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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