-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NSR7P63wmjeqWEB56Qq6azASlqwd1ypUF7/nyE8TbA/c4d6sq1BsZcuJMGwFIaD8 lriVudm1xxvH1Vlxe46SJg== 0000909724-02-000009.txt : 20021105 0000909724-02-000009.hdr.sgml : 20021105 20021105102226 ACCESSION NUMBER: 0000909724-02-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEATHER FACTORY INC CENTRAL INDEX KEY: 0000909724 STANDARD INDUSTRIAL CLASSIFICATION: LEATHER & LEATHER PRODUCTS [3100] IRS NUMBER: 752543540 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12368 FILM NUMBER: 02809142 BUSINESS ADDRESS: STREET 1: 3847 EAST LOOP STREET 2: 820 SOUTH CITY: FT WORTH STATE: TX ZIP: 76119 BUSINESS PHONE: 8174964414 MAIL ADDRESS: STREET 1: 3847 EAST LOOP STREET 2: 820 SOUTH CITY: FT WORTH STATE: TX ZIP: 76119 10-Q 1 doc1.txt FORM 10-Q SEPT 02 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 2002 - ------------------------------ ----------------------------------------- Common Stock, par value $.0024 per share 10,134,461 THE LEATHER FACTORY, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS -----------------
PAGE NO. ------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets September 30, 2002 and December 31, 2001 --------------------------------- 3 Consolidated Statements of Operations Three and nine months ended September 30, 2002 and 2001 --------------------------------- 4 Consolidated Statements of Cash Flows Nine months ended September 30, 2002 and 2001 --------------------------------- 5 Consolidated Statements of Stockholders' Equity Nine months ended September 30, 2002 and 2001 --------------------------------- 6 Notes to Consolidated Financial Statements --------------------------------- 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------- 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk --------------------------------- 20 PART II. OTHER INFORMATION Item 4. Controls and Procedures --------------------------------- 20 Item 6. Exhibits and Reports on Form 8-K --------------------------------- 20 SIGNATURES --------------------------------- 21
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THE LEATHER FACTORY, INC. CONSOLIDATED BALANCE SHEETS September 30, December 31, 2002 2001 ------------- ------------ (UNAUDITED) ------------- ------------ ASSETS CURRENT ASSETS: Cash $ 112,100 $ 409,040 Cash restricted for payment on revolving credit facility 486,637 491,729 Accounts receivable-trade, net of allowance for doubtful accounts of $142,000 and $191,000 in 2002 and 2001, respectively 2,400,411 2,297,953 Inventory 10,375,786 9,054,269 Prepaid income taxes 78,232 - Deferred income taxes 170,941 128,111 Other current assets 822,491 479,390 -------------- -------------- Total current assets 14,446,598 12,860,492 --------------- -------------- PROPERTY AND EQUIPMENT, at cost 4,645,296 4,201,368 Less-accumulated depreciation and amortization (3,193,698) (2,858,869) -------------- -------------- Property and equipment, net 1,451,598 1,342,499 GOODWILL, net of accumulated amortization of $733,000 and $1,583,000 in 2002 and 2001, respectively 607,898 4,535,412 OTHER INTANGIBLES, net of accumulated amortization of $100,000 and $66,000, in 2002 and 2001, respectively 474,446 476,908 OTHER assets 710,840 333,012 -------------- -------------- $ 17,691,380 $ 19,548,323 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,625,484 $ 1,303,596 Accrued expenses and other liabilities 1,416,078 1,171,152 Income taxes payable - 52,662 Notes payable and current maturities of long-term debt 3,904,727 4,527,904 -------------- -------------- Total current liabilities 6,946,289 7,055,314 --------------- -------------- DEFERRED INCOME TAXES 97,168 61,647 NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 3,917 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, 10,134,461 and 9,991,161 shares issued and outstanding at 2002 and 2001, respectively 24,323 23,979 Paid-in capital 4,150,464 4,030,508 Retained earnings 6,554,800 8,478,187 Less: Notes receivable - secured by common stock (45,653) (71,939) Accumulated other comprehensive loss (39,928) (37,064) -------------- -------------- Total stockholders' equity 10,644,006 12,423,671 -------------- -------------- $ 17,691,380 $ 19,548,323 ============== ==============
The accompanying notes are an integral part of these financial statements. 3
THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 THREE MONTHS NINE MONTHS ------------ ----------- 2002 2001 2002 2001 NET SALES $ 9,484,730 $ 9,198,401 $29,740,717 $27,930,907 COST OF SALES 4,396,332 4,586,827 13,848,098 13,456,322 ------------- ------------ ----------- ----------- Gross profit 5,088,398 4,611,574 15,892,619 14,474,585 OPERATING EXPENSES 4,246,873 3,823,038 12,646,486 11,533,970 ------------ ------------ ----------- ---------- INCOME FROM OPERATIONS 841,525 788,536 3,246,133 2,940,615 OTHER EXPENSE: Interest expense 54,108 102,235 191,419 375,442 Other, net 18,578 20,317 45,199 31,959 ------------ ------------ ----------- ---------- Total other expense 72,686 122,552 236,618 407,401 ------------ ------------ ----------- ---------- INCOME BEFORE INCOME TAXES and CUMULATIVE EFFECT OF CHANGE IN ACCOUTNING PRINCIPLE 768,839 665,984 3,009,515 2,533,214 PROVISION FOR INCOME TAXES 234,747 269,456 924,071 1,017,492 ------------ ------------ ----------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 534,092 396,528 2,085,444 1,515,722 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAXES - - (4,008,831) - ------------ ------------ ----------- ---------- NET INCOME (LOSS) $ 534,092 $ 396,528 $(1,923,387) $ 1,515,722 ============= ============ =========== =========== NET INCOME (LOSS) PER COMMON SHARE - BASIC: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 0.05 $ 0.04 $ 0.21 $ 0.15 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET - - (0.40) - ------------- ------------ ------------ ----------- NET INCOME (LOSS) PER COMMON SHARE $ 0.05 $ 0.04 $ (0.19) $ 0.15 ============= ============ ============ =========== NET INCOME (LOSS) PER COMMON SHARE - ASSUMING DILUTION: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 0.05 $ 0.04 $ 0.19 $ 0.15 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET - - (0.37) - ------------- ------------ ------------ ----------- NET INCOME (LOSS) PER COMMON SHARE-DILUTED $ 0.05 $ 0.04 $ (0.18) $ 0.15 ============= ============ ============ ===========
The accompanying notes are an integral part of these financial statements. 4
THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(1,923,387) $1,515,722 Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation & amortization 370,234 550,024 Gain on disposal of assets - (333) Amortization of deferred financing costs 37,038 34,316 Other (45,827) (27,174) Cumulative effect of change in accounting principle 4,008,831 - Net changes in assets and liabilities: Accounts receivable-trade, net (102,459) (644,963) Inventory (1,222,308) (260,127) Income taxes (94,697) (145,750) Other current assets (343,101) (2,558) Accounts payable 321,886 305,060 Accrued expenses and other liabilities 244,926 (284,853) ----------- ----------- Total adjustments 3,174,523 (476,358) ----------- ----------- Net cash provided by operating activities 1,251,136 1,039,364 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (429,250) (628,543) Proceeds from sales of assets - 2,000 Payments in connection with businesses acquired (227,747) - Increase in other assets (415,809) (1,391) ----------- ----------- Net cash used in investing activities (1,072,806) (627,934) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in revolving credit loans (601,043) (722,814) Proceeds from notes payable and long-term debt - 18,676 Payments on notes payable and long-term debt (25,905) (74,981) Change in cash restricted for payment on revolving credit facility 5,092 31,883 Payments received on notes secured by common stock 26,286 17,566 Proceeds from issuance of common stock 120,300 84,099 ----------- ----------- Net cash used in financing activities (475,270) (645,571) ----------- ----------- NET DECREASE IN CASH (296,940) (234,141) CASH, beginning of period 409,040 234,141 ----------- ----------- CASH, end of period $ 112,100 $ - =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the period $ 157,916 $ 365,660 Income taxes paid during the period $ 1,076,313 $ 990,311
5
THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Common Stock Notes Accumulated -------------------- Receivable Other Number Par Paid-in Retained secured by Cumulative of shares value capital Earnings common stock Loss BALANCE, December 31, 2000 9,908,161 $23,780 $3,946,608 $ 6,471,754 $ (120,339) $ (26,166) Payments on notes receivable - secured by common stock - - - - 17,566 - Shares issued - employee Stock options exercised 83,000 199 83,900 - - - Net Income - - - 1,515,722 - - Translation adjustment - - - - - (9,729) --------- ------- ---------- ------------ -------------- ------------ BALANCE, September 30, 2001 9,991,161 $23,979 $4,030,508 $ 7,987,476 $ (102,773) $ (35,895) ========= ======= ========== =========== ============== ============ BALANCE, December 31, 2001 9,991,161 $23,979 $4,030,508 $ 8,478,187 $ (71,939) $ (37,064) Payments on notes receivable - secured by common stock - - - - 26,286 - Shares issued - employee Stock options exercised 143,300 344 119,956 - - - Net Loss - - - (1,923,387) - - Translation adjustment - - - - - (2,864) --------- ------- ---------- ------------ -------------- ------------ BALANCE, September 30, 2002 10,134,461 $24,323 $4,150,464 $ 6,554,800 $ (45,653) $ (39,928) ========= ======= ========== =========== ============== ============ Comprehensive Total Income (Loss) BALANCE, December 31, 2000 10,295,637 Payments on notes receivable - secured by common stock 17,566 Shares issued - employee Stock options exercised 84,099 Net Income 1,515,722 $1,515,722 Translation adjustment (9,729) (9,729) -------------- ---------- BALANCE, September 30, 2001 $ 11,903,295 ============== Comprehensive income for the nine months ended September 30, 2001 $1,505,993 ========== BALANCE, December 31, 2001 $ 12,423,671 Payments on notes receivable - secured by common stock 26,286 Shares issued - employee Stock options exercised 120,300 Net Loss (1,923,387) $(1,923,387) Translation adjustment (2,864) (2,864) -------------- ---------- BALANCE, September 30, 2002 $ 10,644,006 ============== Comprehensive loss for the nine months ended September 30, 2002 $(1,926,251) ==========
The accompanying notes are an integral part of these financial statements. 6 THE LEATHER FACTORY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the opinion of The Leather Factory, Inc. ("TLF" or 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 September 30, 2002 and December 31, 2001, and the results of operations and cash flows for the three and nine month periods ended September 30, 2002 and 2001. 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 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 Company in the first quarter of 2002. Upon adoption of SFAS No. 142, TLF recorded a one-time, noncash charge of approximately $4.0 million to eliminate 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 SEPTEMBER 30, DECEMBER 31, ------------ ------------- 2002 2001 ------------ ------------- Finished goods held for sale $ 9,429,013 $ 8,025,845 Raw materials and work in process 946,773 1,028,424 -------------- ------------- $ 10,375,786 $ 9,054,269 *============= =============
7 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share ("EPS"):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------------- ------------------------- 2002 2001 2002 2001 ------------------- ----------------- ----------- ----------- Numerator: Net income (loss) $ 534,092 $ 396,528 $(1,923,387) $ 1,515,722 ------------------- ----------------- ----------- ----------- Numerator for basic and diluted earnings per share 534,092 396,528 (1,923,387) 1,515,722 Denominator: Weighted-average shares outstanding-basic 10,064,249 9,991,052 10,035,890 9,970,985 Effect of dilutive securities: Stock options 448,836 427,831 483,760 228,346 Warrants 210,318 237,976 240,027 201,027 ------------------- ----------------- ----------- ----------- Dilutive potential common shares 659,154 665,807 723,787 429,373 ------------------- ------------------ ------------ ----------- Denominator for diluted earnings per share- weighted-average shares 10,723,403 10,656,859 10,759,677 10,400,358 =================== ================== =========== =========== Basic earnings per share $ 0.05 $ 0.04 $ (0.19) $ 0.15 =================== ================== =========== =========== Diluted earnings per share $ 0.05 $ 0.04 $ (0.18) $ 0.15 =================== ================== =========== ===========
The net effect of converting stock options to purchase 1,081,000 and 1,154,000 of common stock at option prices less than the average market prices has been included in the computation of diluted EPS for the three and nine month periods ended September 30, 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. 8 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 FACTORY TANDY LEATHER COMPANY ROBERTS, CUSHMAN & CO --------------------- ---------------------- --------------------- FOR THE QUARTER ENDED SEPTEMBER 30, 2002 Net Sales 7,244,610 1,727,925 512,195 Gross Profit 3,848,893 1,026,681 212,824 Operating earnings 631,125 76,231 134,169 Interest expense (53,995) (113) - Other, net (18,578) - - Income before income taxes 558,552 76,118 134,169 Depreciation and amortization 94,369 29,612 3,399 Fixed asset additions 139,454 55,050 1,936 ---------------------- ---------------------- --------------------- Total assets $ 14,528,938 $ 2,241,064 $ 921,378 ---------------------- ----------------------- ---------------------- FOR THE QUARTER ENDED SEPTEMBER 30, 2001 Net Sales $ 7,266,214 $ 1,453,959 $ 478,228 Gross Profit 3,656,235 827,881 127,458 Operating earnings 700,505 73,303 14,728 Interest expense (102,235) - - Other, net (20,065) (252) - Income before income taxes 578,205 73,051 14,728 Depreciation and amortization 130,711 24,267 38,330 Fixed asset additions 96,299 - 485 ---------------------- ---------------------- ---------------------- Total assets $ 12,864,099 $ 2,572,448 $ 4,995,347 ---------------------- ----------------------- ---------------------- THE LEATHER FACTORY TANDY LEATHER COMPANY ROBERTS, CUSHMAN & CO --------------------- ---------------------- --------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Net Sales $ 22,769,549 $ 5,420,108 $ 1,551,060 Gross Profit 12,151,507 3,179,498 561,614 Operating earnings 2,625,651 315,268 305,214 Interest expense (190,903) (516) - Other, net (44,566) (633) - Income before income taxes 2,390,182 314,119 305,214 Depreciation and amortization 316,071 81,256 9,945 Fixed asset additions 267,823 157,953 3,474 ---------------------- ---------------------- ---------------------- Total assets $ 14,528,938 $ 2,241,064 $ 921,378 ----------------------- ----------------------- ---------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Net Sales $ 21,385,770 $ 5,016,601 $ 1,528,536 Gross Profit 11,203,925 2,809,848 460,812 Operating earnings 2,761,863 127,401 51,351 Interest expense (375,442) - - Other, net (31,830) (129) - Income before income taxes 2,354,591 127,272 51,351 Depreciation and amortization 356,676 78,651 114,697 Fixed asset additions 454,419 172,434 1,690 ---------------------- ---------------------- ---------------------- Total assets $ 12,864,099 $ 2,572,448 $ 4,995,347 ----------------------- ----------------------- ---------------------- TOTAL ------------ FOR THE QUARTER ENDED SEPTEMBER 30, 2002 Net Sales $ 9,484,730 Gross Profit 5,088,398 Operating earnings 841,525 Interest expense (54,108) Other, net (18,578) ------------ Income before income taxes 768,839 Depreciation and amortization 127,380 Fixed asset additions 196,440 ------------ Total assets $17,691,380 ------------ FOR THE QUARTER ENDED SEPTEMBER 30, 2001 Net Sales $ 9,198,401 Gross Profit 4,611,574 Operating earnings 788,536 Interest expense (102,235) Other, net (20,317) ------------ Income before income taxes 665,984 Depreciation and amortization 193,308 Fixed asset additions 96,784 ------------ Total assets $20,431,894 ------------ TOTAL ------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Net Sales $29,740,717 Gross Profit 15,892,619 Operating earnings 3,246,133 Interest expense (191,419) Other, net (45,199) ------------ Income before income taxes 3,009,515 Depreciation and amortization 407,272 Fixed asset additions 429,250 ------------ Total assets $17,691,380 ------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Net Sales $27,930,907 Gross Profit 14,474,585 Operating earnings 2,940,615 Interest expense (375,442) Other, net (31,959) ------------ Income before income taxes 2,533,214 Depreciation and amortization 550,024 Fixed asset additions 628,543 ------------ Total assets $20,431,894 ------------
9 Net sales for geographic areas was as follows:
QUARTER ENDED SEPTEMBER 30, 2002 2001 ----------- ----------- United States $ 8,941,654 $ 8,631,554 All other countries 543,076 566,847 ----------- ----------- $ 9,484,730 $ 9,198,401 =========== =========== NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 ----------- ----------- United States $28,052,774 $26,324,849 All other countries 1,687,943 1,606,058 ----------- ----------- $29,740,717 $27,930,907 =========== ===========
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 $4.0 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 statement of operations for the nine months ended September 30, 2002. 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 nine-month period ended September 30, 2002 is as follows:
JANUARY 1, ACQUISITIONS & SEPTEMBER 30, 2002 ADJUSTMENTS IMPAIRMENTS 2002 ----------- -------------- ------------- ------------- Leather Factory $ 332,630 $ 252 - $332,882 Tandy Leather 193,951 81,065 - $275,016 Roberts, Cushman 4,008,831 - $ (4,008,831) - ----------- ------------- ------------- ------------- Total $ 4,535,412 $ 81,317 $ (4,008,831) $607,898 =========== ============= ============= =============
10 As of September 30, 2002 and December 31, 2001, the Company's intangible assts and related accumulated amortization consisted of the following:
AS OF SEPTEMBER 30, 2002 --------------------------------------------- GROSS ACCUMULATED AMORTIZATION NET -------- ------------------------- -------- Trademarks, Copyrights $542,744 $ 92,964 $449,780 Non-Compete Agreements 32,000 7,334 24,666 -------- ------------------------- -------- $574,744 $ 100,298 $474,446 ======== ========================= ========
AS OF DECEMBER 31, 2001 --------------------------------------------- GROSS ACCUMULATED AMORTIZATION NET -------- ------------------------- -------- Trademarks, Copyrights $542,744 $ 65,836 $476,908 ======== ========================= ========
The Company recorded amortization expense of $12,027 during the third quarter of 2002 compared to $9,354 during the third 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 FACTORY TANDY LEATHER CUSHMAN TOTAL ---------------- -------------- -------- ------ 2002 $ 5,837 $ 40,337 $ 0 $46,174 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 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 (without giving effect to the charge relating to the reduction of goodwill) would have been changed to the adjusted amounts indicated below:
THREE MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------------------------- NET INCOME EARNINGS PER SHARE - BASIC EARNINGS PER SHARE - DILUTED ----------------- --------------------------- ----------------------------- Reported net income $ 396,528 $ 0.04 $ 0.04 Addback goodwill amortization 50,742 0.00 0.00 ----------------- --------------------------- ----------------------------- Adjusted net income $ 447,270 $ 0.04 $ 0.04 ================= =========================== =============================
NINE MONTHS ENDED SEPTEMBER 30, 2001 ------------------------------------------------------------------------- NET INCOME EARNINGS PER SHARE - BASIC EARNINGS PER SHARE - DILUTED -------------- -------------------------- ----------------------------- Reported net income $ 1,515,722 $ 0.15 $ 0.15 Addback goodwill amortization 163,027 0.02 0.01 -------------- -------------------------- ---------------------------- Adjusted net income $ 1,678,749 $ 0.17 $ 0.16 ============== ========================== ============================
11 6. NEW AUTHORITATIVE PRONOUNCEMENTS In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company expects to adopt SFAS 143 in January 2003 and believes that the adoption of SFAS 143 will not have a material effect on the Company's results of operations or financial position. Also in August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 establishes a single accounting model, based on the framework established in Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), for long-lived assets to be disposed of by sale. SFAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB Opinion No. 30, Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30") so two accounting models existed for the disposal of long-lived assets. SFAS 144 replaces both SFAS 121 and APB 30, so that only one accounting model exists for the disposal of long-lived assets. SFAS 144 also resolves implementation issues related to SFAS 121. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The provisions of SFAS 144 are to be applied prospectively. The Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not have a material effect on the Company's results of operations or financial position. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. The adoption of this statement is not expected to have a material impact on the Company's current financial position and results of operations. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS 146 nullifies FASB Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB's conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. The Company does not expect that the adoption of SFAS 146 will have a material impact on its financial position or results from operations. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL - ------- The Leather Factory, Inc. ("TLF," the "Company" or "we") is a Delaware corporation whose common stock trades on the American Stock Exchange under the symbol "TLF". The Company is managed on a business entity basis, with those businesses being The Leather Factory ("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. Its marketing focus is primarily toward the wholesale and business customers, although Leather Factory stores also sell to retail customers. 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. Tandy, which was 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 13 company-owned retail stores, including 10 opened in the first nine months of 2002.. Its marketing focus is primarily toward the traditional retail customer. The flagship Leather Factory store located in Fort Worth, Texas and the three Canadian locations operate as "combination" stores - offering complete product lines of both entities. These stores are equipped to service both retail and wholesale customers. 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:
QUARTER ENDED QUARTER ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 --------------- -------------- ----------- ----------- OPERATING OPERATING SALES INCOME SALES INCOME -------------- -------------- ---------- ----------- Leather Factory $ 7,244,610 $ 631,125 $7,266,214 $ 700,505 Tandy 1,727,925 76,231 1,453,959 73,303 Cushman 512,195 134,169 478,228 14,728 -------------- -------------- ---------- ----------- Total Operations $ 9,484,730 $ 841,525 $9,198,401 $ 788,536 -------------- -------------- ---------- -----------
13
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 ------------------------------- ------------------------- OPERATING OPERATING SALES INCOME SALES INCOME -------------- --------------- ----------- ---------- Leather Factory $ 22,769,549 $ 2,625,651 $21,385,770 $2,761,863 Tandy 5,420,108 315,268 5,016,601 127,401 Cushman 1,551,060 305,214 1,528,536 51,351 -------------- -------------- ----------- ---------- Total Operations $ 29,740,717 $ 3,246,133 $27,930,907 $2,940,615 ============== ============== =========== ==========
Consolidated net sales for the quarter ended September 30, 2002 increased $286,000, or 3.1%, compared to the same period in 2001. Tandy's sales contributed $274,000 to the increase due to new store sales, while Cushman's sales added $34,000 and Leather Factory's sales were down $22,000. Operating income increased $53,000 for the quarter ended 2002 compared to the quarter ended 2001. The increase in Cushman's operating income contributed $119,000. Tandy contributed $3,000 to the increase while Leather Factory's operating income was down $69,000. Consolidated net sales for the nine months ended September 30, 2002 increased $1,810,000, or 6.5%, compared to the same period in 2001. Leather Factory contributed $1,384,000 to the increase. Tandy added $404,000 in increased sales and Cushman added $22,000 in sales. Operating income increased $305,000 for the first nine months of 2002 over the first nine months of 2001. Cushman's increased operating income contributed $254,000; Tandy contributed $187,000 to the increase while Leather Factory's operating income was down for the year by $136,000. As shown below, our net sales increased 6.5% in the first nine months of 2002 over the same period in 2001. Comparing these same periods, costs of sales increased only 2.9%. An even more dramatic change is seen in a comparison of the third quarters of 2001 and 2002. There net sales were up 3.1% while costs of sales were down 4.2%. These changes are attributable to the continued shift in our sales mix to a higher percent of retail sales. This shift is expected to continue to some degree as Tandy's sales, which are predominately to retail customers, become a larger part of our total sales. Sales to retail customers bring a higher gross profit than sales to whole customers. Therefore, we can sell the same product to a retail customer and earn a higher margin than by selling the product to a wholesale customer.
% OF NET SALES QUARTERLY PERIOD ENDED SEPTEMBER 30, CHANGE IN $ AND % -------------------------------- --------------------- 2002 2001 $ CHANGE % CHANGE ---------------- -------------- ---------- --------- Net sales 100.00% 100.00% $ 286,329 3.11% Cost of sales 46.35 49.87 (190,495) (4.15) --------------- ------------- --------- --------- Gross profit 53.65 50.13 476,824 10.34 Operating expenses 44.78 41.56 423,835 11.09 --------------- ------------- --------- --------- Income from operations 8.87 8.57 52.989 6.72 Interest expense and other 0.77 1.33 (49,866) (40.69) --------------- ------------- --------- --------- Income before income taxes and cumulative effect of change in accounting principle 8.11 7.24 102,855 15.44 Income tax provision 2.47 2.93 (34,709) (12.88) --------------- ------------- --------- --------- Net income before cumulative effect of change in accounting principle 5.63 4.31 137,564 34.69 Cumulative effect of change - - - - --------------- ------------- --------- --------- Net income (loss) 5.63% 4.31% $ 137,564 34.69% =============== ============= ========= =========
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% OF NET SALES NINE MONTHS ENDED SEPTEMBER 30, CHANGE IN $ AND % -------------------------------- ----------------------- 2002 2001 $ CHANGE % CHANGE ---------------- ------------- ------------ --------- Net sales 100.00% 100.00% $ 1,809,810 6.48% Cost of sales 46.56 48.18 391,776 2.91 ---------------- ------------- ----------- -------- Gross profit 53.44 51.82 1,418,034 9.80 Operating expenses 42.52 41.29 1,112,516 9.65 ---------------- ------------- ----------- -------- Income from operations 10.91 10.53 305,518 10.39 Interest expense and other 0.80 1.46 (170,783) (41.92) ---------------- ------------- ----------- -------- Income before income taxes and cumulative effect of change in accounting principle 10.12 9.07 476,301 18.80 Income tax provision 3.11 3.64 (93,421) (9.18) ---------------- ------------- ----------- -------- Net income before cumulative effect of change in accounting principle 7.01 5.43 569,722 37.59 Cumulative effect of change in accounting principle (13.48) - (4,008,831) N/A ---------------- ------------- ----------- -------- Net income (loss) (6.47%) 5.43% $(3,439,109) (123.13%) ================ ============= =========== =========
LEATHER FACTORY OPERATIONS Net sales from Leather Factory's 30 sales/distribution units decreased 0.30% for the third quarter of 2002 as follows:
$change % of sales ---------- ----------- Same store sales $ 12,110 0.20% New store sales (2 stores - opened 9/01 & 8/02) 81,459 1.1% "Transferred" store (became Tandy Leather store in 2nd qtr. '02) (115,173) (1.6)% --------- ----------- $ (21,604) (0.30)% ========= ===========
The following table presents Leather Factory's sales mix by customer categories for the quarters ended September 30, 2002 and 2001:
QUARTER ENDED CUSTOMER GROUP 9/30/02 9/30/01 - -------------- --------- --------- RETAIL (end users, consumers, individuals) 17% 19% INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 7% 6% WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, dealers, etc.) 34% 32% CRAFT (craft and fabric stores) 28% 27% MIDAS (small manufacturers) 8% 10% ASC (Authorized Sales Centers) 6% 6% --------- --------- 100% 100% ========= =========
As the table indicates, Leather Factory 's sales mix this quarter varied little from the same quarter in 2001. Sales to all customer groups, with the exception of Midas (small manufacturers), increased in dollars over the third quarter of 2001. Orders from our small manufacturer-type customers have decreased recently as these customers are experiencing reductions in orders from their retail customers. We believe this is the result of the sluggishness in the overall economy. Operating income for Leather Factory decreased $69,400 or 9.9% of sales for the current quarter compared to 2001. Operating expenses as a percentage of sales were 44.4% compared to 40.7% a year ago. Personnel and related costs account for the majority of the increase as the number of employees has increased 8% over the past year. Increased advertising costs have also contributed to the increase in operating expenses. 15 TANDY LEATHER OPERATIONS Net sales for Tandy, which consisted of ten retail stores as of September 30, 2002, increased 18.8% for the third quarter of 2002 over the same quarter last year. The increase in sales consists of the following:
$change % of sales ---------- ----------- Same store sales $ - N/A New store sales (9 stores opened in 2002) 939,504 64.6% Transferred store sales (former Leather Factory store) 182,233 12.5% "Closed" central distribution facility - sales have been absorbed by new stores (847,771) (58.3)% --------- ----------- $ 273,966 18.8% ========= ===========
Effective April 1, 2002, a change of software allows Tandy to track its sales mix in a similar fashion as that of Leather Factory. The following table presents Tandy's sales mix by customer categories for the quarter ended September 30, 2002 with the quarter ended June 30, 2002 presented for comparison purposes:
QUARTER ENDED CUSTOMER GROUP 9/30/02 - -------------- ------------- RETAIL (end users, consumers, individuals) 62% INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 12% WHOLESALE (saddle & tack stores, resellers & distributors, dealers, etc.) 18% CRAFT (craft and fabric stores) * MIDAS (small manufacturers) * ASC (Authorized Sales Centers) 7% ------------- 100% =============
_________________ * less than 1% Tandy's retail sales continue to increase which accounts for the continued improvement in its gross profit margins. This sales category is expected to become an even larger part of Tandy's sales mix as more retail stores are opened. Sales to wholesalers saw slight sales gains as well. Operating income for Tandy increased minimally (3.6%) in the current quarter. Gross profit margins improved by 2.48 percentage points or $199,000. The increase in operating expenses absorbed the increase in margins, increasing $196,000. Tandy's operating expenses were 55.01% of sales for the quarter ended September 30, 2002 compared to 51.88% for the same quarter last year. The expenses associated with opening the new stores (increase in personnel, additional rents, telephone and utility services, etc.) account for the increase. Shipping costs (paid to freight companies to ship merchandise to customers) continue to decrease as more customers are purchasing in the stores versus phone and mail order. Tandy has opened (or has announced plans to open) retail stores in the following locations since June 30, 2002:
CITY, STATE MONTH OPENED SQ FOOTAGE - ----------------------- ------------ ---------- Dallas, Texas August 2002 1,700 Albuquerque, New Mexico August 2002 1,764 Las Vegas, Nevada August 2002 1,350 Indianapolis, Indiana October 2002 1,500 Peoria, Illinois October 2002 1,350 Memphis, Tennessee October 2002 2,500
16 CUSHMAN OPERATIONS Net sales for Cushman increased $34,000 for the third quarter of 2002, a improvement of 7.1%. The gross profit margin increased by 14.9 percentage points resulting in an increase in gross profit of $85,000. This significant improvement is the result of a decrease in direct labor costs and a more cost-effective purchasing of goods. Specifically, the number of manufacturing personnel has been reduced slightly and the manufacturing shifts have been cut from five days per week to four. Also, Cushman is purchasing a larger portion of its merchandise from outside vendors rather than manufacturing all of its products. The company has developed vendor sources for certain products at lower cost than it can produce them internally. Operating income for Cushman increased $119,000. The adoption of SFAS 142 (eliminating the amortization of goodwill beginning in 2002) produced $30,000 of the increase with gross profit margins accounting for the balance of the increase. Personnel costs are down slightly as well. EFFECT OF WEST COAST DOCK CLOSING Management is closely monitoring the aftereffects of the West Coast dockworkers lockout still unwinding. The company imports some merchandise from Taiwan and Hong Kong and there were several shipments tied up on the docks at the time of the lockout. Since the dockworkers have returned to work, the company has received the majority of this merchandise. The dock closing doesn't appear to have had any impact on the company's sales and profits in the third quarter; however, fourth quarter sales could be affected somewhat if additional merchandise expected to be received by the company does not arrive on a timely basis. To help offset that potential impact, the company is preparing its light manufacturing facility located in Fort Worth to produce certain products that are normally imported. CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION - --------------------------------------------------------- The change in accounting principle discussed above had significant effects on our consolidated balance sheet at September 30, 2002. Total goodwill was reduced from $4,535,412 at the end of 2001 to $607,898. This reduction was the principal cause of the decrease in total assets from $19,548,323 at the end of 2001 to $17,691,380 at the end of the third quarter of 2002 (a reduction of 9.5%). Total stockholders' equity was reduced from $12,423,671 at December 31, 2001 to $10,644,006 at September 30, 2002 (a reduction of 14.3%). This reduction was also attributable to the change in accounting principle, but the effect was partially offset by operating results from the first nine months of this year. The Company's investment in accounts receivable was $2.4 million at September 30, 2002, up $102,000 from $2.3 million at year-end 2001. The average days to collect accounts improved from 47.4 days in the third quarter of 2001 to 42.4 days in the third quarter of 2002. Tandy's average days to collect experienced the most improvement, from 46.8 days in 2001 to 23.6 days for the current quarter of 2002. Inventory increased $1.3 million to $10.4 million at September 30, 2002 from $9.1 million at year-end 2001. This increase is largely consists of inventory stocked at the new Tandy stores and increases in anticipation of the fourth quarter holiday shopping season. Historically, the company has not experienced seasonality in its quarter-to-quarter sales. However, with the new Tandy retail stores opened this year, management anticipated the possibility of additional fourth quarter sales as a result of holiday shopping and stocked additional inventory as we headed into the fourth quarter. The inventory turnover annualized rate for the first nine months of 2002 held steady at 4.08 times, the same as the turnover rate for the first nine months of 2001 as well as for all of 2001. 17 The Fort Worth complex houses our corporate and administrative offices as well as our central warehouse and factory. We have negotiated a new agreement with the landlord extending the lease term through March 2013. In conjunction with the new agreement, we have begun a remodeling project to consolidate formerly separate Leather Factory and Tandy warehouses, to relocate the factory in closer proximity to the warehouse, and to remodel the Fort Worth Leather Factory store into a combination Leather Factory/Tandy Leather flagship store with a more retail-oriented presentation. Our estimate of the total cost of the project is still expected to be $500,000 to $600,000. As of September 30, 2002, we had paid $405,535 on the renovation work. The project is expected to be completed by the end of 2002 and the amount currently classified as Other Assets (non-current) will be reclassified to Leasehold Improvements in the fourth quarter of 2002. Notes payable and current maturities of long-term debt decreased from $4,527,904 at the end of 2001 to $3,904,727 at September 30, 2002. Accounts payable increased $322,000 to $1.6 million at the end of the third quarter, due primarily to the increase in inventory. The Company's current ratio improved from 1.82 at December 31, 2001 to 2.08 at September 30, 2002. The primary sources of liquidity and capital resources during the first nine months of 2002 were funds provided by operating activities in the amount of $1,251,000 and the Company's Credit and Security Agreement with Wells Fargo Bank Minnesota, N.A. ("Wells Fargo"). The Company used its cash flow from operations and additional funds on hand at the beginning of the year to pay down loan balances ($601,043), to purchase equipment ($429,250), and to purchase the assets of two existing leathercraft stores ($227,747). Approximately 26% of the 2002 capital spending was for computer equipment, software, and fixtures for the new Tandy retail stores, 19% was for Tandy's new point-of-sale software and inventory scanning equipment for the existing Leather Factory stores, 29% was for various computer workstation and software upgrades in existing locations and departments, and 26% was for various furniture and fixtures. The revolving credit facility with Wells Fargo is based upon the level of the Company's accounts receivable and inventory. At September 30, 2002, the available and unused portion of the credit facility was approximately $2,401,000. 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 and 2003 we anticipate the funding for the opening of any new locations is expected to be provided by operating leases, cash flows from operating activities, and, if needed, the revolving credit facility. 18 FORWARD-LOOKING STATEMENTS - --------------------------- This report (particularly this 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 that could cause actual results to differ materially from those suggested by the forward-looking statements include, among other things: - - 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. - - The labor dispute that closed the West Coast docks earlier this year will have some effect on the Company's flow of inventory from Asia in the fourth quarter of 2002, although the extent of those effects is not known at this time. A federal court reopened these docks until December 26, 2002. If the dock closure resumes, we are likely to encounter additional delays in receiving inventory. - - The anticipated increases in retail sales from our Tandy stores could fail to materialize for a number of reasons, including the inability to locate suitable new locations or qualified personnel to manage them. - - Recent favorable trends in the arts and crafts industry may slow or reverse. - - If more terrorist activities such as those on September 11, 2001 occur, consumer-buying habits could change and decrease our sales. Also, 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. - - The prices of hides and leathers also fluctuate in normal times, and these fluctuations can affect the Company. 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. - - 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. - - 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. - - Tax or interest rates might increase. In particular, interest rates are likely to increase at some point from their present low levels, thereby increasing our costs of borrowing funds needed in our business. - - 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. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's Credit Facility includes loans with interest rates that vary with changes in the prime rate. An increase of one percentage point in the prime rate would not have a material impact on the Company's future earnings. PART II. OTHER INFORMATION ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. (b) Changes in internal controls. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -------- None (b) Reports on Form 8-K ---------------------- None 20 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 5, 2002 By: /s/ Wray Thompson ------------------- Wray Thompson Chairman of the Board and Chief Executive Officer Date: November 5, 2002 By: /s/ Shannon L. Greene ------------------------ Shannon L. Greene Chief Financial Officer and Treasurer (Chief Accounting Officer) - ----------------------------------------------------------- CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and only to the extent required by that provision, the undersigned certify that this report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that all information contained in this report fairly presents in all material respects the financial condition and results of operations of the issuer. Date: November 5, 2002 /s/ Wray Thompson ------------------- Wray Thompson, Chief Executive Officer /s/ Shannon L. Greene ------------------------ Shannon L. Greene, Chief Financial Officer - ----------------------------------------------------------- 21 CERTIFICATIONS I, Wray Thompson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Leather Factory, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidating subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 5, 2002 /s/ Wray Thompson ------------------- Wray Thompson President and Chief Executive Officer (principal executive officer) 22 ******** I, Shannon L. Greene, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Leather Factory, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidating subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report was prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 5, 2002 /s/ Shannon L. Greene ------------------------- Shannon L. Greene Chief Financial Officer and Treasurer (principal financial and accounting officer) 23 -----END PRIVACY-ENHANCED MESSAGE-----