
beginning of the third quarter of 2001 and expect this trend to continue
throughout the remainder of the year, barring some unforeseen occurrence. Sales
increases to prisons and prisoners in other states, such as Washington,
California, and North Carolina, have offset some of the decrease in sales to the
Texas prison market.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 46.8% for the second quarter of
2001 as compared to 50.0% for the same quarter in 2000. This translates into
gross profit margins of 53.2% and 50.0% for the quarters ended June 30, 2001 and
2000, respectively. This improvement is primarily the result of more efficient
and aggressive purchasing of merchandise. Inventory control and costing is an
on-going process; however, the acquisition of Tandy Leather in November 2000
created the opportunity to analyze and overhaul our entire inventory line, from
a purchasing standpoint. We took advantage of the increase in volume purchasing
power afforded by the Tandy Leather transaction, and as a result, we have
negotiated better pricing with vendors, particularly on some of our most popular
items. As a result, we were able to increase gross profit margins without
necessarily raising selling prices to our customers.
Operating expenses were $983,000 higher in the second quarter of 2001 than in
the same quarter of 2000. Tandy Leather contributed $930,000 of this increase.
As a percentage of sales, excluding the impact of Tandy Leather, operating
expenses increased less than 1% of sales from last year's totals. The increase
continues to be the result of additional advertising efforts toward the retail
market. Tandy Leather's operating efficiency has improved slightly in the second
quarter of 2001 as operating expenses were 52% of sales (compared to 56% in the
first quarter of 2001). TLF's operating efficiency remained steady at 38% in
both the first and second quarters of 2001. Management continues its efforts to
improve Tandy Leather's operating efficiency, striving for a ratio more
consistent with that of TLF.
The Company experienced some increases in its costs of leather during the second
quarter, and it is possible that leather prices paid by us may increase further
as a result of the foot and mouth and mad cow diseases in Europe. Because of the
uncertainty in leather prices, we have attempted to maintain a certain amount of
stability in availability and price by purchasing larger quantities of leather
in bulk in order to minimize the effect of rising prices. Even though it appears
that leather prices are beginning to drop as we begin the third quarter, the
Company's profit margins may be adversely affected in the next several quarters,
despite our efforts.
12
Other (Income) Expense
Other expenses were down 17.2% in the second quarter of 2001 compared to the
same quarter of 2000. This reduction is primarily in interest expense due to the
decrease in average outstanding debt balances and lower average interest rates
in 2001 as compared to 2000.
Net Income
The Company reported net income of $622,000 during the second quarter of 2001
compared to net income of $493,000 for the same period a year ago. The
significant improvement was principally due to the higher gross profit margins
earned as a result of more efficient purchasing.
Capital Resources, Liquidity and Financial Condition
- ----------------------------------------------------
The primary sources of liquidity and capital resources during the first six
months of 2001 were funds provided by operating activities in the amount of
$1,450,000 and the Company's Credit and Security Agreement with Wells Fargo
Business Credit, Inc. ("WFBC"). The largest portion of the operating cash flow
was used to pay down debt balances and purchase property and equipment. Current
year capital expenditures of $532,000 as of June 30, 2001 consist of $280,000 in
computer equipment, $172,000 in equipment and leasehold improvements related to
the Tandy acquisition, and $80,000 in various equipment and furniture purchases.
The Company also uses a revolving credit facility under the Credit and Security
Agreement to manage cash flow. In an attempt to apply all available cash to the
balance on this revolving credit facility, the Company recorded a small balance
of unrestricted cash at June 30, 2001. At the same date, however, the Company
had in excess of $900,000 in available credit under the revolving credit
facility.
The Company's investment in accounts receivable was $2.7 million at June 30,
2001, up $470,000 from $2.2 million at year-end 2000. This is primarily the
result of increased sales to our large craft customers who have open accounts
with us. Inventory decreased $213,000 to $9.0 million at June 30, 2001 from $9.2
million at year-end 2000. Inventory turnover increased to an annualized rate of
4.12 times during the first six months of 2001, an improvement over the turnover
of 3.64 times for all of 2000. Compared to the annualized inventory turnover
rate of 4.26 times as of March 31, 2001, we experienced a slight decrease in the
rate as of June 30, 2001. As discussed previously, management expected a slight
reduction in inventory turns in the second quarter due to the increase in
leather purchases during the quarter.
Accounts payable increased 21% to $2.6 million at the end of the second quarter,
due primarily to the increased purchases of leather in the second quarter. The
additional purchases were transacted in an attempt to minimize potentially
significant price increases as a result of the foot and mouth disease and the
mad cow scare.
Under the Credit and Security Agreement, WFBC agreed to provide a revolving
credit facility of up to $8,500,000. On November 30, 2000, the Company entered
into the First Amendment to the Credit and Security Agreement ("Amendment 1")
with WFBC. There, WFBC consented to the Tandy leather transaction and amended
certain financial tests to reflect the acquisition of the Tandy Leather assets,
to make previously contemplated extensions of these tests, and to raise the
standards required in those tests based on the Company's improved financial
performance since the credit agreement was originally signed.
On February 7, 2001, the Company entered into the Second Amendment to the Credit
and Security Agreement ("Amendment 2") with WFBC. There, WFBC granted a special
accommodation advance of a maximum of $300,000 to be used by the Company as
needed through July 2001. At the time of Amendment 2, the Company was
anticipating significant cash requirements for payment of income taxes and
annual ESOP contribution and manager bonuses. However, the Company was able to
generate adequate cash flow from its operations to meet these annual cash
payments and the special accommodation advance was not needed.
13
On June 14, 2001, the Company entered into the Third Amendment to the Credit and
Security Agreement ("Amendment 3") with WFBC. There, WFBC reduced the interest
rate on the revolving credit facility from prime + 1/2% to prime (6.75% at June
30, 2001). In addition, the capital expenditure limit was increased from
$500,000 to $650,000 for 2001 to accommodate the additional expenditures
incurred following the acquisition of Tandy Leather.
The revolving credit facility with WFBC is based upon the level of the Company's
accounts receivable and inventory. At June 30, 2001 and December 31, 2000, the
available and unused portion of the credit facility was approximately $912,000
and $885,000, 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 2001, the funding for the opening of any new
units is expected to be provided by operating leases, cash flows from operating
activities, and the revolving credit facility. As previously disclosed, a new
unit is to be opened in the third quarter of 2001. Historically, the Company
invests approximately $125,000 in opening a new unit. However, management
expects the new unit (located in Toronto, Ontario) opening in July 2001 will
require slightly less capital to open.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's Credit Facility includes loans with interest rates that vary with
changes in the prime rate. An increase of one percentage point in the prime rate
would not have a material impact on the Company's future earnings.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 24, 2001, the Annual Meeting of the Stockholders of the Company was held
in the Longhorn Room at The Stockyards Hotel, Fort Worth, Texas to consider and
act on the following manner:
(1) To elect the following individuals to serve as directors until the
Company's 2002 Annual Meeting of Stockholders or until their
successors are duly elected and qualified:
Shannon L. Greene Michael A. Markwardt Anthony C. Morton
Joseph R. Mannes Robin L. Morgan Wray Thompson
H.W. "Hub" Markwardt Ronald C. Morgan William M. Warren
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
--- ------- ----------
Shannon L. Greene 9,528,502 101 6,000
Joseph R. Mannes 9,527,997 606 6,000
H.W. "Hub" Markwardt 9,528,502 101 6,000
Michael A. Markwardt 9,526,997 1,606 6,000
Robin L. Morgan 9,527,481 1,122 6,000
Ronald C. Morgan 9,527,502 1,101 6,000
Anthony C. Morton 9,527,502 1,101 6,000
Wray Thompson 9,527,502 1,101 6,000
William M. Warren 9,527,502 1,101 6,000
14
The foregoing matters are described in detail in the Company's proxy statement
dated April 24, 2001, for the 2001 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
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, 2001 By: /s/ Wray Thompson
--------------------------
Wray Thompson
Chairman of the Board and
Chief Executive Officer
Date: August 14, 2001 By: /s/ Shannon L. Greene
--------------------------
Shannon L. Greene
Chief Financial Officer and
Treasurer (Chief Accounting
Officer)
15
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
*4.1 Amendment to Loan and Security Agreement dated February 7,
2001, by and between The Leather Factory, Inc. a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Roberts,
Cushman & Company, Inc., Hi-Line Leather & Manufacturing, and
Tandy Leather Company, Inc. (f/k/a Leather Tan Acquisition,
Inc.) and Wells Fargo Business Credit, Inc.
*4.2 Amendment to Loan and Security Agreement dated June 14, 2001,
by and between The Leather Factory, Inc. a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Roberts,
Cushman & Company, Inc., Hi-Line Leather & Manufacturing, and
Tandy Leather Company, Inc. (f/k/a Leather Tan Acquisition,
Inc.) and Wells Fargo Business Credit, Inc.
- -------------------
*Filed herewith.
16