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 September 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
Class of November 14, 2001
- ---------------------------------------- ---------------------------------
Common Stock, par value $.0024 per share 9,991,161
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 The recent downturn in the economy in the United States, as well as abroad,
may cause our sales to decrease or not to increase.
o As a result of the terrorist activities on and after September 11, 2001,
consumer-buying habits could change and decrease our sales.
o If terrorists choose to target livestock in the United States or abroad for
chemical, biological or other attacks, our sources of raw material and
inventory could decrease, or these items could become more expensive.
o The prices of hides and leathers also fluctuate in normal times, and these
fluctuations can affect the Company.
o 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.
o 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.
o The Company currently buys in 22 countries around the world. War,
terrorism, changes in the internal affairs or international relations of
these countries (such as events that might affect their Most Favored Nation
status with the United States of America) and other uncertainties can
disrupt our purchases from abroad.
o We might fail to realize the anticipated benefits of the recent acquisition
of the assets of Tandy Leather.
o 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.
o Any change in the commercial banking environment may affect us and our
ability to borrow capital as needed.
o Other uncertainties, which are difficult to predict and many of which are
beyond the control of the Company, may occur as well.
The Company does not intend to update forward-looking statements.
2
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000.......................... 4
Consolidated Statements of Income
Three and nine months ended September 30, 2001 and 2000........... 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000..................... 6
Consolidated Statements of Stockholders' Equity
Nine months ended September 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................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES............................................................. 16
3
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30, December 31,
2001 2000
----------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ -- $ 234,141
Cash restricted for payment on revolving credit facility 358,583 390,467
Accounts receivable-trade, net of allowance for doubtful accounts
of $210,000 and $338,000 in 2001 and 2000, respectively 2,836,959 2,191,996
Inventory 9,466,025 9,205,898
Prepaid income taxes 50,955 --
Deferred income taxes 140,111 130,802
Other current assets 712,643 710,085
----------------- -----------------
Total current assets 13,565,276 12,863,389
----------------- -----------------
PROPERTY AND EQUIPMENT, at cost 4,282,144 3,657,601
Less-accumulated depreciation and amortization (2,837,597) (2,494,732)
----------------- -----------------
Property and equipment, net 1,444,547 1,162,869
GOODWILL, net of accumulated amortization of $1,528,000
and $1,367,000 in 2001 and 2000, respectively 4,591,352 4,765,092
OTHER INTANGIBLES, net of accumulated amortization of
$167,000 and $100,000, in 2001 and 2000, respectively 550,246 615,647
OTHER assets 280,473 279,082
----------------- -----------------
$ 20,431,894 $ 19,686,079
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,464,970 $ 2,159,910
Accrued expenses and other liabilities 1,005,761 1,290,613
Income taxes payable -- 94,795
Notes payable and current maturities of long-term debt 4,980,523 5,759,626
----------------- -----------------
Total current liabilities 8,451,254 9,304,944
----------------- -----------------
DEFERRED INCOME TAXES 64,337 72,473
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 13,008 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, 9,991,161 and 9,908,161 shares issued
and outstanding at 2001 and 2000, respectively 23,979 23,780
Paid-in capital 4,030,508 3,946,608
Retained earnings 7,987,476 6,471,754
Less: Notes receivable - secured by common stock (102,773) (120,339)
Accumulated other comprehensive loss (35,895) (26,166)
----------------- -----------------
Total stockholders' equity 11,903,295 10,295,637
----------------- -----------------
$ 20,431,894 $ 19,686,079
================= =================
The accompanying notes are an integral part of these financial statements.
4
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE and NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
2001 2000 2001 2000
-------------- -------------- -------------- --------------
NET SALES $ 9,198,401 $ 7,374,556 $27,930,907 $22,382,518
COST OF SALES 4,586,827 3,660,995 13,456,322 11,297,333
-------------- -------------- -------------- --------------
Gross profit 4,611,574 3,713,561 14,474,585 11,085,185
OPERATING EXPENSES 3,823,038 3,012,409 11,533,970 8,619,243
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 788,536 701,152 2,940,615 2,465,942
OTHER EXPENSE:
Interest expense 102,235 135,316 375,442 439,878
Other, net 20,317 14,547 31,959 30,752
-------------- -------------- -------------- --------------
Total other expense 122,552 149,863 407,401 470,630
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 665,984 551,289 2,533,214 1,995,312
PROVISION FOR INCOME TAXES 269,456 236,190 1,017,492 802,877
-------------- -------------- -------------- --------------
NET INCOME $ 396,528 $ 315,099 $ 1,515,722 $ 1,192,435
============== ============== ============== ==============
NET INCOME PER COMMON SHARE - Basic $ 0.04 $ 0.03 $ 0.15 $ 0.12
============== ============== ============== ==============
NET INCOME PER COMMON SHARE--Assuming Dilution $ 0.04 $ 0.03 $ 0.15 $ 0.12
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
5
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,515,722 $ 1,192,435
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation & amortization 550,024 443,500
Loss (gain) on disposal of assets (333) 3,689
Amortization of deferred financing costs 34,316 18,132
Other (27,174) (7,837)
Net changes in assets and liabilities:
Accounts receivable-trade, net (644,963) 22,316
Inventory (260,127) 1,048,017
Income taxes (145,750) (363,950)
Other current assets (2,558) 25,238
Accounts payable 305,060 (758,283)
Accrued expenses and other liabilities (284,853) 168,870
-------------- --------------
Total adjustments (476,358) 599,692
-------------- --------------
Net cash provided by operating activities 1,039,364 1,792,127
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (628,543) (161,042)
Proceeds from sales of assets 2,000 --
Increase in other assets (1,391) 1,088
Other intangible costs -- 2,186
-------------- --------------
Net cash used in investing activities (627,934)
(157,768)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in revolving credit loans (722,814) (1,530,281)
Proceeds from notes payable and long-term debt 18,676 --
Payments on notes payable and long-term debt (74,981) (218,519)
Change in cash restricted for payment on revolving credit facility 31,883 93,810
Payments received on notes secured by common stock 17,566 8,814
Deferred financing cost incurred -- (25,626)
Proceeds from issuance of common stock 84,099 16,875
-------------- --------------
Net cash used in financing activities (645,571) (1,654,927)
-------------- --------------
NET DECREASE IN CASH (234,141) (20,568)
CASH, beginning of period 234,141 134,465
-------------- --------------
CASH, end of period $ -- $ 113,897
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 365,660 $ 453,645
Income taxes paid during the period, net of (refunds) $ 990,311 $ 1,168,449
The accompanying notes are an integral part of these financial statements.
6
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 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 -- -- -- -- 8,814 --
Shares issued - employee
Stock options exercised 30,000 72 16,803 -- -- --
Net Income -- -- -- 1,192,435 -- --
Translation adjustment -- -- -- -- -- (4,980)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2000 9,883,161 $ 23,720 $ 3,918,543 $ 6,122,869 $ (144,602) $ (26,961)
============ ============ ============ ============ ============ ============
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 -- -- -- -- 17,566 --
Shares issued - employee
Stock options exercised 83,000 199 83,900 -- -- --
Net Income -- -- -- 1,515,722 -- --
Translation adjustment -- -- -- -- -- (9,729)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2001 9,991,161 $ 23,979 $ 4,030,508 $ 7,987,476 $ (102,773) $ (35,895)
============ ============ ============ ============ ============ ============
Comprehensive
Total Income (Loss)
------------ -------------
BALANCE, December 31, 1999 $ 8,680,425
Payments on notes receivable -
secured by common stock 8,814
Shares issued - employee
Stock options exercised 16,875
Net Income 1,192,435 1,192,435
Translation adjustment (4,980) (4,980)
------------
BALANCE, September 30, 2000 $ 9,893,569
============
------------
Comprehensive income for the nine months ended September 30, 2000 $ 1,187,455
============
BALANCE, December 31, 2000 10,295,637
Payments on notes receivable -
secured by common stock 17,566
Shares issued - employee
Stock options exercised 84,099
Net Income 1,515,722 1,515,722
Translation adjustment (9,729) (9,729)
------------
BALANCE, September 30, 2001 $ 11,903,295
============
------------
Comprehensive income for the nine months ended September 30, 2001 $ 1,505,993
============
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 September
30, 2001 and December 31, 2000, and the results of operations and cash flows for
the three and nine month periods ended September 30, 2001 and 2000. The results
of operations for the three and nine 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
------------------------------------
September 30, December 31,
2001 2000
----------------- -----------------
Finished goods held for sale $ 8,375,700 $ 8,175,429
Raw materials and work in process 1,090,325 1,030,469
----------------- -----------------
$ 9,466,025 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Numerator:
Net income $ 396,528 $ 315,099 $ 1,515,722 $ 1,192,435
------------ ------------ ------------ ------------
Numerator for basic and diluted earnings per share 396,528 315,099 1,515,722 1,192,435
Denominator:
Weighted-average shares outstanding-basic 9,991,052 9,876,422 9,970,985 9,869,803
Effect of dilutive securities:
Stock options 427,831 146,668 228,346 128,764
Warrants 237,976 176,074 201,027 170,807
------------ ------------ ------------ ------------
Dilutive potential common shares 665,807 322,742 429,373 299,571
Denominator for diluted earnings per share-
weighted-average shares 10,656,859 10,199,164 10,400,358 10,169,374
============ ============ ============ ============
Basic earnings per share $ 0.04 $ 0.03 $ 0.15 $ 0.12
============ ============ ============ ============
Diluted earnings per share $ 0.04 $ 0.03 $ 0.15 $ 0.12
============ ============ ============ ============
8
Unexercised stock options owned by certain employees and directors to purchase
2,000 and 6,000 shares of common stock as of September 30, 2001 and 2000,
respectively, 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 September 30, 2001
Net Sales $ 7,266,214 $ 1,453,959 $ 478,228 $ 9,198,401
Gross Profit 3,656,235 827,881 127,458 4,611,574
Operating earnings 700,505 73,303 14,728 788,536
Interest expense (102,235)
Other, net (20,317)
--------------
Income before income taxes 665,984
--------------
Depreciation and amortization 130,711 24,267 38,330 193,308
Total assets $ 12,864,099 $ 2,572,448 $ 4,995,347 $ 20,431,894
--------------------------------------------------------------
For the quarter ended September 30, 2000
Net Sales $ 6,782,283 -- $ 592,273 $ 7,374,556
Gross Profit 3,437,633 -- 275,928 3,713,561
Operating earnings 562,362 -- 138,790 701,152
Interest expense (135,316)
Other, net (14,547)
--------------
Income before income taxes 551,289
--------------
Depreciation and amortization 114,335 -- 38,518 152,853
Total assets $ 11,549,163 -- $ 5,157,987 $ 16,707,150
--------------------------------------------------------------
9
The Leather Tandy Leather Roberts,
Factory Company Cushman & Co Total
--------------------------------------------------------------
For the nine months ended September 30, 2001
Net Sales $ 21,385,770 $ 5,016,601 $ 1,528,536 $ 27,930,907
Gross Profit 11,203,925 2,809,848 460,812 14,474,585
Operating earnings 2,761,863 127,401 51,351 2,940,615
Interest expense (375,442)
Other, net (31,959)
--------------
Income before income taxes 2,533,214
--------------
Depreciation and amortization 356,676 78,651 114,697 550,024
Total assets $ 12,864,099 $ 2,572,448 $ 4,995,347 $ 20,431,894
--------------------------------------------------------------
For the nine months ended September 30, 2000
Net Sales $ 20,538,813 -- $ 1,843,705 $ 22,382,518
Gross Profit 10,345,621 -- 739,564 11,085,185
Operating earnings 2,080,955 -- 384,987 2,465,942
Interest expense (439,878)
Other, net (30,752)
------------
Income before income taxes 1,995,312
------------
Depreciation and amortization 327,346 -- 116,154 443,500
Total assets $ 11,549,163 -- $ 5,157,987 $ 16,707,150
--------------------------------------------------------------
Net sales for geographic areas were as follows:
Quarter ended September 30,
2001 2000
-------------------- -----------------
United States $ 8,631,554 $ 6,965,365
All other countries 566,847 409,191
-------------------- -----------------
$ 9,198,401 $ 7,374,556
==================== =================
Nine months ended September 30,
2001 2000
-------------------- -----------------
United States $26,324,849 $21,309,022
All other countries 1,606,058 1,073,496
-------------------- -----------------
$27,930,907 $22,382,518
==================== =================
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141 and 142. SFAS 141, "Business
Combinations" requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the pooling of
interests method of accounting will be prohibited. The Company does not have any
pending acquisitions that will be impacted by this new rule.
SFAS 142, "Goodwill and Other Intangible Assets" changes the accounting for
goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill will cease January 1, 2002, the date the Company
expects to adopt this standard. Subsequently, the Company's goodwill will be
tested at least annually for impairment. As of September 30, 2001, the Company
had $4.6 million of goodwill with annual amortization expected to be
approximately $225,000 for 2001. The Company does not believe there is any
goodwill impairment at this time.
10
Intangible assets other than goodwill will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144,
issued by FASB in October 2001, addresses accounting and reporting for the
impairment of disposal of long-lived assets, including the disposal of a segment
of business. SFAS 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The provisions of SFAS 144
will be adopted by the Company effective January 1, 2002, applied prospectively.
At this time, we are reviewing the impact of SFAS 144 but do not expect it to
have a material effect on the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
The Leather Factory, Inc. ("TLF," the "Company" or "we") 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 ("LF"), 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.
The Leather Factory 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. LF also carries 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 LF.
Cushman produces and sells a related product line of hat trims in braids,
leather and woven fabrics.
As previously disclosed, the Company acquired the operating assets of two
subsidiaries of Tandycrafts, Inc. on November 30, 2000 to form Tandy Leather
Company as a subsidiary of the Company. 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
11
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
September 30, Change in $ and %
---------------------------------- ------------------------------------
2001 2000 $ Change % Change
---------------- -------------- ---------------- ----------------
Net sales 100.0% 100.0% $1,823,846 24.73%
Cost of sales 49.9 49.6 925,832 25.29
---------------- -------------- ----------------
Gross Profit 50.1 50.4 898,014 24.18
Operating expenses 41.6 40.9 810,629 26.91
---------------- -------------- ----------------
Income from operations 8.5 9.5 87,385 12.46
Interest expense and other 1.3 2.0 (27,310) (18.22)
---------------- -------------- ----------------
Income before income taxes 7.2 7.5 114,695 20.80
Income tax provision 2.9 3.2 33,265 14.08
---------------- -------------- ----------------
Net income 4.3% 4.3% $81,430 25.84%
================ ============== ================
% of Net Sales
Nine months ended
September 30, Change in $ and %
---------------------------------- ------------------------------------
2001 2000 $ Change % Change
---------------- -------------- ---------------- ----------------
Net sales 100.0% 100.0% $5,548,389 24.79%
Cost of sales 48.2 50.5 2,158,989 19.11
---------------- -------------- ----------------
Gross Profit 51.8 49.5 3,389,400 30.58
Operating expenses 41.3 38.5 2,914,727 33.82
---------------- -------------- ----------------
Income from operations 10.5 11.0 474,673 19.25
Interest expense and other 1.4 2.1 (63,230) (13.44)
---------------- -------------- ----------------
Income before income taxes 9.1 8.9 537,903 26.96
Income tax provision 3.6 3.6 214,616 26.73
---------------- -------------- ----------------
Net income 5.5% 5.3% $323,287 27.11
================ ============== ================
Revenues
We continued our growth trend as the third quarter of 2001 produced consolidated
sales totaling $9.2 million compared to $7.4 million for the third quarter of
2000. Tandy Leather's sales of $1.45 million accounted for 80% of the increase.
Sales for the nine months ended September 30, 2001 are up $5.5 million or 25%
over the first nine months of 2000. Tandy's sales contributed $5.0 million to
the increase.
Our retail sales were strong in the current quarter, increasing 15% over the
second quarter of 2001 and 6% over the third quarter of 2000. On an annual
basis, retail sales are up 7% over last year. As we discussed previously, our
catalog was released in July 2001. Historically, retail sales are strong in the
quarter in which the catalog is distributed. This year proved to be no
exception. Sales to our small manufacturer market group are showing promise as
we experienced a 26% increase to these customers in the current quarter over
last year. Sales trends to this market group are difficult to predict as the
timing of orders from manufacturing facilities varies from year to year. We have
been successful in adding new customers to this market group and are pleased
with the potential revenue to be earned in the future.
12
Craft sales continued a growth trend into this quarter. Third quarter sales
increased 38% over sales in the third quarter a year ago. Annual craft sales are
up 35% over 2000. We continue to look for and design new products for our craft
programs as a way of generating continuing revenue from this customer base. Our
traditional wholesale and Authorized Sales Center ("ASC") sales dropped slightly
in the current quarter compared to a year ago. We believe that this decrease is
due to the softening of the economy in general as the small retailers generally
are the first businesses to reduce their spending in this situation. We are
working with this market group to enhance advertising efforts in hopes of
generating sales.
Costs, Gross Profit, and Expenses
Our cost of sales as a percentage of revenue was 49.9% for the third quarter of
2001 as compared to 49.6% for the same quarter in 2000. This translates into
gross profit margins of 50.1% and 50.4% for the quarters ended September 30,
2001 and 2000, respectively. The slight decrease in gross profit margin was
primarily due to the variations in leather prices during the last six months. As
previously discussed, we purchased extra quantities of leather in the early part
of the year in order to avoid potential rising leather prices as a result of the
hoof and mouth disease scare in Europe. We believe we acted appropriately in
order to "hedge" against rising prices. Since then, hide prices have fallen
below those before the scare. Our inventory is valued at the lower of cost or
market and the price we paid for leather in the spring of 2001 is now higher
than current market price. Therefore, we dropped the value of our leather
inventory at the end of the third quarter to match market price and as a result,
our cost of goods increased slightly. Management is not concerned with the 0.3%
decrease in gross profit margin compared to a year ago as we believe we were
successful in avoiding significant price spikes in an unusually volatile leather
market.
For the nine months ended September 30, 2001, our gross profit margin gained 2.3
percentage points against gross profit margins for the nine months ended
September 30, 2000. We continue to believe that the retail/wholesale mix and
faster response to product cost changes contributes to the improvement. The
Company's point-of-sale computer system provides timely information to
management concerning selling prices and margins being attained at the
distribution units. This information is useful to manage inventory more
efficiently (i.e. selling prices, cost changes, product usage, etc.)
Operating expenses were $811,000 higher in the third quarter of 2001 than in the
same quarter of 2000. Tandy Leather contributed $755,000 of this increase.
Excluding the effect of Tandy Leather, operating expenses as a percentage of
sales increased less than 2% from last year's totals. Tandy Leather's operating
efficiency held at 52% of sales in the third quarter of 2001, the same as the
second quarter of 2001. LF's operating expenses were up slightly in the third
quarter of 2001 - primarily the result of increased employee benefit costs and
continued advertising efforts to expand current markets. We continue to monitor
the operating efficiencies of the Company overall and have implemented some
cost-cutting measures in the early part of the fourth quarter in order to
achieve our operating goals.
Our operating expenses year-to-date are up approximately $3.0 million over last
year. Tandy Leather's contribution to this increase totaled $2.7 million. The
increase in advertising expenses throughout the year contributes the significant
portion of the additional increase.
Other (Income) Expense
Other expenses were down 18.2% in the third quarter of 2001 compared to the same
quarter of 2000. This reduction is primarily in interest expense due to the
decrease in interest rates in 2001 as compared to 2000. The floating interest
rate paid on the Company's debt decreased nine times during the nine months
ended September 30, 2001 from 10% to 6%. In the first nine months of 2000, the
interest rate increased four times, from 9% to 10%.
13
For the nine months ended September 30, 2001, other expenses decreased $63,000
over the same period in 2000. The decrease in interest costs account for the
majority of the decrease as the company's debt balance and the interest rates
continue to decline.
Net Income
The Company reported net income of $396,000 during the third quarter of 2001
compared to net income of $315,000 for the same period a year ago. Net income
for the nine months ended September 30, 2001 was $1.5 million versus $1.2
million for the nine months ended September 30, 2000. The improvement was
principally due to the increase in gross profit margin, offset somewhat by the
increase in operating expenses.
Effect of September 11, 2001
During the first ten to fifteen days after the attacks on September 11, 2001,
our sales decreased slightly. Although it may be too early to predict a definite
trend, sales in the early part of the fourth quarter suggest a promising return
to pre-September 11th levels.
Also in the wake of the September 11 attacks, we have encountered some delays in
the delivery of domestic mail. Several of our sales flyers were up to two weeks
late in reaching customers, and, for a brief period, there were delays in the
delivery of orders to customers because of suspended air travel. However, these
delays appear to have been temporary, and currently, management believes mailing
and delivery schedules are being met by the U.S. Postal Service and the freight
carriers.
At this time, management does not believe that the events of September 11th and
thereafter had or will have a material impact on the Company.
Because terrorists have only targeted humans, anthrax does not appear to be a
threat to any of the Company's product sources. However, an outbreak of mad cow
disease or other similar disease in livestock herds here or abroad could result
in significant negative effects on the Company's product availability or prices.
Capital Resources, Liquidity and Financial Condition
- ----------------------------------------------------
Our primary sources of liquidity and capital resources during the first three
quarters of 2001 were funds provided by operating activities in the amount of
$1,039,000 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. Capital
expenditures of $629,000 through September 30, 2001 consisted of $330,000 in
computer equipment, $172,000 in equipment and leasehold improvements related to
the Tandy acquisition, and $127,000 in various equipment and furniture
purchases.
The primary sources of liquidity and capital resources during the third quarter
of 2001 were funds provided by the Company's Credit and Security Agreement.
Operating activities in the third quarter used cash in the amount of $478,000,
due to an increase in inventory and a decrease in accounts payable. This is
caused by the extra leather purchases made in the second quarter of 2001
required to be paid for in the third quarter.
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, we had a zero balance of unrestricted
cash at September 30, 2001. At the same date, the Company had in excess of $1.1
million in available credit under the revolving credit facility.
14
The Company's investment in accounts receivable was $2.8 million at September
30, 2001, up $645,000 from $2.2 million at year-end 2000. Credit sales in the
current year are on pace to exceed the 2000 totals by approximately $3 million.
As of September 30, 2001, days to collect dropped by almost 3 days compared to
2000. We closely monitor the purchasing and payment activities of customers who
have been granted credit by us for indications of possible delinquency. Given
the state of the national economy, our credit policies have been further
tightened in an attempt to avoid potential problems in collecting accounts.
Inventory increased $260,000 to $9.5 million at September 30, 2001 from $9.2
million at year-end 2000. Inventory turnover increased to an annualized rate of
4.32 times during the first nine months of 2001, an improvement over the
turnover of 3.64 times for all of 2000. Compared to annualized inventory
turnover rates of 4.26 times in the first quarter of 2001 and 4.12 times in the
second quarter, the fluctuations in the rates are in line with management's
expectations following the intentional increase in inventory during the past
several quarters.
Accounts payable increased 14% to $2.5 million at the end of the third quarter
from the end of 2000. Compared to the end of the second quarter 2001, the total
dropped 6%. These relationships are consistent with previous discussions
concerning the fluctuations in inventory over the last several quarters.
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.
As previously disclosed, 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.
Also disclosed previously, 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 and 6.0% at September 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 September 30, 2001 and December 31, 2000,
the available and unused portion of the credit facility was approximately $1.1
million and $885,000, respectively.
We believe 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. Two new units, located in
Toronto, Ontario, and Chicago, Illinois, were opened in the third quarter of
2001. Historically, the Company invests approximately $125,000 in opening a new
unit. However, both units were opened at substantially lower costs than
expected.
15
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None
(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: November 14, 2001 By: /s/ Wray Thompson
--------------------------
Wray Thompson
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2001 By: /s/ Shannon L. Greene
----------------------
Shannon L. Greene
Chief Financial Officer and
Treasurer (Chief Accounting
Officer)
16