TANDY LEATHER FACTORY INC - Annual Report: 2006 (Form 10-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
|
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2006
OR
|
[
]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 [NO FEE REQUIRED]
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For
the
transition period ________ to ________
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Commission
File Number 1-12368
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|
Tandy
Leather Factory, Inc.
|
|
(exact
name of registrant as specified in its
charter)
|
|
Delaware
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75-2543540
|
|
|
(State
or other jurisdiction of incorporation)
|
(IRS
Employer Identification Number)
|
|
3847
East Loop 820 South, Fort Worth, Texas
|
76119
|
|
|
(Address
of principal executive offices)
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(Zip
Code)
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|
Registrant’s
telephone number, including area code:
(817) 496-4414
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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|
|
Common
Stock, par value $0.0024
|
American
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act Yes [ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. Yes [ ] No [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $47,230,588 at June 30, 2006 (the last business
day
of its most recently completed second fiscal quarter). At March 15, 2007, there
were 10,919,568 shares of the registrant's common stock
outstanding.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer
[X]
Portions
of the Registrant’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 22, 2007, are incorporated by reference in Part
III of this report.
1
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Part
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9A
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9B
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Part
III
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Part
IV
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15
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38
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2
PART
I
General
We
are a
retailer and wholesale distributor of a broad line of leather and related
products, including leather, leatherworking tools, buckles and adornments for
belts, leather dyes and finishes, saddle and tack hardware, and do-it-yourself
kits. We also manufacture leather lacing and kits. During 2006, our consolidated
sales totaled $55.2 million of which approximately 10.9% were export sales.
We
maintain our principal offices at 3847 East Loop 820 South, Fort Worth, Texas
76119. Our common stock trades on the American Stock Exchange under the symbol
"TLF."
Our
company was founded in 1980 as Midas Leathercraft Tool Company, a Texas
corporation. Midas' original business activity focused on the distribution
of
leathercraft tools. In addition, the founders of Midas entered into a consulting
agreement with Brown Group, Inc., a major footwear retailer, as a result of
their proposal to develop a multi-location chain of wholesale stores known
as
"The Leather Factory." In 1985, Midas purchased the assets of The Leather
Factory from Brown Shoe Group, which then consisted of six wholesale stores.
In
1993,
we changed our name to "The Leather Factory, Inc.", then reincorporated in
the
state of Delaware in 1994. In 2005, we changed our name to Tandy Leather
Factory, Inc.
Our
Development in Recent Years
Our
expansion of the wholesale chain occurred via the opening of new stores as
well
as numerous acquisitions of small businesses in strategic geographic locations
including the acquisition of our Canadian distributor, The Leather Factory
of
Canada, Ltd., in 1996. By 2000, we had grown to twenty-seven Leather Factory
stores located in the United States and two Leather Factory stores in Canada.
In
November 2000, we acquired the operating assets of two subsidiaries of
Tandycrafts, Inc. to form Tandy Leather Company. In 2002, we began opening
retail stores under the "Tandy Leather" name. During that year, Tandy Leather
purchased four independent leathercraft retail stores and opened another ten.
We
also opened our thirtieth Leather Factory store - our third in Canada. In 2003,
we opened twelve Tandy Leather retail stores. In 2004, we purchased three
independent leathercraft retail stores and opened an additional nine stores
in
the U.S. We also opened another store in Canada which is operating as a Tandy
Leather retail store. In November 2004, we acquired all of the issued and
outstanding shares of capital stock of Heritan Ltd. and its parent, our primary
Canadian competitor, headquartered in Barrie, Ontario. The acquisition resulted
in an additional three retail stores in Canada, bringing the total locations
in
Canada to seven - three Leather Factory stores and four Tandy Leather stores.
In
2005, we opened eight Tandy Leather retail stores. In 2006, we opened eleven
Tandy Leather retail stores and converted one wholesale store to a retail
store.
At
December 31, 2005, we operated twenty-nine wholesale stores operating under
the
Leather Factory name (26 in the U.S. and 3 in Canada) and sixty-two retail
stores operating under the Tandy Leather name (58 in the U.S. and 4 in Canada).
We also own and operate Roberts, Cushman and Company, Inc., a manufacturer
of
custom hat trims.
Our
growth, measured both by our net sales and net income, occurs as a result of
the
increase in the number of stores we have and the increase from year to year
of
the sales in our existing stores. The following tables provide summary
information concerning the additions of facilities for our Leather Factory
wholesale stores and Tandy Leather retail stores in each of our fiscal years
from 1999 to 2006.
STORE
COUNT
YEARS
ENDED DECEMBER 31, 1999 through 2006
|
Leather
Factory wholesale stores
|
Tandy
Leather retail stores
|
|||||
|
Year
Ended
|
Opened
|
Conversions(1)
|
Total
|
Opened
(2)
|
Closed
|
Total
|
|
Balance
Fwd
|
22
|
N/A
|
||||
|
1999
|
4
|
0
|
26
|
N/A
|
||
|
2000
|
2
|
0
|
28
|
1*
|
0
|
1
|
|
2001
|
2
|
0
|
30
|
0
|
0
|
1
|
|
2002
|
1
|
(1)
|
30
|
14
|
1*
|
14
|
|
2003
|
0
|
0
|
30
|
12
|
0
|
26
|
|
2004
|
0
|
0
|
30
|
16
|
0
|
42
|
|
2005
|
0
|
0
|
30
|
8
|
0
|
50
|
|
2006
|
0
|
(1)
|
29
|
12
|
0
|
62
|
(1)
Leather Factory wholesale store converted to a Tandy Leather retail
store.
(2)
Includes conversions of Leather Factory wholesale stores to Tandy Leather retail
stores.
(*)
The
Tandy Leather operation began as a central mail-order fulfillment center in
2000
that we closed in 2002.
No
single
customer’s purchases represent more than 10% of our total sales in 2006. Sales
to our five largest customers combined to represent 9.5%, 9.4% and 10.6%,
respectively, of consolidated sales in 2006, 2005 and 2004. While management
does not believe the loss of one of these customers would have a significant
negative impact on our operations, it does believe the loss of several of these
customers simultaneously or a substantial reduction in sales generated by them
could temporarily affect our operating results.
Our
Operating Divisions
We
service our customers primarily through the operation of three divisions. We
identify those divisions based on management responsibility and customer focus.
The Wholesale Leathercraft division consists of twenty-nine Leather Factory
stores of which 26 are located in the United States and three are located in
Canada. As of March 1, 2007, the Retail Leathercraft division consists of 65
Tandy Leather retail stores of which 61 are located in the United States and
four are located in Canada. Both of these divisions sell leather and
leathercraft-related products. Our third business segment, referred to as
“Other,” consists of our hatband manufacturer, Roberts, Cushman & Company,
Inc.
Wholesale
Leathercraft
The
Wholesale Leathercraft operation distributes its broad product line of leather
and leathercraft-related products in the United States and internationally
through Leather Factory stores. This segment had net sales of $31.0 million,
$31.0 million and $30.6 million for 2006, 2005 and 2004, respectively.
General We
operate Leather Factory stores in 20 states and three Canadian provinces. The
centers range in size from 2,600 square feet to 19,800 square feet, with the
average size of a store being approximately 6,000 square feet. The type of
premises utilized for Leather Factory locations is generally light industrial
office/warehouse space in proximity to a major freeway or with other similar
access. This type of location typically offers lower rents compared to other
more retail-oriented locations.
Business
Strategy The
Leather Factory business concept centers around the wholesale distribution
of
leather and related accessories to retailers, manufacturers, and end users.
Our
strategy is that a customer can purchase the leather, related accessories and
supplies necessary to complete his project from one place. The size and layout
of the centers are planned to allow large quantities of product to be displayed
in an easily accessible and visually appealing manner. Leather is displayed
by
the pallet where the customer can see and touch it, assessing first-hand the
numerous sizes, styles, and grades offered. The location of the stores is
selected based on the location of customers, so that delivery time to customers
is minimized. A two-day maximum delivery time for phone, internet and mail
orders is our goal.
Leather
Factory stores serve customers through various means including walk-in traffic,
phone and mail order. We also employ a distinctive marketing tactic in that
we
maintain an internally-developed target customer mailing list for use in our
aggressive direct mail advertising campaigns. We staff Leather Factory stores
with experienced managers whose compensation is tied to the operating profit
of
the store they manage. Sales are generated by the selling efforts of the store
personnel, our direct mail advertising, our website (www.leatherfactory.com),
our participation at trade shows and, on a limited basis, the use of sales
representative organizations. The sales representative organizations consist
of
companies located in specific geographic areas that represent numerous companies
in a similar industry. These organizations call on customers and show multiple
products from more than one vendor at a time.
Customers Leather
Factory’s customer base consists of individuals, wholesale distributors, tack
and saddle shops, institutions (prisons and prisoners, schools, hospitals),
western stores, craft stores and craft store chains, other large volume
purchasers, manufacturers, and retailers dispersed geographically throughout
the
world. Wholesale sales constitute the majority of our Leather Factory business,
although retail customers may purchase products from Leather Factory stores.
Leather Factory sales generally do not reflect significant seasonal patterns.
Our
Authorized Sales Center (“ASC”) program was developed to create a presence in
geographical areas where we do not have a wholesale store. An unrelated person
operating an existing business who desires to become an ASC must apply with
Leather Factory and upon approval, place a minimum initial order. There are
also
minimum annual purchase amounts to which the ASC must adhere in order to
maintain ASC status. In exchange, the benefits to the ASC are free advertising
in various sale flyers produced and distributed by us, price breaks on many
products, advance notice of new products, and priority shipping and handling
on
all orders. Leather Factory stores service 155 ASC's: 89 located in the U.S.,
47
located in Canada, and 19 located outside North America.
Merchandise Our
products are generally organized into thirteen categories. We carry a wide
assortment of products including leather, lace, hand tools, kits, and craft
supplies. We operate a light manufacturing facility in Fort Worth whose
processes generally involve cutting leather into various shapes and patterns
using metal dies. The factory produces approximately 20% of our products and
also assembles and repackages product as needed. Products manufactured in our
factory are distributed through our stores under the TejasTM
brand
name. We also distribute product under the Tandy LeatherTM
and Dr.
Jackson'sTM
brands.
We develop new products through the ideas and referrals of customers and store
personnel as well as the tracking of fads and trends of interest in the market.
Our personnel walk trade shows and various specialty stores with the purpose
of
obtaining product ideas that are then developed in-house.
We
offer
an unconditional satisfaction guarantee to our customers. Simply stated, we
will
accept product returns for any reason. We believe this liberal policy promotes
customer loyalty. We offer credit terms to our non-retail customers, upon
receipt of a credit application and approval by our credit manager. Generally,
our open accounts are net 30 days.
During
2006 and 2005, Wholesale Leathercraft division sales by product category were
as
follows:
|
Product
Category
|
2006
Sales
Mix
|
2005
Sales
Mix
|
|
|
Belts
strips and straps
|
2%
|
2%
|
|
|
Books,
patterns, videos
|
1%
|
1%
|
|
|
Buckles
|
4%
|
4%
|
|
|
Conchos^
|
4%
|
4%
|
|
|
Craft
supplies
|
5%
|
5%
|
|
|
Custom
tools and hardware
|
1%
|
1%
|
|
|
Dyes,
finishes, glues
|
5%
|
5%
|
|
|
Hand
tools
|
12%
|
12%
|
|
|
Hardware
|
8%
|
8%
|
|
|
Kits
|
7%
|
8%
|
|
|
Lace
|
14%
|
13%
|
|
|
Leather
|
34%
|
34%
|
|
|
Stamping
tools
|
3%
|
3%
|
|
|
100%
|
100%
|
^A
concho
is a metal adornment attached to clothing, belts, saddles, etc., usually made
into a pattern of some southwestern or geometric object.
In
addition to meeting ordinary operational requirements, our working capital
demands are a product of the need to maintain a level of inventory sufficient
to
fill customer orders as they are received with minimal backorders and the time
required to collect our accounts receivable. Because availability of merchandise
and prompt delivery time are important competitive factors for us, we maintain
higher levels of inventory than our smaller competitors. For additional
information regarding our cash, inventory and accounts receivable at the end
of
2006 and 2005, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Suppliers We
currently purchase merchandise and raw materials from 100-150 vendors dispersed
throughout the United States and in approximately 20 foreign
countries. In
2006,
our ten largest vendors accounted for approximately 80% of our inventory
purchases.
Because
leather is sold internationally, market conditions abroad are likely to affect
the price of leather in the United States. Outbreaks of mad cow and
hoof-and-mouth disease (or foot-and-mouth disease) in any part of the world
can
influence the price of the leather we purchase. As such an occurrence is beyond
our control, we cannot predict when and to what extent we could be affected
in
the future. Aside from increasing purchases when we anticipate price increases
(or possibly delaying purchases if we foresee price declines), we do not attempt
to hedge our inventory costs.
Overall, we
believe that our relationships with suppliers are strong and do not anticipate
any material changes in these supplier relationships. Due to the number of
alternative sources of supply, the loss of any of these principal suppliers
would not have a material impact on our operations.
Operations Hours
of
operations vary by location, but generally range from 8:00 am to 6:00 pm
Monday
through Friday, and from 9:00 am to 4:00 pm on Saturdays. The stores maintain
uniform prices, except where lower prices are necessary to meet local
competition.
Competition Most
of
our competition comes in the form of small, independently-owned retailers who
in
most cases are also our customers. We estimate that there are a few hundred
of these small independent stores in the United States and Canada. We compete
on
price, availability of merchandise, and delivery time. While there is
competition in connection with a number of our products, to our knowledge there
is no direct competition affecting our entire product line. Our large size
relative to most competitors gives us the advantage of being able to purchase
large volumes and stock a full range of products.
Distribution The
Leather Factory stores receive the majority of their inventory from our central
warehouse located in Fort Worth, Texas, although occasionally, merchandise
is
shipped directly from the vendor. Inventory is shipped to the stores from our
central warehouse once a week to meet customer demand without sacrificing
inventory turns. Customer orders are filled as received, and we do not have
backlogs.
We
attempt to maintain the optimum number of items in our product line to minimize
out-of-stock situations against carrying costs involved with such an inventory
level. We generally maintain higher inventories of imported items to ensure
a
continuous supply. The number of products offered changes every year due to
the
introduction of new items and the discontinuance of others. We carry
approximately
2,700 items in the current lines of leather and leather-related merchandise.
All
items are offered in both the Leather Factory and Tandy Leather stores.
Expansion
Leather
Factory's expansion across the United States has been fairly consistent since
we
purchased the original six stores in 1985. We opened our thirtieth store in
August 2002. We converted one Leather Factory store to a Tandy Leather store
in
2006, reducing the number of Leather Factory stores to twenty-nine. While we
do
not believe there is a significant and immediate opportunity for expansion
of
the Leather Factory distribution system in terms of opening additional
locations, we do believe expansion could be achieved by acquiring companies
in
related areas/markets which offer collaborative advantages based on the local
markets and/or the product lines of the businesses.
Retail
Leathercraft
Our
Retail Leathercraft division consists of a growing chain of retail stores
operating under the name, Tandy Leather. Tandy Leather Company, established
in
1919 as Hinkley-Tandy Leather Company, is the oldest and best-known supplier
of
leather and related supplies used in the leathercraft industry. We offer a
product line of quality tools, leather, accessories, kits and teaching
materials. This segment had net sales of $22.5 million, $18.0 million and $13.5
million for 2006, 2005 and 2004, respectively.
General
As of
March 1, 2007, the Tandy Leather retail chain has 65 stores located in 31 states
and three Canadian provinces with plans to reach 100 to 120 stores as
opportunities arise over the next several years. The stores range in size from
1,200 square feet to 3,800 square feet, with the average size of a store being
approximately 2,000 square feet. The type of premises utilized for a Tandy
Leather store is generally an older strip shopping center located at well-known
crossroads, making the store easy to find.
Business
Strategy Tandy
Leather has long been known for its reputation in the leathercraft industry
and
its commitment to promoting and developing the craft through education and
customer development. Our commitment to this strategy is evidenced by our
re-establishment of the retail store chain throughout the United States
following our acquisition of the assets of Tandy Leather in 2000. We continue
to
broaden our customer base by working with various youth organizations and
institutions where people are introduced to leathercraft, as well as hosting
classes in our stores.
The
retail stores serve walk-in, mail and phone order customers as well as orders
generated from its website, www.tandyleather.com. Tandy Leather stores are
staffed by knowledgeable sales people whose compensation is based, in part,
upon
the profitability of their store. Sales by Tandy Leather are driven by the
efforts of the store staff, trade shows, and our direct mail and e-mail
marketing program.
Customers Individual
retail customers are our largest customer group, representing more than 65%
of
Tandy Leather's 2006 sales. Youth groups, summer camps, schools, and a limited
number of wholesale customers complete our customer base. Like Leather Factory,
Tandy fills orders as they are received, and there is no order backlog. Tandy
maintains reasonable amounts of inventory to fill these orders. Tandy Leather’s
retail store operations historically generate slightly more sales in the
4th
quarter
of each year (30-32%) while the other three quarters remain fairly even at
23-25% per quarter.
Merchandise Our
products are generally organized into thirteen categories. We carry a wide
assortment of products including leather, hand tools, kits, dyes & finishes,
and stamping tools.
During
2006 and 2005, Retail Leathercraft division sales by product category were
as
follows:
|
Product
Category
|
2006
Sales
Mix
|
2005
Sales
Mix
|
|
|
Belts
strips and straps
|
5%
|
5%
|
|
|
Books,
patterns, videos
|
2%
|
3%
|
|
|
Buckles
|
4%
|
4%
|
|
|
Conchos
|
4%
|
4%
|
|
|
Craft
supplies
|
3%
|
3%
|
|
|
Dyes,
finishes, glues
|
7%
|
7%
|
|
|
Hand
tools
|
16%
|
16%
|
|
|
Hardware
|
7%
|
6%
|
|
|
Kits
|
11%
|
12%
|
|
|
Lace
|
4%
|
4%
|
|
|
Leather
|
31%
|
30%
|
|
|
Stamping
tools
|
6%
|
6%
|
|
|
100%
|
100%
|
As
indicated above, the products sold in our Tandy Leather stores are also sold
in
our Leather Factory stores. Therefore, the discussion above regarding Leather
Factory products, their sources and the working capital requirements for the
Wholesale Leathercraft division also apply to the Tandy Leather stores. Sales
at
Tandy Leather stores are generally cash transactions or through national credit
cards. We also sell on open account to selected wholesale customers including
schools and other institutions and small retailers. Our terms are generally
net
30 days. Like Leather Factory, Tandy Leather has an unconditional return policy.
Operations Hours
of
operation are 9:00 am to 6:00 pm Monday through Friday, and from 9:00 am to
4:00
pm on Saturdays. In addition, most of the stores stay open late one night a
week
for leathercrafting classes taught in the stores. Selling prices are uniform
throughout the Tandy Leather store system.
Competition Our
competitors are generally small local craft stores that carry a limited line
of
leathercraft products. Several national retail chains that are customers in
our
Wholesale Leathercraft division also carry leathercraft products on a very
small
scale relative to their overall product line. To our knowledge, our retail
store
chain is the only one in existence solely specializing in
leathercraft.
Distribution The
Tandy
Leather stores receive their inventory from our central warehouse located in
Fort Worth, Texas. The stores generally restock their inventory once a week
with
a shipment from the warehouse. Retail Leathercraft’s inventory turns are higher
than Wholesale Leathercraft’s because the Wholesale Leathercraft calculation
includes the central warehouse inventory whereas the Retail Leathercraft
calculation includes only the inventory in the Tandy Leather retail stores.
Expansion
We
intend to expand the Tandy Leather retail store chain to 100 to 120 stores
throughout North America at an average rate of approximately 12 stores per
year.
Fourteen stores were opened in 2002; twelve stores were opened in 2003; sixteen
were opened in 2004 (including four in Canada); eight were opened in 2005,
and
twelve were opened in 2006. Ten of the 65 stores opened to date were independent
leathercraft stores that we acquired. Separately, these acquisitions are not
material. The other fifty-five stores have been de
novo
stores
opened by us. In 2007, we plan to open 12 retail stores. Three stores have
been
opened in 2007 as of March 1st.
Other
Roberts,
Cushman, founded in 1856, produces made-to-order trimmings for the headwear
industry. This segment had net sales of $1.7 million, $1.6 million, and $2.0
million for 2006, 2005 and 2004, respectively.
Business
Strategy
Roberts,
Cushman has long been considered one of the leaders in the field of headwear
trimmings. It designs and supplies exclusive trimmings for all types of hats.
Trims are sold to hat manufacturers directly. We do not employ an outside sales
force. Instead, customers visit our facilities and, with the review of previous
designs, incorporate their ideas into a customized product. The customer is
provided samples or photographs of each design before they leave the premises.
These samples can then be used as a sales tool to obtain hat orders from their
customers. This “design-on-site” process is unique in the industry.
Customers We
design
and supply trims for approximately 50 of the headwear manufacturers worldwide,
supplying customized trims, ribbons, buckle sets, name pins, feathers, and
other
items. Our success in developing and maintaining long-standing relationships
with our customers is due primarily to our ability to deliver quality products
in a timely manner. Our backlog of in-house orders from customers as of February
20, 2007 was $110,000, which approximates thirty days of sales. Roberts,
Cushman’s sales generally do not reflect significant seasonal
patterns.
The
working capital requirements of this operation are dictated by the amounts
needed to meet current obligations, purchase raw material and allow for
collection of accounts receivable. Roberts, Cushman provides sufficient cash
flow to satisfy these requirements.
Merchandise Our
hat
bands are generally produced from leather, ribbon, or woven fabrics, depending
on the style of hat. They are created by cutting leather and/or other materials
into strips, and then enhancing the trim by attaching conchos and/or three-piece
buckle sets, braiding with other materials, and finishing the end or borders
by
stitching or by lacing with leather lace. We also supply custom-designed buckles
and conchos, feathers for dress hats, and name pins, separate from hat bands.
Roberts, Cushman purchases components from over 25 vendors, located
predominately in the United States. In 2006, our top 10 vendors (in dollars
purchased) represented approximately 45% of its total purchases. Products are
sold on terms that generally range from net 30 to net 90 days. Because our
products are custom-designed, we do not accept product returns, except in the
case of defective merchandise.
Expansion Cushman
has been successful in providing a very specific product line directly to
headwear manufacturers. Given the current industry conditions, we do not believe
there is much potential for expansion, other than to capture additional market
share.
Additional
Information
Compliance
With Environmental Laws Our
compliance with federal, state and local environmental protection laws has
not
had, and is not expected to have, a material effect on our capital expenditures,
earnings or competitive position.
Employees As
of
December 31, 2006, we employed 412 people, 310 of whom were employed on a
full-time basis. We are not a party to any collective bargaining agreements.
Overall, we believe that relations with employees are good.
Intellectual
Property
We own
approximately 20 registered trademarks, including federal trade name
registrations for "The Leather Factory" and "Tandy Leather Company." We also
own
approximately 20 registered foreign trademarks worldwide.
We
own
approximately 500 registered copyrights in the United States covering more
than
600 individual works relating to various products. We also own several United
States patents for specific belt buckles and leather-working equipment. These
rights are valuable assets and we defend them as necessary.
International
Operations Information
regarding our revenues from the United States and abroad and our long-lived
assets are found in Note 13 to our Consolidated Financial Statements,
Segment
Information.
Our
Website and Availability of SEC Reports
We file
reports with the Securities and Exchange Commission ("SEC"). These reports
include our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any amendments to these filings. The public may read
any
of these filings at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. In addition, the public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Further, the SEC maintains an Internet site that contains reports, proxy and
information statements and other information concerning us. You can connect
to
this site at http://www.sec.gov.
Our
corporate website is located at http://www.tandyleatherfactory.com. We make
copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, proxy statements and any amendments filed with
or
furnished to the SEC available to investors on or through our website free
of
charge as soon as reasonably practicable after we electronically file them
with
or furnish them to the SEC. Our SEC filings can be found on the Investor
Relations page of our website through the "SEC Filings" link. In addition,
certain other corporate governance documents are available on this website
through the "Corporate Governance" link.
Executive
Officers of the Registrant
The
following table sets forth information concerning our executive
officers.
|
Name
and Age
|
Position
and Business Experience During
Past Five Years
|
Served
as Officer Since
|
|
J.
Wray Thompson, 75
|
Chief
Executive Officer from June 1993 to December 2006; President from
June
1993 to January 2001
|
1993
|
|
Ronald
C. Morgan, 59
|
Chief
Executive Officer since January 2007; President since January 2001;
Chief
Operating Officer since June 1993
|
1993
|
|
Shannon
L. Greene, 41
|
Chief
Financial Officer since May 2000; Controller from January 1998 to
May 2000
|
2000
|
|
Robin
L. Morgan, 56
|
Vice
President of Administration since June 1993
|
1993
|
Wray
Thompson has
served as our Chairman of the Board since June 1993. He served as Chief
Executive Officer from June 1993 to December 2006. He also served as President
from June 1993 to January 2001. Mr. Thompson was a co-founder of the
company.
Ronald
C. Morgan
has
served as our President since January 2001 and has served as Chief Operating
Officer and director since June 1993. He was appointed as our Chief Executive
Officer in January 2007 following the resignation of Wray Thompson.
Mr. Morgan was also a co-founder of the company. Mr. Morgan is married to
Robin L. Morgan, our Vice President.
Shannon
L. Greene has
served as our Chief Financial Officer and Treasurer since May 2000. She was
appointed to serve on the Board of Directors in January 2001. Ms. Greene is
also
our Chief Accounting Officer. From September 1997 to May 2000, Ms. Greene served
as our Controller and Assistant Controller. Ms. Greene also is a member of
our
Employees’ Stock Ownership Plan (ESOP) Committee and is a certified public
accountant. Her professional affiliations include the American Institute of
Certified Public Accountants, the Texas Society of Certified Public Accountants
and its Fort Worth chapter, the Fort Worth Association for Financial
Professionals, the National Investor Relations Institute, and the Financial
Executives International.
Robin
L. Morgan has
served as our Vice President of Administration and Assistant Secretary since
June 1993. Ms. Morgan is responsible for import, banking, and procurement for
our import product lines and maintains all inventory costs. She administers
our
insurance programs and serves as chairman of our ESOP committee. Ms. Morgan
is
married to Ronald C. Morgan, our CEO and President.
All
officers are elected annually by the Board of Directors to serve for the ensuing
year.
We
have
two stock option plans - an incentive stock option plan for key management
personnel and a non-qualified stock option plan for our outside directors.
Both
plans expired in 2005. At expiration, there were 20,000 unoptioned shares from
the 1995 Stock Option Plan and 24,000 unoptioned shares from the 1995 Directors
Non-Qualified Stock Option Plan. The expiration of the plans has no effect
on
the options previously granted. There were no changes to the exercise prices
of
the outstanding options under these two plans during 2006.
Certain
risk factors that may affect our business, financial condition, results of
operations and cash flows, or that may cause our actual results to vary from
the
forward-looking statements contained in this Annual Report on Form 10-K are
set
forth in Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations, under the caption, “Forward-Looking Statements,” in this
Annual Report on Form 10-K.
We
lease
all of our premises and believe that all of our properties are adequately
covered by insurance. The properties leased by our Wholesale Leathercraft
(Leather Factory stores) and Retail Leathercraft (Tandy Leather stores)
divisions are described in Item 1 in the description of each segment. Our Fort
Worth location, which includes the Fort Worth Leather Factory store, our central
warehouse and manufacturing facility, the sales, advertising, administrative,
and executive offices, and the administrative offices of Roberts, Cushman,
consists of 115,000 square feet and leases for $427,000 per year. The lease
expires in March 2008. We also lease a 284 square-foot showroom in the Denver
Merchandise Mart for $5,908 per year. This lease will expire in October 2008.
The following table summarizes the locations of our leased premises on a state
and province basis as of December 31, 2006:
|
State
|
Wholesale
Leathercraft
|
Retail
Leathercraft
|
Other
|
|
Alabama
|
-
|
1
|
-
|
|
Arizona
|
2
|
2
|
-
|
|
Arkansas
|
-
|
1
|
-
|
|
California
|
3
|
6
|
-
|
|
Colorado
|
1
|
3
|
-
|
|
Connecticut
|
-
|
1
|
-
|
|
Florida
|
1
|
3
|
-
|
|
Georgia
|
-
|
1
|
-
|
|
Idaho
|
-
|
1
|
-
|
|
Illinois
|
1
|
1
|
-
|
|
Indiana
|
-
|
2
|
-
|
|
Iowa
|
1
|
-
|
-
|
|
Kansas
|
1
|
-
|
-
|
|
Kentucky
|
-
|
1
|
-
|
|
Louisiana
|
1
|
-
|
-
|
|
Maryland
|
-
|
1
|
-
|
|
Michigan
|
1
|
1
|
-
|
|
Minnesota
|
-
|
2
|
-
|
|
Missouri
|
1
|
2
|
-
|
|
Montana
|
1
|
-
|
-
|
|
Nebraska
|
-
|
1
|
-
|
|
Nevada
|
-
|
2
|
-
|
|
New
Mexico
|
1
|
2
|
-
|
|
New
York
|
-
|
1
|
-
|
|
North
Carolina
|
-
|
2
|
-
|
|
Ohio
|
1
|
1
|
-
|
|
Oklahoma
|
-
|
2
|
-
|
|
Oregon
|
1
|
-
|
-
|
|
Pennsylvania
|
1
|
1
|
-
|
|
Tennessee
|
1
|
2
|
-
|
|
Texas
|
5
|
9
|
1
|
|
Utah
|
1
|
2
|
-
|
|
Virginia
|
-
|
1
|
-
|
|
Washington
|
1
|
2
|
-
|
|
Wisconsin
|
-
|
1
|
-
|
|
Canadian
locations:
|
|||
|
Alberta
|
1
|
1
|
-
|
|
British
Columbia
|
-
|
1
|
-
|
|
Manitoba
|
1
|
-
|
-
|
|
Ontario
|
1
|
2
|
-
|
We
are
involved in litigation in the ordinary course of business but are not currently
a party to any material pending legal proceedings.
There
were no matters submitted to a vote of our security holders during the fourth
quarter of our fiscal year ended December 31, 2006.
PART
II
Our
common stock is traded on the American Stock Exchange using the symbol TLF.
The
high and low prices for each calendar quarter during the last two fiscal years
are as follows:
|
2006
|
High
|
Low
|
2005
|
High
|
Low
|
|
|
4th
quarter
|
$8.30
|
$6.30
|
4th
quarter
|
$7.23
|
$4.15
|
|
|
3rd
quarter
|
$6.90
|
$5.75
|
3rd
quarter
|
$5.65
|
$4.30
|
|
|
2nd
quarter
|
$8.30
|
$6.40
|
2nd
quarter
|
$4.95
|
$3.25
|
|
|
1st
quarter
|
$7.40
|
$5.79
|
1st
quarter
|
$3.79
|
$3.20
|
There
were approximately 509 stockholders
of record on March 10,
2007.
We
have
never declared or paid any cash dividends on the shares of our common stock.
Our
Board of Directors has historically followed a policy of reinvesting our
earnings in the expansion of our business. This policy is subject to change
based on future industry and market conditions, as well as other
factors.
The
following table sets forth information regarding our equity compensation plans
(including individual compensation arrangements) that authorize the issuance
of
shares of our common stock. The information is aggregated in two categories:
plans previously approved by our stockholders and plans not approved by our
stockholders. The table includes information for officers, directors, employees
and non-employees. All information is as of December 31, 2006.
|
Plan
Category
|
Column
(a)
Number
of Securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Column
(b)
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Column
(c)
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in Column
(a)
|
|
Equity
compensation plans approved by stockholders
|
296,200
|
$2.05
|
-
|
|
Equity
compensation plans not approved by stockholders
|
98,300
|
3.65
|
-
|
|
TOTAL
|
561,000
|
$2.39
|
44,000
|
For
additional information, see Note 11 to our Consolidated Financial Statements,
Stockholders'
Equity.
The
line
graph below compares the yearly percentage change in our cumulative five-year
total stockholder return on our common stock with the Standard & Poor’s
SmallCap 600 Index and the S&P Specialty Stores Index. The graph assumes
that $100 was invested on December 31, 2001 in our common stock, the
Standard & Poor’s SmallCap 600 Index, and the S&P Specialty Stores
Index, and that all dividends were reinvested. The returns shown on the graph
are not necessarily indicative of future performance.
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
Tandy
Leather Factory, Inc.
|
Company
Name / Index
|
Dec
01
|
Dec
02
|
Dec
03
|
Dec
04
|
Dec
05
|
Dec
06
|
|
TANDY
LEATHER FACTORY
|
100
|
162.50
|
232.69
|
170.67
|
329.33
|
387.98
|
|
S&P
SMALLCAP 600 INDEX
|
100
|
85.37
|
118.48
|
145.32
|
156.48
|
180.14
|
|
S&P
SPECIALTY STORES
|
100
|
88.89
|
119.69
|
125.92
|
148.72
|
180.78
|
Data
Source: Research Data Group, Inc., San Francisco, CA
The
selected financial data presented below are derived from and should be read
in
conjunction with our Consolidated Financial Statements and related notes. This
information should also be read in conjunction with "Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” Data in prior years has not been restated to reflect
acquisitions, if any, that occurred in subsequent years.
|
Income
Statement Data,
Years
ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||
|
Net
sales
|
$55,199,021
|
$50,719,574
|
$46,146,284
|
$41,712,191
|
$39,728,615
|
|||||
|
Cost
of sales
|
23,566,251
|
21,964,530
|
20,706,239
|
19,020,292
|
18,393,914
|
|||||
|
Gross
profit
|
31,632,770
|
28,755,044
|
25,440,045
|
22,691,899
|
21,334,701
|
|||||
|
Operating
expenses
|
24,565,056
|
23,181,633
|
21,181,599
|
18,594,240
|
17,202,927
|
|||||
|
Operating
income
|
7,067,714
|
5,573,411
|
4,258,446
|
4,097,659
|
4,131,774
|
|||||
|
Operating income per share - basic
|
$0.65
|
$0.52
|
$0.40
|
$0.40
|
$0.41
|
|||||
|
Operating income per shares - diluted
|
$0.64
|
$0.51
|
$0.39
|
$0.38
|
$0.38
|
|||||
|
Other
(income) expense
|
(98,391)
|
(134,502)
|
44,800
|
125,169
|
311,917
|
|||||
|
Income before
income taxes
|
7,166,105
|
5,707,913
|
4,213,646
|
3,972,490
|
3,819,857
|
|||||
|
Income
tax provision
|
2,389,039
|
1,994,199
|
1,559,605
|
1,232,116
|
1,224,868
|
|||||
|
Income before
cumulative effect of change in accounting principle
|
4,777,066
|
3,713,714
|
2,654,041
|
2,740,374
|
2,594,989
|
|||||
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
-
|
(4,008,831)
|
|||||
|
Net
income (loss)
|
$4,777,066
|
$3,713,714
|
$2,654,041
|
$2,740,374
|
$(1,413,842)
|
|||||
|
Earnings
(loss) per share
|
$0.44
|
$0.35
|
$0.25
|
$0.27
|
$(0.14)
|
|||||
|
Earnings
(loss) per share- assuming
dilution
|
$0.43
|
$0.34
|
$0.24
|
$0.25
|
$(0.13)
|
|||||
|
Weighted
average common shares outstanding for:
|
||||||||||
|
Basic
EPS
|
10,807,316
|
10,643,004
|
10,543,994
|
10,323,549
|
10,063,581
|
|||||
|
Diluted
EPS
|
11,113,855
|
10,976,240
|
10,957,518
|
10,861,305
|
10,761,670
|
|||||
|
Balance
Sheet Data, as of December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||
|
Cash
and cash equivalents
|
$6,739,981
|
$3,215,727
|
$2,560,202
|
$1,728,344
|
$101,557
|
||||
|
Total
assets
|
31,916,635
|
25,680,473
|
22,167,163
|
19,058,406
|
19,675,602
|
||||
|
Capital
lease obligation, including current portion
|
111,723
|
245,789
|
379,857
|
1,134
|
7,691
|
||||
|
Long-term
debt, including current portion
|
-
|
-
|
505,154
|
1,792,984
|
4,213,533
|
||||
|
Total
Stockholders’ Equity
|
$26,323,243
|
$21,257,857
|
$17,310,233
|
$14,509,493
|
$11,170,062
|
We
intend
for the following discussion to provide you with information that will assist
you in understanding our financial statements, the changes in key items in
those
financial statements from year to year, and the primary factors that accounted
for those changes, as well as how particular accounting principles affect our
financial statements. This discussion also provides information about the
financial results of the various segments of our business so you may better
understand how those segments and their results affect our financial condition
and results of operations as a whole. Finally, we have identified and discussed
trends known to management that we believe are likely to have a material effect.
This
discussion should be read in conjunction with our financial statements as of
December 31, 2006 and 2005 and the two years then ended and the notes
accompanying those financial statements. You are also urged to consider the
information under the caption "Summary of Critical Accounting
Policies."
Summary
We
are
the world's largest specialty retailer and wholesale distributor of leather
and
leathercraft-related items. Our operations are centered on operating retail
and
wholesale stores. We have built our business by offering our customers quality
products in one location at competitive prices. The key to our success is our
ability to grow our base business. We grow that business by opening new
locations and by increasing sales in our existing locations. We intend to
continue to expand both domestically, in the short-term, and internationally,
in
the long-term.
We
operate in three segments. First, Wholesale Leathercraft, consisting of our
Leather Factory stores and our national account group, is the largest source
of
revenues ($31.0 million in 2006). This division has generally offered steady
but
modest increases in sales. Sales in 2006 declined 0.1%, short of our target
of
annual sales growth of 2% to 4%. The decrease in sales to national accounts
in
2006 accounted for the shortfall. Excluding national account sales, the stores
produced a sales gain of 2.7% for 2006.
Since
acquiring its assets in 2000, we have focused on re-establishing Tandy Leather
as the operator of retail leathercraft stores. These retail stores comprise
our
second segment, Retail Leathercraft. Because of growth here, this segment has
experienced the greatest increases in sales ($22.5 million in 2006, up from
$18.0 million in 2005). Our business plan calls for opening an average of 12
stores annually as we work toward a goal of 100+ stores from 64 stores at the
end of 2006.
We
refer
to our third segment as “Other”. It consists of Roberts, Cushman, a supplier of
trimmings for headwear. Its operations are not material to us. In 2002, we
wrote
off the goodwill related to our investment in Roberts, Cushman in connection
with an accounting change.
On
a
consolidated basis, a key indicator of costs, gross margin as a percent of
total
net sales, increased in 2005 and again in 2006, reflecting a number of factors
including more retail sales with higher profit margins. Operating expenses
as a
percent of total net sales in 2006 decreased 1.2% from 2005. Operating expenses
were down 0.2% as a percentage of total net sales in 2005 when compared with
2004.
We
reported consolidated net income for 2006 of $4.8 million. Consolidated net
income for 2005 and 2004 was $3.7 million and $2.7 million, respectively. We
have used our cash flow to fund our operations, to fund the opening of new
Tandy
Leather stores and to eliminate our bank debt. At the end of 2006, our
stockholders’ equity had increased to $26.3 million from $21.3 million the
previous year.
Comparing
the December 31, 2006 balance sheet with the prior year’s, we increased our
investments in inventory ($17.2 million from $15.7 million) and accounts
receivable ($2.6 million from $2.2 million), while total cash increased to
$6.7
million from $3.2 million. In addition to cash on hand, we have a $3 million
bank line of credit, of which none was drawn on December 31, 2006.
Net
Sales
Net
sales
for the three years ended December 31, 2006 were as follows:
|
Year
|
Wholesale
Leathercraft
|
Retail
Leathercraft
|
Other
|
Total
Company
|
Total
Company Incr from Prior Year
|
|
2006
|
$31,068,188
|
$22,520,461
|
$1,610,372
|
$55,199,021
|
8.8%
|
|
2005
|
$31,046,268
|
$18,023,214
|
$1,650,092
|
$50,719,574
|
9.9%
|
|
2004
|
$30,630,122
|
$13,515,662
|
$2,000,500
|
$46,146,284
|
10.6%
|
Our
net
sales grew by 8.8% in 2006 when compared with 2005 and 9.9% in 2005 when
compared with 2004. These annual increases resulted primarily from our Retail
Leathercraft expansion program.
Costs
and Expenses
In
general, our gross profit as a percentage of sales (our gross margin) fluctuates
based on the mix of customers we serve, the mix of products we sell, and our
ability to source products globally. Our negotiations with suppliers for lower
pricing are an on-going process and we have varying degrees of success in those
endeavors. Sales to retail customers tend to produce higher gross margins than
sales to wholesale customers due to the difference in pricing levels. Therefore,
as retail sales increase in the overall sales mix, higher gross margins tend
to
follow. Finally, there is significant fluctuation in gross margins between
the
various merchandise categories we offer. As a result, our gross margins can
vary
depending on the mix of products sold during any given time period.
For
2006,
our cost of sales decreased as a percentage of total net sales when compared
to
2005, resulting in an overall increase of 0.6% in our consolidated gross margin
from 56.7% in 2005 to 57.3% in 2006. Similarly, our total cost of sales as
a
percentage of our total net sales had decreased for 2005 when compared to 2004
resulting in an overall increase in consolidated gross margin of 1.6% from
55.1%
for 2004 to 56.7% in 2005. These increases in gross margin were primarily due
to
increased retail sales over the three years.
Our
gross
margins for the three years ended December 31, 2006 were as follows:
|
Year
|
Wholesale
Leathercraft
|
Retail
Leathercraft
|
Other
|
Total
Company
|
|
2006
|
56.13%
|
60.79%
|
32.09%
|
57.31%
|
|
2005
|
55.20%
|
61.82%
|
27.89%
|
56.69%
|
|
2004
|
53.82%
|
61.77%
|
30.31%
|
55.13%
|
Our
operating expenses decreased 1.2% as a percentage of total net sales to 44.5%
in
2006 when compared with 45.7% in 2005 which indicates that our sales grew faster
than our operating expenses. Significant expense fluctuations in 2006 compared
to 2005 are as follows:
|
Expense
|
2006
amount
|
Incr
(decr) over
2005
|
|
Employee
compensation & benefits
|
$13.3
million
|
$1.1
million
|
|
Rent
& utilities
|
3.5
million
|
300,000
|
|
Supplies
|
800,000
|
200,000
|
|
Contributions
|
-
|
(200,000)
|
|
Legal
& professional fees
|
300,000
|
(100,000)
|
Our
operating expenses decreased 0.2% as a percentage of total net sales to 45.7%
in
2005 when compared with 45.9% in 2004. Significant expense fluctuations in
2005
compared to 2004 are as follows:
|
Expense
|
2005
amount
|
Incr
(decr) over
2004
|
|
Employee
compensation & benefits
|
$12.2
million
|
$1.2
million
|
|
Rent
& utilities
|
3.2
million
|
300,000
|
|
Advertising
& marketing
|
3.3
million
|
600,000
|
|
Property
insurance
|
400,000
|
(150,000)
|
|
Legal
& professional fees
|
400,000
|
(100,000)
|
Other
Income/Expense (net)
Other
Income/Expense consists primarily of currency exchange fluctuations and
discounts taken or given. In 2006, we had income (net) of $98,000 compared
to a
income (net) of $135,000 in 2005, attributable to currency exchange gain of
$52,000 in 2006 compared to $72,000 in 2005, and net discounts given in 2006
of
$16,000 compared to net discounts taken in 2005 of $11,000.
In
2005,
we had income (net) of $135,000 compared to an expense (net) of $45,000 in
2004,
attributable to the reduction of $50,000 in interest paid, a currency exchange
gain of $72,000 in 2005 compared to a currency exchange loss of $5,000 in 2004,
and net discounts taken in 2005 of $11,000 compared to net discounts given
in
2004 of $63,000.
Net
Income
During
2006, we earned net income of $4.8 million, a 29% improvement over our net
income of $3.7 million earned during 2005. As a result of the increase in our
overall gross margin and an improvement in operating efficiency, our profits
in
2006 grew at a rate faster than sales.
During
2005, we earned net income of $3.7 million, a 40% improvement over our net
income of $2.65 million earned during 2004. As a result of the increase in
our
overall gross margin, slight improvement in operating efficiency, and reduction
in interest and other expenses, our profits in 2005 grew at a rate faster than
sales.
Wholesale
Leathercraft
|
Year
|
Net
Sales Incr
(Decr)
from
Prior Yr
|
Operating
Income
|
Operating
Income Incr
(Decr)
from
Prior Year
|
Operating
Income as a Percentage of
Sales
|
|
2006
|
(0.1)%
|
$4,814,240
|
29.4%
|
15.5%
|
|
2005
|
1.4%
|
$3,721,891
|
23.5%
|
12.0%
|
|
2004
|
(0.2)%
|
$3,013,316
|
(13.0)%
|
9.8%
|
Wholesale
Leathercraft, consisting of 29 Leather Factory stores, accounted for 56.2%
of
our consolidated net sales in 2005, which compares to 61.2% in 2005 and 66.4%
in
2004. The decrease in this division's contribution to our total net sales is
the
result of the growth in Retail Leathercraft and we expect this trend to
continue.
Sales
in
the stores increased 2.5% in 2006 compared to sales in 2005, but this gain
was
offset by a 4% sales decline in our national account group. By customer group,
we achieved gains to our retail and small manufacturing customers while our
sales to our wholesale customers declined slightly. Our sales mix by customer
group was as follows:
|
Customer
Group
|
2006
|
2005
|
2004
|
|
Retail
|
25%
|
23%
|
23%
|
|
Institution
|
7%
|
7%
|
7%
|
|
Wholesale
|
39%
|
45%
|
47%
|
|
National
Accounts
|
19%
|
16%
|
16%
|
|
Manufacturers
|
10%
|
9%
|
7%
|
|
100%
|
100%
|
100%
|
The
2006
increase in operating income as a percentage of divisional sales resulted from
an increase of 1.81% in gross margin (as a percentage of sales) compared with
2005, and a decrease of 5.8% in operating expenses as a percent of sales.
Significant operating expense decreases occurred in contributions ($200,000),
various bank fees ($100,000), legal and professional fees ($100,000),
depreciation ($100,000) and advertising costs ($250,000). These reductions
were
partially offset by increases in employee wages ($100,000) and general supplies
($150,000).
The
2005
increase in operating income as a percentage of divisional sales resulted from
an increase of 1.43% in gross margin (as a percentage of sales) compared with
2004, and a decrease of 0.3% in operating expenses as a percent of sales.
Significant operating expense decreases occurred in employee benefits
($245,000), various insurance costs ($195,000), legal and professional fees
($80,000) and outside services ($125,000). These reductions were partially
offset by increases in manager bonuses ($320,000) and advertising and marketing
expenses ($285,000).
Retail
Leathercraft
|
Year
|
Net
Sales Increase
from
Prior Yr
|
Operating
Income
|
Operating
Income Incr
(Decr)
from
Prior Year
|
Operating
Income as a Percentage of
Sales
|
|
2006
|
25.0%
|
$2,310,073
|
30.7%
|
10.3%
|
|
2005
|
33.4%
|
$1,766,960
|
45.9%
|
9.8%
|
|
2004
|
46.6%
|
$1,210,566
|
100.3%
|
8.9%
|
Reflecting
the growth previously discussed, Retail Leathercraft accounted for 40.8% of
our
total net sales in 2006, up from 35.5% in 2005 and 29.3% in 2004.
Growth
in
net sales for Retail Leathercraft division in 2006 and 2005 resulted primarily
from our expansion program. Expansion during 2006 and 2005 consisted of the
opening of 12 and 8 new stores, respectively.
Our
sales
mix by customer group was as follows:
|
Customer
Group
|
2006
|
2005
|
2004
|
|
Retail
|
65%
|
62%
|
72%
|
|
Institution
|
8%
|
11%
|
6%
|
|
Wholesale
|
26%
|
26%
|
21%
|
|
National
Accounts
|
0%
|
0%
|
0%
|
|
Manufacturers
|
1%
|
1%
|
1%
|
|
100%
|
100%
|
100%
|
Operating
income as a percentage of sales increased to 10.3% for 2006 compared to 9.8%
for
2005. Gross margin fell to 60.8% in 2006 from 61.8% in 2005. Operating expenses
as a percent of sales in 2006 decreased by 1.5%, from 52.0% for 2005 to 50.5%
for 2006 as sales and gross margin grew at a faster pace than that of operating
expenses.
Operating
income as a percentage of sales increased to 9.8% for 2005 compared to 8.9%
for
2004. Gross margin remained steady at 61.8% in 2004 and 2005. Operating expenses
as a percent of sales in 2005 decreased by 0.8%, from 52.8% for 2004 to 52.0%
for 2005.
We
intend
to continue the expansion of Tandy Leather’s retail store chain in 2007 by
opening approximately 12 new stores throughout the year. As of March 1, 2007,
we
have opened three new stores this year:
| · |
Boston,
MA
|
| · |
Allentown,
PA
|
| · |
Cincinnati,
OH
|
We
remain
committed to a conservative expansion plan for this division that minimizes
risks to our profits and maintains financial stability.
Other
Roberts,
Cushman accounted for 2.9% of our total sales in 2006 compared with 3.3% and
4.3% in 2005 and 2004, respectively. The loss from operations was $57,000 in
2006 compared to operating income of $84,000 in 2005 and $35,000 in 2004.
Roberts, Cushman's sales and profits are immaterial to us as a whole.
Financial
Condition
At
December 31, 2005, we held $3.2 million of cash, $15.6 million of inventory,
accounts receivable of $2.2 million, and $1.7 million of property and equipment.
Goodwill and other intangibles (net of amortization and depreciation) were
$747,000 and $399,000, respectively. We also own a leather artwork collection,
most of which was created by Al Stohlman, a legendary leathercrafter, valued
on
our balance sheet at $250,000. Net total assets were $25.7 million. Current
liabilities were $4.1 million (including $134,000 of current maturities of
capital lease obligations), while long-term debt was $111,000. Total
stockholders’ equity at the end of 2005 was $21.2 million.
At
December 31, 2006, we held $6.7 million of cash, $17.2 million of inventory,
accounts receivable of $2.6 million, and $1.9 million of property and equipment.
Goodwill and other intangibles (net of amortization and depreciation) were
$747,000 and $360,000, respectively. Net total assets were $31.9 million.
Current liabilities were $5.4 million (including $111,000 of current maturities
of capital lease obligations), while long-term debt was $0. Total stockholders’
equity at the end of 2006 was $26.3 million.
Specific
ratios on a consolidated basis at the end of each year ended December 31 were
as
follows:
|
2006
|
2005
|
2004
|
||
|
Solvency
Ratios:
|
||||
|
Quick
Ratio
|
Cash+Accts
Rec/Total Current Liabilities
|
1.74
|
1.31
|
1.21
|
|
Current
Ratio
|
Total
Current Assets/Total Current Liabilities
|
5.19
|
5.30
|
4.79
|
|
Current
Liabilities to Net Worth
|
Total
Current Liabilities/Net Worth
|
0.20
|
0.19
|
0.22
|
|
Current
Liabilities to Inventory
|
Total
Current Liabilities/Inventory
|
0.31
|
0.26
|
0.30
|
|
Total
Liabilities to Net Worth
|
Total
Liabilities/Net Worth
|
0.21
|
0.21
|
0.28
|
|
Fixed
Assets to Net Worth
|
Fixed
Assets/Net Worth
|
0.07
|
0.08
|
0.11
|
|
Efficiency
Ratios:
|
||||
|
Collection
Period (Days Outstanding)
|
Accounts
Receivable/Credit Sales x 365
|
53.43
|
44.17
|
43.57
|
|
Inventory
Turnover
|
Sales/Average
Inventory
|
3.36
|
3.57
|
3.87
|
|
Assets
to Sales
|
Total
Assets/Sales
|
0.58
|
0.51
|
0.48
|
|
Sales
to Net Working Capital
|
Sales/Current
Assets - Current Liabilities
|
2.45
|
2.38
|
3.21
|
|
Accounts
Payable to Sales
|
Accounts
Payable/Sales
|
0.03
|
0.02
|
0.04
|
|
Profitability
Ratios:
|
||||
|
Return
on Sales (Profit Margin)
|
Net
Profit After Taxes/Sales
|
0.09
|
0.07
|
0.06
|
|
Return
on Assets
|
Net
Profit After Taxes/Total Assets
|
0.15
|
0.14
|
0.12
|
|
Return
on Net Worth
(Return on Equity)
|
Net
Profit After Taxes/Net Worth
|
0.18
|
0.18
|
0.15
|
Capital
Resources and Liquidity
On
November 1, 2004, we entered into a Credit Agreement with JPMorgan Chase Bank,
N.A. (formerly BankOne, N.A.), which replaced our line of credit with Wells
Fargo Bank. The current facility matures in October 2008 and is secured by
our
accounts receivable and inventory. We opted to reduce the maximum amount that
may be borrowed under this line of credit to $3.0 million in order to reduce
the
fees required on the un-borrowed portion of the line.
We
are
currently in compliance with all covenants and conditions contained in the
JPMorgan Chase Credit Agreement and have no reason to believe that we will
not
continue to operate in compliance with the provisions of these financing
arrangements. The principal terms and conditions of the Credit Agreement are
described in further detail in Note 5 to the Consolidated Financial Statements,
Notes
Payable and Long-Term Debt.
We
borrow
and repay funds under revolving credit terms as needed. The principal balance
has been zero since the first quarter of 2005. We have not borrowed (and repaid)
funds since that time. Total bank indebtedness at the end of 2006 and 2005
is
zero.
Reflecting
the reduction of bank indebtedness during the periods, our financing activities
for 2006, 2005 and 2004 provided (required) net cash of $69,000, ($447,000),
and
($1.2 million), respectively.
The
primary source of liquidity and capital resources during 2006 was cash flow
provided by operating activities. Cash flow from operations for 2006 and 2005
was $3.9 million and $1.5 million, respectively, the largest portion generated
from net income partially offset by the increase in inventory. Cash flow from
operations in 2004 was $2.9 million.
Consolidated
accounts receivable increased to $2.6 million at December 31, 2006 compared
to
$2.2 million at December 31, 2005. Average days to collect accounts slowed
from
44.17 days in 2005 to 53.4 days in 2006 on a consolidated basis due primarily
to
the suspension of payments from a large customer due to a processing error
on
the part of the customer. The problem was resolved and we expect to collect
the
backlog of payments by the end of the first quarter of 2007.
Inventory
increased from $15.7 million at the end of 2005 to $17.2 million at December
31,
2006. We expect our inventory to slowly trend upward as we continue our
expansion of the Tandy Leather store chain. We attempt to manage our inventory
levels to avoid tying up excessive capital while maintaining sufficient
inventory in order to service our current customer demand as well as plan for
our expected store growth and expansion. While we believe our investment in
inventory at the end of 2006 was at a reasonable level given our expansion
plans, it was approximately 5% above our internal targets of optimum
inventory levels.
Consolidated
inventory turned 3.36 times during 2006, a slight slow down from the 3.57 times
turned in 2005. We compute our inventory turnover rates as sales divided by
average inventory.
By
operating division, inventory turns are as follows:
|
Segment
|
2006
|
2005
|
2004
|
|
Wholesale
Leathercraft
|
2.40
|
2.68
|
3.11
|
|
Retail
Leathercraft
|
6.99
|
8.23
|
8.88
|
|
Roberts,
Cushman
|
7.15
|
3.75
|
4.12
|
|
Wholesale
Leathercraft stores only
|
7.48
|
7.73
|
8.69
|
Retail
Leathercraft inventory turns are significantly higher than that of Wholesale
Leathercraft because its inventory consists only of the inventory at the stores.
The Tandy Leather stores have no warehouse (backstock) inventory to include
in
the turnover computation as the stores get their product from the central
warehouse. Wholesale Leathercraft’s turns are expected to be slower because the
central warehouse inventory is part of this division and its inventory is held
as the backstock for all of the stores.
Accounts
payable increased to $1.8 million at the end of 2006 compared to $1.2 million
at
the end of 2005 due primarily to the intentional slowdown in payments to
vendors. We were paying ahead of terms in many cases in 2005 which resulted
in
the lower accounts payable balance at December 31, 2005.
As
discussed above, the largest use of operating cash in 2006 was for inventory
purchases and increase in accounts receivable. Capital expenditures totaled
$471,000 and $273,000 for the years ended December 31, 2006 and 2005,
respectively. In 2006, capital expenditures consisted of factory machines and
dies ($85,000); fixtures and equipment for the new Tandy Leather retail stores
($175,000), air conditioner replacements at existing stores ($40,000), leather
display racks ($25,000); computer server upgrades ($60,000) and miscellaneous
computer and other office equipment ($150,000). Since we intend to continue
opening or acquiring new Tandy Leather stores, expenditures related to this
expansion should continue into 2007.
We
believe that cash flow from operations will be adequate to fund our operations
in 2007, while also funding expansion. At this time, we know of no trends or
demands, commitments events or uncertainties that will or are likely to
materially affect our liquidity, capital resources or results of operations.
In
addition, we anticipate that this cash flow will enable us to meet the
contractual obligations and commercial commitments. However, if cash flows
should decrease or uses of cash increase, we may increase our borrowings on
our
line of credit as needed. We believe that, if desired, our present financial
condition would permit us to increase the maximum amount that could be borrowed
from lenders. Further, we could defer expansion plans if required by
unanticipated drops in cash flow. In particular, because of the relatively
small
investment required by each new Tandy Leather store, we have flexibility in
when
we make most expansion expenditures.
Off-Balance
Sheet Arrangements
We
did
not have any off-balance sheet arrangements during 2006, 2005 and 2004, and
we
do not currently have any such arrangements.
Contractual
Obligations
The
following table summarizes by years our contractual obligations and commercial
commitments as of December 31, 2006 (not including related interest
expense):
|
Payments
Due by Periods
|
|||||
|
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1
- 3
Years
|
4
-5
Years
|
After
5
Years
|
|
Long-Term
Debt(1)
|
--
|
--
|
--
|
--
|
--
|
|
Capital
Lease Obligations
|
$
111,722
|
$
111,722
|
--
|
--
|
--
|
|
Operating
Leases(2)
|
6,050,225
|
2,370,711
|
$
3,408,483
|
$270,031
|
--
|
|
Total
Contractual Obligations
|
$6,161,947
|
$2,482,433
|
$3,408,483
|
$270,031
|
$
--
|
____________________
(1)
Our
loan from JPMorgan Chase matures in October 2008. The loan's maturity can be
accelerated in the event of a material adverse change or upon other occurrences
described in the related credit agreement.
(2)
These
are our leased facilities.
The
interest rate on the capital lease is 0%. Any imputed interest over the term
of
the lease would be insignificant.
Summary
of Critical Accounting Policies
We
strive
to report our financial results in a clear and understandable manner, although
in some cases accounting and disclosure rules are complex and require us to
use
technical terminology. We follow generally accepted accounting principles in
the
U.S. in preparing our consolidated financial statements. These principles
require us to make estimates and apply judgments that affect our financial
position and results of operations. We continually review our accounting
policies, how they are applied and how they are reported and disclosed in our
financial statements. Following is a summary of our more significant accounting
policies and how they are applied in preparation of the financial
statements.
Basis
of Consolidation.
We
report our financial information on a consolidated basis. Therefore, unless
there is an indication to the contrary, financial information is provided for
the parent company, Tandy Leather Factory, Inc., and its subsidiaries as a
whole. Transactions between the parent company and any subsidiaries are
eliminated for this purpose. We own all of the capital stock of our
subsidiaries, and we do not have any subsidiaries that are not consolidated.
None of our subsidiaries are “off balance sheet.”
Revenue
Recognition.
We
recognize revenue for retail (over the counter) sales as transactions occur
and
other sales upon shipment of our products, 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.
Allowance
for Accounts Receivable.
We
reduce accounts receivable by an allowance for amounts that may become
uncollectible in the future. This allowance is an estimate based primarily
on
our evaluation of the customer's financial condition, past collection history,
and the aging of the account. If the financial condition of any of our customers
deteriorates, resulting in an impairment or inability to make payments,
additional allowances may be required.
Inventory.
Inventory is stated at the lower of cost or market and is accounted for on
the
“first in, first out” method. This means that sales of inventory treat the
oldest item of identical inventory as being the first sold. In addition, we
regularly reduce the value of our inventory for slow-moving or obsolete
inventory. This reduction is based on our review of items on hand compared
to
their estimated future demand. If actual future demand is less favorable than
what we project, additional write-downs may be necessary. Goods shipped to
us
are recorded as inventory owned by us when the risk of loss shifts to us from
the supplier.
Goodwill. A
change in the accounting rules necessitated a change in 2002 in how we report
goodwill on our balance sheet. As a result, we incurred an impairment write-down
in 2002 of our investment in Roberts, Cushman in the amount of $4.0 million.
We
periodically analyze the remaining goodwill on our balance sheet to determine
the appropriateness of its carry value. As of December 31, 2006, we 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. If actual results of these stores differ significantly from
our projections, such difference could affect the present value calculation
in
the future resulting in an impairment of all or part of the goodwill currently
carried on our balance sheet.
Forward-Looking
Statements
“Item
1.
Business” and “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of this report contain forward-looking
statements of management. In general, these are predictions or suggestions
of
future events and statements or expectations of future occurrences. There are
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
might fail to realize the anticipated benefits of the opening of
Tandy
Leather retail stores or we might be unable to obtain sufficient
new
locations on acceptable terms to meet our growth plans. Further,
we might
fail to hire and train competent managers to oversee the stores
opened.
|
| · |
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.
|
| · |
A
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.
|
| · |
Livestock
diseases such as mad cow could reduce the availability of hides and
leathers or increase their cost. Also, the prices of hides and leathers
fluctuate in normal times, and these fluctuations can affect
us.
|
| · |
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.
|
| · |
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.
|
| · |
Tax
or interest rates might increase. In particular, interest rates have
been
increasing. 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
our control, may occur as well.
|
We
do not
intend to update forward-looking statements.
We
face
exposure to financial market risks, including adverse movement in foreign
current exchange rates and changes in interest rates. These exposures may change
over time and could have a material impact on our financial results. We do
not
use or invest in market risk sensitive instruments to hedge any of these risks
or for any other purpose.
Foreign
Currency Exchange Rate Risk
Our
primary foreign currency exposure is related to our subsidiary in Canada. The
Leather Factory of Canada, Ltd. has local currency (Canadian dollar) revenue
and
local currency operating expenses. Changes in the currency exchange rate impact
the U.S. dollar amount of revenue and expenses. See Note 13 to the Consolidated
Financial Statements,
Segment Information,
for
financial information concerning our foreign activities.
Interest
Rate Risk
We
are
subject to market risk associated with interest rate movements on outstanding
debt. Our current credit agreement with JPMorgan Chase accrues interest at
a
rate that changes with fluctuations in the prime rate. Because we currently
have
no outstanding borrowings, changes in the prime rate do not impact us in this
area.
Tandy
Leather Factory, Inc.
Consolidated
Balance Sheets
December
31, 2006 and 2005
|
December
31,
2006
|
December
31,
2005
|
||
|
ASSETS
|
|||
|
CURRENT
ASSETS:
|
|||
|
Cash
|
$6,739,891
|
$3,215,727
|
|
|
Accounts
receivable-trade, net of allowance for doubtful accounts
|
|||
|
of
$149,000 and $138,000 in 2006 and 2005, respectively
|
2,599,279
|
2,178,848
|
|
|
Inventory
|
17,169,358
|
15,669,182
|
|
|
Deferred
income taxes
|
266,018
|
273,872
|
|
|
Other
current assets
|
1,089,258
|
358,058
|
|
|
Total
current assets
|
27,863,804
|
21,695,687
|
|
|
PROPERTY
AND EQUIPMENT, at cost
|
6,865,946
|
6,424,091
|
|
|
Less
accumulated depreciation and amortization
|
(4,989,341)
|
(4,664,614)
|
|
|
1,876,605
|
1,759,477
|
||
|
GOODWILL
|
746,139
|
746,611
|
|
|
OTHER
INTANGIBLES, net of accumulated amortization of
|
|||
|
$262,000
and $223,000 in 2006 and 2005, respectively
|
360,676
|
398,967
|
|
|
OTHER
assets
|
1,069,411
|
1,079,731
|
|
|
$31,916,635
|
$25,680,473
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||
|
CURRENT
LIABILITIES:
|
|||
|
Accounts
payable-trade
|
$1,776,646
|
$1,220,420
|
|
|
Accrued
expenses and other liabilities
|
3,424,010
|
2,550,573
|
|
|
Income
taxes payable
|
59,392
|
199,581
|
|
|
Current
maturities of capital lease obligation
|
111,723
|
134,067
|
|
|
Total
current liabilities
|
5,371,771
|
4,104,641
|
|
|
DEFERRED
INCOME TAXES
|
221,621
|
206,253
|
|
|
CAPITAL
LEASE OBLIGATION, net of current maturities
|
-
|
111,722
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
-
|
-
|
|
|
STOCKHOLDERS'
EQUITY:
|
|||
|
Preferred
stock, $0.10 par value; 20,000,000 shares
|
|||
|
authorized,
none issued or outstanding
|
-
|
-
|
|
|
Common
stock, $0.0024 par value; 25,000,000 shares
|
|||
|
authorized,
10,885,068 and 10,741,835 shares issued at 2006 and 2005,
|
|||
|
10,879,209
and 10,735,976 outstanding at 2006 and 2005, respectively
|
26,124
|
25,780
|
|
|
Paid-in
capital
|
5,292,591
|
4,988,445
|
|
|
Retained
earnings
|
20,949,540
|
16,172,475
|
|
|
Treasury
stock (5,859 shares at cost)
|
(25,487)
|
(25,487)
|
|
|
Accumulated
other comprehensive income
|
80,475
|
96,644
|
|
|
Total
stockholders' equity
|
26,323,243
|
21,257,857
|
|
|
$31,916,635
|
$25,680,473
|
The
accompanying notes are an integral part of these financial
statements.
Tandy
Leather Factory, Inc.
Consolidated
Statements of Income
For
the Years Ended December 31, 2006, 2005 and 2004
|
2006
|
2005
|
2004
|
|||
|
NET
SALES
|
$
55,199,021
|
$
50,719,574
|
$
46,146,284
|
||
|
COST
OF SALES
|
23,566,251
|
21,964,530
|
20,706,239
|
||
|
Gross
Profit
|
31,632,770
|
28,755,044
|
25,440,045
|
||
|
OPERATING
EXPENSES
|
24,565,056
|
23,181,633
|
21,181,599
|
||
|
INCOME
FROM OPERATIONS
|
7,067,714
|
5,573,411
|
4,258,446
|
||
|
OTHER
(INCOME) EXPENSE:
|
|||||
|
Interest
expense
|
-
|
3,188
|
53,400
|
||
|
Other,
net
|
(98,391)
|
(137,690)
|
(8,600)
|
||
|
Total
other expense
|
(98,391)
|
(134,502)
|
44,800
|
||
|
INCOME
BEFORE INCOME TAXES
|
7,166,105
|
5,707,913
|
4,213,646
|
||
|
PROVISION
FOR INCOME TAXES
|
2,389,039
|
1,994,199
|
1,559,605
|
||
|
NET
INCOME
|
$4,777,066
|
$3,713,714
|
$2,654,041
|
||
|
NET
INCOME PER COMMON SHARE - BASIC
|
$0.44
|
$0.35
|
$0.25
|
||
|
NET
INCOME PER COMMON SHARE - DILUTED
|
$0.43
|
$0.34
|
$0.24
|
||
|
Weighted
Average Number of Shares Outstanding:
|
|||||
|
Basic
|
10,807,316
|
10,643,004
|
10,543,994
|
||
|
Diluted
|
11,113,855
|
10,976,240
|
10,957,518
|
The
accompanying notes are an integral part of these financial
statements.
Tandy
Leather Factory, Inc.
Consolidated
Statements of Cash Flow
For
the Years Ended December 31, 2006, 2005 and 2004
|
2006
|
2005
|
2004
|
|||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||
|
Net
income
|
$
4,777,066
|
$
3,713,714
|
$
2,654,041
|
||
|
Adjustments
to reconcile net income to net cash
|
|||||
|
provided
by operating activities -
|
|||||
|
Depreciation
and amortization
|
392,915
|
456,706
|
452,653
|
||
|
Gain
on disposal of assets
|
(3,750)
|
(9,145)
|
(2,000)
|
||
|
Non-cash
stock-based compensation
|
101,080
|
-
|
-
|
||
|
Deferred
income taxes
|
23,222
|
(181,317)
|
38,721
|
||
|
Other
|
(15,696)
|
38,276
|
20,123
|
||
|
Net
changes in assets and liabilities, net of effect of
|
|||||
|
business
acquisitions:
|
|||||
|
Accounts
receivable-trade, net
|
(420,431)
|
(146,559)
|
(112,738)
|
||
|
Inventory
|
(1,500,176)
|
(2,919,473)
|
(1,303,762)
|
||
|
Income
taxes
|
(140,189)
|
176,817
|
228,787
|
||
|
Other
current assets
|
(731,200)
|
271,664
|
(102,163)
|
||
|
Accounts
payable-trade
|
556,226
|
(733,726)
|
406,357
|
||
|
Accrued
expenses and other liabilities
|
873,437
|
868,570
|
658,692
|
||
|
Total
adjustments
|
(864,562)
|
(2,178,187)
|
284,670
|
||
|
Net
cash provided by operating activities
|
3,912,504
|
1,535,527
|
2,938,711
|
||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||
|
Purchase
of property and equipment
|
(471,753)
|
(272,826)
|
(369,559)
|
||
|
Payments
in connection with businesses acquired
|
-
|
-
|
(556,794)
|
||
|
Proceeds
from sale of assets
|
3,750
|
9,145
|
2,000
|
||
|
Decrease
(increase) in other assets
|
10,320
|
(168,981)
|
10,280
|
||
|
Net
cash used in investing activities
|
(457,683)
|
(432,662)
|
(914,073)
|
||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||
|
Net
decrease in revolving credit loans
|
-
|
(505,154)
|
(1,287,830)
|
||
|
Payments
on capital lease obligations
|
(134,067)
|
(134,067)
|
(23,478)
|
||
|
Payments
received on notes secured by common stock
|
-
|
-
|
20,000
|
||
|
Repurchase
of common stock (treasury stock)
|
-
|
-
|
(25,487)
|
||
|
Proceeds
from issuance of common stock and warrants
|
203,410
|
191,881
|
124,015
|
||
|
Net
cash provided by (used in) financing activities
|
69,343
|
(447,340)
|
(1,192,780)
|
||
|
NET
INCREASE IN CASH
|
3,524,164
|
655,525
|
831,858
|
||
|
CASH,
beginning of period
|
3,215,727
|
2,560,202
|
1,728,344
|
||
|
CASH,
end of period
|
$6,739,891
|
$3,215,727
|
$2,560,202
|
||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|||||
|
Interest
paid during the period
|
$
-
|
$
3,188
|
$
59,773
|
||
|
Income
tax paid during the period, net of (refunds)
|
2,282,113
|
1,954,364
|
1,197,347
|
||
|
NON-CASH
INVESTING ACTIVITIES:
|
|||||
|
Equipment
acquired under capital lease financing arrangements
|
-
|
-
|
$
402,201
|
The
accompanying notes are an integral part of these financial
statements.
Tandy
Leather Factory, Inc.
Consolidated
Statements of Stockholders' Equity
For
the Years Ended December 31, 2006, 2005 and 2004
|
Number
of Shares
|
Par
Value
|
Paid-in
Capital
|
Treasury
Stock
|
Retained
Earnings
|
Notes
receivable - secured by common stock
|
Accumulated
Other Comprehensive Income (Loss)
|
Total
|
Comprehensive
Income
(Loss)
|
||||||||||
|
BALANCE,
December 31, 2003
|
10,487,961
|
$25,171
|
$4,673,158
|
-
|
$9,804,719
|
$(20,000)
|
$26,445
|
$14,509,493
|
||||||||||
|
Payments
on notes receivable
secured
by common stock
|
-
|
-
|
-
|
-
|
20,000
|
-
|
20,000
|
|||||||||||
|
Shares
issued - stock options and warrants
exercised
|
72,700
|
174
|
74,896
|
-
|
-
|
-
|
-
|
75,070
|
||||||||||
|
Warrants
to acquire 50,000 shares of
common stock issued
|
-
|
-
|
48,945
|
-
|
-
|
-
|
-
|
48,945
|
||||||||||
|
Purchase
of treasury stock
|
-
|
-
|
-
|
(25,487)
|
-
|
-
|
-
|
(25,487)
|
||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
2,654,041
|
-
|
-
|
2,654,041
|
$2,654,041
|
|||||||||
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
28,171
|
28,171
|
28,171
|
|||||||||
|
BALANCE,
December 31, 2004
|
10,560,661
|
$25,345
|
$4,796,999
|
$(25,487)
|
$12,458,760
|
-
|
$54,616
|
$17,310,233
|
||||||||||
|
Comprehensive
income for the year ended December 31, 2004
|
$2,682,212
|
|||||||||||||||||
|
Shares
issued - stock options and warrants
exercised
|
181,174
|
435
|
191,446
|
-
|
-
|
-
|
-
|
191,881
|
||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
3,713,714
|
-
|
-
|
3,713,714
|
$3,713,714
|
|||||||||
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
42,029
|
42,029
|
42,029
|
|||||||||
|
BALANCE,
December 31, 2005
|
10,741,835
|
$25,780
|
$4,988,445
|
$(25,487)
|
$16,172,474
|
-
|
$96,645
|
$21,257,857
|
||||||||||
|
Comprehensive
income for the year ended December 31, 2005
|
$3,755,743
|
|||||||||||||||||
|
Shares
issued - stock options and warrants
exercised
|
143,233
|
344
|
203,066
|
-
|
-
|
-
|
-
|
203,410
|
||||||||||
|
Stock-based
compensation
|
-
|
-
|
101,080
|
-
|
-
|
-
|
-
|
101,080
|
||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
4,777,066
|
-
|
-
|
4,777,066
|
$4,777,066
|
|||||||||
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
(16,170)
|
(16,170)
|
(16,170)
|
|||||||||
|
BALANCE,
December 31, 2006
|
10,885,068
|
$26,124
|
$5,292,591
|
$(25,487)
|
$20,949,540
|
-
|
$80,475
|
$26,323,243
|
||||||||||
|
Comprehensive
income for the year ended December 31, 2006
|
$4,760,896
|
|||||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
TANDY
LEATHER FACTORY, INC.
DECEMBER
31, 2006, 2005, and 2004
1.
DESCRIPTION OF BUSINESS
Our
primary line of business is the sale of leather, leather crafts and related
supplies. We sell our products via company-owned stores throughout the United
States and Canada. Numerous customers including retailers, wholesalers,
assemblers, distributors and other manufacturers are geographically disbursed
throughout the world. We also have light manufacturing facilities in
Texas.
On
May
23, 2005, our stockholders approved changing the name of the Company from The
Leather Factory, Inc. to Tandy Leather Factory, Inc.
2.
SIGNIFICANT ACCOUNTING POLICIES
| · |
Management
estimates and reporting
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the periods
presented. Actual results could differ from those estimates. Assets and
liabilities with reported amounts based on significant estimates include trade
accounts receivables, inventory (slow-moving), and deferred income
taxes.
| · |
Principles
of consolidation
|
Our
consolidated financial statements include the accounts of Tandy Leather Factory,
Inc. and its wholly owned subsidiaries, The Leather Factory, L.P. (a Texas
limited partnership) and its corporate partners, Tandy Leather Company, L.P.
(a
Texas limited partnership) and its corporate partners, Roberts, Cushman &
Company, Inc. (a New York corporation), and The Leather Factory of Canada,
Ltd.
(a Canadian corporation). All intercompany accounts and transactions have been
eliminated in consolidation.
| · |
Foreign
currency translation
|
Foreign
currency translation adjustments arise from activities of our Canadian
operations. Results of operations are translated into U.S. dollars using the
average exchange rates during the period, while assets and liabilities are
translated using period-end exchange rates. Foreign currency translation
adjustments of assets and liabilities are recorded in stockholders’ equity.
Gains and losses resulting from foreign currency translations are reported
in
the statements of income under the caption “Other (Income) Expense”, net, for
all periods presented.
| · |
Revenue
recognition
|
Our
sales
generally occur via two methods: (1) at the store counter, 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. Shipping terms are normally FOB shipping
point.
We
offer
an unconditional satisfaction guarantee to all customers and accept all product
returns. Net sales represent gross sales less negotiated price allowances,
product returns, and allowances for defective merchandise.
| · |
Discounts
|
We
maintain four price levels on a consistent basis: retail, wholesale, business,
and distributor. Gross sales are reported after deduction of discounts. We
do
not pay slotting fees or make other payments to resellers. Several customers
require us to participate in their cooperative advertising programs. These
programs are a negotiated percentage of their purchases and are accounted for
as
a reduction of sales.
| · |
Expense
categories
|
Cost
of
goods sold includes inbound freight and duty charges from vendors to our central
warehouse, freight and handling charges to move merchandise from our central
warehouse to our stores, and manufacturing overhead, as
appropriate.
Operating
expenses include all selling, general and administrative costs including wages
and related employee expenses (payroll taxes, health benefits, savings plans,
etc.), advertising, outbound freight charges (to ship merchandise to customers),
rent, and utilities.
| · |
Property
and equipment, net of accumulated depreciation and amortization
|
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which are
five to ten years for equipment, five to seven years for furniture and fixtures,
and five years for vehicles. Leasehold improvements are amortized over the
lesser of the life of the lease or the useful life of the asset. Repairs and
maintenance costs are expensed as incurred.
| · |
Inventory
|
Inventory
is valued at the lower of first-in, first-out cost or market. 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.
| · |
Impairment
of long-lived assets
|
Potential
impairments of long-lived assets are reviewed annually or when events and
circumstances warrant an earlier review. In accordance with SFAS No. 144,
impairment is determined when estimated future undiscounted cash flows
associated with an asset are less than the asset’s carrying value.
| · |
Earnings
per share
|
Basic
earnings per share are computed based on the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes,
to
the extent inclusion of such shares would be dilutive to earnings per share,
the
effect of outstanding options and warrants, computed using the treasury stock
method.
|
BASIC
|
2006
|
2005
|
2004
|
||
|
Net
income (loss)
|
$4,777,066
|
$3,713,714
|
$
2,654,041
|
||
|
Weighted
average common shares outstanding
|
10,807,316
|
10,643,004
|
10,543,994
|
||
|
Earnings
per share - basic
|
$
0.44
|
$
0.35
|
$
0.25
|
||
|
DILUTED
|
|||||
|
Net
income (loss)
|
$
4,777,066
|
$
3,713,714
|
$
2,654,041
|
||
|
Weighted
average common shares outstanding
|
10,807,316
|
10,643,004
|
10,543,994
|
||
|
Effect
of assumed exercise of stock options and warrants
|
306,539
|
333,236
|
413,524
|
||
|
Weighted
average common shares outstanding, assuming
dilution
|
11,113,855
|
10,976,240
|
10,957,518
|
||
|
Earnings
per share - diluted
|
$
0.43
|
$
0.34
|
$
0.24
|
||
|
Outstanding
options and warrants excluded as anti-dilutive
|
-
|
-
|
136,000
|
For
additional disclosures regarding the employee stock options and the warrants,
see Note 11. The net effect of converting stock options and warrants to purchase
446,500 and 596,174 shares of common stock at option prices less than the
average market prices has been included in the computations of diluted EPS
for
the years ended December 31, 2006 and 2005, respectively.
| · |
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. We
periodically analyze goodwill remaining on the balance sheet to determine the
appropriateness of its carrying value and have elected to perform
the annual analysis during the fourth calendar quarter of each year.
As
of
December 31, 2006, we 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. Under
SFAS 142, goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value. Our reporting units are
generally the same as the operating segments identified in Note 13 - Segment
Information.
A
summary
of changes in our goodwill for the years ended December 31, 2006 and 2005 is
as
follows:
|
Leather
Factory
|
Tandy
Leather
|
Total
|
|||
|
Balance,
December 31, 2004
|
$359,454
|
$383,406
|
$742,860
|
||
|
Acquisitions
and adjustments
|
-
|
-
|
-
|
||
|
Foreign
exchange gain/loss
|
3,751
|
-
|
3,751
|
||
|
Impairments
|
-
|
-
|
-
|
||
|
Balance,
December 31, 2005
|
$363,205
|
$383,406
|
$746,611
|
||
|
Acquisitions
and adjustments
|
-
|
-
|
-
|
||
|
Foreign
exchange gain/loss
|
(472)
|
-
|
(472)
|
||
|
Impairments
|
-
|
-
|
-
|
||
|
Balance,
December 31, 2006
|
$362,733
|
$383,406
|
$746,139
|
As
of
December 31, 2006 and 2005, our intangible assets and related accumulated
amortization consisted of the following:
|
As
of December 31, 2006
|
|||||
|
Gross
|
Accumulated
Amortization
|
Net
|
|||
|
Trademarks,
Copyrights
|
$544,369
|
$247,193
|
$297,176
|
||
|
Non-Compete
Agreements
|
78,000
|
14,500
|
63,500
|
||
|
$622,369
|
$261,693
|
$360,676
|
|||
|
As
of December 31, 2005
|
|||||
|
Gross
|
Accumulated
Amortization
|
Net
|
|||
|
Trademarks,
Copyrights
|
$544,369
|
$210,902
|
$333,467
|
||
|
Non-Compete
Agreements
|
78,000
|
12,500
|
65,500
|
||
|
$622,369
|
$223,402
|
$398,967
|
|||
Excluding
goodwill, we have no intangible assets not subject to amortization under SFAS
142. Amortization of intangible assets of $38,291 in 2006, $38,791 in 2005,
and
$33,782 in 2004 was recorded in operating expenses. Based on the current amount
of intangible assets subject to amortization, the estimated amortization expense
for each of the succeeding 5 years are as follows:
|
Leather
Factory
|
Tandy
Leather
|
Total
|
|
|
2007
|
$5,954
|
$31,837
|
$37,791
|
|
2008
|
5.954
|
30,337
|
36,291
|
|
2009
|
5,954
|
30,337
|
36,291
|
|
2010
|
5,954
|
30,337
|
36,291
|
|
2011
|
5,027
|
30,337
|
35,364
|
During
2006, we did not acquire any intangible assets.
| · |
Fair
value of financial Instruments
|
The
principal financial instruments held consist of accounts receivable, accounts
payable, notes payable and long-term debt. The carrying value of accounts
receivable and accounts payable approximate their fair value due to the
relatively short-term nature of the accounts. The interest rates on our notes
payable and long-term debt fluctuate with changes in the prime rate and are
the
rates currently available to us; therefore, the carrying amount of those
instruments approximates their fair value.
| · |
Deferred
taxes
|
Deferred
income taxes result from temporary differences in the bases of our assets and
liabilities reported for book and tax purposes.
| · |
Stock-based
compensation - Change in Accounting
Principle
|
We
had
two stock option plans which provided for stock option grants to officers,
key
employees and directors. Both plans expired in the 4th
quarter
of 2005. The expiration of the plans have no effect on the options previously
granted. Options outstanding and exercisable were granted at a stock option
price which was not less than the fair market value of our Common Stock on
the
date the option was granted and no option has a term in excess of ten years.
Additionally, options vest and become exercisable either six months from the
option grant date or in equal installments over a five year period. Prior to
fiscal 2006, we accounted for stock-based compensation using the intrinsic
value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related Interpretations and provided the required pro forma disclosures of
SFAS
No. 123, Accounting
for Stock-Based Compensation.
On
January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” and elected
to adopt the standard using the modified prospective transition method. Under
this transition method, compensation cost associated with stock options
recognized in 2006 includes: (1) amortization related to the remaining unvested
portion of all share based payments granted prior to, but not vested as of
December 31, 2005, based on the grant date fair value estimated in accordance
with the original pro forma footnote disclosure provisions of FASB Statement
No.
123 and (2) amortization related to all share based payments granted subsequent
to December 31, 2005, based on the grant date fair value estimated in accordance
with the provisions of FASB Statement No. 123(R). Accordingly, stock
compensation award expense is recognized over the requisite service period
using
the straight-line attribution method. Previously reported amounts have not
been
restated.
We
recognized share based compensation expense of approximately $101,000 for the
year ended December 31, 2006, as a component of operating expenses. Had
compensation expense for our stock option plans been based upon the projected
fair values at the grant dates for awards under those plans in accordance with
SFAS No. 123, our pro forma net earnings, basic and diluted earnings per common
share for the years ended December 31, 2005 and 2004 would have been as
follows:
|
2005
|
2004
|
||
|
Net
income, as reported
|
$3,713,714
|
$2,654,041
|
|
|
Add:
Stock-based compensation expense included in reported net
income
|
-
|
-
|
|
|
Deduct:
Stock-based compensation expense determined under fair value
method
|
122,934
|
117,443
|
|
|
Net
income, pro forma
|
$3,590,780
|
$2,536,598
|
|
|
Net
income per share:
|
|||
|
Basic
- as reported
|
$0.35
|
$0.25
|
|
|
Basic
- pro forma
|
$0.34
|
$0.24
|
|
|
Diluted
- as reported
|
$0.34
|
$0.24
|
|
|
Diluted
- pro forma
|
$0.33
|
$0.23
|
The
fair
value of options at the date of grant was estimated using the Black-Scholes
option pricing model (BSM) with the following weighted-average
assumptions:
|
2005
|
2004
|
|
|
Volatility
|
36.6%
|
36.4%
|
|
Expected
option life
|
3-5
|
3-5
|
|
Interest
rate (risk free)
|
4.25%
|
3.375%
|
|
Dividends
|
None
|
None
|
The
effect on 2005 and 2004 pro forma net income and earnings per share of the
estimated fair value of stock options and shares are not necessarily
representative of the effects on the results of operations in the future. In
addition, the estimates made utilize a pricing model developed for traded
options with relatively short lives; our option grants typically have a life
of
up to ten years and are not transferable. Therefore, the actual fair value
of a
stock option grant may be different from our estimates. We believe that our
estimates incorporate all relevant information and represent a reasonable
approximation in light of the difficulties involved in valuing non-traded stock
options.
During
the year ended December 31, 2006, the stock option activity under our stock
option plans was as follows:
|
Weighted
Average Exercise
Price
|
#
of
shares
|
Weighted
Average Remaining Contractual Term
(in
years)
|
Aggregate
Intrinsic Value
|
|
|
Outstanding,
January 1, 2006
|
$1.93
|
421,000
|
||
|
Granted
|
-
|
-
|
||
|
Cancelled
|
-
|
-
|
||
|
Exercised
|
1.63
|
(124,800)
|
||
|
Outstanding,
December 31, 2006
|
$2.05
|
296,200
|
4.99
|
$333,060
|
|
Exercisable,
December 31, 2006
|
$1.82
|
266,200
|
4.77
|
$269,520
|
Other
information pertaining to option activity during the twelve month periods ended
December 31, 2006 and 2005 are as follows:
|
December
31, 2006
|
December
31, 2005
|
|
|
Weighted
average grant-date fair value of stock options granted
|
N/A
|
$11,814
|
|
Total
fair value of stock options vested
|
$89,915
|
$95,866
|
|
Total
intrinsic value of stock options exercised
|
$90,780
|
$99,879
|
As
of
December 31, 2006, there was $52,000 of total unrecognized compensation cost
related to nonvested stock options, which is expected to be recognized over
a
remaining weighted average vesting period of 3 years.
Stock
options to purchase our common stock are granted at prices at or above the
fair
market value on the date of grant. For employees, options become exercisable
in
five equal installments beginning a year from the date of grant. For
non-employee directors, options become exercisable six months after the date
of
grant. All options expire 10 years from the date of grant.
The
fair
value of each stock option granted is estimated on the date of grant using
the
BSM option valuation model. The assumptions used to calculate the fair value
of
options granted are evaluated and revised, as necessary, to reflect market
conditions and our experience. Compensation expense is recognized only for
those
options expect to vest, with forfeitures estimated at the date of grant based
on
our historical experience and future expectations.
| · |
Comprehensive
income
|
Comprehensive
income represents all changes in stockholders’ equity, exclusive of transactions
with stockholders. The accumulated balance of foreign currency translation
adjustments is presented in the consolidated financial statements as
“accumulated other comprehensive income or loss”.
| · |
Shipping
and handling costs
|
All
shipping and handling costs incurred by us are included in operating expenses
on
the statements of income. These costs totaled approximately $1,611,000,
$1,504,000 and $1,360,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
| · |
Advertising
|
With
the
exception of catalog costs, advertising costs are expensed as incurred. Catalog
costs are capitalized and expensed over the estimated useful life of the
particular catalog in question, which is typically twelve to eighteen months.
Such capitalized costs are included in other current assets and totaled $238,000
and $211,000 at December 31, 2006 and 2005, respectively. Total advertising
expense was $3,087,943 in 2006; $3,074,991 in 2005; and $2,571,124 in
2004.
We
agree
to list the names and addresses of our Authorized Sales Centers (ASCs) in
certain mailing pieces produced. The inclusion of these names and addresses
are
at our sole discretion. The production and distribution of direct mailings
is
the primary method of advertising we use and normally consists of 75 to 80
unique mailing pieces annually. Generally, the ASCs are listed in six to eight
of those pieces. We believe that the inclusion of these ASC locations in the
flyers has no impact on our financial statements.
| · |
Cash
flows presentation
|
For
purposes of the statement of cash flows, we consider all highly liquid
investments with initial maturities of three months or less from the date of
purchase to be cash equivalents.
3.
VALUATION AND QUALIFYING ACCOUNTS
| · |
Allowance
for uncollectible accounts
|
We
maintain allowances for bad debts based on factors such as the composition
of
accounts receivable, the age of the accounts, historical bad debt experience,
and our evaluation of the financial condition and past collection history of
each customer. Accounts are written off as they are deemed uncollectible based
on a periodic review of accounts. Our allowance for doubtful accounts was
$149,172 and $137,587, respectively, at December 31, 2006 and 2005. The
following is a roll forward of the allowance for doubtful accounts:
|
Balance
at beginning of year
|
Reserve
"purchased" during year
|
Additions
(reductions) charged to costs and expenses
|
Foreign
exchange gain/loss
|
Write-offs
|
Balance
at
end
of
year
|
|
|
Year
ended December 31, 2006
|
$137,587
|
-
|
85,439
|
241
|
(74,095)
|
$149,172
|
|
Year
ended December 31, 2005
|
$
85,133
|
-
|
87,873
|
527
|
(35,946)
|
$137,587
|
|
Year
ended December 31, 2004
|
$
31,469
|
9,785
|
104,587
|
4,980
|
(65,688)
|
$
85,133
|
| · |
Sales
returns and defective merchandise
|
Product
returns are generally recorded directly against sales as those returns occur.
Historically, the amount of returns is immaterial and as a result, no reserve
is
recorded in the financial statements.
| · |
Slow-moving
and obsolete inventory
|
The
majority of inventory items maintained by us have no restrictive shelf life.
We
review all inventory items annually to determine what items should be eliminated
from the product line. Items are selected for several reasons: (1) the item
is
slow-moving; (2) the supplier is unable to provide an acceptable quality or
quantity; or (3) to maintain a freshness in the product line. Once an item
has
been selected to discontinue, we devalue the cost of the item by 25% of its
original value each quarter until its value has been reduced to zero. Reductions
in inventory for slow-moving and obsolete inventory are recorded directly
against inventory.
4.
BALANCE SHEET COMPONENTS
|
December
31, 2006
|
December
31, 2005
|
||
|
INVENTORY
|
|||
|
On
hand:
|
|||
|
Finished goods held for sale
|
$14,774,445
|
$14,035,384
|
|
|
Raw materials and work in process
|
628,539
|
984,878
|
|
|
Inventory
in transit
|
1,766,374
|
648,920
|
|
|
TOTAL
|
$17,169,358
|
$15,669,182
|
|
|
PROPERTY
AND EQUIPMENT
|
|||
|
Leasehold
improvements
|
$1,199,900
|
$1,199,996
|
|
|
Equipment
|
4,449,949
|
4,093,722
|
|
|
Furniture
and fixtures
|
1,149,875
|
1,064,081
|
|
|
Vehicles
|
66,222
|
66,292
|
|
|
6,865,946
|
6,424,091
|
||
|
Less:
accumulated depreciation
|
(4,989,341)
|
(4,664,614)
|
|
|
TOTAL
|
$1,876,605
|
$1,759,477
|
|
|
OTHER
CURRENT ASSETS
|
|||
|
Accounts
receivable - employees
|
$16,247
|
$12,158
|
|
|
Accounts
receivable - other
|
390,937
|
2,037
|
|
|
Prepaid
expenses
|
598,094
|
313,344
|
|
|
Payments
for merchandise not received
|
83,980
|
30,519
|
|
|
TOTAL
|
$1,089,258
|
$358,058
|
|
|
OTHER
ASSETS
|
|||
|
Security
deposits - utilities, locations, etc.
|
$70,771
|
$83,087
|
|
|
Leather
art collection
|
252,000
|
250,000
|
|
|
Computer
software not implemented yet
|
746,640
|
746,644
|
|
|
TOTAL
|
$1,069,411
|
$1,079,731
|
|
|
ACCRUED
EXPENSES AND OTHER LIABILITIES
|
|
||
|
Accrued
bonuses
|
$950,056
|
$1,120,517
|
|
|
Accrued
payroll
|
274,514
|
328,691
|
|
|
Sales
and payroll taxes payable
|
231,076
|
208,396
|
|
|
Inventory
in transit
|
1,766,374
|
648,920
|
|
|
Other
|
201,990
|
244,049
|
|
|
TOTAL
|
$3,424,010
|
$2,550,573
|
Depreciation
expense was $348,797, $417,914, and $444,878 for the years ended December 31,
2006, 2005 and 2004, respectively.
5.
NOTES PAYABLE AND LONG-TERM DEBT
On
November 1, 2004, we entered into a Credit Agreement with JPMorgan Chase
(“Chase”) pursuant to which Chase agreed to provide a revolving credit facility
of up to $3,000,000. The revolver bears interest at prime less .5% (7.75% at
December 31, 2006) or LIBOR plus 1.35%, matures on October 6, 2008, and is
collateralized by inventory and accounts receivable.
At
December 31, 2006 and 2005, there were no amounts outstanding under the above
agreement and other long-term debt.
The
terms
of the Credit Facility contain various covenants which, among other things,
require us to meet a specific debt service coverage ratio and limit capital
expenditures. We are prohibited from incurring indebtedness except as permitted
by the terms of the Credit Facility, from entering into any new business or
making material changes in any of our business objectives, purposes or
operations. We also have an affirmative duty to disclose any covenant violation
to the lender.
6.
CAPITAL LEASE OBLIGATIONS
We
lease
certain licensed software under a capital lease agreement. The asset subject
to
the agreement totaling $402,201 is included in other assets as of December
31,
2006. The asset will be reclassified into property and equipment once the
conversion and implementation process is completed.
At
December 31, 2006 and 2005, the amounts outstanding under capital lease
obligations consisted of the following:
|
2006
|
2005
|
|
|
Capital
Lease secured by certain licensed software - total monthly principal
payments of $11,172, no interest, maturing October 2007
|
$111,723
|
$245,789
|
|
Less
- Current maturities
|
111,723
|
134,067
|
|
$
-
|
$111,722
|
7.
EMPLOYEE BENEFIT AND SAVINGS PLANS
We
have
an Employee Stock Ownership Plan (the "Plan") for employees with at least one
year of service (as defined by the Plan) and who have reached their 21st
birthday. Under the Plan, we make annual cash or stock contributions to a trust
for the benefit of eligible employees. As of December 31, 2006, 229 employees
and former employees were participants in or beneficiaries of the ESOP. The
trust invests in shares of our common stock. The amount of our annual
contribution is discretionary. Benefits under the Plan are 100% vested after
three years of service and are payable upon death, disability or retirement.
Vested benefits are payable upon termination of employment.
We
apply
Statement of Position 93-6 (SOP 93-6), "Employers’ Accounting for Employee Stock
Ownership Plans," of the Accounting Standards Division of the American Institute
of CPAs. During 2006, 2005, and 2004, respectively, we contributed $225,350;
$300,000; and $250,000 in cash as current year contributions to the plan and
recognized compensation expense related to these payments.
The
following table summarizes the number of shares held by the Plan and the market
value as of December 31, 2006, 2005, and 2004:
|
Number
of Shares
|
Market
Value
|
||||||
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
||
|
Allocated
|
929,069
|
943,241
|
948,147
|
$7,497,587
|
$6,461,201
|
$3,365,922
|
|
|
Unearned
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Total
|
929,069
|
948,147
|
948,147
|
$7,497,587
|
$6,461,201
|
$3,365,922
|
|
In
December 2006, the Board of Directors decided to terminate the Plan effective
December 31, 2006. As a result, all participants became 100% vested in their
accounts. No further contributions will be made to the Plan. The accounts will
be distributed to participants upon receipt of the appropriate determination
letter from the Internal Revenue Service regarding the Plan
termination.
Beginning
in 2006, we have a 401(k) plan to provide retirement benefits for our employees.
As allowed under Section 401(k) of the Internal Revenue Code, the plan provides
tax-deferred salary contributions for eligible employees and allows employees
to
contribute a percentage of their annual compensation to the Plan on a pretax
basis. Employee contributions are limited to a maximum annual amount as set
periodically by the Internal Revenue Code. We match pretax employee
contributions up to 50% of the first 4% of eligible earnings that are
contributed by employees. Therefore, the maximum matching contribution that
we
may allocate to each participant’s account will not exceed $4,400 for the 2006
calendar year due to the $220,000 annual limit on eligible earnings imposed
by
the Internal Revenue Code. All matching contributions vest over 6 years from
the
date of hire. Our matching contribution to the plan totaled $108,565 in
2006.
The
plan
allows employees who meet the age requirements and reach the plan contribution
limits to make a catch-up contribution. The catch-up contributions are not
eligible for matching contributions. In addition, the plan provides for
discretionary matching contributions as determined by the Board of Directors.
There were no discretionary matching contributions made in 2006.
We
currently offer no postretirement or postemployment benefits to our
employees.
8.
INCOME TAXES
The
provision for income taxes consists of the following:
|
2006
|
2005
|
2004
|
||||
|
Current
provision:
|
||||||
|
Federal
|
$2,167,141
|
$1,932,791
|
$1,380,951
|
|||
|
State
|
198,676
|
242,725
|
139,933
|
|||
|
2,365,817
|
2,175,516
|
1,520,884
|
||||
|
Deferred
provision (benefit):
|
||||||
|
Federal
|
19,447
|
(166,850)
|
33,483
|
|||
|
State
|
3,775
|
(14,467)
|
5,238
|
|||
|
23,222
|
(181,317)
|
38,721
|
||||
|
$2,389,039
|
$1,994,199
|
$1,559,605
|
Income
before income taxes is earned in the following tax jurisdictions:
|
2006
|
2005
|
2004
|
|||
|
United
States
|
$6,560,994
|
$5,220,991
|
$
4,078,434
|
||
|
Canada
|
605,111
|
486,922
|
135,212
|
||
|
$7,166,105
|
$5,707,913
|
$
4,213,646
|
The
income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities are as
follows:
|
2006
|
2005
|
||
|
Deferred
income tax assets:
|
|||
|
Allowance
for doubtful accounts
|
$49,601
|
$45,665
|
|
|
Capitalized
inventory costs
|
131,054
|
134,466
|
|
|
Warrants
|
42,989
|
41,498
|
|
|
Accrued
expenses, reserves, and other
|
85,363
|
93,741
|
|
|
Total
deferred income tax assets
|
309,007
|
315,370
|
|
|
Deferred
income tax liabilities:
|
|||
|
Property
and equipment depreciation
|
197,287
|
193,337
|
|
|
Goodwill
and other intangible assets amortization
|
67,323
|
54,414
|
|
|
Total
deferred income tax liabilities
|
264,610
|
247,751
|
|
|
Net
deferred tax asset (liability)
|
$44,397
|
$67,619
|
The
net
deferred tax liability is classified on the balance sheets as
follows:
|
2006
|
2005
|
||
|
Current
deferred tax assets
|
$266,018
|
$273,872
|
|
|
Long-term
deferred tax liabilities
|
(221,621)
|
(206,253)
|
|
|
Net
deferred tax asset (liability)
|
$44,397
|
$67,619
|
The
effective tax rate differs from the statutory rate as follows:
|
2006
|
2005
|
2004
|
||
|
Statutory
rate
|
34%
|
34%
|
34%
|
|
|
State
and local taxes
|
2%
|
4%
|
4%
|
|
|
Other
|
(3%)
|
(3%)
|
(1%)
|
|
|
Effective
rate
|
33%
|
35%
|
37%
|
9.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
Our
primary office facility and warehouse are leased under a five-year lease
agreement that expires in March 2008. Rental agreements for the stores and
warehouse distribution units expire on dates ranging from March 2007 to February
2012. Rent expense on all operating leases for the years ended December 31,
2006, 2005, and 2004, was $2,495,380, $2,227,345 and $1,994,030,
respectively.
Future
minimum lease payments under noncancelable operating leases at December 31,
2006
were as follows:
|
Year
ending December 31:
|
|
|
2007
|
$2,370,711
|
|
2008
|
1,627,040
|
|
2009
|
1,088,361
|
|
2010
|
693,082
|
|
2011
and thereafter
|
271,031
|
|
Total
minimum lease payments
|
$6,050,225
|
Litigation
We
are
involved in various litigation that arise in the ordinary course of business
and
operations. There are no such matters pending that we expect to have a material
impact on our financial position and operating results.
10.
SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK
Major
Customers
Our
revenues are derived from a diverse group of customers primarily involved in
the
sale of leathercrafts. While no single customer accounts for more than 10%
of
our consolidated revenues in 2006, 2005 and 2004, sales to our five largest
customers represented 9.5%, 9.4% and 10.6%, respectively, of consolidated
revenues in those years. While we do not believe the loss of one of these
customers would have a significant negative impact on our operations, we do
believe the loss of several of these customers simultaneously or a substantial
reduction in sales generated by them could temporarily affect our operating
results.
Major
Vendors
We
purchase a significant portion of our inventory through one supplier. Due to
the
number of alternative sources of supply, loss of this supplier would not have
an
adverse impact on our operations.
Credit
Risk
Due
to
the large number of customers comprising our customer base, concentrations
of
credit risk with respect to customer receivables are limited. At December 31,
2006 and 2005, 38% and 19%, respectively, of our consolidated accounts
receivable were due from two nationally recognized retail chains. We do not
generally require collateral for accounts receivable, but we do perform periodic
credit evaluations of our customers and believe the allowance for doubtful
accounts is adequate. It is our opinion that if any one or a group of customer
receivable balances should be deemed uncollectable, it would not have a material
adverse effect on our results of operations and financial
condition.
We
maintain our cash in bank deposit accounts that, at times, may exceed federally
insured limits. We have not experienced any losses in such accounts. We believe
we are not exposed to any significant credit risk on our cash and cash
equivalents.
11.
STOCKHOLDERS' EQUITY
| (a) |
Stock
Option Plans
|
| · |
1995
Stock Option Plan
|
In
connection with the 1995 Stock Option Plan for officers and key management
employees, we have outstanding options to purchase our common stock. The
plan
provides for the granting of either qualified incentive stock options or
non-qualified options at the discretion of the Stock Option Committee of
the
Board of Directors. Options are granted at the fair market value of the
underlying common stock at the date of grant and vest over a five-year period.
We reserved 1,000,000 shares of common stock for issuance under this plan.
The
plan expired in the 4th quarter of 2005 with 20,000 ungranted options
remaining.
| · |
1995
Director Non-Qualified Stock Option
Plan
|
In
connection with the 1995 Director Non-qualified Stock Option Plan for
non-employee directors, we have outstanding options to purchase our common
stock. The plan provides for the granting of non-qualified options at the
discretion of the Directors Stock Option Committee of the Board of Directors.
Options are granted at the fair market value of the underlying common stock
at
the date of grant and vest after six months. We reserved 100,000 shares of
common stock for issuance under this plan. The plan expired in the 4th quarter
of 2005 with 18,000 ungranted options remaining.
| · |
Stock
Option Summary
|
All
options expire ten years from the date of grant and are exercisable at any
time
after vesting. Of the combined 1,100,000 shares available for issuance under
the
two plans, at December 31, 2006, 2005 and 2004, there were 0, 44,000, and
40,000, respectively, in un-optioned shares available for future
grants.
A
summary
of stock option transactions for the years ended December 31, 2006, 2005, and
2004, is as follows:
|
|
2006
|
2005
|
2004
|
|||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||
|
Average
|
Average
|
Average
|
||||||||||
|
Option
|
Exercise
|
Option
|
Exercise
|
Option
|
Exercise
|
|||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||
|
Outstanding
at January 1
|
421,000
|
$1.93
|
602,500
|
$1.630
|
675,200
|
$1.540
|
||||||
|
Granted
|
-
|
-
|
8,000
|
4.960
|
18,000
|
3.598
|
||||||
|
Forfeited
or expired
|
-
|
-
|
(12,000)
|
|
1.350
|
(18,000)
|
1.350
|
|||||
|
Exchanged
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exercised
|
(124,800)
|
1.63
|
(177,500)
|
1.081
|
(72,700)
|
1.053
|
||||||
|
Outstanding
at December 31
|
296,200
|
$2.05
|
421,000
|
$1.930
|
602,500
|
$1.630
|
||||||
|
Exercisable
at end of year
|
266,200
|
$1.82
|
295,000
|
$1.670
|
354,500
|
$1.320
|
||||||
|
Weighted-average
fair value of
|
||||||||||||
|
options
granted during year
|
-
|
$1.48
|
$1.20
|
|||||||||
The
following table summarizes outstanding options into groups based upon exercise
price ranges at December 31, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||
|
Option
|
Exercise
|
Maturity
|
Option
|
Exercise
|
Maturity
|
|||||||
|
Exercise
Price Range
|
Shares
|
Price
|
(Years)
|
Shares
|
Price
|
(Years)
|
||||||
|
$0.75
or Less
|
4,000
|
$0.595
|
2.24
|
4,000
|
$0.595
|
2.24
|
||||||
|
$0.76
to $1.125
|
42,000
|
$0.943
|
3.70
|
42,000
|
$0.943
|
3.70
|
||||||
|
$1.126
to $1.69
|
165,700
|
$1.350
|
4.40
|
165,700
|
$1.350
|
4.40
|
||||||
|
$1.70
to $2.55
|
2,000
|
$1.900
|
4.74
|
2,000
|
$1.900
|
4.74
|
||||||
|
$2.56
to $3.84
|
12,000
|
$3.270
|
7.31
|
6,000
|
$3.160
|
6.99
|
||||||
|
$3.85-$4.96
|
70,500
|
$4.241
|
6.89
|
46,500
|
$4.241
|
6.98
|
||||||
|
296,200
|
$2.050
|
4.99
|
266,200
|
$1.820
|
4.77
|
|||||||
| (b) |
Warrants
|
Warrants
to acquire up to 100,000 shares of common stock at $3.10 per share were issued
in conjunction with a consulting agreement to an unrelated entity in February
2003. The warrants may be exercised at anytime until expiration on February
12,
2008.
Warrants
to acquire up to 50,000 shares of common stock at $5.00 per share were issued
in
conjunction with a consulting agreement to an unrelated entity in February
2004.
The warrants may be exercised at anytime until expiration on February 24, 2009.
A
summary
of warrant transactions for the years ended December 31, 2006, 2005, and 2004,
is as follows:
|
|
2006
|
2005
|
2004
|
|||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||
|
Average
|
Average
|
Average
|
||||||||||
|
Option
|
Exercise
|
Option
|
Exercise
|
Option
|
Exercise
|
|||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||
|
Outstanding
at January 1
|
140,000
|
3.7786
|
150,000
|
3.7333
|
100,000
|
3.1000
|
||||||
|
Granted
|
-
|
-
|
-
|
-
|
50,000
|
5.0000
|
||||||
|
Forfeited
or expired
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exchanged
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exercised
|
(41,700)
|
4.089
|
(10,000)
|
3.1000
|
-
|
-
|
||||||
|
Outstanding
at December 31
|
98,300
|
3.650
|
140,000
|
3.7786
|
150,000
|
3.7333
|
||||||
|
Exercisable
at end of year
|
98,300
|
3.650
|
140,000
|
3.7786
|
150,000
|
3.7333
|
||||||
|
Weighted-average
fair value of
|
||||||||||||
|
warrants
granted during year
|
-
|
-
|
$
0.98
|
|||||||||
The
following table summarizes outstanding warrants into groups based upon exercise
price ranges at December 31, 2006:
|
Warrants
Outstanding
|
Warrants
Exercisable
|
|||||||||||
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
|||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||
|
Exercise
|
Maturity
|
|
Exercise
|
Maturity
|
||||||||
|
Exercise
Price Range
|
Warrant
|
Price
|
(Years)
|
Warrant
|
Price
|
(Years)
|
||||||
|
$3.00
or Less
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
More
than $3.00 and
|
||||||||||||
|
Less
Than $5.00
|
70,000
|
$3.100
|
1.12
|
70,000
|
$3.100
|
1.12
|
||||||
|
$5.00
or More
|
28,300
|
$5.000
|
2.15
|
28,300
|
$5.000
|
2.15
|
||||||
|
98,300
|
$3.650
|
1.42
|
98,300
|
$3.650
|
1.42
|
|||||||
12.
BUSINESS ACQUISITIONS
During
2004, we acquired certain assets of the following entities for a total purchase
price of $156,452:
|
Entity
|
Location
|
Date
of acquisition
|
|
Robyn's
LLC
|
Syracuse,
NY
|
January
2004
|
|
Hawkins
Handcrafted Leathers
|
St.
Louis, MO
|
February
2004
|
|
Santa
Fe Hides & Trappings
|
Santa
Fe, NM
|
July
2004
|
All
of
the acquired entities were formerly operated as independent retail leathercraft
stores. The assets purchased in these acquisitions consisted primarily of
inventory, store furniture and fixtures, and equipment. Goodwill recognized
in
these transactions amounted to $30,577, and is reported in the Retail
Leathercraft segment. We also entered into non-compete agreements with the
former owners totaling $26,000 for periods ranging from one to five
years.
On
November 30, 2004, we acquired all of the issued and outstanding shares of
capital stock of 1124055 Ontario Inc., a Canadian corporation, and its
wholly-owned subsidiary, Heritan Ltd. The total purchase price was approximately
$400,000 which was funded with cash generated from operations. For financial
reporting purposes, the transaction was accounted for under the purchase method,
effective December 1, 2004.
In
the
first quarter of 2007, we acquired all of the issued and outstanding shares
of
capital stock of Mid-Continent Leather Sales Company, an Oklahoma corporation.
The total purchase price was approximately $575,000 which was funded with cash
generated from operations. We also entered into a non-compete agreement with
the
former owner totaling $75,000 for five years. This company will be included
in
our Wholesale Leathercraft segment beginning in 2007.
13.
SEGMENT INFORMATION
We
identify our segments based on the activities of three distinct operations:
| · |
Wholesale
Leathercraft,
which consists of a chain of wholesale stores operating under the
name,
The
Leather Factory,
located in the United States and Canada;
|
| · |
Retail
Leathercraft,
which consists of a chain of retail stores operating under the name,
Tandy
Leather Company,
located in the United States and Canada;
and
|
| · |
Other,
which is a supplier of decorative hat trims sold directly to hat
manufacturers.
|
Our
reportable operating segments have been determined as separately identifiable
business units. We measure segment earnings as operating earnings, defined
as
income before interest and income taxes.
|
Wholesale
Leathercraft
|
Retail
Leathercraft
|
Other
|
Total
|
|
|
For
the year ended December 31, 2006
|
||||
|
Net
Sales
|
$31,068,188
|
$22,520,461
|
$1,610,372
|
$55,199,021
|
|
Gross
Profit
|
17,463,398
|
13,690,030
|
479,342
|
31,632,770
|
|
Operating
earnings
|
4,814,240
|
2,310,073
|
(56,599)
|
7,067,714
|
|
Interest
expense
|
-
|
-
|
-
|
-
|
|
Other,
net
|
118,381
|
(21,220)
|
1,230
|
98,391
|
|
Income
before income taxes
|
4,932,621
|
2,288,853
|
(55,369)
|
7,166,105
|
|
Depreciation
and amortization
|
245,838
|
141,070
|
6,007
|
392,915
|
|
Fixed
asset additions
|
298,689
|
172,902
|
162
|
471,753
|
|
Total
assets
|
$26,529,796
|
$5,112,188
|
$274,651
|
$31,916,635
|
|
For
the year ended December 31, 2005
|
||||
|
Net
Sales
|
$31,046,268
|
$18,023,214
|
$1,650,092
|
$50,719,574
|
|
Gross
Profit
|
17,152,549
|
11,142,350
|
460,145
|
28,755,044
|
|
Operating
earnings
|
3,721,891
|
1,766,960
|
84,560
|
5,573,411
|
|
Interest
expense
|
3,188
|
-
|
-
|
3,188
|
|
Other,
net
|
(126,040)
|
(11,650)
|
-
|
(137,690)
|
|
Income
before income taxes
|
3,844,743
|
1,778,610
|
84,560
|
5,707,913
|
|
Depreciation
and amortization
|
323,881
|
125,493
|
7,332
|
456,706
|
|
Fixed
asset additions
|
131,603
|
136,630
|
4,593
|
272,826
|
|
Total
assets
|
$20,999,477
|
$3,896,291
|
$784,705
|
$25,680,473
|
|
For
the year ended December 31, 2004
|
||||
|
Net
Sales
|
$30,630,122
|
$13,515,662
|
$2,000,500
|
$46,146,284
|
|
Gross
Profit
|
16,485,052
|
8,348,616
|
606,377
|
25,440,045
|
|
Operating
earnings
|
3,013,316
|
1,210,566
|
34,564
|
4,258,446
|
|
Interest
expense
|
53,400
|
-
|
-
|
53,400
|
|
Other,
net
|
(6,748)
|
(1,852)
|
-
|
(8,600)
|
|
Income
before income taxes
|
2,966,664
|
1,212,418
|
34,564
|
4,213,646
|
|
Depreciation
and amortization
|
363,878
|
80,045
|
8,730
|
452,653
|
|
Fixed
asset additions
|
226,095
|
127,086
|
16,378
|
369,559
|
|
Total
assets
|
$17,991,403
|
$3,372,812
|
$802,918
|
$22,167,163
|
Net
sales
for geographic areas was as follows:
|
2006
|
2005
|
2004
|
|
|
United
States
|
$49,188,609
|
$45,492,215
|
$42,485,339
|
|
Canada
|
4,287,180
|
3,643,133
|
2,112,601
|
|
All
other countries
|
1,723,232
|
1,584,226
|
1,548,344
|
|
$55,199,021
|
$50,719,574
|
$46,146,284
|
Geographic
sales information is based on the location of the customer. Net sales from
no
single foreign country, except for Canada, was material to our consolidated
net
sales for the years ended December 31, 2006, 2005 and 2004. We do not have
any
significant long-lived assets outside of the United States.
14.
RECENT ACCOUNTING PRONOUNCEMENTS
In
July
2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which
seeks to reduce the diversity in practice associated with the accounting and
reporting for uncertainty in income tax provisions. This interpretation
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. FIN 48 is effective for fiscal
years
beginning after December 15, 2006 and we will adopt the new requirements in
the
first quarter of 2007. The cumulative effects, if any, of adopting FIN 48 will
be recorded as an adjustment to retained earnings as of the beginning of the
period of adoption. We have not determined the impact, if any, of adopting
FIN
48 on our consolidated financial statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value measurements. SFAS
157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Early adoption
is permitted. We must adopt these new requirements no later than the first
quarter of 2008. We have not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS 157, or if we will adopt
the
requirements prior to the first quarter of 2008.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”). The intent of
SAB 108 is to reduce diversity in practice for the method companies use to
quantify financial statement misstatements, including the effect of prior year
uncorrected errors. SAB 108 establishes an approach that requires quantification
of financial statement errors using both an income statement and cumulative
balance sheet approach. SAB 108 is effective for fiscal years beginning after
November 15, 2006, and we will adopt the new requirements in 2007. The adoption
of SAB 108 is not currently expected to have a significant impact on our
consolidated financial statements.
15.
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
||
|
2006
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|
|
Net
sales
|
$14,413,649
|
$13,393,082
|
$12,559,593
|
$14,832,697
|
|
|
Gross
profit
|
8,114,134
|
7,722,301
|
7,071,414
|
8,724,921
|
|
|
Net
income
|
1,346,263
|
1,132,494
|
890,419
|
1,407,891
|
|
|
Net
income per common share:
|
|||||
|
Basic
|
0.13
|
0.11
|
0.08
|
0.13
|
|
|
Diluted
|
0.12
|
0.10
|
0.08
|
0.13
|
|
|
Weighted
average number of common shares outstanding:
|
|
Basic
|
10,756,745
|
10,790,661
|
10,818,130
|
10,807,316
|
||
|
Diluted
|
11,102,906
|
11,112,475
|
11,102,383
|
11,113,855
|
||
|
First
|
Second
|
Third
|
Fourth
|
|||
|
2005
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||
|
Net
sales
|
$12,707,516
|
$12,181,699
|
$11,777,133
|
$14,053,226
|
||
|
Gross
profit
|
7,157,283
|
6,899,872
|
6,763,802
|
7,934,087
|
||
|
Net
income
|
1,049,222
|
787,669
|
696,090
|
1,180,733
|
||
|
Net
income per common share:
|
||||||
|
Basic
|
0.10
|
0.07
|
0.07
|
0.11
|
||
|
Diluted
|
0.10
|
0.07
|
0.06
|
0.11
|
||
|
Weighted
average number of common shares outstanding:
|
|||||
|
Basic
|
10,584,244
|
10,615,802
|
10,679,389
|
10,735,702
|
|
|
Diluted
|
10,911,103
|
10,955,282
|
11,029,840
|
11,047,426
|
PUBLIC
ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
Tandy
Leather Factory, Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Tandy Leather Factory,
Inc. and Subsidiaries (the Company) as of December
31, 2006
and
2005,
and the
related consolidated statements of income, stockholders’ equity and cash flows
for each of the years in the three-year period ended December
31, 2006.
These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as
of
December
31, 2006,
2005
and
2004
and the
consolidated results of its operations and its cash flows for each of the
years
in the three-year period ended December
31, 2006,
in
conformity with accounting principles generally accepted in the United States
of
America.
As
discussed in Note 2 to the financial statements, in 2006 the Company
adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment."
WEAVER
AND TIDWELL, L.L.P.
Fort
Worth, Texas
March
26,
2007
None
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2006. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required
to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of
our
disclosure controls and procedures as of December 31, 2006, our chief executive
officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at a reasonable assurance
level.
We
maintain certain internal controls over financial reporting that are
appropriate, in management’s judgment with similar cost-benefit considerations,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. No change in our internal control
over financial reporting occurred during the fiscal year ended December 31,
2006
that has materially affected, or is reasonably likely to affect, our internal
control over financial reporting.
None
PART
III
Certain
information required by Part III is omitted from this annual report as we will
file a proxy statement for our 2007 Annual Meeting of Stockholders, pursuant
to
Regulation 14A of the Securities Exchange Act of 1934, as amended, not later
than 120 days after the end of our fiscal year covered by this Report, and
certain information included in that proxy statement is incorporated herein
by
reference.
The
information required by this item is contained under the heading "Executive
Officers of the Registrant" in Part I of this Annual Report on Form 10-K, and
the remainder is contained in our proxy statement for our 2007 Annual Meeting
of
Stockholders under the heading "Election of Directors," and is incorporated
herein by reference. Information relating to filings on Forms 3, 4 and 5 will
be
contained in our 2007 proxy statement under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance," and is incorporated herein by
reference. Information required by this item pursuant to Items 401(h), 401(i)
and 401(j) of Regulation S-K relating to an audit committee financial expert,
the identification of the audit committee of our board of directors and
procedures of security holders to recommend nominees to our board of directors
will be contained in our 2007 proxy statement under the heading "Corporate
Governance" and is incorporated herein by reference.
We
have
adopted a written code of ethics that applies to our employees, including our
principal executive officer principal financial officer, principal accounting
officer, controller, or persons performing similar functions. It is available
on
our website (http://www.tandyleather.com).
The
information required by this item is contained in our proxy statement for our
2007 Annual Meeting of Stockholders under the heading "Report of the
Compensation Committee,” which is incorporated herein by reference.
The
information required by this item is contained in our proxy statement for our
2007 Annual Meeting of Stockholders under the headings "Stock Ownership by
Directors and Executive Officers” and “Principal Holders of Stock,” which is
incorporated herein by reference.
The
information required by this item is contained in our proxy statement for our
2007 Annual Meeting of Stockholders under the heading “Other Relationships
Involving Directors, Executive Officers, or their Associates” and is
incorporated herein by reference.
The
information required by this item is contained in our proxy statement for our
2007 Annual Meeting of Stockholders under the headings "Audit Committee” and
“Report of the Audit Committee” and is incorporated herein by
reference.
PART
IV
(a) The
following are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
The
following consolidated financial statements are included in Item 8:
| · |
Consolidated
Balance Sheets at December 31, 2006 and
2005
|
| · |
Consolidated
Statements of Income for the years ended December 31, 2006, 2005
and
2004
|
| · |
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and
2004
|
| · |
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2006,
2005 and 2004
|
2.
Financial Statement Schedules
All
financial statement schedules are omitted because the required information
is
not present or not present in sufficient amounts to require submission of the
schedule or because the information is reflected in the consolidated financial
statements or notes thereto.
3.
Exhibits
The
exhibits listed in the Exhibit Index immediately preceding such exhibits are
filed as part of this Annual Report on Form 10-K.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
TANDY
LEATHER
FACTORY, INC.
|
By:
|
/s/
Ronald C. Morgan
|
|
|
Ronald
C. Morgan
|
||
|
Chief
Executive Officer and President
|
||
|
By:
|
/s/
Shannon L. Greene
|
|
|
Shannon
L. Greene
|
||
|
Chief
Financial Officer, Chief Accounting Officer and
Treasurer
|
Dated:
March 27, 2007
In
accordance with the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of Tandy Leather Factory, Inc. and
in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
Wray Thompson
|
Chairman
of the Board and Director
|
March
27, 2007
|
|
Wray
Thompson
|
||
|
/s/
Ronald C. Morgan
|
Chief
Executive Officer, President and Director
|
March
27, 2007
|
|
Ronald
C. Morgan
|
||
|
/s/
Shannon L. Greene
|
Chief
Financial Officer, Chief Accounting Officer,
|
March
27, 2007
|
|
Shannon
L. Greene
|
Treasurer
and Director
|
|
|
/s/
T. Field Lange
|
Director
|
March
27, 2007
|
|
T.
Field Lange
|
||
|
/s/
Joseph R. Mannes
|
Director
|
March
27, 2007
|
|
Joseph
R. Mannes
|
||
|
/s/
L. Edward Martin III
|
Director
|
March
27, 2007
|
|
L.
Edward Martin III
|
||
|
/s/
Robin L. Morgan
|
Vice
President and Assistant Secretary
|
March
27, 2007
|
|
Robin
L. Morgan
|
||
|
/s/
Michael A. Nery
|
Director
|
March
27, 2007
|
|
Michael
A. Nery
|
||
|
/s/
William M. Warren
|
Secretary
|
March
27, 2007
|
|
William
M. Warren
|
|
TANDY
LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT
INDEX
|
|
|
Exhibit
Number
|
Description
|
|
3.1
|
Certificate
of Incorporation of The Leather Factory, Inc., and Certificate of
Amendment to Certificate of Incorporation of The Leather Factory,
Inc.
filed as Exhibit 3.1 to Form 10-Q filed by Tandy Leather Factory,
Inc.
with the Securities and Exchange Commission on August 12, 2005 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
|
Financial
Advisor’s Warrant Agreement, dated February 24, 2004, 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, 2004 and incorporated by reference
herein.
|
|
10.1
|
Credit
Agreement, dated as of October 6, 2004, made by 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.
|
|
10.2
|
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.
|
|
10.3*
|
Consultation
Agreement, dated January 1, 2007, between Tandy Leather Factory,
Inc. and
J. Wray Thompson.
|
|
14.1
|
Code
of Business Conduct and Ethics of The Leather Factory, Inc., adopted
by
the Board of Directors on February 26, 2004, filed as Exhibit 14.1
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.
|
|
21.1
|
Subsidiaries
of Tandy Leather Factory, Inc. filed as Exhibit 21.1 to the Annual
Report
on Form 10-K of The Leather Factory, Inc. for the year ended December
31,
2002 filed with the Securities and Exchange Commission on March 28,
2003,
and incorporated by reference herein.
|
|
*23.1
|
Consent
of Weaver & Tidwell LLP dated March 26, 2007
|
|
*31.1
|
13a-14(a)
Certification by Ronald C. Morgan, Chief Executive Officer and
President
|
|
*31.2
|
13a-14(a)
Certification by Shannon Greene, Chief Financial Officer and
Treasurer
|
|
*32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
|
______________
|
|
|
*Filed
herewith.
|