-----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, VI0JXQRQ7CDpYl2JBp+gpo9tahrZpYwWo7FAtWwVpIGi5QfxhztsbosvzWcQavhE VW1zYnOPU6WotYc6bLiI4g== 0000909724-04-000056.txt : 20041115 0000909724-04-000056.hdr.sgml : 20041115 20041112184125 ACCESSION NUMBER: 0000909724-04-000056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041112 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: 041141138 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 SEPTEMBER 30, 2004 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 BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER. YES_____ NO__X___ 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 29, 2004 - -------------------------------------------- ---------------------- COMMON STOCK, PAR VALUE $.0024 PER SHARE 10,554,711 THE LEATHER FACTORY, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS PAGE NO. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 3 CONSOLIDATED STATEMENTS OF INCOME THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 4 CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES 18 ITEM 6. EXHIBITS 18 SIGNATURES 19 THE LEATHER FACTORY, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2004 2003 (UNAUDITED) -------------- -------------- ASSETS CURRENT ASSETS: CASH $ 1,328,052 $ 1,728,344 ACCOUNTS RECEIVABLE-TRADE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $61,000 AND $31,000 IN 2004 AND 2003, RESPECTIVELY 2,242,548 1,828,738 INVENTORY 12,880,245 11,079,893 PREPAID INCOME TAXES 14,357 206,023 DEFERRED INCOME TAXES 199,881 134,312 OTHER CURRENT ASSETS 608,857 702,236 -------------- -------------- TOTAL CURRENT ASSETS 117,273,940 15,679,546 --------------- -------------- PROPERTY AND EQUIPMENT, AT COST 5,882,044 5,574,992 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (3,992,857) (3,669,099) --------------- -------------- PROPERTY AND EQUIPMENT, NET 1,889,187 1,905,893 GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $762,000 AND $758,000 IN 2004 AND 2003, RESPECTIVELY 737,543 704,235 OTHER INTANGIBLES, NET OF ACCUMULATED AMORTIZATION OF $206,000 AND $164,000 IN 2004 AND 2003, RESPECTIVELY 416,231 432,549 OTHER ASSETS 324,796 336,183 --------------- -------------- $ 20,641,696 $ 19,058,406 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 1,632,357 $ 1,545,079 ACCRUED EXPENSES AND OTHER LIABILITIES 1,178,921 1,000,427 NOTES PAYABLE AND CURRENT MATURITIES OF LONG-TERM DEBT - 1,134 --------------- -------------- TOTAL CURRENT LIABILITIES 2,811,278 2,546,640 --------------- -------------- DEFERRED INCOME TAXES 288,617 209,289 NOTES PAYABLE AND LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,006,821 1,792,984 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, 10,560,661 AND 10,487,961 SHARES ISSUED IN 2004 AND 2003, RESPECTIVELY; 10,555,153 AND 10,487,961 SHARES OUTSTANDING IN 2004 AND 2003, RESPECTIVELY 25,345 25,171 PAID-IN CAPITAL 4,796,999 4,673,158 RETAINED EARNINGS 11,719,282 9,804,719 LESS: NOTES RECEIVABLE SECURED BY COMMON STOCK (15,000) (20,000) LESS: TREASURY STOCK, 5,508 SHARES, AT COST (23,960) - ACCUMULATED OTHER COMPREHENSIVE LOSS 32,314 26,445 --------------- -------------- TOTAL STOCKHOLDERS' EQUITY 16,534,980 14,509,493 --------------- -------------- $ 20,641,696 $ 19,058,406 =============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
THREE MONTHS NINE MONTHS 2004 2003 2004 2003 -------------- ------------- ------------ ------------ NET SALES $ 10,580,074 $ 10,119,070 $33,720,764 $31,139,830 COST OF SALES 4,640,641 4,529,258 15,075,359 14,183,460 -------------- ------------- ------------ ------------ GROSS PROFIT 5,939,433 5,589,812 18,645,405 16,956,370 OPERATING EXPENSES 5,164,190 4,672,820 15,569,191 13,769,241 -------------- ------------- ------------ ------------ INCOME FROM OPERATIONS 775,243 916,992 3,076,214 3,187,129 OTHER INCOME (EXPENSE): INTEREST EXPENSE (14,910) (40,735) (41,019) (174,555) OTHER, NET 30,600 (6,089) 3,509 68,433 -------------- ------------- ------------ ------------ TOTAL OTHER INCOME (EXPENSE) 15,690 (46,824) (37,510) (106,122) -------------- ------------- ------------ ------------ INCOME BEFORE INCOME TAXES 790,933 870,168 3,038,704 3,081,007 PROVISION FOR INCOME TAXES 363,548 268,488 1,124,141 926,105 -------------- ------------- ------------ ------------ NET INCOME $ 427,385 $ 601,680 $ 1,914,563 $ 2,154,902 ============== ============= ============ ============ NET INCOME PER COMMON SHARE-BASIC $ 0.04 $ 0.06 $ 0.18 $ 0.21 ============== ============= ============ ============ NET INCOME PER COMMON SHARE-DILUTED $ 0.04 $ 0.06 $ 0.17 $ 0.20 ============== ============= ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 10,560,661 10,394,374 10,540,374 10,269,415 DILUTED 10,931,940 10,902,794 10,986,541 10,840,764
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 1,914,563 $ 2,154,902 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES- DEPRECIATION & AMORTIZATION 366,077 397,959 LOSS ON DISPOSAL OF ASSETS - 9,372 DEFERRED INCOME TAXES 13,759 59,508 OTHER 3,137 14,960 NET CHANGES IN ASSETS AND LIABILITIES: ACCOUNTS RECEIVABLE-TRADE, NET (413,809) (390,808) INVENTORY (1,739,977) 1,074,217 INCOME TAXES 191,666 2,936 OTHER CURRENT ASSETS 93,380 (37,153) ACCOUNTS PAYABLE 87,279 (162,618) ACCRUED EXPENSES AND OTHER LIABILITIES 178,494 (1,538,342) ------------ ------------ TOTAL ADJUSTMENTS (1,219,995) (569,969) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 694,568 1,584,933 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASE OF PROPERTY AND EQUIPMENT (267,552) (326,284) PAYMENTS IN CONNECTION WITH BUSINESSES ACQUIRED (156,454) - PROCEEDS FROM SALE OF ASSETS - 6,217 INCREASE IN OTHER ASSETS 11,387 (22,305) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (412,619) (342,372) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: NET DECREASE IN REVOLVING CREDIT LOANS (786,162) (1,544,417) PAYMENTS ON NOTES PAYABLE AND LONG-TERM DEBT - (4,878) DECREASE IN CASH RESTRICTED FOR PAYMENT ON REVOLVING CREDIT FACILITY (1,134) 43,685 PAYMENTS RECEIVED ON NOTES SECURED BY COMMON STOCK 5,000 24,003 REPURCHASE OF COMMON STOCK (TREASURY STOCK) (23,960) - PROCEEDS FROM ISSUANCE OF COMMON STOCK 124,015 325,688 ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (682,241) (1,155,919) ------------ ------------ NET CHANGE IN CASH (400,292) 86,642 CASH, BEGINNING OF PERIOD 1,728,344 101,557 ------------ ------------ CASH, END OF PERIOD $ 1,328,052 $ 188,199 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: INTEREST PAID DURING THE PERIOD $ 43,960 $ 178,558 INCOME TAXES PAID DURING THE PERIOD, NET OF (REFUNDS) 848,427 809,602
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. THE LEATHER FACTORY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
TREASURY NUMBER OF SHARES PAR VALUE PAID-IN CAPITAL STOCK ----------------- -------------- ---------------- --------- BALANCE, DECEMBER 31, 2002 10,149,961 $ 24,360 $ 4,163,901 - PAYMENTS ON NOTES RECEIVABLE SECURED BY COMMON STOCK - - - - SHARES ISSUED - WARRANTS AND EMPLOYEE STOCK OPTIONS EXERCISED 320,500 769 198,537 - WARRANTS TO ACQUIRE 100,000 SHARES OF COMMON STOCK ISSUED - - 126,381 - NET INCOME - - - - TRANSLATION ADJUSTMENT - - - - ----------------- -------------- ---------------- --------- BALANCE, SEPTEMBER 30, 2003 10,470,461 $ 25,129 $ 4,488,819 - ================= ============== ================ ========= BALANCE, DECEMBER 31, 2003 10,487,961 $ 25,171 $ 4,673,158 - PAYMENTS ON NOTES RECEIVABLE SECURED BY COMMON STOCK - - - - SHARES ISSUED - STOCK OPTIONS EXERCISED 72,700 174 74,896 - WARRANTS TO ACQUIRE 50,000 SHARES OF COMMON STOCK ISSUED - - 48,945 - PURCHASE OF TREASURY STOCK - - - $(23,960) NET INCOME - - - - TRANSLATION ADJUSTMENT - - - - ----------------- -------------- ---------------- --------- BALANCE, SEPTEMBER 30, 2004 10,560,661 $ 25,345 $ 4,796,999 $(23,960) ================= ============== ================ ========= NOTES RECEIVABLE ACCUMULATED OTHER RETAINED SECURED BY CUMULATIVE COMPREHENSIVE EARNINGS COMMON STOCK INCOME (LOSS) TOTAL INC(LOSS) ---------- ---------------- ----------------- ----------- ------------- BALANCE, DECEMBER 31, 2002 $7,064,345 $ (44,003) $ (38,541) $11,170,062 PAYMENTS ON NOTES RECEIVABLE SECURED BY COMMON STOCK - 24,003 - 24,003 SHARES ISSUED - WARRANTS AND EMPLOYEE STOCK OPTIONS EXERCISED - - - 199,306 WARRANTS TO ACQUIRE 100,000 SHARES OF COMMON STOCK ISSUED - - - 126,381 NET INCOME 2,154,902 - - 2,154,902 $ 2,154,902 TRANSLATION ADJUSTMENT - - 28,739 28,739 28,739 ---------- ---------------- ----------------- ----------- ------------- BALANCE, SEPTEMBER 30, 2003 $9,219,247 $ (20,000) $ (9,802) $13,703,393 ========== ================ ================= =========== COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 $ 2,183,641 ============ BALANCE, DECEMBER 31, 2003 $9,804,719 $ (20,000) $ 26,445 $14,509,493 PAYMENTS ON NOTES RECEIVABLE SECURED BY COMMON STOCK - 5,000 - 5,000 SHARES ISSUED - STOCK OPTIONS EXERCISED - - - 75,070 WARRANTS TO ACQUIRE 50,000 SHARES OF COMMON STOCK ISSUED - - - 48,945 PURCHASE OF TREASURY STOCK - - - (23,960) NET INCOME 1,914,563 - - 1,914,563 $ 1,914,563 TRANSLATION ADJUSTMENT - - 5,869 5,869 5,869 ---------- ---------------- ----------------- ----------- ------------ BALANCE, SEPTEMBER 30, 2004 $11,719,282 $ (15,000) $ 32,314 $16,534,980 ========== ================ ================= =========== COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 $ 1,920,432 ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. 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 (THE "COMPANY" OR "TLF") CONTAIN ALL ADJUSTMENTS (CONSISTING OF NORMAL RECURRING ADJUSTMENTS) NECESSARY TO PRESENT FAIRLY ITS FINANCIAL POSITION AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003, AND ITS RESULTS OF OPERATIONS AND CASH FLOWS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003. OPERATING RESULTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE YEAR ENDING DECEMBER 31, 2004. THESE CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003. 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. 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 SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------ ------------ FINISHED GOODS HELD FOR SALE. . . $ 11,800,258 $ 9,902,140 RAW MATERIALS AND WORK IN PROCESS 1,079,987 1,177,753 ------------ ------------ $ 12,880,245 $ 11,079,893 ============ ============
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 DURING THE INTERIM. THE FIRST PHASE SCREENS FOR IMPAIRMENT, WHILE THE SECOND PHASE (IF NECESSARY) MEASURES THE IMPAIRMENT. THE COMPANY HAS ELECTED TO PERFORM THE ANNUAL ANALYSIS DURING THE FOURTH CALENDAR QUARTER OF EACH YEAR. AS OF DECEMBER 31, 2003, 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 NINE MONTHS OF 2004. OTHER INTANGIBLES CONSIST OF THE FOLLOWING:
AS OF SEPTEMBER 30, 2004 AS OF DECEMBER 31, 2003 --------------------------------- --------------------------------- ACCUMULATED ACCUMULATED GROSS AMORTIZATION NET GROSS AMORTIZATION NET --------- ------------ -------- --------- ------------ -------- TRADEMARKS, COPYRIGHTS $ 544,369 $ 165,538 $378,831 $ 544,369 $ 138,320 $406,049 NON-COMPETE AGREEMENTS 78,000 40,600 37,400 52,000 25,500 26,500 --------- ------------ -------- --------- ------------ -------- $ 622,369 $ 206,138 $416,231 $ 596,369 $ 163,820 $432,549 ========= ============ ======== ========== ============ ========
THE COMPANY RECORDED AMORTIZATION EXPENSE OF $42,318 DURING THE FIRST NINE MONTHS OF 2004 COMPARED TO $39,161 DURING THE FIRST NINE MONTHS OF 2003. 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 FIVE YEARS IS AS FOLLOWS:
ROBERTS, LEATHER FACTORY. TANDY LEATHER CUSHMAN TOTAL ---------------- -------------- -------- ------- 2004 $ 5,954 $ 41,670 $ 0 $47,624 2005 5,954 33,004 0 38,958 2006 5,954 32,337 0 38,291 2007 5,954 31,837 0 37,791 2008 5,954 30,337 0 36,291
REVENUE RECOGNITION THE COMPANY'S SALES GENERALLY OCCUR VIA TWO METHODS: (1) AT THE COUNTER IN THE COMPANY'S STORES, AND (2) SHIPMENT BY COMMON CARRIER. SALES AT THE COUNTER ARE RECORDED AND TITLE PASSES AS TRANSACTIONS OCCUR. OTHERWISE, SALES ARE RECORDED AND TITLE PASSES WHEN THE MERCHANDISE IS SHIPPED TO THE CUSTOMER. THE COMPANY'S SHIPPING TERMS ARE FOB SHIPPING POINT. THE COMPANY'S OFFERS AN UNCONDITIONAL SATISFACTION GUARANTEE TO ITS CUSTOMERS AND ACCEPTS ALL PRODUCT RETURNS. NET SALES REPRESENT GROSS SALES LESS NEGOTIATED PRICE ALLOWANCES, PRODUCT RETURNS, AND ALLOWANCES FOR DEFECTIVE MERCHANDISE. RECENT ACCOUNTING PRONOUNCEMENTS IN JANUARY 2003, THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED FIN 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES (VIE'S)," AN INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN NO. 51. FIN 46 REQUIRES CERTAIN VARIABLE INTEREST ENTITIES TO BE CONSOLIDATED BY THE PRIMARY BENEFICIARY OF THE ENTITY IF THE EQUITY INVESTORS IN THE ENTITY DO NOT HAVE THE CHARACTERISTICS OF A CONTROLLING FINANCIAL INTEREST OR DO NOT HAVE SUFFICIENT EQUITY AT RISK FOR THE ENTITY TO FINANCE ITS ACTIVITIES WITHOUT ADDITIONAL SUBORDINATED FINANCIAL SUPPORT FROM OTHER PARTIES. IN DECEMBER 2003, THE FASB ISSUED FIN 46R (REVISED DECEMBER 2003) WHICH DELAYED THE APPLICATION OF FIN 46 TO TLF UNTIL THE INTERIM PERIOD ENDED MARCH 31, 2004, AND PROVIDES ADDITIONAL TECHNICAL CLARIFICATIONS TO IMPLEMENTATION ISSUES. THE APPLICATION OF THIS INTERPRETATION DID NOT HAVE A MATERIAL IMPACT ON THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS. 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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003, ON A PRO FORMA BASIS, WOULD HAVE BEEN AS FOLLOWS:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ------------ ------------ ---------- ---------- NET INCOME, AS REPORTED $ 427,385 $ 601,680 $1,914,563 $2,154,902 ADD: STOCK-BASED COMPENSATION EXPENSE INCLUDED IN REPORTED NET INCOME - - - - DEDUCT: STOCK-BASED COMPENSATION EXPENSE DETERMINED UNDER FAIR VALUE METHOD 29,361 24,546 88,083 73,639 ------------ ------------ ---------- ---------- NET INCOME, PRO FORMA $ 398,024 $ 577,134 $1,826,480 $2,081,263 ------------ ------------ ---------- ---------- NET INCOME PER SHARE: BASIC - AS REPORTED $ 0.04 $ 0.06 $ 0.18 $ O.21 BASIC - PRO FORMA $ 0.04 $ 0.06 $ 0.17 $ 0.20 DILUTED - AS REPORTED $ 0.04 $ 0.06 $ 0.17 $ 0.20 DILUTED - PRO FORMA $ 0.04 $ 0.05 $ 0.17 $ 0.19
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 3.375% AND 3.125% FOR 2004 AND 2003, RESPECTIVELY; DIVIDEND YIELDS OF 0% FOR BOTH PERIODS; VOLATILITY FACTORS OF .364 FOR 2004 AND .706 FOR 2003; AND AN EXPECTED LIFE OF THE VALUED OPTIONS OF THREE TO FIVE YEARS. 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, 2004 2003 2004 2003 ----------- ----------- NUMERATOR: NET INCOME $ 427,385 $ 601,680 $ 1,914,563 $ 2,154,902 ------------------- ------------------ ----------- ----------- NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE 427,385 601,680 1,914,563 2,154,902 ------------------- ------------------ ----------- ----------- DENOMINATOR: WEIGHTED-AVERAGE SHARES OUTSTANDING-BASIC 10,560,661 10,394,374 10,540,374 10,269,415 EFFECT OF DILUTIVE SECURITIES: STOCK OPTIONS 352,595 422,000 413,576 425,818 WARRANTS 18,684 86,420 32,591 145,531 ------------------- ------------------ ----------- ----------- DILUTIVE POTENTIAL COMMON SHARES 371,279 508,420 446,167 571,349 ------------------- ------------------ ----------- ----------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE- WEIGHTED-AVERAGE SHARES 10,931,940 10,902,794 10,986,541 10,840,764 ------------------- ------------------ ----------- ----------- BASIC EARNINGS PER SHARE $ 0.04 $ 0.06 $ 0.18 $ 0.21 =================== ================== =========== =========== DILUTED EARNINGS PER SHARE $ 0.04 $ 0.06 $ 0.17 $ 0.20 =================== ================== =========== ===========
THE NET EFFECT OF CONVERTING STOCK OPTIONS TO PURCHASE 825,200 AND 924,700 SHARES OF COMMON STOCK AT OPTION PRICES LESS THAN THE AVERAGE MARKET PRICES HAS BEEN INCLUDED IN THE COMPUTATIONS OF DILUTED EPS FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003, 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 WHOLESALE CENTERS 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.
LEATHER TANDY ROBERTS, FACTORY LEATHER CUSHMAN TOTAL ----------- ---------- ---------- ------------ FOR THE QUARTER ENDED SEPTEMBER 30, 2004 NET SALES $ 7,067,483 $3,053,712 $ 458,879 $10,580,074 GROSS PROFIT 3,861,917 1,934,296 143,220 5,939,433 OPERATING EARNINGS 583,253 168,459 23,531 775,243 INTEREST EXPENSE 14,910 - - 14,910 OTHER, NET (28,995) (1,605) - (30,600) INCOME BEFORE INCOME TAXES 597,338 170,064 23,531 790,933 DEPRECIATION AND AMORTIZATION 79,937 30,724 2,715 113,376 FIXED ASSET ADDITIONS . 66,883 67,752 1,867 136,502 TOTAL ASSETS $16,399,199 $3,399,499 $ 842,998 $20,641,696 ----------- ---------- ---------- ------------ FOR THE QUARTER ENDED SEPTEMBER 30, 2003 NET SALES $ 7,372,159 $2,334,127 $ 412,784 $10,119,070 GROSS PROFIT 3,996,866 1,475,312 117,634 5,589,812 OPERATING EARNINGS 784,322 117,514 15,156 916,992 INTEREST EXPENSE (40,735) - - (40,735) OTHER, NET (6,315) 226 - (6,089) INCOME BEFORE INCOME TAXES 737,272 117,740 15,156 870,168 DEPRECIATION AND AMORTIZATION 99,489 20,978 2,365 122,832 FIXED ASSET ADDITIONS 33,230 21,300 1,377 55,907 TOTAL ASSETS $15,300,407 $2,802,218 $ 904,582 $19,007,207 ----------- ---------- ---------- ------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 NET SALES $22,934,369 $9,193,196 $1,593,199 $33,720,764 GROSS PROFIT 12,416,110 5,709,563 519,732 18,645,405 OPERATING EARNINGS 2,306,807 660,782 108,625 3,076,214 INTEREST EXPENSE 41,019 - - 41,019 OTHER, NET (996) (2,513) - (3,509) INCOME BEFORE INCOME TAXES 2,266,784 663,295 108,625 3,038,704 DEPRECIATION AND AMORTIZATION 275,216 83,693 7,168 366,077 FIXED ASSET ADDITIONS 114,592 143,143 9,817 267,552 TOTAL ASSETS $16,399,199 $3,399,499 $ 842,998 $20,641,696 ----------- ---------- ---------- ------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 NET SALES $23,375,158 $6,312,145 $1,452,527 $31,139,830 GROSS PROFIT 12,447,180 3,981,715 497,475 16,956,370 OPERATING EARNINGS 2,626,394 430,737 129,998 3,187,129 INTEREST EXPENSE (174,555) - - (174,555) OTHER, NET 68,064 369 - 68,433 INCOME BEFORE INCOME TAXES 2,519,903 431,106 129,998 3,081,007 DEPRECIATION AND AMORTIZATION 335,184 55,064 7,711 397,959 FIXED ASSET ADDITIONS 201,862 122,189 2,233 326,284 TOTAL ASSETS $15,300,407 $2,802,218 $ 904,582 $19,007,207 ----------- ---------- ---------- ------------
NET SALES FOR GEOGRAPHIC AREAS WERE AS FOLLOWS:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ------------ ------------ ----------- ----------- UNITED STATES . . . $ 9,729,500 $ 9,456,440 $31,213,487 $29,038,861 ALL OTHER COUNTRIES 850,574 662,630 2,507,277 2,100,969 ------------ ------------ ----------- ----------- $ 10,580,074 $ 10,119,070 $33,720,764 $31,139,830 ============ ============ =========== ===========
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003. 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. WE ARE A DELAWARE CORPORATION WHOSE COMMON STOCK TRADES ON THE AMERICAN STOCK EXCHANGE UNDER THE SYMBOL "TLF". OUR COMPANY IS MANAGED ON A BUSINESS ENTITY BASIS, WITH THOSE BUSINESSES BEING THE LEATHER FACTORY, TANDY LEATHER COMPANY, AND ROBERTS, CUSHMAN & COMPANY, INC. SEE NOTE 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL INFORMATION CONCERNING OUR BUSINESS SEGMENTS, AS WELL AS OUR FOREIGN OPERATIONS. LEATHER FACTORY, FOUNDED IN 1980, 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 THIRTY COMPANY-OWNED WHOLESALE CENTERS LOCATED THROUGHOUT NORTH AMERICA AND ONE COMPANY-OWNED RETAIL STORE LOCATED IN CANADA. TANDY LEATHER, FOUNDED IN 1919, IS THE BEST-KNOWN SUPPLIER OF LEATHER AND RELATED SUPPLIES USED IN THE LEATHERCRAFT INDUSTRY. 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 SEPTEMBER 30, 2004 WE HAVE OPENED THIRTY-SIX TANDY LEATHER RETAIL STORES LOCATED THROUGHOUT THE UNITED STATES. ROBERTS, CUSHMAN, WHOSE ORIGINS DATE BACK TO THE MID-1800S, CUSTOM DESIGNS AND MANUFACTURES A PRODUCT LINE OF DECORATIVE HAT TRIMS FOR HEADWEAR MANUFACTURERS. CRITICAL ACCOUNTING POLICIES A DESCRIPTION OF OUR CRITICAL ACCOUNTING POLICIES APPEARS IN "ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003. FORWARD-LOOKING STATEMENTS - --------------------------- CERTAIN STATEMENTS CONTAINED IN THIS REPORT AND OTHER MATERIALS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION, AS WELL AS INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY US, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS GENERALLY ARE ACCOMPANIED BY WORDS SUCH AS "MAY," "WILL," "COULD," "SHOULD," "ANTICIPATE," "BELIEVE," "BUDGETED," "EXPECT," "INTEND," "PLAN," "PROJECT," "POTENTIAL," "ESTIMATE," "CONTINUE," OR "FUTURE" OR THE NEGATIVE, OTHER VARIATIONS THEREOF OR OTHER OR SIMILAR STATEMENTS. 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: WE MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE OPENING OF TANDY LEATHER RETAIL STORES OR WE MAY BE UNABLE TO OBTAIN SUFFICIENT NEW LOCATIONS ON ACCEPTABLE TERMS TO MEET OUR GROWTH PLANS. ALSO, OTHER RETAIL INITIATIVES MAY NOT BE SUCCESSFUL. WHEN WE ACQUIRED THE ASSETS OF TANDY LEATHER IN LATE 2000, THERE WAS ONLY A SINGLE TANDY LEATHER DISTRIBUTION CENTER AND NO RETAIL OUTLETS. IN 2002, WE BEGAN A PROGRAM OF DEVELOPING TANDY LEATHER RETAIL STORES, AND THROUGH SEPTEMBER 30, 2004, WE HAVE ADDED THIRTY-SIX TANDY LEATHER STORES AND CLOSED THE DISTRIBUTION CENTER. WE BELIEVE THAT THESE STORE OPENINGS AND ACQUISITIONS HAVE BEEN SUCCESSFUL, BUT THERE CAN BE NO ASSURANCE THAT THIS SUCCESS WILL CONTINUE OR THAT WE WILL BE ABLE TO FIND ADDITIONAL LOCATIONS FOR NEW STORES OR EXISTING LEATHERCRAFT STORES TO ACQUIRE ON ECONOMICALLY VIABLE TERMS. BECAUSE, IN RECENT YEARS, THE EXPANSION OF TANDY LEATHER HAS PRODUCED MUCH OF THE INCREASE IN OUR PROFITS, DISRUPTION OF THIS EXPANSION WOULD LIKELY SLOW OR STOP THIS INCREASE IN PROFITS. RECENT DECLINES IN SALES TO NATIONAL ACCOUNTS BY OUR LEATHER FACTORY OPERATION COULD CONTINUE. SALES TO NATIONAL ACCOUNTS BY OUR LEATHER FACTORY OPERATION DECREASED AT THE END OF 2003 AND WERE ALSO DOWN IN THE FIRST NINE MONTHS OF 2004. WE ARE WORKING TO REVERSE THIS TREND, BUT, IF IT CONTINUES, OUR CONSOLIDATED NET INCOME COULD BE REDUCED. POLITICAL CONSIDERATIONS HERE AND ABROAD COULD DISRUPT OUR SOURCES OF SUPPLIES FROM ABROAD OR AFFECT THE PRICES WE PAY FOR GOODS. CONTINUED INVOLVEMENT BY THE UNITED STATES IN WAR AND OTHER MILITARY OPERATIONS IN THE MIDDLE EAST AND OTHER AREAS ABROAD COULD DISRUPT INTERNATIONAL TRADE AND AFFECT OUR INVENTORY SOURCES. RECENT POLITICAL DISCUSSIONS HAVE SUGGESTED THAT THE UNITED STATES IMPOSE BARRIERS ON THE IMPORTATION OF CERTAIN GOODS. WE RELY HEAVILY ON IMPORTED GOODS AS SOURCES OF THE INVENTORY WE SELL. TARIFFS, TAXES AND LIMITS ON THESE IMPORTS COULD AFFECT OUR ABILITY TO OBTAIN INVENTORY OR INCREASE THE PRICE WE PAY FOR INVENTORY. IF THESE DISRUPTIONS OCCUR, OUR OPERATIONS COULD BE ADVERSELY AFFECTED. ALSO, THE INVOLVEMENT OF THE UNITED STATES IN THE WAR IN IRAQ AND THE ANTI-TERRORIST ACTIVITIES IN AFGHANISTAN HAVE PRODUCED POLITICAL UNCERTAINTY AND, IN CERTAIN COUNTRIES, RESENTMENT AGAINST THE UNITED STATES AND ITS CITIZENS AND COMPANIES. THESE ISSUES MAY ALSO AFFECT OUR ABILITY TO OBTAIN PRODUCTS FROM ABROAD. 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. THE PRICES OF HIDES AND LEATHERS FLUCTUATE IN NORMAL TIMES, AND THESE FLUCTUATIONS CAN AFFECT OUR BUSINESS. LIVESTOCK DISEASES SUCH AS MAD COW COULD REDUCE THE AVAILABILITY OF HIDES AND LEATHERS OR INCREASE THEIR COST. WE BELIEVE THAT THE RECENT RISE IN OIL AND NATURAL GAS PRICES WILL INCREASE THE COSTS OF THE GOODS THAT WE SELL, INCLUDING THE COSTS OF SHIPPING THOSE GOODS FROM THE MANUFACTURER TO OUR STORES AND CUSTOMERS. VARIOUS OILS USED TO MANUFACTURE CERTAIN LEATHER AND LEATHERCRAFTS ARE DERIVED FROM PETROLEUM AND NATURAL GAS. ALSO, THE CARRIERS WHO TRANSPORT OUR GOODS RELY ON PETROLEUM-BASED FUELS TO POWER THEIR SHIPS, TRUCKS AND TRAINS. THEY ARE LIKELY TO PASS THEIR INCREASED COSTS ON TO US. WE ARE UNSURE HOW MUCH OF THIS INCREASE WE WILL BE ABLE TO PASS ON TO OUR CUSTOMERS. THE RECENT ECONOMY DOWNTURN 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. RECENTLY, THE WORLD ECONOMY HAS SHOWN SIGNS OF RECOVERING FROM AN ECONOMIC SLUMP. HOWEVER, THIS RECOVERY IS NOT YET COMPLETE, AND THERE CAN BE NO ASSURANCE THAT INCREASED OIL AND GAS PRICES, TERRORISM, OR OTHER FACTORS WILL NOT IMPEDE THIS RECOVERY. CONTINUATION OR WORSENING OF THE ECONOMIC CONDITION IN THE UNITED STATES OR INTERNATIONALLY IS LIKELY TO LIMIT OR DECREASE OUR PROFITS. IN ADDITION, TERRORISM OR THE THREAT OF TERRORIST ATTACKS IN THE UNITED STATES OR AGAINST UNITED STATES INTERESTS ABROAD COULD CAUSE CONSUMER BUYING HABITS TO CHANGE AND DECREASE OUR SALES. WE BELIEVE THAT MAJOR DISRUPTIONS (SUCH AS TERRORIST ATTACKS) COULD REDUCE CONSUMER SPENDING, PARTICULARLY PURCHASES OF NON-ESSENTIAL PRODUCTS SUCH AS OURS. 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 ASSUME NO OBLIGATION TO UPDATE OR OTHERWISE REVISE OUR FORWARD-LOOKING STATEMENTS EVEN IF EXPERIENCE OR FUTURE CHANGES MAKE IT CLEAR THAT ANY PROJECTED RESULTS, EXPRESS OR IMPLIED, WILL NOT BE REALIZED. RESULTS OF OPERATIONS - ----------------------- THE FOLLOWING TABLES PRESENT SELECTED FINANCIAL DATA ON THE OPERATING RESULTS OF EACH OF OUR THREE SEGMENTS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003:
QUARTER ENDED SEPTEMBER 30, 2004 QUARTER ENDED SEPTEMBER 30, 2003 OPERATING OPERATING SALES INCOME SALES INCOME ------------- ----------- ------------- -------- Leather Factory. $ 7,067,483 $ 583,253 $ 7,372,159 $784,322 Tandy 3,053,712 168,459 2,334,127 117,514 Roberts, Cushman 458,879 23,531 412,784 15,156 ------------- ----------- ------------- -------- Total Operations $ 10,580,074 $ 775,243 $ 10,119,070 $916,992 ============= ============ ============= ========
NINE MONTHS ENDED SEPTEMBER 30, 2004 NINE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------ ------------------------------------ OPERATING OPERATING SALES INCOME SALES INCOME ------------ ----------- ------------ ---------- Leather Factory. $ 22,934,369 $ 2,306,807 $ 23,375,158 $2,626,394 Tandy 9,193,196 660,782 6,312,145 430,737 Roberts, Cushman 1,593,199 108,625 1,452,527 129,998 ------------ ----------- ------------ ---------- Total Operations $ 33,720,764 $ 3,076,214 $ 31,139,830 $3,187,129 ============ =========== ============ ==========
Consolidated net sales for the quarter ended September 30, 2004 increased $461,000, or 4.6%, compared to the same period in 2003. Tandy Leather contributed $720,000 and Roberts, Cushman recorded a gain of $46,000. Leather Factory's sales were down $305,000. Operating income on a consolidated basis for the quarter ended September 30, 2004 was down 15% or $141,000 compared with the third quarter of 2003. Consolidated net sales for the nine months ended September 30, 2004 increased $2.6 million, or 8.3%, compared to the same period in 2003. Tandy Leather contributed $2.9 million of the sales gain while Roberts, Cushman added $141,000. Leather Factory's 2004 sales were down $440,000 from those of a year ago. Operating income on a consolidated basis for the nine months ended September 30, 2004 was down 3.5% or $111,000 over last year. The following table shows in comparative form our consolidated net income for the third quarter and nine months ended September 30, 2004 and 2003:
QUARTER ENDED 09/30/04 QUARTER ENDED 09/30/03 % CHANGE ---------------------- ---------------------- -------- Net income $ 427,385 $ 601,680 (28.9%) ====================== ====================== ======== NINE MONTHS ENDED NINE MONTHES ENDED 09/30/04 09/30/03 % CHANGE ---------------------- ---------------------- -------- Net income $ 1,914,563 $ 2,154,902 (11.2%) ====================== ====================== ========
LEATHER FACTORY OPERATIONS Net sales from Leather Factory's wholesale centers decreased 4.1% for the third quarter of 2004 compared to the sale period in 2003 as follows:
QUARTER ENDED 09/30/04 09/30/03 $ CHANGE % CHANGE ---------- ---------- ---------- --------- Sales, excluding NATIONAL ACCOUNTS $5,910,887 $5,862,053 $ 48,834 1.0% NATIONAL ACCOUNT sales 1,156,596 1,510,106 (353,510) (23.4)% ---------- ---------- ---------- --------- Total sales $7,067,483 $7,372,159 $(304,676) (4.1)% ========== ========== ========== =========
As shown by the table above, the Leather Factory wholesale centers, excluding the impact of the NATIONAL ACCOUNT customer group, achieved a modest sales gain. We recorded sales gains totaling $157,000 in our WHOLESALE and MANUFACTURERS customer groups but those gains were partially offset by a sales decline to our RETAIL and INSTITUTION customer groups of $110,000. We believe the decline in these customer categories is primarily due to the continued expansion of Tandy Leather into the market. Sales to our NATIONAL ACCOUNTS continue to decline this year compared to last year as discussed in previous filings. We still believe that these decreases are temporary but do not expect to see any significant improvement in these sales until 2005. The following table presents Leather Factory's sales mix by customer categories for the quarters ended September 30, 2004 and 2003:
QUARTER ENDED -------------------- CUSTOMER GROUP 9/30/04 9/30/03 - ------------------------------------------------------------------------------------- --------- -------- RETAIL (end users, consumers, individuals) 22% 22% INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 7 7 WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.) 48 45 NATIONAL ACCOUNTS 15 20 MANUFACTURERS 8 6 --------- -------- 100% 100% ========= ========
Operating income for Leather Factory decreased $201,000 for the third quarter compared to 2003, a decline of 25%. Gross profit margins improved slightly to 54.6% for the current quarter compared to 54.2% a year ago. The decrease in sales resulted in a decline in gross profit dollars of $135,000. Operating expenses increased $66,000, or 2.1%, in the third quarter of 2004. The cost of health care benefits for employees continues to rise and accounted for $130,000 in additional expenses over last year. In addition, we incurred approximately $50,000 in fees related to Sarbanes-Oxley 404 compliance during the current quarter. These additional expenses were offset somewhat by decreases in other areas, such as telephone and utilities ($12,000), bad debts ($92,000), and miscellaneous fees ($10,000). Net sales for the nine months ended September 30, 2004 decreased less than 1% from the same period in 2003 as follows:
NINE MONTHS ENDED 09/30/04 09/30/03 $ CHANGE % CHANGE ----------- ----------- ------------ --------- Sales, excluding NATIONAL ACCOUNTS $18,645,805 $17,904,519 $ 741,286 4.1% NATIONAL ACCOUNT sales 4,288,564 5,470,639 (1,182,075) (21.6)% ----------- ----------- ------------ --------- Total sales $22,934,369 $23,375,158 $ (440,789) (1.9)% =========== =========== ============ =========
The Leather Factory wholesale centers achieved solid sales gains, excluding the impact of the NATIONAL ACCOUNT customer group. The 4.1% sales growth is consistent with management's expectations of 2 to 4% annually. Similar to that of the third quarter, we recorded sales gains to our WHOLESALE and MANUFACTURER customer groups of approximately $785,000 but those gains were offset slightly by sales declines to our RETAIL and INSTITUTION customers of $45,000. Sales to our NATIONAL ACCOUNTS for the first nine months of this year have been lower than expectations. We are working on the development of some new products to present to these customers. Assuming these new products are well-received when presented, we would still not expect to see any positive impact to our sales to this customer group until some time in 2005. Operating income for Leather Factory decreased $320,000 for the nine months ended September 30, 2004 compared to 2003, a decline of 12%. Gross profit margins improved from 53.4% at September 30, 2003 to 54.1% at September 30, 2004. The cost of health care is up $330,000 for the first nine months of 2004 compared to that of the same period in 2003 which accounts for the decrease in operating income. We continue to analyze options to control health care costs, such as increasing the employees' contribution, modifying benefits, or other similar measures. However, even if we implement these strategies, we still expect health care to be a significant expense to the company. TANDY LEATHER OPERATIONS The Tandy Leather retail store chain has grown from twenty-six stores at September 30, 2003 to thirty-six a year later. Net sales for Tandy were up approximately 41% for the third quarter of 2004 over the same quarter last year.
QTR ENDED QTR ENDED 9/30/04 9/30/03 $INCR (DECR) % INCR(DECR) ---------- ---------- ------------ ------------ Same store sales (24 stores) $2,323,564 $2,269,179 $ 54,385 2.4% New or acquired store sales (12 stores) 730,148 62,404 667,744 *** Closed store (order fulfillment house - 2,544 (2,544) (100.0) ---------- ---------- ------------ ------------ Total sales $3,053,712 $2,334,127 $ 719,585 30.8% ========== ========== ============ ============
Sales in the third quarter showed healthy growth. The older stores continue to post sales gains despite the fact that they are competing against the dozen new stores. Average sales per month for stores that have been open for at least six months as of September 30, 2004 is $33,000, which continues to beat our internal expectations of $30,000 per month per store. The following table presents Tandy Leather's sales mix by customer categories for the quarters ended September 30, 2004 and 2003:
QUARTER ENDED ------------------ CUSTOMER GROUP 09/30/04 09/30/03 - ------------------------------------------------------------------------------------- -------- -------- RETAIL (end users, consumers, individuals) 70% 72% INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.) 7 7 WHOLESALE (reseller & distributors, saddle & tack stores, authorized dealers, etc.) 23 20 NATIONAL ACCOUNTS * * MANUFACTURERS * 1 -------- -------- 100% 100% ======== ======== * less than 1%
Third quarter operating income for Tandy Leather increased $51,000 or 43% over operating income in last year's third quarter. Gross profit margins improved minimally from 63.2% to 63.3% for the quarter. Operating expenses in the current quarter were $400,000 higher than last year's quarter, although as a percentage of sales, operating expenses dropped from 58.2% last year to 57.8% this year. Expenses incurred this quarter related to stores open now that did not exist at September 2003, including such expenses as personnel, rents, utilities, etc., totaled approximately $310,000. Additionally, manager bonuses are up approximately $30,000 in the third quarter 2004 compared to the third quarter 2003 due to the increase in operating profit at the store level. Finally, advertising and marketing expenses increased $50,000 compared to the same period in 2003 as the result of the new stores. Net sales for Tandy Leather were up approximately 46% for the first nine months of 2004 over the same period last year. New stores are defined as those that were operated less than half of the comparable period in the prior year. Specifically, stores that opened in May 2003 or later are classified as new stores in the following table:
NINE MONTHS ENDED NINE MONTHS ENDED 9/30/04 9/30/03 $INCR (DECR) % INCR(DECR) ------------------ ------------------ ------------ ------------ Same store sales (20 stores) $ 6,380,603 $ 5,914,463 $ 466,140 7.9% New or acquired store sales (16 stores) 2,812,593 392,750 2,419,843 *** Closed store (order fulfillment center) - 4,932 (4,932) (100.0) ------------------ ------------------ ------------ ------------ Total sales $ 9,193,196 $ 6,312,145 $ 2,881,051 45.6% ================== ================== ============ ============
Operating income for the nine months ended September 30, 2004 increased $230,000 or 53% over operating income in last year's comparable period. Gross profit margins declined from 63.1% to 62.1% due to limitations in selling price increases to match cost increases. Operating expenses were 54.9% of sales in the first nine months of 2004 compared to 56.3% in the same period last year. ROBERTS, CUSHMAN OPERATIONS Net sales for Roberts, Cushman increased $46,000 for the third quarter of 2004 over the third quarter of 2003 and operating income increased $8,000. Gross profit margins improved from 28.5% to 31.2%. The volume of orders from hat manufacturers continued its positive momentum during the quarter which resulted in the sales increase. We have been able to adjust our selling prices slightly which contributed to the improvement in our gross profit margin this quarter. Operating expenses increased $17,000 for the quarter due to an increase in employee benefits ($10,000), additional bonuses accrued for employees ($3,000) and sales commissions ($3,000). Net sales for Roberts, Cushman increased $140,000 for the first nine months of 2004 over the first nine months of 2003, although operating income decreased $21,000. We are experiencing an increase in orders from hat manufacturers which accounts for the sales increase. Gross profit margins decreased from 34.2% at September 30, 2004 to 32.6% at September 30, 2004. We have been slow to pass cost increases on to our customers which explains the decline in gross margins. However, we began to remedy that situation late in the third quarter in an attempt to stabilize our margins. Operating expenses increased $43,000 during the first nine months of 2004 primarily due to an increase in salaries and bonuses ($13,000), as well as health care and other benefits ($30,000). OTHER EXPENSES Interest expense in the third quarter of 2004 was $15,000, down from $41,000 in the third quarter of 2003. The decrease was attributable to the continued reduction in our debt balance. Interest expense in the first nine months of 2004 was $41,000, down from $175,000 in the first nine months of 2003. Our average debt balance for the first nine months of 2004 was $1.4 million, compared to $3.0 million for the first nine months of 2003. CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION - --------------------------------------------------------- On our consolidated balance sheet, total assets increased from $19.0 million at year-end 2003 to $20.6 million at September 30, 2004. An increase in inventory of $1.8 million and accounts receivable of $414,000 accounted for the increase in total assets, partially offset by a decrease in cash of $400,000 and a reduction in prepaid income taxes of $190,000. Total stockholders' equity increased from $14.5 million at December 31, 2003 to $16.5 million at September 30, 2004. The increase in equity is attributable to the earnings in the first nine months of the year. Our investment in inventory was $12.9 million at September 30, 2004 compared to $11.1 million at December 31, 2003. Inventory turnover increased to an annualized rate of 3.75 times during the first nine months of 2004, an improvement from 3.41 times for the comparable period in 2003 and 3.51 times for all of 2003. We compute our inventory turns as sales divided by average inventory. As we stated in our 2003 Annual Report on Form 10-K, we expect our inventory to slowly trend upward as we continue our expansion of the Tandy Leather store chain. However, we continually analyze our inventory levels as inventory management is a significant factor in our financial position. Our inventory at September 30, 2004 was within 5% of our internal optimal targets. Credit sales increased in the first nine months of 2004, and our investment in accounts receivable was $2.2 million at September 30, 2004, up $414,000 from $1.8 million at year-end 2003. Consolidated average days to collect accounts remained virtually unchanged for the first nine months of 2004 (41.2 days) compared to 41.0 days for the same period in 2003. Roberts, Cushman posted the most improvement in average days to collect accounts, from 72.3 days to 46.2 days outstanding. Tandy Leather's days outstanding decreased from 39.2 in 2003 to 36.1 days in 2004, while Leather Factory's days outstanding increased from 37.4 days in 2003 to 40.9 days in 2004. Accounts payable increased $87,000 to $1.6 million at the end of the third quarter compared with December 31, 2003. Accrued expenses and other liabilities increased $178,000, from $1.0 million at December 31, 2003 to $1.2 million at September 30, 2004. At September 30, 2004, our ratio of debt to equity was 0.06, an improvement from December 31, 2003 at which time the debt-to-equity ratio was 0.12. Our current ratio remained steady at 6.17 at September 30, 2004, from 6.16 at the end of 2003. During the first thee quarters of 2004, cash flows provided by operating activities was $694,000. Net income, reduced by the increase in inventory from year-end to September 30, 2004, accounted for the majority of the cash flow. Cash flows used in investing activities totaled $413,000. Capital expenditures for the first nine months of 2004 totaled $267,000. The asset purchases of the Syracuse, NY, St. Louis, MO, and Santa Fe, NM Tandy Leather retail stores required $156,000. Cash flows used by financing activities was $682,000 during the first three quarters of 2004. The funds were primarily used to reduce the principal balance of our revolving credit facility. At December 31, 2003, our bank debt totaled $1.8 million. At September 30, 2004, the balance was $1.0 million, a decrease of 44% in the first nine months of 2004. In the twelve months ended September 30, 2004, we have repaid $1.7 million on our bank debt. We will continue to repay our bank debt as quickly as is practical without compromising our operations and expansion plans. We expect to fund our operating and liquidity needs as well as our current expansion of Tandy Leather's retail store chain from a combination of current cash balances, internally generated funds and our revolving credit facility with our lender. The borrowing base on our revolving line of credit is based on the level of our accounts receivable and inventory. At September 30, 2004, the available, unused portion of the credit facility was approximately $4.0 million. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For disclosures about market risk affecting our 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, 2003. We believe that our exposure to market risks has not changed significantly since December 31, 2003. ITEM 4. CONTROLS AND PROCEDURES At the end of the third quarter of 2004, 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 and Exchange Act of 1934, as amended (the "Exchange Act"). Based upon this evaluation and notwithstanding the limitations contained in the final paragraph of this Item 4, they concluded that, as of September 30, 2004, our disclosure controls and procedures offer reasonable assurance that the information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the results and forms adopted by the Securities and Exchange Commission. During the period covered by this report, there has been no change in our 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 our disclosure controls and procedures or the our internal controls will prevent all error and all fraud. A well conceived and operating 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY SECURITIES In an effort to reduce our administrative and compliance costs for stockholders who only have a small investment in our common stock, our Board of Directors approved an offer to purchase the holdings of stockholders who hold fewer than 100 shares of our common stock. The Board set June 25, 2004 as the record date for this offer, with the offer to begin July 1, 2004 and the closing price on July 8, 2004 ($4.35 per share) to be the offer price. This offer terminated on September 30, 2004. As of that date, 5,508 shares of our common stock had been repurchased by us. The following table sets forth the monthly repurchase of common stock for the period covered by this report:
TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF TOTAL NUMBER OF AVERAGE PRICE PURCHASED AS PART OF SHARES THAT MAY YET BE SHARES PURCHASED (1) PAID PER SHARE PUBLICLY ANNOUNCED PURCHASED UNDER THE PLANS OR PROGRAMS (2) PLANS OR PROGRAMS (2) -------------------- --------------- --------------------- ---------------------- JULY 1-31, 2004 0 $ 4.35 0 5,950 AUGUST 1-31, 2004 2,853 $ 4.35 2,853 3,097 SEPTEMBER 1-30, 2004 2,655 $ 4.35 2,655 442 (1) The total number of shares purchased includes all repurchases made during the periods indicated. All repurchases were made as part of a publicly announced plan. (2) These publicly announced plans or programs consist of The Leather Factory's Odd-Lot Purchase Program. This program was announced on July 1, 2004 and expired on September 30, 2004.
ITEM 6. EXHIBITS Exhibits - -------- 3.1 Certificate of Incorporation of The Leather Factory, Inc., filed as Exhibit 3.1 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the Registration Statement on Form SB-2 of The Leather Factory, Inc. (Commission File No. 33-81132) filed with the Securities and Exchange Commission on July 5, 1994, and incorporated by reference herein. 4.1 Financial Advisor's Warrant Agreement, dated February 12, 2003, between The Leather Factory, Inc. and Westminster Securities Corporation filed as Exhibit 4.1 to Form 10-Q filed by The Leather Factory, Inc. with the Securities and Exchange Commission on May 14, 2003, and incorporated by reference herein. 4.2 Capital Markets Services Engagement Agreement, dated February 12, 2003, between The Leather Factory, Inc. and Westminster Securities Corporation filed as Exhibit 4.2 to Form 10-Q filed by The Leather Factory, Inc. with the Securities and Exchange Commission on May 14, 2003, and incorporated by reference herein. 10.1 Credit Agreement, dated as of November 3, 2003, made by and among The Leather Factory, Inc., a Delaware corporation; Roberts, Cushman & Company, Inc., a New York corporation; Hi-Line Leather & Manufacturing Company, a California corporation, The Leather Factory of Nevada Investments, Inc., a Nevada corporation, The Leather Factory, Inc., a Nevada corporation; The Leather Factory, L.P., a Texas limited partnership; The Leather Factory, Inc., an Arizona corporation; Tandy Leather Company Investments, Inc., a Nevada corporation; Tandy Leather Company, Inc., a Nevada corporation; Tandy Leather Company, L.P., a Texas limited partnership; and Wells Fargo Bank Texas, National Association filed as Exhibit 10.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on November 7, 2003 and incorporated by reference herein. 10.2 Revolving Line of Credit Note, dated November 3, 2003, in the principal amount of up to $6,000,000.00 given by The Leather Factory, Inc., a Delaware corporation; Roberts, Cushman & Company, Inc., a New York corporation; Hi-Line Leather & Manufacturing Company, a California corporation, The Leather Factory of Nevada Investments, Inc., a Nevada corporation, The Leather Factory, Inc., a Nevada corporation; The Leather Factory, L.P., a Texas limited partnership; The Leather Factory, Inc., an Arizona corporation; Tandy Leather Company Investments, Inc., a Nevada corporation; Tandy Leather Company, Inc., a Nevada corporation; Tandy Leather Company, L.P., a Texas limited partnership, as borrowers, payable to the order of Wells Fargo Bank Texas, National Association filed as Exhibit 10.2 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on November 7, 2003 and incorporated by reference herein. 10.3 First Amendment to Credit Agreement, dated as of November 26, 2003, made by and among The Leather Factory, Inc., a Delaware corporation; Roberts, Cushman & Company, Inc., a New York corporation; Hi-Line Leather & Manufacturing Company, a California corporation, The Leather Factory of Nevada Investments, Inc., a Nevada corporation, The Leather Factory, Inc., a Nevada corporation; The Leather Factory, L.P., a Texas limited partnership; The Leather Factory, Inc., an Arizona corporation; Tandy Leather Company Investments, Inc., a Nevada corporation; Tandy Leather Company, Inc., a Nevada corporation; Tandy Leather Company, L.P., a Texas limited partnership; and Wells Fargo Bank, National Association, successor by merger to Wells Fargo Bank Texas, National Association filed as Exhibit 10.3 to the Annual Report on Form 10-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 29, 2004 and incorporated by reference herein. 10.4 First Modification to Promissory Note, dated as of November 26, 2003, made by and among The Leather Factory, Inc., a Delaware corporation; Roberts, Cushman & Company, Inc., a New York corporation; Hi-Line Leather & Manufacturing Company, a California corporation, The Leather Factory of Nevada Investments, Inc., a Nevada corporation, The Leather Factory, Inc., a Nevada corporation; The Leather Factory, L.P., a Texas limited partnership; The Leather Factory, Inc., an Arizona corporation; Tandy Leather Company Investments, Inc., a Nevada corporation; Tandy Leather Company, Inc., a Nevada corporation; Tandy Leather Company, L.P., a Texas Limited partnership; and Wells Fargo Bank, National Association, successor by merger to Wells Fargo Bank Texas, National Association filed as Exhibit 10.4 to the Annual Report on Form 10-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 29, 2004 and incorporated by reference herein. 10.5 Asset Purchase Agreement dated November 30, 2000, by Tandy Leather Company, Inc. (f/k/a Leather Tan Acquisition, Inc.), a Texas corporation, TLC Direct, Inc., a Texas corporation, and Tandy Leather Dealer, Inc., a Texas corporation, filed as Exhibit No. 2.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference. 10.6 Credit Agreement, dated as of October 6, 2004, made by and among The Leather Factory, Inc., a Delaware corporation, and Bank One, National Association filed as Exhibit 10.1 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on November 5, 2004 and incorporated by reference herein. 10.7 Line of Credit Note, dated October 6, 2004, in the principal amount of up to $3,000,000 given by The Leather Factory, Inc., a Delaware corporation as borrower, payable to the order of Bank One, National Association filed as Exhibit 10.2 to the Current Report on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on November 5, 2004 and incorporated by reference herein. 31.1* 13a-14(a) Certification by Wray Thompson, Chairman of the Board and Chief Executive Officer. 31.2* 13a-14(a) Certification by Shannon L. Greene, Chief Financial Officer and Treasurer. 32* Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. 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 12, 2004 By: /s/ Wray Thompson -------------------- Wray Thompson Chairman and Chief Executive Officer Date: November 12, 2004 By: /s/Shannon L. Greene ---------------------- Shannon L. Greene Chief Financial Officer and Treasurer (Chief Accounting Officer) EXHIBIT 31.1 RULE 13A-14(A) 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)) [language intentionally omitted SEC Rel. 33-8238] 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) [Left blank intentionally SEC Rel. No. 33-8238]; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer 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 controls over financial reporting. Date: November 12, 2004 /s/ Wray Thompson ------------------- Wray Thompson Chairman and Chief Executive Officer (principal executive officer) EXHIBIT 31.2 RULE 13A-14(A) 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)) [language intentionally omitted SEC Rel. 33-8238] 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) [Left blank intentionally SEC Rel. No. 33-8238]; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer 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 controls over financial reporting. Date: November 12, 2004 /s/ Shannon L. Greene ------------------------- Shannon L. Greene Chief Financial Officer and Treasurer (principal financial and accounting officer) EXHIBIT 32.1 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 September 30, 2004 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. November 12, 2004 By: /s/ Wray Thompson ------------------- WRAY THOMPSON CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER November 12, 2004 By: /s/ Shannon L. Greene ------------------------ SHANNON L. GREENE CHIEF FINANCIAL OFFICER AND TREASURER -----END PRIVACY-ENHANCED MESSAGE-----