Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2002
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
-------------------- --------------------
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
3847 East Loop 820 South, Ft. Worth, Texas 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares outstanding as of May 10, 2002
- ---------------------------------------- -------------------------------------
Common Stock, par value $.0024 per share 10,041,161
Forward-Looking Statements
- --------------------------
This report (particularly Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations) contains forward-looking
statements of management. In general, these are predictions or suggestions of
future events and statements or expectations of future trends or occurrences.
There are certain important risks that could cause results to differ materially
from those anticipated by some of the forward-looking statements. Some, but not
all, of the important risks which could cause actual results to differ
materially from those suggested by the forward-looking statements include, among
other things:
o Changes in the economic recovery in the United States, as well as abroad,
from a recent downturn may cause our sales to decrease or not to increase.
o Favorable trends in the arts and crafts industry may slow or reverse.
o Although the Company believes that it has fixed recent problems,
reoccurrence of problems with our websites could result in lost sales.
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 acquisition of the
assets of Tandy Leather, the opening of Tandy Leather retail stores or
other retail initiatives might not be successful.
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 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 MARCH 31, 2002
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 ............................... 4
Consolidated Statements of Operations
Three months ended March 31, 2002 and 2001.......................... 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001.......................... 6
Consolidated Statements of Stockholders' Equity
Three months ended March 31, 2002 and2001........................... 7-8
Notes to Consolidated Financial Statements........................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results ofOperations........................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form8-K............................... 16
SIGNATURES............................................................... 17
3
4
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31, December 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 93,453 $ 409,040
Cash restricted for payment on revolving credit facility 346,081 491,729
Accounts receivable-trade, net of allowance for doubtful accounts
of $177,000 and $191,000 in 2002 and 2001, respectively 2,742,873 2,297,953
Inventory 8,275,170 9,054,269
Deferred income taxes 165,481 128,111
Other current assets 945,471 479,390
------------ ------------
Total current assets 12,568,529 12,860,492
------------ ------------
PROPERTY AND EQUIPMENT, at cost 4,313,668 4,201,368
Less-accumulated depreciation and amortization (2,970,318) (2,858,869)
------------ ------------
Property and equipment, net 1,342,499 1,343,350
GOODWILL, net of accumulated amortization of $732,000
and $1,583,000 in 2002 and 2001, respectively 607,455 4,535,412
OTHER INTANGIBLES, net of accumulated amortization of
$77,000 and $66,000, in 2002 and 2001, respectively 497,871 476,908
OTHER assets
296,079 333,012
------------ ------------
$ 15,313,284 $ 19,548,323
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,547,766 $ 1,303,596
Accrued expenses and other liabilities 1,116,555 1,171,152
Income taxes payable 387,396 52,662
Notes payable and current maturities of long-term debt 2,987,517 4,527,904
------------ ------------
Total current liabilities 6,039,234 7,055,314
------------ ------------
DEFERRED INCOME TAXES 62,727 61,647
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 6,657 7,691
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,000
Shares authorized, none issued or outstanding -- --
Common stock, $0.0024 par value; 25,000,000 shares
authorized, 10,011,161 and 9,991,161 shares issued
and outstanding at 2002 and 2001, respectively 24,027 23,979
Paid-in capital 4,043,585 4,030,508
Retained earnings 5,228,661 8,478,187
Less: Notes receivable - secured by common stock (51,203) (71,939)
Accumulated other comprehensive loss (40,404) (37,064)
------------ ------------
Total stockholders' equity 9,204,666 12,423,671
------------ ------------
$ 15,313,284 $ 19,548,323
============ ============
The accompanying notes are an integral part of these financial statements.
4
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
-------------------------------------------------------------------------------
2002 2001
------------ ------------
NET SALES $ 10,203,951 $ 9,372,613
COST OF SALES 4,835,356 4,488,397
------------ ------------
Gross profit 5,368,595 4,884,216
OPERATING EXPENSES 4,175,136 3,908,877
------------ ------------
INCOME FROM OPERATIONS 1,193,459 975,339
OTHER EXPENSE:
Interest expense 89,869 148,593
Other, net 16,355 7,291
------------ ------------
Total other expense 106,224 155,884
------------ ------------
INCOME BEFORE INCOME TAXES and CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 1,087,235 819,455
PROVISION FOR INCOME TAXES 327,930 322,172
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 759,305 497,283
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAXES (4,008,831) --
------------ ------------
NET INCOME (LOSS) $ (3,249,526) $ 497,283
============ ============
NET INCOME PER COMMON SHARE - BASIC:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 0.08 $ 0.05
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET (0.40) --
------------ ------------
NET INCOME PER COMMON SHARE $ (0.32) $ 0.05
============ ============
NET INCOME PER COMMON SHARE - ASSUMING DILUTION:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 0.07 $ 0.05
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET (0.37) --
------------ ------------
NET INCOME PER COMMON SHARE - DILUTED $ (0.30) $ 0.05
============ ============
The accompanying notes are an integral part of these financial statements.
5
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,249,526) $ 497,283
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation & amortization 122,993 193,643
Amortization of deferred financing costs 37,038 11,438
Other (39,630) (11,662)
Cumulative effect of change in accounting principle 4,008,831 --
Net changes in assets and liabilities:
Accounts receivable-trade, net (444,920) (365,273)
Inventory 878,308 822,650
Income taxes 334,734 193,113
Other current assets (465,286) 69,898
Accounts payable 244,169 (156,510)
Accrued expenses and other liabilities (54,597) (489,104)
----------- -----------
Total adjustments 4,621,640 268,193
----------- -----------
Net cash provided by operating activities 1,372,114 765,476
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (97,622) (453,230)
Payments in connection with businesses acquired (227,747) --
Increase in other assets (421) (1,078)
----------- -----------
Net cash used in investing activities (325,790) (454,308)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in revolving credit loans (1,521,777) (635,354)
Proceeds from notes payable and long-term debt -- 18,676
Payments on notes payable and long-term debt (19,643) (25,182)
Decrease in cash restricted for payment on revolving credit facility 145,648 35,064
Payments received on notes secured by common stock 20,736 1,750
Proceeds from issuance of common stock 13,125 59,737
----------- -----------
Net cash used in financing activities (1,361,911) (545,309)
----------- -----------
NET DECREASE IN CASH (315,587) (234,141)
CASH, beginning of period 409,040 234,141
----------- -----------
CASH, end of period $ 93,453 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 59,283 $ 148,337
Income taxes paid during the period, net of (refunds) 25,172 135,248
The accompanying notes are an integral part of these financial statements.
6
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
- --------------------------------------------------------------------------------
Common Stock Notes
---------------------------- receivable
Number Par Paid-in Retained - secured by
of shares value capital earnings common stock
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2000 9,908,161 $ 23,780 $ 3,946,608 $ 6,471,754 $ (120,339)
Payments on notes
receivable -
secured by common stock -- -- -- -- 1,750
Shares issued - employee
Stock options exercised 60,000 144 59,593 -- --
Net Income -- -- -- 497,283 --
Translation adjustment -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2001 9,968,161 $ 23,924 $ 4,006,201 $ 6,969,037 $ (118,589)
============ ============ ============ ============ ============
Comprehensive income for the three months ended March 31, 2001
BALANCE, December 31, 2001 9,991,161 $ 23,979 $ 4,030,508 $ 8,478,187 $ (71,939)
Payments on notes
receivable -
secured by common stock -- -- -- -- 20,736
Shares issued - employee
Stock options exercised 20,000 48 13,077 -- --
Net loss -- -- -- (3,249,526) --
Translation adjustment -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2002 10,011,161 $ 24,027 $ 4,043,585 $ 5,228,661 $ (51,203)
============ ============ ============ ============ ============
Comprehensive loss for the three months ended March 31, 2002
The accompanying notes are an integral part of these financial statements.
7
- --------------------------------------------------------------------------------
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONTINUED
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
- --------------------------------------------------------------------------------
Accumulated
Other
Cumulative Comprehensive
Loss Total Income (Loss)
------------ ------------ ------------
BALANCE, December 31, 2000 $ (26,166) 10,295,637
Payments on notes
receivable -
secured by common stock -- 1,750
Shares issued - employee
Stock options exercised -- 59,737
Net Income -- 497,283 497,283
Translation adjustment (9,768) (9,768) (9,768)
------------ ------------
BALANCE, March 31, 2001 $ (35,934) $ 10,844,639
============ ============
------------
Comprehensive income for the three months ended March 31, 2001 $ 487,515
============
BALANCE, December 31, 2001 $ (37,064) 12,423,671
Payments on notes
receivable -
secured by common stock -- 20,736
Shares issued - employee
Stock options exercised -- 13,125
Net loss -- (3,249,526) (3,249,526)
Translation adjustment
(3,340) (3,340) (3,340)
------------ ------------
BALANCE, March 31, 2002 $ (40,404) $ 9,204,666
============ ============
------------
Comprehensive loss for the three months ended March 31, 2002 $ (3,252,866)
============
The accompanying notes are an integral part of these financial statements.
8
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of those of a normal recurring
nature) considered necessary to present fairly its financial position as of
March 31, 2002 and December 31, 2001, and the results of operations and cash
flows for the three-month periods ended March 31, 2002 and 2001. The results of
operations for the three-month periods are not necessarily indicative of the
results to be expected for the full fiscal year. The consolidated financial
statements should be read in conjunction with the financial statements and
disclosures contained in the Company's 2001 Annual Report on Form 10-K ("Annual
Report").
In June 2001, the FASB issued Statements of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. This standard requires
companies to stop amortizing goodwill and certain intangible assets with
indefinite useful lives. Instead, goodwill and intangible assets deemed to have
indefinite useful lives will be subject to an annual review of impairment. The
new standard was effective for The Leather Factory, Inc. ("TLF") in the first
quarter of 2002. Upon adoption of SFAS No. 142, TLF recorded a one-time, noncash
charge of approximately $4 million to reduce the carrying value of its goodwill
relating to its subsidiary, Roberts, Cushman & Co., Inc. This charge is
non-operational in nature and is reflected as a cumulative effect of an
accounting change in the accompanying consolidated statement of operations. For
additional discussion on the impact of adopting SFAS No. 142, see Note 5.
Certain reclassifications have been made to conform the 2001 financial
statements to the presentation in 2002. The reclassifications had no effect on
net income.
2. INVENTORY
The components of inventory consist of the following:
As of
---------------------------
March 31, December 31,
2002 2001
------------ ------------
Finished goods held for sale $ 7,333,112 $ 8,025,845
Raw materials and work in process 942,058 1,028,424
------------ ------------
$ 8,275,170 $ 9,054,269
============ ============
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Numerator:
Net income (loss) $ (3,249,526) $ 497,283
------------ ------------
Numerator for basic and diluted earnings per share (3,249,526) 497,283
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 10,001,717 9,949,494
Effect of dilutive securities:
Stock options 482,800 92,424
Warrants 247,196 162,690
------------ ------------
Dilutive potential common shares 729,996 255,114
------------ ------------
Denominator for diluted earnings per share -
weighted-average shares 10,731,713 10,204,608
============ ============
Basic earnings per share $ (0.32) $ 0.05
============ ============
Diluted earnings per share $ (0.30) $ 0.05
============ ============
9
The net effect of converting stock options to purchase 844,000 and 442,000
shares of common stock at option prices less than the average market prices has
been included in the computations of diluted EPS for the quarter ended March 31,
2002 and 2001, respectively.
4. SEGMENT INFORMATION
The Company identifies its segments based on the activities of three distinct
businesses: The Leather Factory, which sells product to both wholesale and
retail customers and consists of a chain of sales/distribution units located in
the United States and Canada; Tandy Leather Company, which sells product
throughout the United States via retail stores, the Internet and mail-order, and
internationally through authorized dealers; and Roberts, Cushman & Company,
which manufactures decorative hat trims sold directly to hat manufacturers and
distributors.
The Company's reportable operating segments have been determined as separately
identifiable business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes.
The Leather Tandy Leather Roberts,
Factory Company Cushman & Co Total
------------ ------------ ------------ ------------
For the quarter ended March 31, 2002
Net sales $ 7,824,517 $ 1,877,874 $ 501,560 $ 10,203,951
Gross profit 4,126,872 1,073,579 168,144 5,368,595
Operating earnings 975,727 141,501 76,231 1,193,459
Interest expense (89,655) (214) -- (89,869)
Other, net (15,854) (501) -- (16,355)
------------
Income before income taxes & change in
accounting principle 870,218 140,786 76,231 1,087,235
------------
Depreciation and amortization 132,946 23,703 3,382 160,031
Fixed asset additions 71,529 25,513 580 97,622
------------ ------------ ------------ ------------
Total assets $ 11,928,363 $ 2,530,336 $ 854,585 $ 15,313,284
------------ ------------ ------------ ------------
For the quarter ended March 31, 2001
Net sales $ 7,103,792 $ 1,775,116 $ 493,705 $ 9,372,613
Gross profit 3,764,419 978,310 141,487 4,884,216
Operating earnings (loss) 1,003,701 (19,664) (8,698) 975,339
Interest expense (148,593) -- -- (148,593)
Other, net (7,444) 153 -- (7,291)
------------
Income (loss) before income taxes 847,664 (19,511) (8,698) 819,455
------------
Depreciation and amortization 131,044 35,861 38,176 205,081
Fixed asset additions 280,076 172,434 720 453,230
------------ ------------ ------------ ------------
Total assets $ 10,852,853 $ 3,213,420 $ 5,071,821 $ 19,138,094
------------ ------------ ------------ ------------
10
Net sales for geographic areas were as follows:
Three months ended
March 31, 2002 March 31, 2001
-------------------------------
United States $ 9,662,434 $ 8,869,011
All other countries 541,517 503,602
-------------------------------
$ 10,203,951 $ 9,372,613
===============================
5. GOODWILL and OTHER INTANGIBLES
As discussed in Note 1, in January 2002, the Company adopted SFAS 142, which
requires companies to stop amortizing goodwill and certain intangible assets
with indefinite lives. Instead, it requires that goodwill and intangible assets
deemed to have indefinite useful lives be reviewed for impairment upon adoption
(January 1, 2002) and annually thereafter.
Under SFAS 142, goodwill impairment is deemed to exist if the net book value of
a reporting unit exceeds its estimated fair value. The Company's reporting units
are generally the same as the operating segments identified in Note 4 - Segment
Information. The new methodology in SFAS 142 differs from the Company's prior
policy, which was permitted under earlier accounting standards, of using
undiscounted cash flows of the acquired asset to determine if goodwill is
recoverable.
Upon adoption of SFAS 142, the Company recorded a one-time, non-cash charge of
approximately $4 million in the first quarter of 2002 to reduce the carrying
value of its goodwill. This charge in non-operational in nature and is reflected
as a cumulative effect of an accounting change in the accompanying consolidated
statements of operations.
The SFAS 142 goodwill impairment is associated solely with goodwill resulting
from the acquisition of Roberts, Cushman & Co., Inc. ("Cushman") in 1995. The
current fair value of Cushman and its assets was estimated by an independent
third party using projected discounted future operating cash flows. The amount
of the impairment primarily reflects the decline in Cushman's sales since the
acquisition occurred.
A summary of changes in the Company's goodwill during the quarter ended March
31, 2002 by business segment is as follows:
January 1, Acquisitions & March 31,
2002 Adjustments Impairments 2002
-------------- -------------- -------------- --------------
Leather Factory $ 332,630 (191) -- $ 332,439
Tandy Leather 193,951 81,065 -- $ 275,016
Roberts, Cushman 4,008,831 -- (4,008,831) --
-------------- -------------- -------------- --------------
Total $ 4,535,412 80,874 (4,008,831) $ 607,455
============== ============== ============== ==============
As of March 31, 2002 and December 31, 2001, the Company's intangible assts and
related accumulated amortization consisted of the following:
As of March 31, 2002
------------------------------------------
Accumulated
Gross Amortization Net
------------ ------------ ------------
Trademarks, Copyrights $ 542,744 $ 74,873 $ 467,871
Non-Compete Agreements 32,000 2,000 30,000
------------ ------------ ------------
$ 574,744 $ 76,873 $ 497,871
============ ============ ============
11
As of December 31, 2001
------------------------------------------
Accumulated
Gross Amortization Net
------------ ------------ ------------
Trademarks, Copyrights $ 542,744 $ 65,836 $ 476,908
============ ============ ============
The Company recorded amortization expense of $11,352 during the first quarter of
2002 compared to $20,426 during the first quarter of 2001. The Company has no
intangible assets not subject to amortization under SFAS 142. Based on the
current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the succeeding 5 years are as follows:
Leather Tandy
Factory Leather Cushman Total
--------- --------- --------- ---------
2002 $ 5,809 $ 40,339 $ 0 $ 46,148
2003 5,809 41,004 0 46,813
2004 5,809 41,004 0 46,813
2005 5,809 31,004 0 36,813
2006 5,809 30,339 0 36,148
During the first quarter of 2002, the Company acquired the following intangible
assets:
Amortization Period
-------------------
Non-Compete Agreements $32,000 3 years
The 2001 results on a historical basis do not reflect the provision of SFAS 142.
Had the Company adopted SFAS 142 on January 1, 2001, the historical net income
and basic and diluted net income per common share would have been changed to the
adjusted amounts indicated below:
Three Months Ended March 31, 2001
-------------------------------------------------
Earnings per Earnings per
Net Income Share - Basic Share - Diluted
--------------- --------------- ---------------
Reported net income $ 497,283 $ 0.05 $ 0.05
Addback goodwill amortization 51,282 0.01 --
--------------- --------------- ---------------
Adjusted net income $ 548,565 $ 0.06 $ 0.05
=============== =============== ===============
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
- -------
The Leather Factory, Inc. ("TLF" or the "Company") is a Delaware corporation
whose common stock trades on the American Stock Exchange under the symbol "TLF".
The Company is managed on a business entity basis, with those businesses being
The Leather Factory ("Leather Factory"), Tandy Leather Company ("Tandy"), and
Roberts, Cushman & Company, Inc. ("Cushman"). See Note 4 to the Consolidated
Financial Statements for additional information concerning the Company's
segments.
Leather Factory, founded in 1980 by Wray Thompson and Ron Morgan, is the premier
distributor of leather products to customers worldwide. Products are distributed
primarily through 30 sales units located in twenty states and Canada. Products
include leather, leatherworking tools, buckles and adornments for belts, leather
dyes and finishes, shoe repair supplies, saddle and tack hardware, and
do-it-yourself kits.
12
Tandy, acquired in November 2000, is the most recognized supplier in the
leathercraft industry. From its founding in 1919, Tandy has been the primary
resource for leathercrafters world wide. Products include quality tools,
leather, accessories, kits and teaching materials and are distributed through
three company-owned retail stores and its central distribution facility.
Cushman, whose origins date back to the mid-1800's, custom designs and
manufactures a product line of decorative hat trims for headwear manufacturers.
Results of Operations
---------------------
The following tables present selected financial data of each of the Company's
three segments for the quarters ended March 31, 2002 and 2001:
Quarter Ended March 31, 2002 Quarter Ended March 31, 2001
---------------------------- ----------------------------
Operating Operating
Sales Income Sales Income
----------- ----------- ----------- -----------
Leather Factory $ 7,824,517 $ 975,727 $ 7,103,792 $ 1,003,701
Tandy 1,877,874 141,501 1,775,116 (19,664)
Cushman 501,560 76,231 493,705 (8,698)
----------- ----------- ----------- -----------
Total Operations $10,203,951 $ 1,193,459 $ 9,372,613 $ 975,339
=========== =========== =========== ===========
Consolidated net sales for the quarter ended March 31, 2002 increased $831,000,
or 8.9%, compared to the same period in 2001. Leather Factory contributed
$720,000 to the increase due primarily to continued growth in our sales to craft
store customers. Tandy added $103,000 of additional sales while Cushman's sales
held virtually steady. The Company experienced an increase in operating income
of 22.4% from 2001 to 2002.
% of Net Sales
Quarterly period ended
March 31, Change in $ and %
------------------------- -------------------------
2002 2001 $ Change % Change
----------- ----------- ----------- -----------
Net sales 100.00% 100.00% $ 831,338 8.87%
Cost of sales 47.39 47.89 346,959 7.73
----------- ----------- -----------
Gross profit 52.61 52.11 484,379 9.92
Operating expenses 40.92 41.71 266,259 6.81
----------- ----------- -----------
Income from operations 11.69 10.40 218,120 22.36
Interest expense and other 1.04 1.66 (49,659) (31.86)
----------- ----------- -----------
Income before income taxes and cumulative effect of
change in accounting principle 10.65 8.74 267,779 32.68
Income tax provision 3.21 3.44 5,757 1.79
----------- ----------- -----------
Net income tax before cumulative effect of change in
accounting principle 7.44 5.30 262,022 52.69
Cumulative effect of change in accounting principle (39.29) -- (4,008,831) N/A
----------- ----------- -----------
Net income (loss) (31.85%) 5.30% (3,746,809) (753.46%)
=========== =========== ===========
13
Leather Factory Operations
Net sales from Leather Factory's 30 sales/distribution units increased 10.2% for
the first quarter of 2002. The two units opened in the third quarter of 2001
contributed 23.5% of the sales increase. Same store sales increased 7.8% over
the first quarter of 2001.
The following table presents TLF's sales mix by customer categories for the
quarters ended March 31, 2002 and 2001:
Quarter ended
Customer Group 3/31/02 3/31/01
- -------------- ---------- ----------
RETAIL (end users, consumers, individuals) 21% 21%
INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 7 8
WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, dealers, etc.) 32 32
CRAFT (craft stores (individually owned) and craftstore chains) 26 21
MIDAS (small manufacturers) 7 11
ASC (Authorized Sales Centers) 7 7
---------- ----------
100% 100%
========== ==========
Our sales to our CRAFT customers continue to gain momentum as the majority of
the sales increase gained this quarter was from this customer group. The arts
and crafts industry in general is booming domestically and Leather Factory is
benefiting as a result. Various publications and articles have been published
recently to support the theory that the crafts industry is expected to show
solid growth during the remainder of the decade. The sales decline to our MIDAS
customer group was caused by a general slow-down in orders from the
manufacturers due to the slow-down in orders received from their retail
customers.
Operating income for TLF decreased $34,500 or 3.4% of sales for the current
quarter compared to 2001. Operating expenses as a percentage of sales were
40.3%, which is slightly higher than management's target of 40.0%. The Company's
expected contribution to the ESOP for the benefit of employees was increased in
the first quarter, as management believes the employees should benefit from the
Company's operational successes. As a result of the additional ESOP contribution
amount, the operating expenses and operating income amounts were negatively
impacted when compared to the first quarter of 2001.
Tandy Leather Operations
Net sales for Tandy, which consisted of two retail stores and a central
distribution center as of March 31, 2002, increased 5.8% for the first quarter
of 2002 over the same quarter last year. The two retail stores opened in the
current quarter added $175,000 in sales while the central distribution center's
sales decreased by $72,500. The central distribution center's sales are
generated by phone, fax, mail order and Internet orders. The sales decline at
this facility was the result of reduction in Internet orders received due to a
technical problem with the website (www.tandyleather.com) during the latter part
of March. Although we believe we have fixed this problem at the end of April,
the problem may affect Internet sales reported by Tandy in the second quarter.
Operating income for Tandy increased $161,000 in the current quarter as a result
of an increase in gross profit margin of 2% and a reduction in operating
expenses of 6%. Tandy's operating expenses were less than 50% of sales for the
first time since the acquisition. Management is pleased with the improvement
while hoping to continue this trend of streamlining operating expenses. The
retail stores tend to operate more efficiently than the central distribution
center. Therefore, as more retail stores are added, the overall operating
efficiency of Tandy should improve.
14
Roberts, Cushman Operations
Net sales for Cushman increased $7,800 for the first quarter of 2002, a minimal
improvement. However, even though the sales were virtually flat, Cushman's gross
profit margin improved almost 5% compared to the first quarter of 2001. As
previously discussed in the 2001 Annual Report, we intentionally sold some
inventory at a low gross margin in 2001 in order to position Cushman to achieve
better financial results in the future. We believe that the first quarter 2002
financial results add evidence to support the appropriateness of that decision.
Operating income for Cushman increased $85,000 as a result of the improvement in
the gross margins and also the reduction of operating expenses. We operated with
fewer personnel in the current quarter - an adjustment made by management late
in 2001 in order to compensate for flat sales.
In 2001, operating expenses included $30,000 of amortization of goodwill that is
not included in 2002 due to the change in accounting principle regarding
goodwill (SFAS No. 142). The reduction of goodwill in the first quarter
eliminated all goodwill recorded on our books for Cushman. Further discussion
regarding this accounting rule is contained in Note 5 to the Consolidated
Financial Statements.
Capital Resources, Liquidity and Financial Condition
- ----------------------------------------------------
The change in accounting principle discussed above had significant effects on
our consolidated balance sheet at March 31, 2002. Total goodwill was reduced
from $4,535,412 at the end of 2001 to $607,455. This reduction was the principal
cause of the reduction in total assets from $19,548,323 at the end of 2001 to
$15,313,284 at the end of the first quarter of 2002 (a reduction of 21.7%).
Total stockholders' equity was reduced from $12,423,671 at December 31, 2001 to
$9,204,666 at March 31, 2002 (a reduction of 25.9%). This reduction was also
attributable to the change in accounting principle, but the effect was partially
offset by operating results from the first quarter of this year.
The Company's investment in accounts receivable was $2.7 million at March 31,
2002, up $445,000 from $2.3 million at year-end 2001. This is a result of an
increase in credit sales during the quarter ended March 31, 2002 as compared to
that of the quarter ended December 31, 2001. The average days to collect
accounts improved slightly over the first quarter of 2001 to 47.2 days. Tandy's
average days to collect experienced the most improvement, from 51.7 days in 2001
to 42.9 days for the first quarter of 2002.
Inventory decreased $779,000 to $8.3 million at March 31, 2002 from $9.1 million
at year-end 2001. Inventory turnover increased to an annualized rate of 4.71
times during the first quarter of 2002, an improvement over the turnover rate of
4.11 times for the first quarter of 2001 and 4.08 times for all of 2001. Tandy's
inventory turnover rate accounts for the improvement due to the drastic decrease
in its inventory levels from March 31, 2001 to March 31, 2002 while supporting
the same sales level. Management believes Tandy is operating with a more
realistic inventory level currently although we do have the ability to transfer
merchandise from Leather Factory to Tandy almost immediately if necessary to
support sales requirements.
Notes payable and current maturities of long-term debt decreased from $4,527,904
at the end of 2001 to $2,987,518 at March 31, 2002. Accounts payable increased
$244,000 to $1.5 million at the end of the first quarter, due primarily to
management's success in obtaining longer credit terms with several large
vendors. The Company's current ratio improved from 1.82 at December 31, 2001 to
2.08 at March 31, 2002.
The primary sources of liquidity and capital resources during the first quarter
of 2002 were funds provided by operating activities in the amount of $1,372,000
and the Company's Credit and Security Agreement with Wells Fargo Business
Credit, Inc. ("WFBC"). The Company used its first quarter operating cash flow
and additional funds on hand at the beginning of the quarter to pay down debt
balances ($1,547,766), purchase equipment ($97,622), and purchase the assets of
two existing leathercraft stores ($227,747).
15
Approximately 25% of the 2002 capital spending was for computer equipment and
software for the new Tandy retail stores, 25% was for inventory scanning
equipment for the existing Leather Factory stores, 30% was for various computer
workstation and software upgrades in existing locations and departments, and 20%
was for various furniture and fixtures. The two leathercraft stores acquired
created Tandy's two retail stores in Oklahoma City, OK and Boise, ID. The assets
purchased in the two transactions were inventory and miscellaneous store
fixtures.
As previously disclosed, on March 20, 2002, the Company entered into an Amended
and Restated Credit and Security Agreement with Wells Fargo Bank Minnesota, N.A.
("Wells Fargo"), which replaced the Company's previous borrowing arrangement
with WFBC. The agreement provides for a revolving credit facility of up to
$7,500,000 and contains similar covenants as that of the previous WFBC
agreement. The significant difference between the two agreements is that the new
agreement has a provision regarding the value of inventory included in the
borrowing base calculation that is more favorable to the Company.
The revolving credit facility with Wells Fargo is based upon the level of the
Company's accounts receivable and inventory. At March 31, 2002, the available
and unused portion of the credit facility was approximately $3,122,000. Wells
Fargo has granted a waiver of any noncompliance with our financial covenants
arising from the change in accounting principle described above.
The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current operations and the opening of any potential
new Tandy retail stores or Leather Factory sales/distribution units. In 2002,
the funding for the opening of any new locations is expected to be provided by
operating leases, cash flows from operating activities, and the revolving credit
facility.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's Credit Facility includes loans with interest rates that vary with
changes in the prime rate. An increase of one percentage point in the prime rate
would not have a material impact on the Company's future earnings.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On March 20, 2002, the Company filed a report on Form 8-K (Items 5 and 7)
describing the Amended and Restated Credit and Security Agreement with Wells
Fargo Bank Minnesota, N.A.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: May 14, 2002 By: /s/ Wray Thompson
--------------------------
Wray Thompson
Chairman of the Board and
Chief Executive Officer
Date: May 14, 2002 By: /s/ Shannon L. Greene
----------------------
Shannon L. Greene
Chief Financial Officer and
Treasurer (Chief Accounting
Officer)
17