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, 2000
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
--------- ---------
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its chart er)
Delaware 75-2543540
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
3847 East Loop 820 South
Fort 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 15, 2000
- ----------------------------------------- -------------------------------------
Common Stock, par value $.0024 per share 9,873,161
<PAGE>
Forward-Looking Statements
- --------------------------
The disclosures in this report contain forward-looking statements and
projections of management. There are certain important factors which could cause
results to differ materially than those anticipated by some of the
forward-looking statements. These factors are detailed from time to time in
TLF's reports filed with the Securities and Exchange Commission. See the
Company's 1999 Annual Report on Form 10-K for the most recent discussion of
these factors.
2
<PAGE>
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 ................................ 4
Consolidated Statements of Income
Three months ended March 31, 2000 and 1999........................... 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 ........................... 6
Consolidated Statements of Stockholders' Equity
Three months ended March 31, 2000 and 1999 ........................... 7
Notes to Consolidated Financial Statements ........................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 11
SIGNATURES ............................................................... 12
EXHIBIT .................................................................. 13
INDEX
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
-------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 165,311 $ 134,465
Cash restricted for payment on revolving credit facility 227,243 317,904
Accounts receivable-trade, net of allowance for doubtful accounts
of $150,000 and $177,000 in 2000 and 1999, respectively 2,139,263 2,292,645
Inventory 8,211,813 8,807,963
Deferred income taxes 142,477 160,165
Other current assets 758,489 533,841
-------------------- ---------------------
Total current assets 11,644,596 12,246,983
-------------------- ---------------------
PROPERTY AND EQUIPMENT, at cost 3,174,554 3,143,594
Less-accumulated depreciation and amortization (2,245,712) (2,160,336)
-------------------- ---------------------
Property and equipment, net 928,842 983,258
GOODWILL, net of accumulated amortization of $1,212,000
and $1,160,000 in 2000 and 1999, respectively 4,714,651 4,767,885
OTHER INTANGIBLES, net of accumulated amortization of
$63,000 and $45,000, in 2000 and 1999, respectively 173,183 191,048
OTHER assets 31,175 31,601
-------------------- ---------------------
$ 17,492,447 $ 18,220,775
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,342,284 $ 1,805,918
Accrued expenses and other liabilities 710,180 978,969
Income taxes payable 286,953 474,262
Notes payable and current maturities of long-term debt 5,887,331 6,061,735
-------------------- ---------------------
Total current liabilities 8,226,748 9,320,884
-------------------- ---------------------
DEFERRED INCOME TAXES 89,102 97,780
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 99,186 121,686
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,000
shares authorized, none issued or outstanding - -
Common stock, $0.0024 par value; 25,000,000 shares
authorized, 9,873,161 and 9,853,161 shares issued
and outstanding at 2000 and 1999, respectively 23,696 23,648
Paid-in capital 3,911,692 3,901,740
Retained earnings 5,314,376 4,930,434
Less: Notes receivable - secured by common stock (150,228) (153,416)
Accumulated other comprehensive loss (22,125) (21,981)
-------------------- ---------------------
Total stockholders' equity 9,077,411 8,680,425
-------------------- ---------------------
$ 17,492,447 $ 18,220,775
==================== =====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
2000 1999
------------------- ------------------
<S> <C> <C>
NET SALES $ 7,405,557 $ 5,513,000
COST OF SALES 3,834,966 3,154,110
------------------- ------------------
Gross profit 3,570,591 2,358,890
OPERATING EXPENSES 2,778,389 2,238,516
------------------- ------------------
INCOME FROM OPERATIONS 792,202 120,374
OTHER EXPENSE:
Interest expense 169,195 229,867
Other, net 5,342 683
------------------- ------------------
Total other expense 174,537 230,550
------------------- ------------------
INCOME (LOSS) BEFORE INCOME TAXES 617,665 (110,176)
PROVISION (BENEFIT) FOR INCOME TAXES 233,723 (17,985)
------------------- ------------------
NET INCOME (LOSS) $ 383,942 $ (92,191)
=================== ==================
NET INCOME (LOSS) PER COMMON SHARE $ 0.04 $ (0.01)
=================== ==================
NET INCOME (LOSS) PER COMMON SHARE--Assuming Dilution $ 0.04 $ (0.01)
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 383,942 $ (92,191)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation & amortization 156,477 132,673
Deferred financing costs - 62,942
Deferred income taxes 9,010 (6,716)
Other (144) (2,383)
Net changes in assets and liabilities:
Accounts receivable-trade, net 153,382 42,317
Inventory 596,150 (64,579)
Income taxes (187,309) 97,563
Other current assets (224,649) (368,097)
Accounts payable (463,634) 332,107
Accrued expenses and other liabilities (268,789) (32,373)
--------- ---------
Total adjustments (229,506) 193,454
--------- ---------
Net cash provided by operating activities 154,436 101,263
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (30,961) (240,099)
Other intangible costs 426 (8,174)
--------- ---------
Net cash used in investing activities (30,535) (248,273)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in revolving credit loans (84,692) (118,574)
Proceeds from notes payable and long-term debt - 217,493
Payments on notes payable and long-term debt (112,212) (110,639)
Decrease in cash restricted for payment on revolving credit facility 90,661 81,319
Payments received on notes secured by common stock 3,188 12,898
Proceeds from issuance of common stock 10,000 -
--------- ---------
Net cash provided by (used in) financing activities (93,055) 82,497
--------- ---------
NET INCREASE (DECREASE) IN CASH 30,846 (64,513)
CASH, beginning of period 134,465 510,399
--------- ---------
CASH, end of period $ 165,311 $ 445,886
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 157,391 $ 169,554
Income taxes paid during the period, net of (refunds) 409,631 (91,243)
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Common Stock Notes Accumulated Compre-
------------------------ receivable Other hensive
Number Par Paid-in Retained - secured by Cumulative Income
of shares value capital earnings common stock Loss Total (Loss)
------------ -------- ----------- ----------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 9,853,161 $23,648 $ 3,901,740 $ 4,495,378 $ (224,750) $ (25,738) 8,170,278
Payments on notes receivable -
secured by common - - 12,899 - 12,899
Net Loss - - - (92,191) - - (92,191) (92,191)
Translation adjustment - - - - - (2,383) (2,383) (2,383)
------------ -------- ----------- ----------- ---------- ---------- -----------
BALANCE, March 31, 1999 9,853,161 $ 23,648 $ 3,901,740 $ 4,403,187 $ (211,851) $ (28,121) $ 8,088,603
=========================================================================================
----------
Comprehensive loss for the three months ended March 31, 1999 $(94,574)
==========
BALANCE, December 31, 1999 9,853,161 $ 23,648 $ 3,901,740 $ 4,930,434 $ (153,416) $ (21,981) 8,680,425
Payments on notes receivable -
secured by common - - - - 3,188 - 3,188
Shares issued - employee
Stock options
exercised 20,000 48 9,952 - - - 10,000
Net Income - - - 383,942 - - 383,942 383,942
Translation adjustment - - - - - (144) (144) (144)
----------- -------- ----------- ----------- ---------- ---------- -----------
BALANCE, March 31, 2000 9,873,161 $ 23,696 $ 3,911,692 $ 5,314,376 $ (150,228) $ (22,125) $ 9,077,411
=========================================================================================
----------
Comprehensive income for the three months ended March 31, 2000 $383,798
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
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 March 31,
2000 and December 31, 1999, and the results of operations and cash flows for the
three-month periods ended March 31, 2000 and 1999. The results of operations for
the three-month period are not necessarily indicative of the results to be
expected for the full fiscal year. The consolidated financial statements should
be read in conjunction with the financial statements and disclosures contained
in the Company's 1999 Annual Report on Form 10-K ("Annual Report").
2. INVENTORY
The components of inventory consist of the following:
As of
------------------------------------------------
<S> <C> <C>
March 31, December 31,
2000 1999
----------------------- ---------------------
Finished goods held for sale $ 7,142,818 $ 7,629,995
Raw materials and work in process 1,068,995 1,177,968
----------------------- ---------------------
$ 8,211,813 $ 8,807,963
======================= =====================
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended March 31,
2000 1999
----------------- ----------------
Numerator:
Net income (loss) $ 383,942 $ (92,191)
Numerator for basic and diluted earnings per share 383,942 (92,191)
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 9,859,754 9,853,161
Effect of dilutive securities:
Stock options 101,236 -
Warrants 160,216 -
---------------- ----------------
Dilutive potential common shares 261,452 -
---------------- ----------------
Denominator for diluted earnings per shares -
weighted-average shares 10,121,206 9,853,161
================ ================
Basic earnings per share $ 0.04 $ (0.01)
================ ================
Diluted earnings per share $ 0.04 $ (0.01)
================ ================
</TABLE>
8
<PAGE>
<TABLE>
Unexercised stock options owned by certain employees and directors to purchase
443,000 shares of common stock as of March 31, 1999 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.
Warrants (see note 9 to consolidated financial statements in the Annual Report)
to acquire 300,000 shares of common stock were not included in the computations
of diluted EPS during the quarter ended March 31, 1999 because the exercise
price was greater than the average market price of the common stock.
The 13% convertible debt (see note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted earnings per share
at March 31, 1999 because the interest cost (net of tax) per assumed converted
share was more than basic earnings per share and, therefore, the effect would be
antidilutive.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
The Leather Factory, Inc. (the "Company") is the premier distributor of leather
and leathercraft products to over 40,000 customers ranging from the individual
hobbyist to large retail chains. Customer groups served include: wholesale
distributors, tack and saddle shops, shoe-findings customers, institutions,
prisons and prisoners, dealer stores, western stores, craft stores and craft
store chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers, and retailers. Our products are distributed primarily through 26
sales/distribution units in the United States and Canada or through our
subsidiary, Roberts, Cushman & Company, Inc. ("Cushman") in New York. Cushman
manufactures and distributes a related product line of hat trims in braids,
leather, and woven fabrics. We also carry a line of small finished leather
goods, including cigar cases, wallets and western accessories.
Results of Operations
Income Statement Comparison
The following table sets forth, for the interim periods indicated, certain items
from the Company's Consolidated Statements of Income expressed as a percentage
of net sales and the increase (decrease) in dollars and percent from 1999 to
2000:
% of Net Sales
Quarterly period ended
March 31, Change in $ and %
---------------------------------- ------------------------------------
2000 1999 $ Change % Change
---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% $1,892,557 34.33%
Cost of sales 51.8 57.2 680,856 21.59
---------------- -------------- ----------------
Gross Profit 48.2 42.8 1,211,701 51.37
Operating expenses 37.5 40.6 539,873 24.12
---------------- -------------- ----------------
Income from operations 10.7 2.2 671,828 558.12
Interest expense and other 2.4 4.2 (56,013) (24.30)
---------------- -------------- ----------------
Income (loss) before income taxes 8.3 (2.0) 727,841 660.62
Income tax provision (benefit) 3.2 (0.3) 251,708 N/A
---------------- -------------- ----------------
Net income (loss) 5.1% (1.7)% $476,133 N/A
================ ============== ================
</TABLE>
9
<PAGE>
Revenues
The Company produced another quarter of strong sales, totaling $7.4 million for
the first quarter of 2000 compared to $5.5 million for the first quarter of
1999. Four new sales units opened since April 1999 contributed sales of $370,000
in the first quarter of 2000. In addition, our Authorized Sales Center ("ASC")
program generated $426,000 in current quarter sales. This program began in April
1999. Sales to our craft customers increased 58% over last year at this time,
primarily due the increase in orders from several large craft customers. Our
sales to the retail customer increased 66% compared to last year's first quarter
totals as we continue to earn the business of former Tandycrafts customers.
The only area of sales that decreased in the current quarter over the same
quarter of 1999 was in our shoe care/repair market. Over the last several years,
we have intentionally eliminated significant portions of this product line
because of its history of lower-than-expected margins. The sales decrease to
this market for the first quarter of 2000 was more than offset by steady
increases in sales to other wholesale customer markets, such as saddle/tack and
small manufacturers. Export sales and institutional sales (prisons, prisoners,
schools, hospitals) remained constant compared to last year at this time.
Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 51.8% for the first quarter of 2000
as compared to 57.2% for the same quarter in 1999. This translates into gross
profit margins of 48.2% and 42.8% for the quarters ended March 31, 2000 and
1999, respectively. This improvement is primarily the result of the change in
our sales mix. In prior years, our retail to wholesale mix has been 10%/90%. We
saw that relationship shift in 1999 to a 15%/85% mix. For the first quarter of
2000, our retail sales increased to 20% of our total sales. As retail sales
historically produce the highest profit margins, the growth of retail business
has positively impacted our cost of sales and gross profit percentages.
Operating expenses were $540,000 higher in the first quarter of 2000 than in the
first quarter of 1999. As a percentage of sales however, they dropped 3% from
last year's totals. The main cause for the dollar increase is in our payroll
costs (wages and employee insurance programs). The number of employees has
increased 30% over this time last year as a result of the increase in sales.
Management monitors operating expenses closely and believes that we have
improved operating efficiency as we continue to reduce the ratio of operating
expenses to revenues.
Other (Income) Expense
Other expenses were down 24.3% from 1999. This reduction is primarily in
interest expense due to the decrease in average outstanding debt balances and
lower average interest rates in 2000 as compared to 1999.
Net Income
The Company reported net income of $384,000 during the first quarter of 2000
compared to a net loss of $92,000 for the same period a year ago. The
significant improvement was principally due to the higher gross profit margins
earned on the increased retail sales.
10
<PAGE>
Capital Resources, Liquidity and Financial Condition
The primary sources of liquidity and capital resources during the first quarter
of 2000 were funds provided by operating activities in the amount of $154,000.
The largest portion of the operating cash flow was used to pay down accounts
payable, other liabilities, and debt balances.
The Company's investment in accounts receivable was $2.1 million at March 31,
2000, down $153,000 from $2.3 million at year-end 1999. This is a result of a
slight reduction (1.0%) in first quarter sales from sales in the fourth quarter
of 1999 as well as improved collection efforts. Inventory decreased $596,000 to
$8.2 million at March 31, 2000 from $8.8 million at year-end 1999. Inventory
turnover decreased to an annualized rate of 1.80 times during the first quarter
of 2000, which is slightly lower than the turnover of 1.89 times for all of
1999. Management is closely monitoring the inventory levels as we attempt to
find the proper balance between inventory on hand and the increasing sales.
Accounts payable decreased 25.7% to $1.3 million at the end of the first
quarter, due primarily to the operating cash flow generated from the decrease in
inventory levels for the quarter.
As previously disclosed, on November 22, 1999, the Company entered into a Credit
and Security Agreement with Wells Fargo Business Credit, Inc. ("WFBC"), pursuant
to which WFBC agreed to provide a credit facility of up to $8,650,000 in debt
(the "Credit Facility"). The Credit Facility has a three-year term and is made
up of a revolving credit facility and a $150,000 term note.
The revolving credit facility with WFBC is based upon the level of the Company's
accounts receivable and inventory. At March 31, 2000 and December 31, 1999, the
available and unused portion of the credit facility was approximately $1,089,000
and $508,000, respectively.
The terms of the Credit Facility contains various covenants which among other
things require the Company to maintain a certain level of income and book net
worth, limit capital expenditures, and require the maintenance of certain debt
service coverage ratios. Other covenants prohibit the company from incurring
indebtedness except as permitted by the terms of the Credit Facility, from
declaring or paying cash dividends upon any of its stock and from entering into
any new business or making material changes in any of the Company's business
objectives, purposes or operations.
The Company believes that the current sources of liquidity and capital resources
will be sufficient to fund current operations and the opening of any potential
new sales/distribution units. In 2000, the funding for the opening of any new
units is expected to be provided by operating leases, cash flows from operating
activities, and the Credit Facility.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's Credit Facility includes loans with interest rates that vary with
changes in the prime rate. 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
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.
-------------------
11
<PAGE>
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 15, 2000 By: /s/ Wray Thompson
---------------------------
Wray Thompson
Chairman of the Board, President,
Chief Executive Officer, and Chief
Accounting Officer
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
*27.1 Financial Data Schedule
- -------------------
*Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000909724
<NAME> The Leather Factory, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> jan-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 392,554
<SECURITIES> 0
<RECEIVABLES> 2,289,263
<ALLOWANCES> 150,000
<INVENTORY> 8,211,813
<CURRENT-ASSETS> 11,644,596
<PP&E> 3,174,554
<DEPRECIATION> 2,245,712
<TOTAL-ASSETS> 17,492,447
<CURRENT-LIABILITIES> 8,226,748
<BONDS> 0
0
0
<COMMON> 23,696
<OTHER-SE> 9,053,715
<TOTAL-LIABILITY-AND-EQUITY> 17,492,447
<SALES> 7,405,557
<TOTAL-REVENUES> 7,405,557
<CGS> 3,834,966
<TOTAL-COSTS> 3,834,966
<OTHER-EXPENSES> 2,778,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,195
<INCOME-PRETAX> 617,665
<INCOME-TAX> 233,723
<INCOME-CONTINUING> 383,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 383,942
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
