-----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, TMUzFQG9KXMNo2feI5ekpRCqZaFfclgFjWYesxv8vLZO7ZAIo/slK1ojXlVNEKx3 Z16OHyp0ZwkXxXFjJ833tQ== 0000909724-03-000023.txt : 20030813 0000909724-03-000023.hdr.sgml : 20030813 20030813123355 ACCESSION NUMBER: 0000909724-03-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03839859 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 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 June 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-12368 THE LEATHER FACTORY, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2543540 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 3847 EAST LOOP 820 SOUTH, FT. WORTH, TEXAS 76119 (Address of principal executive offices) (Zip code) (817) 496-4414 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to by filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares outstanding of as Class August 11, 2003 - ---------------------------------------- ------------------------ Common Stock, par value $.0024 per share 10,270,461 1 THE LEATHER FACTORY, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 TABLE OF CONTENTS -----------------
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets June 30, 2003 and December 31, 2002 3 Consolidated Statements of Operations Three and six months ended June 30, 2003 and 2002 4 Consolidated Statements of Cash Flows Six months ended June 30, 2003 and 2002 5 Consolidated Statements of Stockholders' Equity Six months ended June 30, 2003 and 2002 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 18
2 THE LEATHER FACTORY, INC. ------------------------- CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2003 2002 ---------- ------------- (unaudited) ASSETS CURRENT ASSETS: Cash $ 160,621 $ 101,557 Cash restricted for payment on revolving credit facility 470,121 553,839 Accounts receivable-trade, net of allowance for doubtful accounts of $45,000 and $78,000, respectively 2,821,217 1,938,698 Inventory 12,164,127 12,695,344 Prepaid income taxes 5,164 55,644 Deferred income taxes 150,471 159,090 Other current assets 884,667 672,117 ------------- ------------- Total current assets 16,656,388 16,176,289 ------------ ------------- PROPERTY AND EQUIPMENT, at cost 5,461,936 5,321,749 Less accumulated depreciation and amortization (3,426,891) (3,301,898) ------------- ------------- Property and equipment, net 2,035,045 2,019,851 ------------ ------------- GOODWILL, net of accumulated amortization of $738,000 and $1,583,000 in 2003 and 2002, respectively 700,393 686,484 OTHER INTANGIBLES, net of accumulated amortization of $148,000 and $113,000 in 2003 and 2002, respectively 447,975 483,507 OTHER ASSETS 326,436 309,471 ------------ ------------- $20,166,237 $ 19,675,602 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,314,228 $ 1,594,909 Accrued expenses and other liabilities 851,310 2,503,331 Notes payable and current maturities of long-term debt 4,768,199 4,218,968 ------------ ------------- Total current liabilities 6,933,737 8,317,208 ------------ -------------- DEFERRED INCOME TAXES 225,275 186,076 NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities. - 2,256 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY: Preferred stock, $0.10 par value; 20,000 shares authorized, none issued or outstanding - - Common stock, $0.0024 par value; 25,000,000 shares authorized, 10,270,461 and 10,149,961 shares issued 24,649 24,360 Paid-in capital 4,401,799 4,163,901 Retained earnings 8,617,567 7,064,345 Less: notes receivable secured by common stock (20,000) (44,003) Accumulated other comprehensive loss (16,790) (38,541) ------------ -------------- Total stockholders' equity 13,007,225 11,170,062 ------------ -------------- $20,166,237 $ 19,675,602 ============ =============
The accompanying notes are an integral part of these financial statements. 3 THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
THREE MONTHS SIX MONTHS 2003 2002 2003 2002 ------------- ----------- ----------- ----------- NET SALES $ 10,460,675 $10,052,036 $21,020,760 $20,255,987 COST OF SALES 4,739,621 4,616,410 9,654,202 9,451,766 ------------- ----------- ----------- ----------- Gross profit 5,721,054 5,435,626 11,366,558 10,804,221 OPERATING EXPENSES 4,566,590 4,224,477 9,096,422 8,399,613 ------------- ----------- ----------- ----------- INCOME FROM OPERATIONS 1,154,464 1,211,149 2,270,136 2,404,608 OTHER INCOME (EXPENSE): Interest expense (70,468) (47,442) (133,820) (137,311) Other, net 43,705 (10,266) 74,523 (26,621) ------------- ----------- ----------- ----------- Total other income (expense) (26,763) (57,708) (59,297) (163,932) ------------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES and CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. 1,127,701 1,153,441 2,210,839 2,240,676 PROVISION FOR INCOME TAXES 348,997 361,394 657,617 689,324 ------------- ----------- ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 778,704 792,047 1,553,222 1,551,352 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of income taxes. . - - - (4,008,831) ------------- ----------- ----------- ----------- NET INCOME (LOSS) $ 778,704 $ 792,047 $ 1,553,222 $(2,457,479) ============= =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE - BASIC: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 0.08 $ 0.08 $ 0.15 $ 0.15 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET - - - (0.40) ------------- ----------- ----------- ----------- NET INCOME (LOSS) PER COMMON SHARE-BASIC $ 0.08 $ 0.08 $ 0.15 $ (0.25) ============= =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE - DILUTED: INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 0.07 $ 0.07 $ 0.14 $ 0.14 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET - - - (0.37) ------------- ----------- ----------- ----------- NET INCOME (LOSS) PER COMMON SHARE-DILUTED $ 0.07 $ 0.07 $ 0.14 $ (0.23) ============= =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 4 THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2003 AND 2002
2003 2002 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,553,222 $(2,457,479) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities- Depreciation & amortization 275,127 242,534 Loss on disposal of assets 9,372 - Amortization of deferred financing costs - 37,038 Deferred income taxes 47,818 (29,862) Other 7,843 (881) Cumulative effect of change in accounting principle - 4,008,831 Net changes in assets and liabilities: Accounts receivable-trade, net (882,519) (310,362) Inventory 531,217 (390,018) Income taxes 50,479 4,849 Other current assets (86,169) (480,041) Accounts payable (280,681) 590,605 Accrued expenses and other liabilities (1,652,021) 90,406 ----------- ------------ Total adjustments (1,979,534) 3,763,099 ----------- ------------ Net cash (used in) provided by operating activities (426,312) 1,305,620 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (270,377) (232,810) Payments in connection with businesses acquired - (227,747) Proceeds from sale of assets 6,217 - Increase in other assets (16,966) (3,648) ----------- ------------ Net cash used in investing activities (281,126) (464,205) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in revolving credit loans 550,201 (1,177,152) Payments on notes payable and long-term debt (3,226) (23,936) Decrease in cash restricted for payment on revolving credit facility 83,718 37,198 Payments received on notes secured by common stock 24,003 24,636 Proceeds from issuance of common stock 111,806 76,495 ----------- ------------ Net cash provided by (used in) financing activities 766,502 (1,062,759) ----------- ------------ NET CHANGE IN CASH 59,064 (221,344) CASH, beginning of period 101,557 409,040 ----------- ------------ CASH, end of period $ 160,621 $ 187,696 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the period $ 131,122 $ 106,843 Income taxes paid during the period, net of (refunds) 512,151 732,091
The accompanying notes are an integral part of these financial statements. 5 THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Common Stock --------------------------------- Number Par Paid-in Retained of shares value capital Earnings ------------- ----------------- ------------------ ------------ BALANCE, December 31, 2001 9,991,161 $ 23,979 $ 4,030,508 $ 8,478,187 Payments on notes receivable - secured by common stock - - - - Shares issued - employee stock options exercised 73,000 175 76,320 - Net loss - - - (2,457,479) Translation adjustment - - - - ------------- ----------------- ------------------ ------------ BALANCE, June 30, 2002 10,064,161 $ 24,154 $ 4,106,828 $ 6,020,708 ============= ================= ================== =========== BALANCE, December 31, 2002 10,149,961 $ 24,360 $ 4,163,901 $ 7,064,345 Payments on notes receivable - secured by common stock - - - - Shares issued - employee stock options exercised 120,500 289 111,517 - Warrants issued to acquire 100,000 shares of common stock - - 126,381 - Net income - - - 1,553,222 Translation adjustment - - - - ------------- ----------------- ------------------ ------------ BALANCE, June 30, 2003 10,270,461 $ 24,649 $ 4,401,799 $ 8,617,567 ============= ================= ================== =========== Notes Accumulated receivable Other - secured by Cumulative Comprehensive common stock Loss Total Income (Loss) -------------- ------------ -------------- ------------- BALANCE, December 31, 2001 $ (71,939) $ (37,064) $ 12,423,671 Payments on notes receivable - secured by common stock 24,636 - 24,636 Shares issued - employee stock options exercised - - 76,495 Net loss - - (2,457,479) (2,457,479) Translation adjustment - 3,197 3,197 3,197 -------------- ------------ -------------- BALANCE, June 30, 2002 $ (47,303) $ (33,867) $ 10,070,520 ============== ============ ============== -------------- Comprehensive loss for the six months ended June 30, 2002 $ (2,454,282) ============== BALANCE, December 31, 2002 $ (44,003) $ (38,541) $ 11,170,062 Payments on notes receivable - secured by common stock 24,003 - 24,003 Shares issued - employee stock options exercised - - 111,806 Warrants issued to acquire 100,000 shares of common stock - - 126,381 Net income - - 1,553,222 $1,553,222 Translation adjustment - 21,751 21,751 21,751 -------------- ------------ -------------- BALANCE, June 30, 2003 $ (20,000) $ (16,790) $ 13,007,225 ============== ============ ============== -------------- Comprehensive income for the six months ended June 30, 2003 $1,574,973 ==============
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 AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES In the opinion of management, the accompanying consolidated financial statements for The Leather Factory, Inc. and its consolidated subsidiaries ("TLF") contain all adjustments necessary to present fairly its financial position as of June 30, 2003 and December 31, 2002, and its results of operations and cash flows for the three and six month periods ended June 30, 2003 and 2002. Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation. Operating results for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. These consolidated financial statements should be read in conjunction with the audited consolidated financial and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2002. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement 123, ("SFAS 148"). SFAS 148 amends SFAS No.123, Accounting for Stock-Based Compensation, ("SFAS 123"), to provide alternative transition methods for an entity's voluntary change in their accounting for stock-based compensation from the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB No. 25") and related interpretations to the fair value method under SFAS 123. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure of the pro forma effects of using the fair value method of accounting for stock-based compensation in interim as well as annual financial statements. The Company currently accounts for its stock-based compensation using the intrinsic value method as prescribed by APB No. 25. The disclosure provisions of SFAS No. 148 were adopted on December 31, 2002 and are discussed in Note 2. Revenue Recognition The Company recognizes revenue for over-the-counter sales as transactions occur and other sales upon shipment of product provided that there are no significant post-delivery obligations to the customer and collection is reasonably assured, which generally occurs upon shipment. Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise. Inventory Inventory is stated at the lower of cost or market and is accounted for on the "first in, first out" method. In addition, the value of inventory is periodically reduced for slow-moving or obsolete inventory based on management's review of items on hand compared to their estimated future demand. The components of inventory consist of the following as of:
JUNE 30, DECEMBER 31, 2003 2002 ----------- ------------- Finished goods held for sale $10,938,773 $ 11,693,868 Raw materials and work in process 1,225,354 1,001,476 ----------- ------------- $12,164,127 $ 12,695,344 =========== =============
7 Goodwill and Other Intangibles Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," prescribes a two-phase process for impairment testing of goodwill, which is performed once annually, absent indicators of impairment. The first phase screens for impairment, while the second phase (if necessary) measures the impairment. As a result of SFAS 142, we incurred an impairment write-down in the first quarter of 2002 of our investment in our subsidiary, Roberts, Cushman & Company, Inc., in the amount of $4.0 million. The remaining goodwill on our balance sheet is analyzed by management periodically to determine the appropriateness of its carrying value. We have elected to perform our annual analysis during the fourth calendar quarter of each year. As of December 31, 2002, management determined that the present value of the discounted estimated future cash flows of the stores associated with the goodwill is sufficient to support their respective goodwill balances. No indicators of impairment were identified during the first six months of 2003. Other intangibles consist of the following:
AS OF JUNE 30, 2003 AS OF DECEMBER 31, 2002 ---------------------------------------- --------------------------------------- ACCUMULATED ACCUMULATED GROSS AMORTIZATION NET GROSS AMORTIZATION NET ------------ -------------- -------- -------- ------------- -------- Trademarks, Copyrights $ 544,369 $ 130,227 $414,142 $ 544,369 $ 102,029 $442,340 Non-Compete Agreements 52,000 18,167 33,833 52,000 10,833 41,167 ------------ -------------- -------- ------------ ------------- -------- $ 596,369 $ 148,394 $447,975 $ 596,369 $ 112,862 $483,507 ============ ============== ======== ============ ============= ========
The Company recorded amortization expense of $38,256 during the first six months of 2003 compared to $23,374 during the first half of 2002. 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:
ROBERTS LEATHER FACTORY. TANDY LEATHER CUSHMAN TOTAL ---------------- -------------- -------- ------- 2003 $ 5,918 $ 45,004 $ 0 $50,922 2004 5,918 45,004 0 50,922 2005 5,918 35,004 0 40,922 2006 5,918 34,337 0 40,255 2007 5,918 33,504 0 39,422
8 2. STOCK-BASED COMPENSATION The Company accounts for stock options granted to its directors and employees using the intrinsic value method prescribed by APB No. 25 which requires compensation expense be recognized for stock options when the quoted market price of the Company's common stock on the date of grant exceeds the option's exercise price. No compensation cost has been reflected in net income for the granting of director and employee stock options as all options granted had an exercise price equal to the quoted market price of the Company's common stock on the date the options were granted. Had compensation cost for the Company's stock options been determined consistent with the SFAS 123 fair value approach, the Company's net income and net income per common share for the three and six months ended June 30, 2003 and 2002, on a pro forma basis, would have been as follows:
THREE MONTHS ENDED JUNE 30, 2003 2002 ------------------- -------------- Net income (loss), as reported $ 778,704 $ 792,047 Add: Stock-based compensation expense included in reported net income (loss) - - Deduct: Stock-based compensation expense determined under fair value method 20,266 25,905 ------------------- -------------- Net income (loss), pro forma $ 758,438 $ 766,142 Net income (loss) per share: Basic - as reported $ 0.08 $ 0.08 Basic - pro forma $ 0.07 $ 0.08 Diluted - as reported $ 0.07 $ 0.07 Diluted - pro forma $ 0.07 $ 0.07 SIX MONTHS ENDED JUNE 30, 2003 2002 ---------------- -------------- Net income (loss), as reported $ 1,553,222 $ (2.457.479) Add: Stock-based compensation expense included in reported net income (loss) - - Deduct: Stock-based compensation expense determined under fair value method 40,533 51,810 ---------------- -------------- Net income (loss), pro forma $ 1,512,689 $ (2,509,288) Net income (loss) per share: Basic - as reported $ 0.15 $ (0.25) Basic - pro forma $ 0.15 $ (0.25) Diluted - as reported $ 0.14 $ (0.23) Diluted - pro forma $ 0.14 $ (0.23)
The fair values of stock options granted were estimated on the dates of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 2.62% for 2003 and 3.00% for 2002; dividend yields of 0% for both periods; volatility factors of .725 for 2003 and ..736 for 2002; and an expected life of the valued options of 5 years. 9 3. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share ("EPS"):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------- 2003 2002 2003 2002 ------------ ------------ ----------- ------------ Numerator: Net income (loss) $ 778,704 $ 792,047 $ 1,553,222 $(2,457,479) ------------ ------------ ----------- ------------ Numerator for basic and diluted earnings per share 778,704 792,047 1,553,222 (2,457,479) Denominator: Weighted-average shares outstanding-basic 10,234,054 10,041,018 10,205,900 10,021,476 Effect of dilutive securities: Stock options 398,684 503,871 423,109 496,061 Warrants 172,281 254,741 173,668 252,355 ------------ ------------ ----------- ------------ Dilutive potential common shares 570,965 758,612 596,777 748,416 ------------ ------------ ----------- ------------ Denominator for diluted earnings per share- weighted-average shares 10,805,019 10,799,630 10,802,677 10,769,892 ============ ============ =========== =========== Basic earnings (loss) per share $ 0.08 $ 0.08 $ 0.15 $ (0.25) ============ ============ =========== =========== Diluted earnings (loss) per share $ 0.07 $ 0.07 $ 0.14 $ (0.23) ============ ============ =========== ===========
The net effect of converting stock options to purchase 684,700 and 1,126,000 shares of common stock at option prices less than the average market prices has been included in the computations of diluted EPS for the three and six months ended June 30, 2003 and 2002, respectively. 4. SEGMENT INFORMATION The Company identifies its segments based on the activities of three distinct businesses: a. The Leather Factory, which sells primarily to wholesale customers through a chain of 30 outlet stores located in the United States and Canada; b. Tandy Leather Company, which sells primarily to retail customers through a chain of retail stores located in the United States; and c. Roberts, Cushman & Company, manufacturer of decorative hat trims sold directly to hat manufacturers and distributors. The Company's reportable operating segments have been determined as separately identifiable business units. The Company measures segment earnings as operating earnings, defined as income before interest and income taxes. 10
LEATHER FACTORY TANDY LEATHER ROBERTS,CUSHMAN TOTAL ---------------- ---------------- ---------------- ----------- FOR THE QUARTER ENDED JUNE 30, 2003 Net sales $ 7,801,742 $ 2,113,479 $ 545,454 $10,460,675 Gross profit 4,182,812 1,325,072 213,170 5,721,054 Operating earnings 918,434 166,230 69,800 1,154,464 Interest expense (70,468) - - (70,468) Other, net 43,091 614 - 43,705 ----------- Income before income taxes 891,057 166,844 69,800 1,127,701 ----------- Depreciation and amortization 129,328 18,247 2,521 150,096 Fixed asset additions 112,605 62,944 856 176,405 Total assets $ 16,163,098 $ 3,078,121 $ 925,018 $20,166,237 ---------------- ---------------- ---------------- ----------- FOR THE QUARTER ENDED JUNE 30, 2002 Net sales $ 7,700,422 $ 1,814,310 $ 537,304 $10,052,036 Gross profit 4,175,742 1,079,238 180,646 5,435,626 Operating earnings 1,018,799 97,536 94,814 1,211,149 Interest expense (47,253) (189) - (47,442) Other, net (10,134) (132) - (10,266) ----------- Income before income taxes 961,412 97,215 94,814 1,153,441 ----------- Depreciation and amortization 88,219 28,159 3,163 119,541 Fixed asset additions 56,840 77,390 958 135,188 Total assets $ 12,912,434 $ 2,999,716 $ 788,501 $16,700,651 ---------------- ---------------- ---------------- ----------- LEATHER FACTORY TANDY LEATHER ROBERTS,CUSHMAN TOTAL ---------------- ---------------- ---------------- ----------- FOR THE SIX MONTHS ENDED JUNE 30, 2003 Net sales $ 16,003,000 $ 3,978,018 $ 1,039,742 $21,020,760 Gross profit 8,480,314 2,506,403 379,841 11,366,558 Operating earnings 1,842,071 313,223 114,842 2,270,136 Interest expense (133,820) - - (133,820) Other, net 74,381 142 - 74,523 ----------- Income before income taxes 1,782,632 313,365 114,842 2,210,839 ----------- Depreciation and amortization 235,695 34,086 5,346 275,127 Fixed asset additions 152,102 117,419 856 270,377 Total assets $ 16,163,098 $ 3,078,121 $ 925,018 $20,166,237 ---------------- ---------------- ---------------- ----------- FOR THE SIX MONTHS ENDED JUNE 30, 2002 Net sales $ 15,524,939 $ 3,692,183 $ 1,038,865 $20,255,987 Gross profit 8,302,614 2,152,817 348,790 10,804,221 Operating earnings 1,994,526 239,037 171,045 2,404,608 Interest expense (136,908) (403) - (137,311) Other, net (25,988) (633) - (26,621) ----------- Income before income taxes 1,831,630 238,001 171,045 2,240,676 ----------- Depreciation and amortization 184,127 51,862 6,545 242,534 Fixed asset additions 128,369 102,903 1,538 232,810 Total assets $ 12,912,434 $ 2,999,716 $ 788,501 $16,700,651 ---------------- ---------------- ---------------- -----------
11 Net sales for geographic areas were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- United States $ 9,711,785 $ 9,448,686 $ 19,582,421 $ 19,111,120 All other countries 748,890 603,350 1,438,339 1,144,867 ------------- ------------- ------------- -- ----------- $ 10,460,675 $ 10,052,036 $ 21,020,760 $ 20,255,987 ============= ============= ============= =============
Geographic sales information is based on the location of the customer. Net sales from no single foreign country was material to the Company's consolidated net sales for the three and six month periods ended June 30, 2003 and 2002. The Company does not have any significant long-lived assets outside of the United States. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Leather Factory, Inc. ("TLF" or the "Company") is a Delaware corporation whose common stock trades on the American Stock Exchange under the symbol "TLF". The Company is managed on a business entity basis, with those businesses being The Leather Factory ("Leather Factory"), Tandy Leather Company ("Tandy" or "Tandy Leather"), and Roberts, Cushman & Company, Inc. ("Cushman"). See Note 4 to the Consolidated Financial Statements for additional information concerning the Company's segments, as well as its foreign operations. Leather Factory, founded in 1980 by Wray Thompson and Ron Morgan, distributes leather and related products, including leatherworking tools, buckles and adornments for belts, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits. The products are sold primarily through 30 company-owned outlets located throughout the United States and Canada. Tandy Leather is the best-known supplier of leather and related supplies used in the leathercraft industry. From its founding in 1919, Tandy has been the primary leathercraft resource world wide. Products include quality tools, leather, accessories, kits and teaching materials. In early 2002, we initiated a plan to expand Tandy by opening retail stores. As of July 31, 2003, we have opened 22 Tandy Leather retail stores located throughout the United States. Cushman, whose origins date back to the mid-1800's, custom designs and manufactures a product line of decorative hat trims for headwear manufacturers. CRITICAL ACCOUNTING POLICIES A description of the Company's critical accounting policies appears in "Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 12 RESULTS OF OPERATIONS - ----------------------- The following tables present selected financial data of each of the Company's three segments for the quarters and six months ended June 30, 2003 and 2002:
QUARTER ENDED JUNE 30, 2003 QUARTER ENDED JUNE 30, 2002 --------------------------- --------------------------- OPERATING OPERATING SALES INCOME SALES INCOME ------------- ------------ ------------- ------------ Leather Factory $ 7,801,742 $ 918,434 $ 7,700,422 $ 1,018,799 Tandy 2,113,479 166,230 1,814,310 97,536 Cushman 545,454 69,800 537,304 94,814 ------------- ------------ ------------- ------------ Total Operations $ 10,460,675 $ 1,154,464 $ 10,052,036 $ 1,211,149 ============= ============ ============= ============
SIX MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2002 ------------------------------ ------------------------------ OPERATING OPERATING SALES INCOME SALES INCOME ------------- ------------ ------------- ------------ Leather Factory $ 16,003,000 $ 1,842,071 $ 15,524,939 $ 1,994,526 Tandy 3,978,018 313,223 3,692,183 239,037 Cushman 1,039,742 114,842 1,038,865 171,045 ------------- ------------ ------------- ------------ Total Operations $ 21,020,760 $ 2,270,136 $ 20,255,987 $ 2,404,608 ============= ============ ============= ============
Consolidated net sales for the quarter ended June 30, 2003 increased $408,000, or 4.1%, compared to the same period in 2002, with all three segments contributing to the increase. Leather Factory's sales gain was $101,000; Tandy contributed $299,000 and Cushman recorded a gain of $8,000. Operating income on a consolidated basis for the quarter ended June 30, 2003 was down 4.7% or $57,000 over the second quarter of 2002.
$INCR % INCR QTR ENDED 6/30/03 QTR ENDED 6/30/02 (DECR) (DECR) ------------------ ------------------ ----------- ------ Same Store Sales $ 8,851,661 $ 8,697,269 $ 154,392 1.78% New Store Sales 1,607,686 57,842 1,549,844 N/A Closed Store Sales 1,328 1,296,925 (1,295,597) N/A ------------------ ---------------- ----------- ------ Total $ 10,460,675 $ 10,052,036 $ 408,639 4.07% ================== ================== =========== ======
Same store sales for the quarter includes 29 Leather Factory stores, four Tandy stores, and Cushman. New store sales include one Leather Factory store and 18 Tandy stores. Stores opened for less than half of the reporting period last year are classified as new stores in the current reporting period. The closed store in the table above was the Tandy order fulfillment house that was eliminated on September 1, 2002. Consolidated net sales for the six months ended June 30, 2003 increased $765,000, or 3.8%, compared to the same period in 2002. Leather Factory contributed $609,000 of the sales gain while Tandy added $155,000. Cushman's 2003 sales were even with those of a year ago. Operating income on a consolidated basis for the six months ended June 30, 2003 was down 5.6% or $134,000 over last year. 13
$INCR % INCR SIX MONTHS ENDED 6/30/03 SIX MONTHS ENDED 6/30/02 (DECR) (DECR) ------------------------- ------------------------- ----------- ------ Same Store Sales $ 17,202,684 $ 16,754,355 $ 448,329 2.68% New Store Sales 3,815,688 502,139 3,313,549 N/A Closed Store Sales 2,388 2,999,493 (2,997,105) N/A ------------------------- ------------------------- ----------- ------ Total $ 21,020,760 $ 20,255,987 $ 764,773 3.78% ========================= ========================= =========== ======
Same store sales for the six months ended June 30, 2003 include 29 Leather Factory stores, one Tandy store, and Cushman. New store sales include one Leather Factory store and 21 Tandy stores. LEATHER FACTORY OPERATIONS Net sales from Leather Factory's 30 stores increased 1.32% for the second quarter of 2003 as follows:
QTR ENDED QTR ENDED $INCR % INCR 6/30/03 6/30/02 (DECR) (DECR) ---------- ---------- -------- -------- Same store sales (29 stores) $7,668,988 $7,700,422 $(31,433) (0.41)% New store sales (1 store) 132,753 - 132,753 *** ---------- ---------- -------- -------- Total sales $7,801,742 $7,700,422 $101,320 1.32% ========== ========== ======== ========
The following table presents TLF's sales mix by customer categories for the quarters ended June 30, 2003 and 2002:
QUARTER ENDED CUSTOMER GROUP 6/30/03 6/30/02 - ------------------------------------------------------------------------------------- --------- ------- RETAIL (end users, consumers, individuals) 19% 18% INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 8 8 WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, etc.) 29 34 CRAFT (craft stores (individually owned) and craftstore chains) 28 25 MIDAS (small manufacturers) 9 8 ASC (Authorized Sales Centers) 7 7 --------- ------- 100% 100% ========= =======
14 Modest sales gains were achieved in our RETAIL and CRAFT customer groups. However, those gains were offset by a decrease in our WHOLESALE group. Sales to our wholesale customers, which include saddle and tack customers, small resellers and dealers, were down approximately 15% in the second quarter of 2003 compared to last year. Of all our customer groups, WHOLESALE appears to be the most significantly impacted currently by the struggling economy. Their sales to their customers are down which quickly affects their ability to purchase goods from us. We boosted our advertising and marketing efforts to this WHOLESALE group late in the second quarter by increasing the quality and size of the sales flyer produced and expanding the number of pieces mailed to them. These efforts, while not having sufficient time to impact our second quarter sales, are showing signs of success early in the third quarter. Operating income for Leather Factory decreased $100,000 for the current quarter compared to 2002. Operating expenses as a percentage of sales in the second quarter of 2003 were 43.6%, up from 42.0% a year ago. Included in the Leather Factory operating expenses are most corporate and administrative expenses for the entire company. Management's increased emphasis on investor relations accounts for the majority of the operating expense increase of $342,000 in the current quarter when compared to the second quarter of 2002. TANDY LEATHER OPERATIONS Net sales for Tandy, which consisted of twenty-two retail stores as of June 30, 2003, were up 16.49% for the second quarter of 2003 over the same quarter last year, which consisted of six retail stores and the order fulfillment house, as follows:
QTR ENDED QTR ENDED $INCR % INCR 6/30/03 6/30/02 (DECR) (DECR) ---------- ---------- ------------ -------- Same store sales (4 stores) $ 637,218 $ 459,542 $ 177,676 38.66% New store sales (18 stores) 1,474,932 57,843 1,417,0089 *** Closed store (order fulfillment house) 1,329 1,296,925 (1,295,596) (99.90.) ---------- ---------- ------------ -------- Total sales $2,113,479 $1,814,310 $ 299,169 16.49% ========== ========== =========== ========
A store is categorized as "new" as long as it was opened less than half of the comparable period in the prior year. In the above table, "new store sales" for the quarter ended June 30, 2002 includes our Sacramento and Salt Lake City stores because those stores were only open for one month in the quarter (both stores were opened in June 2002). "Same store sales" include the East Hartford, CT store because it opened in April 2002. Sales in the current quarter showed healthy growth. The four "same stores" continue to post strong gains. The order fulfillment house began winding down its operations a year ago as the retail store operation continue to increase its presence across the country. Average sales per month in the stores that have been opened for at least three moths as of June 30, 2003 is still $37,000 (same as the average at the end of March 2003) which beats our internal expectations of $30,000 per month per store. The following table presents Tandy's sales mix by customer categories for the quarters ended June 30, 2003 and 2002:
QUARTER ENDED CUSTOMER GROUP 6/30/03 6/30/02 - ------------------------------------------------------------------------------------- ---------- ------- RETAIL (end users, consumers, individuals) 67% 57% INSTITUTION (prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.) 10 17 WHOLESALE (saddle & tack stores, resellers & distributors, shoe repair shops, etc.) 18 16 CRAFT (craft stores (individually owned) and craftstore chains) * * MIDAS (small manufacturers) * 1 ASC (Authorized Sales Centers) 5 9 ---------- ------- 100% 100% ========== =======
15 Second quarter operating income for Tandy increased $69,000 or 70% over operating income in last year's second quarter. Gross profit margins improved from 59.5% to 62.7% for the quarter due primarily to the increase in retail sales versus other sales categories. Operating expenses were 54.8% of sales in the current quarter compared to 54.6% in the same quarter last year. Additional personnel costs (wages, benefits, etc.), rents, utilities, etc. associated with the new stores accounted for the operating expense increase over last year. ROBERTS, CUSHMAN OPERATIONS Net sales for Cushman increased $8,000 for the second quarter of 2003 over the second quarter of 2002. Operating income for Cushman decreased $25,000. Increases in insurance costs and Cushman's allowance for uncollectible accounts (which results in an increase in bad debt expense in the current period) accounted for the operating income reduction. We have noticed a slow down in collections from customers during the quarter. We continue to closely monitor outstanding accounts and have no reason to believe that we will not be able to collect those accounts in full. However, in accordance with our conservative management policy, we believe the increase in the allowance account is appropriate. OTHER EXPENSES Interest expense of $70,468 in the second quarter of 2003 increased from $47,442 in the second quarter of 2002. The increase was attributable to an increase in the average debt balance in the current quarter versus a year ago. The average debt balance for the first six months of 2003 was $5.4 million compared to $3.2 million for the first six months of 2002. CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION - --------------------------------------------------------- There was a slight change (2.5%) in our consolidated balance sheet from December 31, 2002 to June 30, 2003. Total assets increased from $19,675,602 at year-end to $20,166,237 at June 30. Our accounts receivable accounted for the majority of the increase, partially offset by a decrease in inventory. Total stockholders' equity increased from $11,170,062 at December 31, 2002 to $13,007,225 at June 30, 2003. The increase in equity is attributable to the earnings in the first half of the year. Inventory decreased $531,000 at June 30, 2003 from year-end 2002. Inventory turnover decreased to an annualized rate of 3.52 times during the first six months of 2003, a slowdown from 4.36 times for the first half of 2002 and 3.65 times for all of 2002. The slowdown in turns is still due primarily to the high inventory balance at the end of 2002. We compute our inventory turns as sales divided by average inventory. As we stated in our 2002 Form 10-K, our inventory was above normal and expected levels at the end of 2002, primarily due to our attempts to optimize that inventory during the West Coast dock strike in the later part of the third quarter of 2002 and the eventual unwinding of the backlog of shipments in the fourth quarter of 2002 after the strike ended. We decreased purchases of product significantly from March through June 2003, resulting in the decreased inventory at June 30, 2003. 16 Leather Factory stores are holding an average inventory of $89,000 per store which is in line with management's target of $90,000 per store. Tandy stores are averaging $57,000 of inventory per store - slightly higher than management's target of $50,000 or less. We monitor inventory levels in the stores on a continual basis and are working closely with the store managers to optimize their inventory with their sales volumes on a store by store basis. The Company's investment in accounts receivable was $2.8 million at June 30, 2003, up $882,000 from $1.9 million at year-end 2002, resulting from increased credit sales. Consolidated average days to collect accounts improved slightly over the first half of 2002 from 44.3 days to 43.3 days. Leather Factory posted the most improvement in average days to collect accounts, from 43.5 days to 40.2 days outstanding. Tandy and Cushman days outstanding increased in the first half of 2003 compared to 2002, from 38.88 and 54.26 days in 2002 to 43.7 and 68.2 days in 2003, respectively. Accounts payable decreased $281,000 to $1.3 million at the end of the second quarter, due primarily to the reduction in inventory purchases during the period. Accrued expenses and other liabilities decreased $1.6 million, from $2.5 million at December 31, 2002 to $851,000 at June 30, 2003. The reduction is due to the decrease of accrued inventory in transit of $1.0 million between December 31 and June 30 as well as the change in the balance of accrued managers' bonuses. Bonuses are accrued throughout the year based on the operating profits of each stores and then paid annually in March. Accrued bonuses at December 31, 2002 totaled $930,000 compared to that at June 30, 2003 totaling $285,000. Notes payable and current maturities of long-term debt increased from $4.2 million at the end of 2002 to $4.8 million at June 30, 2003. However, during the second quarter of 2003 (from March 31 to June 30), we reduced our debt by $1.0 million. The Company's current ratio rose from 2.08 at December 31, 2002 to 2.40 at June 30, 2003. Generally accepted accounting principles ("GAAP") require the Company's debt with Wells Fargo Bank Minnesota, N.A. ("Wells Fargo") to be classified as short-term (even though the stated maturity is in November 2004) because our credit agreement with Wells Fargo includes both a subjective acceleration clause and a requirement to maintain an arrangement whereby cash collections from our customers directly reduce the debt outstanding (Emerging Issues Task Force Issue 95-22). If the accounting rules permitted this loan to be report as long-term indebtedness, the Company's current ratio at June 30, 2003 would have been 7.68, an improvement of 5.28. Management believes that disclosure of this non-GAAP information aids the reader's understanding of the Company's balance sheets. During the first half of 2003, cash flows used in operating activities was $426,000. The annual manager bonus payments accounted for the majority of the operating cash used during the period. Cash flows used in investing activities totaled $281,000, the majority of which was for capital expenditures in the amount of $270,000. The majority of the purchases was for the new Tandy stores opened. We also completed the construction of the Stohlman Leather Musuem and Gallery located inside our Fort Worth store during the second quarter of 2003 at a total cost of $25,000. Cash flows provided by financing activities was $767,000, representing our net borrowings against our revolving credit facility for the year and cash received from employees on exercises of stock options. We expect to fund our operating and liquidity needs as well as our current expansion of Tandy's retail store chain from a combination of current cash balances, internally generated funds and our revolving credit facility with Wells Fargo, which is based upon the level of the our accounts receivable and inventory. At June 30, 2003, the available and unused portion of the credit facility was approximately $2.3 million. 17 FORWARD-LOOKING STATEMENTS - --------------------------- This report (particularly Items 2, 3 and 4 of this Part I) contains forward-looking statements of management. In general, these are predictions or suggestions of future events and statements or expectations of future trends or occurrences. There are certain important risks that could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of the important risks which could cause actual results to differ materially from those suggested by the forward-looking statements include, among other things: - - Continued involvement by the United States in military and other operations in the Middle East and other areas abroad could disrupt international trade and affect the Company's inventory sources. - - The recent slump in the economy in the United States, as well as abroad, may cause our sales to decrease or not to increase or adversely affect the prices charged for our products. Also, hostilities, terrorism or other events could worsen this condition. - - As a result of the on-going threat of terrorist attacks on the United States, consumer buying habits could change and decrease our sales. - - 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. - - We might fail to realize the anticipated benefits of opening of additional Tandy Leather retail stores or other retail initiatives might not be successful. - - Tax or interest rates might increase. In particular, interest rates are likely to increase at some point from their present low levels. These increases will increase our costs of borrowing funds as needed in our business. - - Any change in the commercial banking environment may affect us and our ability to borrow capital as needed. - - 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. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For disclosures about market risk affecting the Company, see Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for our fiscal year ended December 31, 2002. The Company believes that its exposure to market risks has not changed significantly since December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES At the end of the second quarter of 2003, our President, Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon this evaluation, they concluded that, subject to the limitations described below, the Company's disclosure controls and procedures offer reasonable assurance that the information required to be disclosed by the Company in the reports it files under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission. During the period covered by this report, there has been no significant change in the Company's internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, these controls. Limitations on the Effectiveness of Controls. Our management, including the President, Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls and procedures will prevent all error and all fraud. A well conceived and operated control system is based in part upon certain assumptions about the likelihood of future events and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 15, 2003, the Annual Meeting of the Stockholders of the Company was held in the Champions Ballroom III at the Wyndham Hotel, Arlington, Texas to consider and act on the election of the following individuals to serve as directors until the Company's 2004 Annual Meeting of Stockholders or until their successors are duly elected and qualified: Shannon L. Greene Michael A. Markwardt Joseph R. Mannes T. Field Lange Ronald C. Morgan Wray Thompson H.W. "Hub" Markwardt The following table shows the votes cast for and against, as well as those that abstained from voting, the election of these individuals as directors of the Company:
For Against Abstaining --------- ------- ---------- Shannon L. Greene 7,112,364 18,344 0 T. Field Lange 7,127,203 3,505 0 Joseph R. Mannes 7,103,110 27,598 0 H.W. "Hub" Markwardt 7,101,222 29,481 0 Michael A. Markwardt 7,100,627 30,081 0 Ronald C. Morgan 7,112,364 18,344 0 Wray Thompson 7,112,364 18,344 0
The Company's proxy statement dated April 15, 2003, for the 2003 Annual Meeting of Stockholders, provided detailed information about this meeting and the action to be taken there. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits --------
EXHIBIT NUMBER. EXHIBIT - ------- ----------------------------------------------------------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K ---------------------- On April 23, 2003, the Company filed a report on Form 8-K in which we furnished under Item 9 the press release entitled "The Leather Factory Reports 1st Quarter 2003 Results" relating to the result of our first quarter ended March 31, 2003. On July 23, 2003, the Company filed a report on Form 8-K in which we furnished under Item 9 the press release entitled "The Leather Factory Reports 2nd Quarter 2003 Results" relating to the result of our second quarter ended June 30, 2003. 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: August 13, 2003 By: /s/ Wray Thompson -------------------- Wray Thompson Chairman and Chief Executive Officer Date: August 13, 2003 By: /s/Shannon L. Greene ---------------------- Shannon L. Greene Chief Financial Officer and Treasurer (Chief Accounting Officer) 20 EXHIBIT 31.1 - ------------- CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. August 13, 2003 /s/ Wray Thompson ------------------- Wray Thompson Chairman and Chief Executive Officer 21 EXHIBIT 31.2 - ------------- CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. August 13, 2003 /s/ Shannon L. Greene ------------------------ Shannon L. Greene Chief Financial Officer and Treasurer 22 EXHIBIT 32 - ----------- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of The Leather Factory, Inc. for the quarter ended June 30, 2003 as filed with the United States Securities and Exchange Commission on the date hereof (the "Report"), Wray Thompson, as Chairman and Chief Executive Officer, and Shannon L. Greene, as Treasurer and Chief Financial Officer, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: i. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and ii. The information contained in the Report fully presents, in all material respects, the financial condition and results of operations of the Company. August 13, 2003 By: /s/ Wray Thompson ------------------- WRAY THOMPSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER August 13, 2003 By: /s/ Shannon L. Greene ------------------------ SHANNON L. GREENE CHIEF FINANCIAL OFFICER AND TREASURER -----END PRIVACY-ENHANCED MESSAGE-----