UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(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, 1999
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 November 4, 1999
- ------------------------------------ -----------------------------------------
Common Stock, par value $.0024 9,853,161
per share
<PAGE>
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998.......................... 3
Consolidated Statements of Income (Loss)
Three and nine months ended September 30, 1999 and 1998........... 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998..................... 5
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) Nine months ended
September 30, 1999 and 1998....................................... 6
Notes to Consolidated Financial Statements......................... 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 14 8-K.......................... 14
SIGNATURES............................................................. 14
EXHIBIT INDEX.......................................................... 15-17
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- ------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 127,389 $ 510,399
Cash restricted for payment on revolving credit facility 432,880 232,838
Accounts receivable-trade, net of allowance for
doubtful accounts of $125,000 and $52,000
in 1999 and 1998, respectively 2,511,984 1,582,459
Inventory 8,333,414 6,956,606
Prepaid income taxes - 228,939
Deferred income taxes 135,520 102,012
Other current assets 522,249 272,993
------------- ------------
Total current assets 12,063,436 9,886,246
------------- ------------
PROPERTY AND EQUIPMENT, at cost 3,113,758 2,671,827
Less-accumulated depreciation and amortization (2,069,922) (1,813,378)
------------- ------------
Property and equipment, net 1,043,836 858,449
GOODWILL and other, net of accumulated amortization of
$1,603,000 and $1,246,000 in 1999 and 1998, respectively 4,959,052 5,285,242
------------- ------------
$ 18,066,324 $ 16,029,937
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,563,862 $ 1,019,069
Accrued expenses and other liabilities 811,413 530,789
Notes payable and current maturities of
long-term debt 7,039,654 6,139,327
------------- ------------
Total current liabilities 9,414,929 7,689,185
------------- ------------
DEFERRED INCOME TAXES 99,137 109,085
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 152,549 61,389
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, 9,853,161 shares issued in 1999 and 1998 23,648 23,648
Paid-in capital 3,901,740 3,901,740
Less: Notes receivable - secured by common stock (182,987) (224,750)
Retained earnings 4,682,460 4,495,378
Accumulated other comprehensive loss (25,152) (25,738)
------------- ------------
Total stockholders' equity 8,399,709 8,170,278
------------- ------------
$ 18,066,324 $ 16,029,937
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
THREE MONTHS NINE MONTHS
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 7,625,168 $ 5,628,895 $ 19,678,118 $ 16,811,190
COST OF SALES 4,180,108 3,146,647 11,060,400 9,487,408
------------ ------------ ------------ ------------
Gross Profit 3,445,060 2,482,248 8,617,718 7,323,782
OPERATING EXPENSES 2,723,615 2,186,063 7,546,169 6,678,596
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 721,445 296,185 1,071,549 645,186
OTHER (INCOME) EXPENSE:
Interest expense 183,403 250,841 581,297 751,188
Other, net 4,701 3,580 (9,679) (20,221)
------------ ------------ ------------ ------------
Total other (income) expense 188,104 254,421 571,618 730,967
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 533,341 41,764 499,931 (85,781)
PROVISION FOR INCOME TAXES 260,776 35,850 312,849 30,377
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 272,565 $ 5,914 $ 187,082 $ (116,158)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE $ 0.03 $ -- $ 0.02 $ (0.01)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution $ 0.03 $ -- $ 0.02 $ (0.01)
============ ============ ============ ============
DIVIDENDS PAID PER COMMON SHARE $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 187,082 $ (116,158)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation & amortization 415,554 399,104
(Gain) loss on sales of assets -- (9,118)
Deferred financing costs 189,472 165,854
Deferred income taxes (43,815) (31,633)
Other 945 4,472
Net changes in operating assets and liabilities:
Accounts receivable-trade, net (929,525) (186,546)
Inventory (1,376,808) 25,002
Income taxes 413,554 20,495
Other current assets (249,255) (12,241)
Accounts payable 544,793 301,191
Accrued expenses and other liabilities 96,009 (94,853)
----------- -----------
Total adjustments (939,076) 581,727
----------- -----------
Net cash provided by operating activities (751,994) 465,569
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (441,932) (112,583)
Proceeds from sales of assets 0 10,000
Other intangible costs (8,174) (1,728)
----------- -----------
Net cash used in investing activities (450,106) (104,311)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans 1,116,440 241,900
Proceeds from notes payable and long-term debt 217,493 --
Payments on notes payable and long-term debt (342,446) (316,150)
Change in cash restricted for payment on revolving credit facility (200,042) 35,481
Payments received on notes secured by common stock 41,763 26,392
Deferred financing costs (14,118) (205,735)
----------- -----------
Net cash used in financing activities 819,090 (218,112)
----------- -----------
NET INCREASE (DECREASE) IN CASH (383,010) 143,146
CASH, beginning of period 510,399 70,496
----------- -----------
CASH, end of period $ 127,389 $ 213,642
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 511,332 $ 594,390
Income taxes paid during the period, net of refunds (56,326) 34,895
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Common Stock Notes Accumulated
------------------- Receivable Other
Number Par Paid-in - Secured by Unearned Retained Comprehensive
of Shares Value Capital Common Stock ESOP Shares Earnings Loss
--------- --------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 9,853,161 $ 23,648 $ 4,119,915 $ (257,617) $ (273,851) $ 4,534,569 $ (14,018)
Payments received on notes
secured by common stock - - - 26,392 - - -
Allocation of suspended
ESOP shares committed to
be released - - (41,419) - 45,795 - -
Warrants issued to
acquire 200,000 shares of
common stock - - 40,000 - - - -
Net loss - - - - - (116,158) -
Foreign currency
translation adjustment,
net of tax of ($6,620) - - - - - - (10,800)
--------- --------- ----------- ------------- ----------- ----------- -------------
BALANCE, September 30, 1998 9,853,161 $ 23,648 $ 4,118,496 $ (231,225) $ (228,056) $ 4,418,411 $ (24,818)
========= ========= ============ ============= =========== =========== =============
Total
Stockholder's Comprehensive
Equity Income (Loss)
------------- -------------
BALANCE, December 31, 1997 $ 8,132,646
Payments received on notes
secured by common stock 26,392
Allocation of suspended
ESOP shares committed to
be released 4,376
Warrants issued to
acquire 200,000 shares of
common stock 40,000
Net loss (116,158) $ (116,158)
Foreign currency
translation adjustment,
net of tax of ($6,620) (10,800) (10,800)
-------------
BALANCE, September 30, 1998 $ 8,076,456
=============
Comprehensive income (loss) for the nine months -------------
ended September 30, 1998 $ (126,958)
=============
Common Stock Notes Accumulated
------------------- Receivable Other
Number Par Paid-in - Secured by Unearned Retained Comprehensive
of Shares Value Capital Common Stock ESOP Shares Earnings Loss
--------- --------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 9,853,161 $ 23,648 $ 3,901,740 $ (224,750) - $ 4,495,378 $ (25,738)
Payments received on notes
secured by common stock - - - 41,763 - - -
Allocation of suspended
ESOP shares committed to
be released - - - - - - -
Net income - - - - - 187,082 -
Foreign currency
translation adjustment,
net of tax of ($359) - - - - - - 586
--------- --------- ----------- ------------- ----------- ----------- -------------
BALANCE, September 30, 1999 9,853,161 $ 23,648 $ 3,901,740 $ (182,987) - $ 4,682,460 $ (25,152)
========= ========= =========== ============= =========== =========== =============
Total
Stockholder's Comprehensive
Equity Income (Loss)
------------- -------------
BALANCE, December 31, 1998 $ 8,170,278
Payments received on notes
secured by common stock 41,763
Allocation of suspended
ESOP shares committed to
be released -
Net income 187,082 $ 187,082
Foreign currency
translation adjustment,
net of tax of ($359) 586 586
-------------
BALANCE, September 30, 1999 $ 8,399,709
============
Comprehensive income (loss) for the nine months -------------
ended September 30, 1999 $ 187,668
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of The Leather Factory, Inc. (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, 1999 and December 31, 1998, and the results of operations
and cash flows for the three and nine month periods ended September 30, 1999 and
1998. 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 1998 Annual
Report on Form 10-K ("Annual Report").
2. INVENTORY
The components of inventory consist of the following:
September 30, December 31,
1999 1998
------------- ------------
Finished goods held for sale $ 7,092,418 $ 5,564,406
Raw materials and work in process 1,240,996 1,392,200
============= ============
$ 8,333,414 $ 6,956,606
============= ============
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator for earnings per share:
Net income (loss) - Basic $ 272,565 $ 5,914 $ 187,082 $ (116,158)
========== ========== ========== ==========
Net income (loss) - Diluted $ 282,532 $ 5,914 $ 187,082 $ (116,158)
========== ========== ========== ==========
Denominator for earnings per share:
Weighted-average shares outstanding - Basic 9,971,982 9,805,385 9,901,828 9,802,349
Weighted-average shares outstanding - Diluted 10,662,590 9,805,385 9,901,828 9,802,349
Basic earnings per share $ 0.03 $ - $ 0.02 $ (0.01)
========== ========== ========== ==========
Diluted earnings per share $ 0.03 $ - $ 0.02 $ (0.01)
========== ========== ========== ==========
</TABLE>
Unexercised employee and director stock options to purchase 360,000 and 543,000
shares of common stock as of September 30, 1999 and 1998, respectively, were not
included in the computations of diluted earnings per share ("EPS") because the
options' exercise prices were greater than or equal to the average market price
of the common stock during the respective periods.
Warrants (see note 9 to consolidated financial statements in the Annual Report)
to acquire 300,000 shares of common stock were included in the computations of
diluted EPS because the warrants' exercise prices were less than the average
market price of the common stock during the quarter and nine months ended
September 30, 1999.
7
<PAGE>
The 13% convertible debt (see note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted EPS for the nine
months ended September 30, 1999 because the interest cost (net of tax) per
assumed converted share was more than basic EPS and, therefore, the effect would
be antidilutive. For the quarter ended September 30, 1999, the net after tax
interest cost per assumed converted share was less than basic EPS, having a
dilutive effect, and have been included in the computation of diluted EPS.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
- -------
The Company is the premier distributor of leather and leathercraft products to
over 40,000 customers ranging from the individual hobbyist to large retail
chains. Customer groups served include: individual hobbyists, wholesale
distributors, tack and saddle shops, shoe-findings customers, institutions,
prisons and prisoners, dealer stores, western stores, craft stores and craft
store chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers, and retailers. The Company's products are distributed primarily
through 26 sales/distribution units in the United States and Canada or through
its subsidiary, Roberts, Cushman & Company, Inc. ("Cushman"), in New York.
Cushman manufactures and distributes hat trims in braids, leather, and woven
fabrics.
Results of Operations
- ---------------------
Analysis of Third Quarter 1999 Compared
To Third Quarter 1998
Income Statement Comparison
The following table sets forth, for the interim periods indicated, certain items
from the Company's Consolidated Statements of Income (Loss) expressed as a
percentage of net sales:
Quarterly Period Ended
September 30,
----------------------
1999 1998
------ ------
Net sales 100.0 % 100.0 %
Cost of sales 54.8 55.9
------ ------
Gross Profit 45.2 44.1
Operating expenses 35.7 38.9
------ ------
Income from operations 9.5 5.2
Interest and other expense, net 2.5 4.5
------ ------
Income before income taxes 7.0 0.7
Provision for income taxes 3.4 0.6
------ ------
Net Income 3.6 % 0.1 %
====== ======
8
<PAGE>
Revenues
For the second consecutive quarter, sales exhibited strong growth well above the
comparative period for the prior year. Net sales for the quarter ended September
30, 1999, increased 35.5% to $7,625,168 from $5,628,895 in the same interim
period during 1998. Outside the effect of a strategic decision to phase out low
profit margin goods sold to shoe repair customers, sales to all major customer
groups continued to show strong sales gains. Third quarter sales to the
Company's core business and institutional customers reflected over a 50% gain in
sales above the third quarter of last year. Through completion of implementation
issues with new programs previously announced, the Company experienced sales
gains of 58.4% over the same period last year in the craft and craft distributor
categories. Likewise, retail sales showed a 75% growth rate. The Company's four
new sales/distribution centers opened earlier in the year generated sales for
the quarter totaling $255,638, while the Company's second quarter program of
authorizing sales centers ("ASCs") produced third quarter sales of $339,619.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 54.8% for the third quarter of 1999
as compared to 55.9% for the same quarter in 1998. This 1.1 percentage point
reduction for the three-month period resulted from improved product mix and the
Company's strategic efforts to selectively increase prices and eliminate low
margin items from its product lines.
Lower relative cost of sales percentages meant that gross profit as a percentage
of sales improved to 45.2% for the three month period ended September 30, 1999,
as compared to 44.1% for the same period in 1998. Accordingly, gross profit
dollars increased $962,812 or 38.8% for the quarterly period ended September 30,
1999, compared to the respective 1998 period.
Operating expenses increased $537,552 or 24.6% to $2,723,615 during the third
quarter of 1999 from $2,186,063 during the quarter ended September 30, 1998. Of
this increase, $145,125 related to the cost of operating the four new
sales/distribution units, with the remaining $392,427 resulting mainly from
increased personnel, salary, and other costs necessary to support the increased
level of sales discussed above. However, the increase for the quarter ended
September 30, 1999, is only 5.4% above the operating expense reported for the
second quarter of this year. The Company's efforts to control these costs while
supporting the increased sales level have reduced operating costs as a
percentage of sales to 35.7% during the quarter from 38.9% in the comparative
quarter of 1998.
Other (Income) Expense
Other expenses decreased $129,908 or 51.1% to $188,104 for the third quarter of
1999 from $254,421 during the same quarter in 1998. The decrease was primarily
due to lower interest expense resulting from a reduction in prevailing interest
rates between the third quarter of 1998 and 1999. While it appears that the
Company's indebtedness was up dramatically for the current quarter, the increase
in notes payable occurred late in the quarter ended September 30, 1999.
Net Income (Loss)
The Company reported net income for the second consecutive quarter of $272,565
for the three months ended September 30, 1999, as compared to net income of
$5,914 in the corresponding period of 1998. The increased operating results for
such period resulted from the factors noted above regarding sales, gross profit,
operating and other expenses.
9
<PAGE>
Analysis of Nine Months Ended 1999 Compared
To Nine Months Ended 1998
Income Statement Comparison
The following table sets forth, for the interim periods indicated, certain items
from the Company's Consolidated Statements of Income (Loss) expressed as a
percentage of net sales:
Nine Months Ended
September 30,
-----------------
1999 1998
----- -----
Net sales 100.0 % 100.0 %
Cost of sales 56.2 56.4
----- -----
Gross Profit 43.8 43.6
Operating expenses 38.3 39.7
----- -----
Income from operations 5.5 3.9
Interest and other expense, net 2.9 4.4
----- -----
Income (Loss) before income taxes 2.6 (0.5)
(Benefit) provision for income taxes 1.6 (0.2)
----- -----
Net Income (Loss) 1.0 % (0.3)%
Revenues
The Company continued to show strong sales gains for the first nine months of
the year in the majority of its customer groups as displayed through the first
six months of the year. Net sales increased 17.1% for the nine months ended
September 30, 1999, compared to the same interim period in 1998. Sales to the
Company's core business and institutional customers reflected over a 37% gain in
sales above the comparative nine months of last year. Craft and craft
distributor sales also reflected an increase in sales of 19.0% over the same
period last year. The Company's four new sales/distribution units posted sales
of $348,452 or 1.8% of sales for the nine months. Sales to the Company's new
ASCs totaled $564,411 and accounted for 2.9% of net sales for the nine-month
period. Management expects this increase in sales to the ASCs to continue
throughout the fourth quarter and could account for 4% of net sales by year-end.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 56.2% for the nine months of 1999
as compared to 56.4% for the same period in 1998. This 0.2 percentage point
reduction for the nine-month period resulted from improved product mix and the
Company's strategic efforts to selectively increase prices and eliminate low
margin items from its product lines.
Lower relative cost of sales percentages meant that gross profit as a percentage
of sales improved to 43.8% for the nine month period ended September 30, 1999,
as compared to only 43.6% for the same period in 1998. This 0.2 percentage point
increase in gross profit generated an additional $1,293,936 or a 17.7% increase
for the nine months ended September 30, 1999 above the respective 1998 period.
Operating expenses increased $867,573 or 13.0% to $7,546,169 during the first
nine months of 1999 from $6,678,596 during the same nine months ended September
30, 1998. The increase between the two nine-month periods resulted from $241,521
in operating costs for the four new sales/distribution units opened earlier in
the year. The balance of costs totaling $626,052 related to the higher cost of
personnel, salary, insurance, and other costs necessary to support the higher
level of sales as reported for the nine-month period.
10
<PAGE>
Other (Income) Expense
Other expenses decreased $159,349 or 21.8% to $571,618 for the nine months of
1999 from $730,967 during the same period in 1998. The decrease was primarily
due to lower interest expense resulting from lower interest rates applicable to
the Company's revolving debt. While it appears that the Company's indebtedness
was up dramatically for the current quarter, the increase in notes payable
occurred late in the quarter ended September 30, 1999.
Net Income (Loss)
The Company reported net after tax income of $187,082 for the nine months ended
September 30, 1999, as compared to a net loss of $116,158 in the corresponding
period during 1998. The increased operating results for such period resulted
from the factors noted above regarding sales, gross profit, operating and other
expenses.
Capital Resources and Liquidity
- -------------------------------
The primary sources of liquidity and capital resources during the first nine
months of 1999 were net income in the amount of $187,082, non-cash adjustments
to net income of depreciation and amortization totaling $605,026, borrowings
from FINOVA Capital Corporation ("FINOVA"), and a subordinated debenture with
The Schlinger Foundation ("Schlinger"), and capital leases to finance investment
in new computer equipment.
The Company's investment in net accounts receivable was $2,511,984 at
September 30, 1999, up $929,525 from $1,582,459 at year-end 1998. The addition
to the average accounts receivable balance is due to the Company's increasing
sales levels. Inventory increased $1,376,808 to $8,333,414 at September 30,
1999, from $6,956,606 at year-end 1998. Although inventories were increased to
support the volume of sales reported in the nine months ended September 30,
1999, inventory turnover remained at the improved annual rate of 1.9 times as
was reported earlier for the six months ended June 30, 1999, which is above the
ratios of 1.81 for the first quarter of 1999 and 1.74 for all of 1998.
Management's ongoing implementation of new information systems assisted in the
monitoring of sales and inventory levels which contributed to improved inventory
management.
The largest uses of cash beyond debt payments during 1999 were for capital
expenditures, which totaled $154,362 for the quarter and $441,932 for the
nine-month period and related to the Company's ongoing computer system
implementation, warehouse fixtures and other equipment additions or replacements
at various sales/distribution units, and leasehold improvements and equipment
costs associated with the opening of four additional sales/distribution units.
The amount of the revolving credit facility with FINOVA that is available for
advances is based upon the level of the Company's accounts receivable and
inventory. At September 30, 1999 and December 31, 1998, the Company had
additional availability on the revolving credit facility of approximately
$702,000 and $475,000 respectively. Cash restricted for payment on this
revolving credit facility increased by $200,042 to $432,880 as of September 30,
1999.
The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current operations, meet debt obligations and fund
the future opening of new sales/distribution units. In 1999, funding for the
opening of new units was provided by operating leases, cash flows from operating
activities, and the Company's Revolving Credit Loan with FINOVA. The Company
expects to open two to three sales/distribution units per year for the next five
years. The opening of a sales/distribution unit is not capital intensive.
Historically, the Company invested approximately $125,000 in opening a new unit.
The four units opened this year required substantially less to open per unit
than the $125,000 historically invested in a new unit.
The Company's Senior Debt Facility with FINOVA and Subordinated Debenture with
Schlinger, (the "Obligations") mature on December 1, 1999. The Company is in the
process of negotiations with potential investors/lenders regarding renewing or
refinancing of the Obligations. Management believes the Company will be able to
successfully replace or renew these Obligations prior to their maturity.
However, management can provide no assurances about the Company's ability to
renew or refinance the Obligations. In the event that the Obligations are not
renewed or refinanced on or before maturity, the Company could experience a
material adverse impact.
11
<PAGE>
Year 2000 Issue
- ---------------
The Year 2000 ("Y2K") problem arose because many computer programs use only the
last two digits to refer to a year. As a consequence, unless modified, many
computer systems will interpret "00" as 1900 rather than the year 2000. This
issue is believed to affect virtually all organizations and failure to address
the problem could result in system failures and the generation of erroneous
data. Each company's potential costs and uncertainties will depend on a number
of factors including but not limited to its software, hardware, the nature of
its industry, and the sophistication of its manufacturing and process control
systems.
The Company has developed a comprehensive Y2K readiness plan to ensure its
systems will be Y2K compliant prior to the year 2000. Pursuant to this plan, the
Company conducted preliminary reviews of its critical information technology
("IT") systems as well as its non-IT systems. The majority of systems that were
found to be defective in this review, including the Company's point of sale
("POS") software used for invoicing and inventory maintenance in the Company's
Texas locations, have now been replaced or upgraded.
The installation of the POS system in the Company's remaining distribution units
was delayed until after the conversion and testing of the Y2K compliant version
of the software. Outside of two sales/distribution units, the conversion is
complete. The installation and training in the remaining two units is scheduled
to be completed by November 30, 1999.
The Company has appointed a Y2K committee composed of senior executives and
middle management. This committee is charged with testing systems for potential
Y2K problems missed in the preliminary review and remediation process as well as
assessing potential risks from the Company's trading partners' Y2K failures. The
committee's testing was completed by June 30, 1999. The committee's assessment
of risks from the Company's trading partners' Y2K failures has been an ongoing
analysis, and the committee has reported periodically to the Company's Board of
Directors.
The Company has managed its Y2K compliance program using mostly internal
salaried staff. For this reason and the fact that much of the replacement cost
of non-compliant IT systems would have been incurred in the normal course of
business, it is difficult to quantify the actual Y2K remediation costs. The
Company invested approximately $402,666 for new computer systems and software in
1998 and the first three quarters of 1999. This investment included system
upgrades that facilitated completion of the Y2K compliance program. Management
believes that the majority of the total expected system remediation cost has
already been incurred and does not expect to have additional hardware, software
or license purchases during the remainder of the year.
The Company believes because of the nature of its operations and the steps taken
as discussed above that the Y2K issue will not have a material impact on the
Company's results of operations, liquidity, or financial condition. Specifically
the Company does not anticipate any disruption in its ability to provide goods
or services to its customers. Actual results may differ from the forward-looking
statements contained in this discussion, and there can be no guarantee that the
failure of certain systems will not have a material adverse effect on the
Company.
In the unlikely event that unforeseen Y2K problems are not remedied prior to a
disruption in normal business operations, the Company would in most instances be
able to temporarily revert to manual processes that the Company successfully
used prior to automating many routine tasks. Because of the nature of the
leathercraft industry and the numerous sources of supply, the Company does not
expect any significant disruption that would hinder its ability to provide goods
and services as a result of any of its vendors or trading partners failing to be
ready for the year 2000.
12
<PAGE>
Cautionary Statement
- --------------------
The disclosures under "-Results of Operations", "-Capital Resources and
Liquidity", and in the "Notes to Consolidated Financial Statements" as provided
elsewhere herein, contain forward-looking statements and projections of
management. There are certain important factors which could cause results to
differ materially than those anticipated by some of the forward-looking
statements. Some of the important factors which could cause actual results to
differ materially from those in the forward-looking statements include, 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, possible negative trends in the craft and western retail
markets, customer acceptance of existing and new products, and pricing pressures
due to competitive industry conditions. Additional factors that may result in
different actual results include: increases in prices for leather (a world-wide
commodity) that for some reason, may not be passed on to the customers of the
Company's products; changes in tax rates; change in interest rates; change in
the commercial banking environment; problems with the importation of the
products which the Company buys in 14 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 those countries of Most
Favored Nation status with the United States of America; and other
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's Senior Debt 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.
13
<PAGE>
PART II. OTHER INFORMATION
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: November 10, 1999 /s/ Wray Thompson
----------------------------------
Wray Thompson
Chairman of the Board, President,
Chief Executive Officer, and Chief
Accounting Officer
14
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of The Leather Factory, Inc., filed as
Exhibit 3.1 to the Registration Statement on Form SB-2 of The Leather
Factory, Inc. (Commission File No. 33-81132) filed with the Securities
and Exchange Commission on July 5, 1994, and incorporated by reference
herein.
3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the
Registration Statement on Form SB-2 of The Leather Factory, Inc.
(Commission File No. 33-81132) filed with the Securities and Exchange
Commission on July 5, 1994, and incorporated by reference herein.
4.1 Loan and Security Agreement dated November 21, 1997, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation, filed as Exhibit 4.1 to
the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
4.2 Revolving Note (Revolving Credit Loan) dated November 21, 1997, in the
principal amount of $7,000,000, payable to the order of FINOVA Capital
Corporation, which matures December 1, 1999 filed as Exhibit 4.2 to
the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
4.3 Term Loan A Note (Term Loan A) dated November 21, 1997, in the
principal amount of $400,000, payable to the order of FINOVA Capital
Corporation, which matures December 1, 1999 filed as Exhibit 4.3 to
the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
4.4 Term Loan C Note (Term Loan C) dated November 21, 1997, in the
principal amount of $1,500,000, payable to the order of FINOVA Capital
Corporation, which matures December 1, 1999 filed as Exhibit 4.5 to
the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
. 4.5 Subordination Agreement dated November 21, 1997, by and between
FINOVA Capital Corporation, The Schlinger Foundation, The Leather
Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a
Texas corporation, The Leather Factory, Inc., an Arizona corporation,
Hi-Line Leather & Manufacturing Company, a California corporation, and
Roberts, Cushman & Company, Inc., a New York corporation filed as
Exhibit 4.6 to the Current Report on Form 8-K of The Leather Factory,
Inc. (Commission File No. 1-12368) filed with the Securities and
Exchange Commission on February 6, 1998, and incorporated by reference
herein.
4.6 Pledge Agreement dated November 21, 1997, by and between Ronald C.
Morgan and Robin L. Morgan and FINOVA Capital Corporation filed as
Exhibit 4.7 to the Current Report on Form 8-K of The Leather Factory,
Inc. (Commission File No. 1-12368) filed with the Securities and
Exchange Commission on February 6, 1998, and incorporated by reference
herein.
4.7 Patent Security Agreement dated November 21, 1997, by and between The
Leather Factory, Inc., a Delaware corporation, The Leather Factory,
Inc., a Texas corporation, The Leather Factory, Inc., an Arizona
corporation, Hi-Line Leather & Manufacturing Company, a California
corporation, Roberts, Cushman & Company, Inc., a New York corporation,
and FINOVA Capital Corporation filed as Exhibit 4.8 to the Current
Report on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on February
6, 1998, and incorporated by reference herein.
15
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(CONTINUED)
Exhibit
Number Description
- ------- -----------
4.8 Trademark Security Agreement dated November 21, 1997, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation filed as Exhibit 4.9 to
the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
4.9 Copyright Security Agreement dated November 21, 1997, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation filed as Exhibit 4.10 to
the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
4.10 Promissory Note (Subordinated Debenture) dated November 14, 1997, in
the principal amount of $1,000,000, payable to the order of The
Schlinger Foundation, which matures December 1, 1999 filed as Exhibit
4.11 to the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
4.11 Pledge and Security Agreement dated November 14, 1997, by and between
The Schlinger Foundation and J. Wray Thompson, Sr. filed as Exhibit
4.12 to the Current Report on Form 8-K of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference herein.
4.12 Amendment to Loan and Security Agreement dated May 13, 1998, by and
between The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation effective as of March
31,1998 filed as Exhibit 4.15 to the Quarterly Report on Form 10-Q of
The Leather Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on May 15, 1998, and incorporated
by reference herein.
4.13 The Leather Factory, Inc. Stock Purchase Warrant for 200,000 shares
common stock, $.0024 par value issued to Evert I. Schlinger dated
August 3, 1998 and terminating on August 3, 2003, filed as Exhibit
4.13 to the Quarterly Report on Form 10-Q of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission November 12, 1998, and incorporated by reference herein.
4.14 Second Amendment to Loan and Security Agreement dated May 13, 1999, by
and between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc.,
an Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation effective as of March
31,1999, filed as Exhibit 4.14 to the Quarterly Report on Form 10-Q of
The Leather Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on May 17, 1999, and incorporated
by reference herein.
16
<PAGE>
4.15 Third Amendment to Loan and Security Agreement dated August 12, 1999,
by and between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc.,
an Arizona corporation, Hi-Line Leather & Manufacturing Company, a
California corporation, Roberts, Cushman & Company, Inc., a New York
corporation, and FINOVA Capital Corporation effective as of June 30,
1999, filed as Exhibit 4.15 to the Quarterly Report on Form 10-Q of
The Leather Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on August 16, 1999, and
incorporated by reference herein.
10.1 Letter Agreement for Consulting Services dated July 24, 1998, by and
between The Leather Factory, Inc. and Evert I. Schlinger, filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission November 12, 1998, and incorporated by
reference herein.
21.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the 1995
Annual Report on Form 10-KSB of The Leather Factory, Inc. (Commission
File No. 1-12368), filed with the Securities and Exchange Commission
on March 28, 1996, and incorporated by reference herein.
*27.1 Financial Data Schedule
- ---------------
*Filed herewith.
17
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