TANDY LEATHER FACTORY INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
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
For the fiscal year ended December 31,
2008
OR
[
] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to ________
|
Commission
File Number 1-12368
|
|
Tandy Leather Factory,
Inc.
|
|
(exact
name of registrant as specified in its
charter)
|
|
Delaware
|
75-2543540
|
|
|
(State
or other jurisdiction of incorporation)
|
(IRS
Employer Identification Number)
|
|
|
1900
Southeast Loop 820, Fort Worth, TX 76140
|
817/872-3200
|
|
|
(Address
of principal executive offices)
|
(Registrant’s
telephone number, including area code)
|
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name of Each Exchange on Which
Registered
|
|
|
Common
Stock, par value $0.0024
|
NYSE
Amex
|
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. [ ]
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]
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 $22,193,469 at June 30, 2008 (the last business day
of its most recently completed second fiscal quarter). At March 10,
2009, there were 10,664,555 shares of the registrant's common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2009, are incorporated by reference in Part
III of this report.
|
Item
|
Page
|
|
|
Part
1
|
||
|
1
|
1
|
|
|
1A
|
5
|
|
|
2
|
6
|
|
|
3
|
7
|
|
|
4
|
7
|
|
|
Part
II
|
||
|
5
|
7
|
|
|
6
|
8
|
|
|
7
|
8
|
|
|
7A
|
12
|
|
|
8
|
13
|
|
|
9
|
28
|
|
|
9A
|
28
|
|
|
9B
|
28
|
|
|
Part
III
|
||
|
10
|
28
|
|
|
11
|
28
|
|
|
12
|
28
|
|
|
13
|
28
|
|
|
14
|
28
|
|
|
Part
IV
|
||
|
15
|
29
|
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 2008, our
consolidated sales totaled $53.2 million of which approximately 13% were export
sales. We maintain our principal offices at 1900 Southeast Loop 820,
Fort Worth, Texas 76140. Our common stock trades on the NYSE Amex
(formerly 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
We have
expanded our wholesale chain by opening new stores and by 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 27 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 10. We also opened our thirtieth Leather Factory store
- our third in Canada. In 2003, we opened 12 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 11 Tandy Leather retail stores and
converted one wholesale store to a retail store. In 2007, we
purchased one independent leathercraft store and opened an additional nine
retail stores – eight in the U.S. and one in Canada. We also
purchased Mid-Continent Leather Sales, Inc., a competitor located in Oklahoma,
which became our thirtieth wholesale store. In 2008, we opened one
retail store in the U.S. and one combination wholesale and retail store in
Northampton, United Kingdom.
At
December 31, 2008, we operated 30 wholesale stores – 29 operating under the
Leather Factory name (26 in the U.S. and three in Canada) and one operating
under the Mid-Continent Leather Sales name. We also operated 73
retail stores operating under the Tandy Leather name (67 in the U.S. and six in
Canada) as well as one combination wholesale and retail store operating under
the Tandy Leather Factory name in the United Kingdom. Finally, we
also own and operate Roberts, Cushman and Company, Inc., a distributor 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 2008.
STORE
COUNT
YEARS
ENDED DECEMBER 31, 1999 through 2008
|
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
|
|
2007
|
1^
|
0
|
30
|
10
|
0
|
72
|
|
2008
|
0
|
0
|
30
|
1
|
0
|
73
|
(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
which was closed in 2002.
(^) Wholesale
store operating as Mid-Continent Leather Sales
No single
customer’s purchases represent more than 5% of our total sales in
2008. Sales to our five largest customers combined to represent 6.2%,
8.3% and 9.5%, respectively, of consolidated sales in 2008, 2007 and
2006. 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 four
divisions. We identify those divisions based on management
responsibility and customer focus. The Wholesale Leathercraft
division consists of thirty wholesale stores of which 27 are located in the
United States and three are located in Canada. As of March 1, 2009,
the Retail Leathercraft division consists of 74 Tandy Leather retail stores of
which 68 are located in the United States and six are located in
Canada. Both of these divisions sell leather and leathercraft-related
products. The International Leathercraft division consists of all
stores, wholesale or retail, located outside of North
America. Currently, we have one such store located in the United
Kingdom. Our fourth 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
$26.4 million, $29.6 million and $31.0 million for 2008, 2007 and 2006,
respectively. The wholesale stores operate under the name “The
Leather Factory”, with the exception of the one store we acquired in February
2007 which operates under the name “Mid-Continent Leather Sales.”
General We operate wholesale
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 our wholesale stores 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.
Our
wholesale 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
our 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.tandyleatherfactory.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 Our
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 business,
although retail customers may purchase products from our wholesale
stores. The Wholesale Leathercraft division’s 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 submit an application 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. Our
wholesale stores service 151 ASC's: 87 located in the U.S., 42
located in Canada, and 22 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 products 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.
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
2008 and 2007, Wholesale Leathercraft division sales by product category were as
follows:
|
Product Category
|
2008 Sales Mix
|
2007 Sales Mix
|
|
|
Belts
strips and straps
|
2%
|
3%
|
|
|
Books,
patterns, videos
|
1%
|
2%
|
|
|
Buckles
|
4%
|
4%
|
|
|
Conchos^
|
5%
|
4%
|
|
|
Craft
supplies
|
6%
|
4%
|
|
|
Custom
tools and hardware
|
0%
|
0%
|
|
|
Dyes,
finishes, glues
|
6%
|
5%
|
|
|
Hand
tools
|
12%
|
12%
|
|
|
Hardware
|
7%
|
8%
|
|
|
Kits
|
8%
|
7%
|
|
|
Lace
|
9%
|
10%
|
|
|
Leather
|
36%
|
37%
|
|
|
Stamping
tools
|
4%
|
4%
|
|
|
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 2008 and 2007, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Suppliers We purchase merchandise
and raw materials from approximately 200 vendors dispersed throughout the United
States and in approximately 15 foreign countries. In 2008, our ten largest
vendors accounted for approximately 70% 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 wholesale 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 2,800 items in the current lines of
leather and leather-related merchandise. All items are offered in all
stores.
Expansion Our
wholesale store 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 wholesale (Leather
Factory) store to a retail (Tandy Leather) store in 2006, reducing the number of
wholesale stores to29. We acquired Mid-Continent Leather Sales in
2007, a wholesale store located in Oklahoma, increasing the number of wholesale
stores to 30. 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 $25.2 million, $24.7 million and $22.5 million for 2008, 2007 and 2006,
respectively.
General As
of March 1, 2009, the Tandy Leather retail chain has 74 stores located in 35
states and five 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 retail 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 our website, www.tandyleatherfactory.com. Our retail
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 2008 sales. Youth groups, summer camps, schools and a
limited number of wholesale customers complete our customer
base. Like the wholesale stores, the retail stores fill orders as
they are received, and there is no order backlog. The retail stores
maintain reasonable amounts of inventory to fill these orders. Tandy
Leather’s retail store operations historically generate slightly more sales in
the fourth 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 2008 and 2007, Retail
Leathercraft division sales by product category were as follows:
|
Product Category
|
2008 Sales Mix
|
2007 Sales Mix
|
|
|
Belts
strips and straps
|
4%
|
4%
|
|
|
Books,
patterns, videos
|
3%
|
3%
|
|
|
Buckles
|
4%
|
4%
|
|
|
Conchos
|
4%
|
4%
|
|
|
Craft
supplies
|
4%
|
3%
|
|
|
Dyes,
finishes, glues
|
8%
|
8%
|
|
|
Hand
tools
|
15%
|
16%
|
|
|
Hardwre
|
6%
|
6%
|
|
|
Kits
|
11%
|
11%
|
|
|
Lace
|
4%
|
4%
|
|
|
Leather
|
31%
|
31%
|
|
|
Stamping
tools
|
6%
|
6%
|
|
|
100%
|
100%
|
As
indicated above, the products sold in our retail stores are also sold in our
wholesale stores. Therefore, the discussion above regarding products,
their sources and the working capital requirements for the Wholesale
Leathercraft division also apply to the Retail Leathercraft
division. Sales at the retail stores are generally made through 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 the wholesale stores, the retail stores have 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 retail 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 retail 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 between 100 and 120
stores throughout North America as it makes financial sense to do so. 14 stores
were opened in 2002; 12 stores were opened in 2003; 16 were opened in 2004
(including four in Canada); eight were opened in 2005, 12 were opened in 2006,
ten were opened in 2007 and one was opened in 2008. Of the 72 stores
opened to date, 11 were independent leathercraft stores that we
acquired. Separately, these acquisitions are not
material. The other 62 stores have been de novo stores opened by
us. In 2009, we plan to open four retail stores. We have already
opened one and anticipate the remaining three to be opened in the middle to last
half of the year.
International
Leathercraft
Our
International Leathercraft division consists of company-owned stores located
outside of North America. Currently, we have one wholesale and retail
combination store located in Northampton, United Kingdom, which we opened in
February 2008. It operates under the Tandy Leather Factory trade
name. This segment had net sales of $836,000 in 2008.
Business
Strategy The business concept for our International
Leathercraft division is a blending of our Leather Factory and Tandy Leather
business strategies – the wholesale distribution of leather and related
accessories to retailers, manufacturers and other businesses, as well as the
promotion and continuance of leathercraft through education and development of
the retail customers. The store is located in a 6,600 square foot
building in a light industrial area. We maintain sufficient inventory
so that our customers can purchase the leather, related accessories and supplies
necessary to complete their projects from one supplier. The layout of
the store is such that large quantities of product can be displayed in an easily
accessible and visually appealing manner. The store services walk-in,
mail and phone order customers as well as orders generated from its website,
www.tandyleatherfactory.co.uk. Sales
are driven by the efforts of the store staff, trade shows, and our direct mail
and e-mail marketing programs.
Customers The
growing customer base consists of individuals, wholesale distributors,
equine-related shops, cobblers, dealers, and retailers dispersed geographically
throughout the UK and Europe. Retail sales generally occur via cash
transactions or through national credits cards. We also sell on open
account to selected wholesale customers including dealers, manufacturers, and
retailers. Like our USA stores, our UK store has an unconditional
return policy.
Merchandise The
products sold in our UK store are also sold in our USA
stores. Therefore, the discussion above regarding products, their
sources and the working capital requirements for the Wholesale and Retail
Leathercraft divisions also apply here.
Operations Hours
of operation are 8:00 am to 5:00 pm Monday through Friday, and from 8:00 am to
2:00 pm on Saturdays. Selling prices are consistent with the USA
store pricing, adjusted for currency fluctuation.
Distribution The
UK store receives the majority of its inventory from our central warehouse
located in Fort Worth, Texas, although occasionally, merchandise is shipped
directly from the vendor. Inventory is shipped from our warehouse to
the store several times per month to meet customer demand without sacrificing
inventory turns. Customer orders are filled as received, and we do
not have backlogs.
Expansion We
intend to expand further internationally although have no specific plans or time
frame at this time. We will continue to grow our customer base
throughout Europe as well as other parts of the world so that we can support
additional stores.
Other
Roberts,
Cushman, founded in 1856, supplies made-to-order trimmings to the headwear
industry. This segment had net sales of $745,000, $1.1 million, and
$1.7 million for 2008, 2007 and 2006, respectively. This segment is
immaterial to our overall business strategy.
For more
information about our business and our reportable segments, see Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” on page 8.
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, 2008,
we employed 458 people, 367 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 14 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 100 F Street, NE, 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 as of
March 27, 2009:
|
Name and Age
|
Position
and Business Experience During Past Five Years
|
Served as Officer Since
|
|
J.
Wray Thompson, 77
|
Chairman
of the Board since June 1993; Chief Executive Officer from June 1993 to
December 2006
|
1993
|
|
Ronald
C. Morgan, 61
|
Chief
Executive Officer since January 2007; President since January 2001; Chief
Operating Officer since June 1993
|
1993
|
|
Jon
W. Thompson, 47
|
President
since June 2008; Senior Vice President since June 1993
|
2008
|
|
Shannon
L. Greene, 43
|
Chief
Financial Officer since May 2000
|
2000
|
|
Mark
J. Angus, 48
|
Senior
Vice President since June 2008; Vice President of Merchandising since June
1993
|
2008
|
|
Robin
L. Morgan, 58
|
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 Chief Executive Officer since January 2007. He has also served as
President and Chief Operating Officer from January 2001 to June 2008 and
director since June 1993. Mr. Morgan was also a co-founder of
the company. Mr. Morgan is married to Robin L. Morgan, our Vice
President.
Jon W. Thompson has served as
President and Chief Operating Officer since June 2008, following the resignation
of Ron Morgan. He served as Senior Vice President from June 1993 to
June 2008. Mr. Thompson is the son of Wray Thompson, Chairman of the
Board.
Shannon L. Greene has served
as our Chief Financial Officer and Treasurer since May 2000 and director since
January 2001. Ms. Greene is also our Chief Accounting
Officer. Ms. Greene, a certified public accountant, also serves on
our 401(k) Plan committee. 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, and the Financial Executives
International. She also sits on the Board of Directors of the U.S.
Chamber of Commerce.
Mark J. Angus has served as
Senior Vice President since June 2008, following Jon Thompson’s
resignation. He served as Vice President of Merchandising since
January 1993.
Robin L. Morgan has served as
our Vice President of Administration and Assistant Secretary since June
1993. She serves as chairman of our 401(k) Plan
committee. Ms. Morgan is married to Ronald C. Morgan, our
CEO.
All officers are elected annually by
the Board of Directors to serve for the ensuing year.
You
should carefully consider the following risk factors together with all of the
other information included in this annual report, including the financial
statements and related notes, when deciding to invest in us. You
should be aware that the occurrence of any of the events described in this Risk
Factors section and elsewhere in this annual report could have a material
adverse effect on our business, financial position, results of operations and
cash flows. Some, but not all, of the important risks which could
cause actual results to differ materially from those suggested by
forward-looking statements made by us include the following:
|
·
|
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.
|
|
·
|
Continued
weakness 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.
|
|
·
|
Negative
trends in general consumer-spending levels, including the impact of the
availability and level of consumer debt and levels of consumer confidence
could adversely affect our sales.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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 lease
all of our store locations premises, with the majority of our stores having
initial lease terms of approximately five years. The leases are
generally renewable, with increases in lease rental rates in some
cases. We believe that all of our properties are adequately covered
by insurance. The properties leased by our Wholesale Leathercraft
(Leather Factory stores), Retail Leathercraft (Tandy Leather stores), and
International Leathercraft divisions are described in Item 1 in the description
of each segment. We also lease a 284 square-foot showroom in the
Denver Merchandise Mart for $5,908 per year. This lease will expire
in October 2011.
We own
our corporate headquarters, which includes our central warehouse and
manufacturing facility, the sales, advertising, administrative, and executive
offices, and the administrative offices of Roberts, Cushman. The
facility consists of 191,000 square feet located on approximately 30
acres.
The
following table summarizes the locations of our leased premises as of December
31, 2008:
|
State
|
Wholesale
Leathercraft
|
Retail
Leathercraft
|
International
|
|
Alabama
|
-
|
1
|
-
|
|
Alaska
|
-
|
1
|
-
|
|
Arizona
|
2
|
2
|
-
|
|
Arkansas
|
-
|
1
|
-
|
|
California
|
3
|
7
|
-
|
|
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
|
-
|
|
Massachusetts
|
-
|
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
|
2
|
-
|
|
Oklahoma
|
1
|
2
|
-
|
|
Oregon
|
1
|
-
|
-
|
|
Pennsylvania
|
1
|
2
|
-
|
|
South
Carolina
|
-
|
1
|
-
|
|
South
Dakota
|
-
|
1
|
-
|
|
Tennessee
|
1
|
3
|
-
|
|
Texas
|
5
|
9
|
-
|
|
Utah
|
1
|
2
|
-
|
|
Virginia
|
-
|
1
|
-
|
|
Washington
|
1
|
2
|
-
|
|
Wisconsin
|
-
|
1
|
-
|
|
Wyoming
|
-
|
1
|
|
Canadian
locations:
|
|||
|
Alberta
|
1
|
1
|
-
|
|
British
Columbia
|
-
|
1
|
-
|
|
Manitoba
|
1
|
-
|
-
|
|
Nova
Scotia
|
-
|
1
|
-
|
|
Ontario
|
1
|
2
|
-
|
|
Quebec
|
-
|
1
|
-
|
|
International
locations:
|
|||
|
United
Kingdom
|
-
|
-
|
1
|
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, 2008.
PART II
Our
common stock is traded on the NYSE Amex using the symbol “TLF”. The
high and low trading prices for each calendar quarter during the last two fiscal
years are as follows:
|
2008
|
High
|
Low
|
2007
|
High
|
Low
|
|
|
4th
quarter
|
$2.75
|
$1.72
|
4th
quarter
|
$7.15
|
$2.70
|
|
|
3rd
quarter
|
$3.07
|
$2.49
|
3rd
quarter
|
$7.55
|
$5.80
|
|
|
2nd
quarter
|
$3.37
|
$2.63
|
2nd
quarter
|
$7.50
|
$6.85
|
|
|
1st
quarter
|
$3.32
|
$2.30
|
1st
quarter
|
$8.25
|
$6.81
|
There
were approximately 526 stockholders of record on March 1,
2009.
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.
We did
not sell any shares of our equity securities during our fiscal year ended
December 31, 2008 that were not registered under the Securities
Act.
The
following table provides information about purchases we have made of our common
stock during the quarter ended December 31, 2008:
|
ISSUER
PURCHASES OF EQUITY SECURITIES
|
||||
|
Period
|
(a)
Total Number of Shares Purchased
|
(b)
Average Price
Paid
per Share
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be
Purchased Under the Plans or Programs
|
|
October
1 through October 31
|
194,610
|
$2.67
|
194,610
|
292,180
|
|
November
1 through November 30
|
73,332
|
$2.35
|
73,332
|
218,848
|
|
December
1 through December 31
|
56,595
|
$1.96
|
56,595
|
-0-
|
|
Total
|
324,537(1)
|
$2.47
|
324,537
|
-0-
|
|
(1)
|
On
September 9, 2008, our Board of Directors approved a limited stock
repurchase plan whereby all non-officer participants in The Leather
Factory, Inc. Stock Ownership Plan (the “ESOP”) would have the option of
selling the shares of our common stock distributed to them upon
termination of the ESOP back to us. The option remained open to the
non-officer participants for a period of sixty days beginning on September
26, 2008 and ending on November 25, 2008. The purchase price of the shares
was calculated at a price-per-share equal to the closing price of a share
of our common stock on the American Stock Exchange on the business day
each non-officer participant notified the ESOP administrator of his or her
intent to sell his or her shares to us. All of the 324,537 shares we
repurchased between October 1 and December 31, 2008 were repurchased in
connection with the termination of the
ESOP.
|
Stockholder
Return Performance Graph
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, 2003 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
03
|
Dec
04
|
Dec
05
|
Dec
06
|
Dec
07
|
Dec
08
|
|
TANDY
LEATHER FACTORY
|
100
|
73.35
|
141.53
|
166.74
|
67.56
|
44.42
|
|
S&P
SMALLCAP 600 INDEX
|
100
|
122.65
|
132.07
|
152.04
|
151.58
|
104.48
|
|
S&P
SPECIALTY STORES
|
100
|
105.20
|
124.25
|
151.04
|
110.87
|
70.30
|
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,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||
|
Net
sales
|
$53,237,094
|
$55,317,002
|
$55,199,021
|
$50,719,574
|
$46,146,284
|
|||||
|
Cost
of sales
|
21,857,800
|
23,644,599
|
23,566,251
|
21,964,530
|
20,706,239
|
|||||
|
Gross
profit
|
31,379,294
|
31,672,403
|
31,632,770
|
28,755,044
|
25,440,045
|
|||||
|
Operating
expenses
|
27,200,150
|
27,161,402
|
24,565,056
|
23,181,633
|
21,181,599
|
|||||
|
Operating
income
|
4,179,144
|
4,511,001
|
7,067,714
|
5,573,411
|
4,258,446
|
|||||
|
Operating
income per share - basic
|
$0.38
|
$0.41
|
$0.65
|
$0.52
|
$0.40
|
|||||
|
Operating
income per shares - diluted
|
$0.38
|
$0.40
|
$0.64
|
$0.51
|
$0.39
|
|||||
|
Other
(income) expense
|
67,072
|
(316,831)
|
(98,391)
|
(134,502)
|
44,800
|
|||||
|
Income
(loss) before income taxes
|
4,112,072
|
4,827,832
|
7,166,105
|
5,707,913
|
4,213,646
|
|||||
|
Income
tax provision (benefit)
|
1,507,891
|
1,739,701
|
2,389,039
|
1,994,199
|
1,559,605
|
|||||
|
Net
income (loss)
|
$2,604,181
|
$3,088,131
|
$4,777,066
|
$3,713,714
|
$2,654,041
|
|||||
|
Earnings
(loss) per share
|
$0.24
|
$0.28
|
$0.44
|
$0.35
|
$0.25
|
|||||
|
Earnings
(loss) per share- assuming
dilution
|
$0.24
|
$0.28
|
$0.43
|
$0.34
|
$0.24
|
|||||
|
Weighted
average common shares outstanding for:
|
||||||||||
|
Basic
EPS
|
10,931,306
|
10,951,481
|
10,643,004
|
10,643,004
|
10,543,994
|
|||||
|
Diluted
EPS
|
11,015,657
|
11,157,775
|
10,976,240
|
10,976,240
|
10,957,518
|
|||||
|
Balance
Sheet Data, as of December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||
|
Cash
and certificates of deposit
|
$10,821,298
|
$6,810,396
|
$6,739,981
|
$3,215,727
|
$2,560,202
|
||||
|
Total
assets
|
40,975,913
|
37,651,506
|
31,916,635
|
25,680,473
|
22,167,163
|
||||
|
Capital
lease obligation, including current portion
|
593,949
|
-
|
111,723
|
245,789
|
379,857
|
||||
|
Long-term
debt, including current portion
|
3,915,000
|
4,050,000
|
-
|
-
|
505,154
|
||||
|
Total
Stockholders’ Equity
|
$31,264,762
|
$29,815,504
|
$26,323,243
|
$21,257,857
|
$17,310,233
|
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, 2008 and 2007 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 four segments. First, Wholesale Leathercraft, consisting
of our Leather Factory stores and our national account group, is the largest
source of our revenues ($26.4 million in 2008). This division has
generally offered steady but modest increases in sales. Sales in 2008
declined 10.6%. The wholesale stores’ sales declined 10% compared to
2007 and national account sales were down 12%. Much of the sales
decline at the stores is attributed to an overall weakness in consumer spending,
which results in fewer purchases of our products by small
businesses. The decline in national account sales is related to
weaker consumer spending as well as the expected decline in sales to one
customer who stopped purchasing from us in the first quarter of
2008.
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 ($25.2
million in 2008, up from $24.6 million in 2007). Our business plan
calls for opening an average of 10-12 stores annually as we work toward a goal
of 100+ stores from 73 stores at the end of 2008. We have slowed down
our new store openings in recent years due to the general economic conditions in
the U.S. We plan to open 4 new stores in 2009, one of which was
opened in the first quarter.
Our third
segment is International Leathercraft, which consists of stores located outside
of North America. Currently, we have one retail/wholesale combination
store located in the United Kingdom, which was opened in February
2008. It is our intention to add more stores to this segment once we
have a large enough customer base to support additional stores.
We refer
to our fourth segment as “Other”. It consists of Roberts, Cushman, a
supplier of trimmings for headwear. Its operations are not material
to us.
On a
consolidated basis, a key indicator of costs, gross margin as a percent of total
net sales, held steady in 2007 and increased in 2008. Operating
expenses as a percent of total net sales in 2008 increased 2.0% from
2007. Operating expenses increased 4.6% as a percentage of total net
sales in 2007 when compared with 2006. The increase in operating
expenses in 2007 was due to our delayed response to cut expenses on weaker than
expected sales, particularly in the second and third quarters. We
were much more successful in our control of operating expenses in 2008, given
the continued weak sales environment.
We
reported consolidated net income for 2008 of $2.6
million. Consolidated net income for 2007 and 2006 was $3.1 million
and $4.8 million, respectively. We have used our cash flow to fund
our operations, to fund the opening of new Tandy Leather stores, to purchase
necessary property and equipment and make acquisitions of small competitors in
the retail and wholesale market. In 2007, we incurred $4.0 million in
bank debt to purchase a 191,000 square foot building to house our corporate
headquarters and central support units. We moved into that facility
in the first quarter of 2008. At the end of 2009, our stockholders’
equity had increased to $31.3 million from $29.8 million the previous
year.
Comparing
the December 31, 2008 balance sheet with the prior year’s balance sheet, we
reduced our investment in inventory from $17.5 million to $16.0 million, while
total cash (including certificates of deposit and other short-term investments)
increased from $6.8 million from $10.8 million.
Net
Sales
Net sales
for the three years ended December 31, 2008 were as follows:
|
Year
|
Wholesale Leathercraft
|
Retail Leathercraft
|
International Leathercraft
|
Other
|
Total Company
|
Incr (Decr) from Prior
Year
|
|
2008
|
$26,423,858
|
$25,231,145
|
$836,535
|
$745,556
|
$53,237,094
|
(3.8)%
|
|
2007
|
$29,555,978
|
$24,663,750
|
-
|
$1,097,274
|
$55,317,002
|
0.2%
|
|
2006
|
$31,068,188
|
$22,520,461
|
-
|
$1,610,372
|
$55,199,021
|
8.8%
|
Our net
sales fell by 3.8% in 2008 when compared with 2007 and grew by 0.2% in 2007 when
compared with 2006. The 2008 sales decline resulted primarily from
our Wholesale Leathercraft segment, offset somewhat by an increase in Retail
Leathercraft sales and the sales from our new International Leathecraft segment,
although sales at our retail stores have slowed down somewhat due to an overall
slowdown in consumer spending in 2007 and 2008. The reduction in
sales in our wholesale stores is also the result of the overall economic
slowdown in the U.S.
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 2008,
our cost of sales decreased as a percentage of total net sales when compared to
2007, resulting in an increase in consolidated gross profit margin from 57.3% to
58.9%. Our total cost of sales as a percentage of our total net sales
held steady from 2006 to 2007, resulting in a consolidated gross profit margin
at 57.3% in both years. Increases in gross margin are primarily due
to increased retail sales from year to year.
Our gross
margins for the three years ended December 31, 2008 were as
follows:
|
Year
|
Wholesale Leathercraft
|
Retail Leathercraft
|
International Leathercraft
|
Other
|
Total Company
|
|
2008
|
56.5%
|
61.6%
|
68.4%
|
44.1%
|
58.9%
|
|
2007
|
55.7%
|
59.7%
|
-
|
44.8%
|
57.3%
|
|
2006
|
56.1%
|
60.8%
|
-
|
32.1%
|
57.3%
|
Our
operating expenses increased 2.0% as a percentage of total net sales to 51.1% in
2008 when compared with 49.1% in 2007. This increase indicates that
our operating expenses grew faster than our sales during this
period. However, 2008 operating expenses were only $38,000 higher
than those of 2007. Significant expense fluctuations in 2008 compared
to 2007 are as follows:
|
Expense
|
2008 amount
|
Incr (decr) over 2007
|
|
Employee
compensation & benefits
|
$14.0
million
|
$(160,000)
|
|
Rent
& utilities
|
4.1
million
|
323,000
|
|
Depreciation
and amortization
|
985,000
|
350,000
|
|
Advertising
|
3.0
million
|
(400,000)
|
|
Freight
out – shipping product to customers
|
1.5
million
|
(140,000)
|
|
Property
taxes
|
260,000
|
135,000
|
|
Outside
services
|
260,000
|
(240,000)
|
Our
operating expenses increased 4.6% as a percentage of total net sales to 49.1% in
2007 when compared with 44.5% in 2006. Significant expense
fluctuations in 2007 compared to 2006 are as follows:
|
Expense
|
2007 amount
|
Incr (decr) over 2006
|
|
Employee
compensation & benefits
|
$14.1
million
|
$800,000
|
|
Rent
& utilities
|
3.8
million
|
300,000
|
|
Depreciation
and amortization
|
635,000
|
240,000
|
|
Advertising
|
3.4
million
|
400,000
|
|
Legal
& professional fees
|
650,000
|
350,000
|
Other
Income/Expense (net)
Other
Income/Expense consists primarily of currency exchange fluctuations, interest
income and interest expense. In 2008, we had other expense (net) of
$67,000 compared to other income (net) of $317,000 in 2007. We
received $230,000 for surface damage and additional access related to the oil
and gas lease associated with a portion of the land surrounding our corporate
facility. We earned $141,000 in interest income on our cash and paid
$332,000 in interest expense on our bank debt. We had a currency
exchange loss of $114,000 in 2008 compared to income of $9,000 in
2007.
In 2007,
we had other income (net) of $317,000 compared to other income (net) of $98,000
in 2006. We received rental income of $150,000 from our new building
as we leased the building to the sellers for 90 days after
purchase. We also received $100,000 as a signing bonus on an oil and
gas lease we signed related to a portion of the land we purchased. We
earned $140,000 in interest income on our cash and paid $122,000 in interest
expense on our bank debt. We had a currency exchange gain of $9,000
in 2007 compared to $52,000 in 2006.
Net
Income
During
2008, we earned net income of $2.6 million, a 16% decline over our net income of
$3.1 million earned during 2007. The decline in net income was the
result of the decrease in gross profit and the decrease in other income,
partially offset by the reduction in income tax expense.
During
2007, we earned net income of $3.1 million, a 35% decline from our net income of
$4.8 million earned during 2006. The decline in net income was the
result of the increase in operating expenses at a higher rate than that of our
sales, partially offset by the reduction in income tax expense.
Wholesale
Leathercraft
The
increases in net sales, operating income, operating income increases (or
decreases) and operating income as a percentage of sales from our Wholesale
Leathercraft stores for the three years ended December 31, 2008 were as
follows:
|
Year
|
Net
Sales Incr
(Decr)
from Prior Yr
|
Operating
Income
|
Operating
Income
Incr
(Decr) from Prior Year
|
Operating
Income as a Percentage
of Sales
|
|
2008
|
(10.6)%
|
$1,842,526
|
(34.8)%
|
6.9%
|
|
2007
|
(3.7)%
|
$2,826,710
|
(41.3)%
|
9.6%
|
|
2006
|
(0.1)%
|
$4,814,240
|
29.4%
|
15.5%
|
Wholesale
Leathercraft, consisting of our 30 wholesale stores and our national account
group, accounted for 49.6% of our consolidated net sales in 2008, which compares
to 53.4% in 2007 and 56.2% in 2006. 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 wholesale stores decreased 10.4% in 2008 compared to sales in 2007 while the
sales decline in our national account group was 12.2%. By customer
group, we had sales declines in all groups. The most significant
decreases were in our wholesale and manufacturer groups. The
customers of these groups are small businesses and have been significantly
affected by the weakness in our economy. Our sales mix by customer
group in the Wholesale Leathercraft division was as follows:
|
Customer Group
|
2008
|
2007
|
2006
|
|
Retail
|
26%
|
23%
|
25%
|
|
Institution
|
8%
|
8%
|
7%
|
|
Wholesale
|
41%
|
42%
|
39%
|
|
National
Accounts
|
17%
|
15%
|
19%
|
|
Manufacturers
|
8%
|
12%
|
10%
|
|
100%
|
100%
|
100%
|
The 2008
decrease in operating income as a percentage of divisional sales resulted from a
decrease of 9.2% in gross margin (as a percentage of sales) compared with 2007,
offset partially by a decrease of 3.9% in operating expenses as a percent of
sales. Significant operating expense decreases occurred in employee
compensation and benefits ($670,000), outside services ($235,000) and freight
out ($200,000). These decreases were partially offset by increases in
depreciation expense ($400,000) and property taxes ($230,000), both due to the
purchase of our corporate facility.
The 2007
increase in operating income as a percentage of divisional sales resulted from a
decrease of 0.6% in gross margin (as a percentage of sales) compared with 2006,
and an increase of 6.6% in operating expenses as a percent of
sales. Significant operating expense increases occurred in employee
compensation and benefits ($500,000), depreciation expense ($200,000), legal and
professional fees ($300,000) and advertising costs ($200,000). These
increases were partially offset by decreases in various insurance expenses
($100,000) and general supplies ($75,000).
Retail
Leathercraft
The
increases in net sales, operating income, operating income increases (or
decreases) and operating income as a percentage of sales from our Retail
Leathercraft stores for the three years ended December 31, 2008 were as
follows:
|
Year
|
Net
Sales Increase
from Prior Yr
|
Operating
Income
|
Operating
Income
Incr
(Decr) from Prior Year
|
Operating
Income as a Percentage
of Sales
|
|
2008
|
2.3%
|
$2,188,282
|
41.7%
|
8.7%
|
|
2007
|
9.5%
|
$1,544,320
|
(33.2)%
|
6.3%
|
|
2006
|
25.0%
|
$2,310,073
|
30.7%
|
10.3%
|
Reflecting
the growth previously discussed, Retail Leathercraft accounted for 47.4% of our
total net sales in 2008, up from 44.6% in 2007 and 40.8% in 2006.
Growth in
net sales for Retail Leathercraft division in 2008 and 2007 resulted primarily
from our expansion program. Expansion during 2008 and 2007 consisted
of the opening of 1 and 10 new stores, respectively.
Our sales
mix by customer group in the Retail Leathercraft division was as
follows:
|
Customer Group
|
2008
|
2007
|
2006
|
|
Retail
|
65%
|
63%
|
65%
|
|
Institution
|
9%
|
8%
|
8%
|
|
Wholesale
|
25%
|
27%
|
26%
|
|
National
Accounts
|
0%
|
0%
|
0%
|
|
Manufacturers
|
1%
|
2%
|
1%
|
|
100%
|
100%
|
100%
|
Operating
income as a percentage of sales increased to 8.7% for 2008 compared to 6.3% for
2007. Gross margin improved to 61.6% in 2008 from 59.7% in
2007. Operating expenses as a percent of sales in 2008 decreased by
0.6%, from 53.5% for 2007 to 52.9% for 2008 as operating expenses grew at a
slower pace than that of sales and gross margin.
Operating
income as a percentage of sales decreased to 6.3% for 2007 compared to 10.3% for
2006. Gross margin fell to 59.7% in 2007 from 60.8% in
2006. Operating expenses as a percent of sales in 2007 decreased by
3.0%, from 50.5% for 2006 to 53.5% for 2007 as operating expenses grew at a
faster pace than that of sales and gross margin.
We intend
to continue the expansion of Tandy Leather’s retail store chain in 2009 by
opening approximately 4 new stores, one of which was opened in the first
quarter. We remain committed to a conservative expansion plan for
this division that minimizes risks to our profits and maintains financial
stability. In the current economic environment in the U.S., it is
possible that we will change our plans for store openings in 2009 if we
determine that the U.S. retail sector can not support additional store openings
at that time.
International
Leathercraft
International
Leathercraft consists of all stores located outside of North
America. Currently, that represents one retail/wholesale combination
store located in the United Kingdom. International Leathercraft
accounted for 1.6% of our total sales in 2008. Operating income was
$54,000 in 2008. We expect this segment to become a larger part of
our total operations as time progresses.
Other
Roberts,
Cushman accounted for 1.4% of our total sales in 2008 compared with 2.0% and
2.9% in 2007 and 2006, respectively. Operating income was $94,000 in
2008 compared to operating income of $140,000 in 2007 and an operating loss of
$57,000 in 2006. Roberts, Cushman's sales and profits are immaterial
to us as a whole.
Financial
Condition
At
December 31, 2008, we held $10.8 million of cash and certificates of deposit,
$16.0 million of inventory, accounts receivable of $1.2 million, and $10.3
million of property and equipment. Goodwill and other intangibles
(net of amortization and depreciation) were $966,000 and $355,000,
respectively. Net total assets were $40.9 million. Current
liabilities were $5.1 million (including $468,000 of current maturities of
long-term debt), while long-term debt was $4.0 million. Total
stockholders’ equity at the end of 2008 was $31.2 million.
At
December 31, 2007, we held $6.8 million of cash, $17.5 million of inventory,
accounts receivable of $2.5 million, and $7.0 million of property and
equipment. Goodwill and other intangibles (net of amortization and
depreciation) were $990,000 and $384,000, respectively. Net total
assets were $37.6 million. Current liabilities were $3.8 million
(including $135,000 of current maturities of long-term debt), while long-term
debt was $3.9 million. Total stockholders’ equity at the end of 2007
was $29.8 million.
Specific
ratios on a consolidated basis at the end of each year ended December 31 were as
follows:
|
2008
|
2007
|
2006
|
||
|
Solvency
Ratios:
|
||||
|
Quick
Ratio
|
Cash+Accts
Rec/Total Current Liabilities
|
2.37
|
2.48
|
1.74
|
|
Current
Ratio
|
Total
Current Assets/Total Current Liabilities
|
5.72
|
7.47
|
5.19
|
|
Current
Liabilities to Net Worth
|
Total
Current Liabilities/Net Worth
|
0.16
|
0.13
|
0.20
|
|
Current
Liabilities to Inventory
|
Total
Current Liabilities/Inventory
|
0.32
|
0.22
|
0.31
|
|
Total
Liabilities to Net Worth
|
Total
Liabilities/Net Worth
|
0.31
|
0.26
|
0.21
|
|
Fixed
Assets to Net Worth
|
Fixed
Assets/Net Worth
|
0.33
|
0.23
|
0.07
|
|
Efficiency
Ratios:
|
||||
|
Collection
Period (Days Outstanding)
|
Accounts
Receivable/Credit Sales x 365
|
54.89
|
63.42
|
53.43
|
|
Inventory
Turnover
|
Sales/Average
Inventory
|
3.18
|
3.19
|
3.36
|
|
Assets
to Sales
|
Total
Assets/Sales
|
0.77
|
0.68
|
0.58
|
|
Sales
to Net Working Capital
|
Sales/Current
Assets - Current Liabilities
|
2.22
|
2.27
|
2.45
|
|
Accounts
Payable to Sales
|
Accounts
Payable/Sales
|
0.02
|
0.03
|
0.03
|
|
Profitability
Ratios:
|
||||
|
Return
on Sales (Profit Margin)
|
Net
Profit After Taxes/Sales
|
0.05
|
0.06
|
0.09
|
|
Return
on Assets
|
Net
Profit After Taxes/Total Assets
|
0.06
|
0.08
|
0.15
|
|
Return
on Net Worth (Return on Equity)
|
Net
Profit After Taxes/Net Worth
|
0.08
|
0.10
|
0.18
|
Capital
Resources and Liquidity
On July
31, 2007, we entered into a Credit Agreement and Line of Credit Note with
JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with
a credit facility of up to $5,500,000 to facilitate our purchase and remodel of
real estate consisting of a 195,000 square foot building situated on 30 acres of
land located at 1900 SE Loop 820 in Fort Worth, Texas. Proceeds in
the amount of $4,050,000 were used to fund the initial purchase of the
property. On April 30, 2008, that amount was rolled into a ten-year
term note, and we began making monthly debt service payments in May
2008.
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 6 to the Consolidated
Financial Statements, Notes
Payable and Long-Term Debt.
Reflecting
the borrowing and reduction of bank indebtedness during the periods, our
financing activities for 2008, 2007 and 2006 provided (required) net cash of
$1.1 million, $4.0 million, and $69,000, respectively.
Our
primary source of liquidity and capital resources during 2008 was cash flow
provided by operating activities. Cash flow from operations for 2008
and 2007 was $7.8 million and $2.5 million, respectively, the largest portion
being generated from net income. This net income was partially offset
by the decrease in accrued expenses in 2007 and the decrease of accounts
receivable and inventory in 2008. Cash flow from operations in 2006
was $3.9 million.
Consolidated
accounts receivable decreased significantly to $1.2 million at December 31, 2008
compared to $2.5 million at December 31, 2007. Average days to
collect accounts improved from 63.4 days in 2007 to 54.9 days in 2008 on a
consolidated basis. As evidenced by the significant reduction in our
accounts receivable at the end of 2008, we have tightened our credit policy and
are aggressively monitoring our customer accounts to ensure
collectibility. We believe the trend in our collections is the result
of the overall slowdown in the U.S. economy. Many of our customers
with open accounts are very small businesses, and they tend to feel the effects
of an economic slowdown more severely than larger businesses.
Inventory
decreased from $17.5 million at the end of 2007 to $16.0 million at December 31,
2008. We expect our inventory to slowly trend upward as we continue
our expansion of the Tandy Leather store chain. In 2009, we expect
minimal increases in our inventory due to the expected weaknesses in our sales
and the limited number of retail stores we plan to open. 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. We
believe our investment in inventory at the end of 2008 was at a very reasonable
level given our expansion plans as it was in line with our internal targets of
optimum inventory levels.
Consolidated
inventory turned 3.18 times during 2008, virtually the same as in 2007 at 3.19
times. We compute our inventory turnover rates as sales divided by
average inventory.
By
operating division, inventory turns are as follows:
|
Segment
|
2008
|
2007
|
2006
|
|
Wholesale
Leathercraft
|
2.14
|
2.37
|
2.40
|
|
Retail
Leathercraft
|
6.05
|
5.87
|
6.99
|
|
International
Leathercraft
|
4.61
|
n/a
|
n/a
|
|
Roberts,
Cushman
|
17.75
|
25.88
|
7.15
|
|
Wholesale
Leathercraft stores only
|
7.14
|
6.87
|
7.48
|
Retail
Leathercraft inventory turns are significantly higher than that of Wholesale
Leathercraft because its inventory consists only of the inventory at the
stores. The retail 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 decreased slightly to $1.1 million at the end of 2008 compared to $1.5
million at the end of 2007.
As
discussed above, the largest use of operating cash in 2008 was in the reduction
of accounts payable. Cash paid for capital expenditures totaled $2.8
million and $1.7 million for the years ended December 31, 2008 and 2007,
respectively. Total capital expenditures (both cash and non-cash)
totaled $3.6 million and $5.8 million for the years ended December 31, 2008 and
2007, respectively. In 2007, the primary capital expenditure was the
purchase of the land and building to house our corporate offices and central
support departments for $4.5 million. Other capital expenditures were
factory machines and dies ($110,000); fixtures and equipment for the new Tandy
Leather retail stores ($105,000), various store fixtures and computer equipment
at existing stores ($85,000), computer system upgrade for advertising department
($100,000), computer equipment for future stores ($125,000); and miscellaneous
computer and other office equipment ($250,000). In 2008, the primary
capital expenditure was the remodel and retrofit of the building for $3.2
million. Other capital expenditures were factory machines and dies
($55,000) and computer equipment ($415,000). Although we intend to
continue opening or acquiring new Tandy Leather retail stores and therefore
expenditures related to this expansion should continue into 2009, we do expect
our 2009 capital expenditures to be substantially less than that of 2008 as the
expenditures related to our building have been completed.
Cash
applied toward stock repurchases in 2008 totaled $802,898.
We
believe that cash flow from operations will be adequate to fund our operations
in 2009, while also funding our limited expansion plans. 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. 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 retail 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 2008, 2007 and 2006, 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, 2008 (not including related interest
expense):
|
Payments
Due by Periods
|
|||||
|
Contractual Obligations
|
Total
|
Less
than 1
Year
|
2
- 3 Years
|
4
-5 Years
|
More
than 5
Years
|
|
Long-Term
Debt(1)
|
$3,915,000
|
$202,500
|
$405,000
|
$405,000
|
$2,902,500
|
|
Capital
Lease Obligations
|
593,949
|
265,111
|
328,838
|
--
|
--
|
|
Operating
Leases(2)
|
7,480,217
|
2,468,217
|
3,602,368
|
1,303,148
|
106,484
|
|
Total
Contractual Obligations
|
$11,989,166
|
$2,935,828
|
$4,336,206
|
$1,708,148
|
$3,008,984
|
____________________
(1) Our
loan from JPMorgan Chase matures in May 2018.
(2) These
are our leased facilities.
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. We
periodically analyze the remaining goodwill on our balance sheet to determine
the appropriateness of its carry value. As of December 31, 2008, 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
Certain
statements contained in this annual report and other materials we file with the
SEC, or in other written or oral statements made or to be made by us, other than
statements of historical fact, are “forward-looking statements” as defined in
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
give our current expectations or forecasts of future events. Words such as
“may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,”
“intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,”
“potential,” or “continue,” and similar expressions are used to identify
forward-looking statements. They can be affected by assumptions used or by known
or unknown risks or uncertainties. Consequently, no forward-looking statements
can be guaranteed. Actual results may vary materially. You are cautioned not to
place undue reliance on any forward-looking statements. You should also
understand that it is not possible to predict or identify all such factors and
should not consider the following list to be a complete statement of all
potential risks and uncertainties. Factors that could cause our actual results
to differ materially from the results contemplated by such forward-looking
statements including the risk factors described in Item 1A, “Risk Factors,” of
this Annual Report on Form 10-K. Management cautions that forward-looking
statements are not guarantees, and our actual results could differ materially
from those expressed or implied in the forward-looking statements. 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 subsidiaries in Canada and
the United Kingdom as those subsidiaries have local currency revenue and local
currency operating expenses. Changes in the currency exchange
rates impact the U.S. dollar amount of revenue and expenses. See Note
14 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 certain
outstanding debt. However, our current credit agreement with JPMorgan
Chase includes a fixed interest rate. Therefore, changes in the prime
rate do not impact us in this area.
Tandy
Leather Factory, Inc.
Consolidated
Balance Sheets
December
31, 2008 and 2007
|
December
31,
2008
|
December
31,
2007
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
|
$7,810,298
|
$6,310,396
|
|||||
|
Short-term
investments, including certificates of deposit
|
3,011,000
|
500,000
|
|||||
|
Accounts
receivable-trade, net of allowance for doubtful accounts
|
|||||||
|
of
$43,000 and $104,000 in 2008 and 2007, respectively
|
1,180,349
|
2,538,816
|
|||||
|
Inventory
|
16,011,147
|
17,473,352
|
|||||
|
Deferred
income taxes
|
229,501
|
256,938
|
|||||
|
Other
current assets
|
777,550
|
1,102,836
|
|||||
|
Total
current assets
|
29,019,845
|
28,182,338
|
|||||
|
PROPERTY
AND EQUIPMENT, at cost
|
15,340,732
|
11,793,317
|
|||||
|
Less
accumulated depreciation and amortization
|
(5,019,885)
|
(4,794,505)
|
|||||
|
10,320,847
|
6,998,812
|
||||||
|
GOODWILL
|
966,655
|
990,536
|
|||||
|
OTHER
INTANGIBLES, net of accumulated amortization of
|
|||||||
|
$367,000
and $313,000 in 2008 and 2007, respectively
|
355,492
|
384,134
|
|||||
|
OTHER
assets
|
313,074
|
1,095,686
|
|||||
|
$40,975,913
|
$37,651,506
|
||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable-trade
|
$1,148,577
|
$1,497,564
|
|||||
|
Accrued
expenses and other liabilities
|
3,182,194
|
2,072,640
|
|||||
|
Income
taxes payable
|
271,122
|
67,150
|
|||||
|
Current
maturities of capital lease obligation
|
265,111
|
-
|
|||||
|
Current
maturities of long-term debt
|
202,500
|
135,000
|
|||||
|
Total
current liabilities
|
5,069,504
|
3,772,354
|
|||||
|
DEFERRED
INCOME TAXES
|
600,309
|
148,648
|
|||||
|
CAPITAL
LEASE OBLIGATION, net of current maturities
|
328,838
|
-
|
|||||
|
LONG-TERM
DEBT, net of current maturities
|
3,712,500
|
3,915,000
|
|||||
|
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,
10,994,951 and 10,982,951 shares issued at 2008 and 2007,
|
|||||||
|
10,664,555
and 10,977,092 outstanding at 2008 and 2007, respectively
|
26,388
|
26,359
|
|||||
|
Paid-in
capital
|
5,464,443
|
5,419,477
|
|||||
|
Retained
earnings
|
26,641,853
|
24,037,672
|
|||||
|
Treasury
stock at cost (330,396 shares at 2008; 5,859 shares at
2007)
|
(828,385)
|
(25,487)
|
|||||
|
Accumulated
other comprehensive income
|
(39,537)
|
357,483
|
|||||
|
Total
stockholders' equity
|
31,264,762
|
29,815,504
|
|||||
|
$40,975,913
|
$37,651,506
|
||||||
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, 2008, 2007 and 2006
|
2008
|
2007
|
2006
|
||||
|
NET
SALES
|
$53,237,094
|
$55,317,002
|
$55,199,021
|
|||
|
COST
OF SALES
|
21,857,800
|
23,644,599
|
23,566,251
|
|||
|
Gross
Profit
|
31,379,294
|
31,672,403
|
31,632,770
|
|||
|
OPERATING
EXPENSES
|
27,200,150
|
27,161,402
|
24,565,056
|
|||
|
INCOME
FROM OPERATIONS
|
4,179,144
|
4,511,001
|
7,067,714
|
|||
|
OTHER
(INCOME) EXPENSE:
|
||||||
|
Interest
expense
|
332,107
|
122,209
|
-
|
|||
|
Other,
net
|
(265,035)
|
(439,040)
|
(98,391)
|
|||
|
Total
other expense
|
67,072
|
(316,831)
|
(98,391)
|
|||
|
INCOME
BEFORE INCOME TAXES
|
4,112,072
|
4,827,832
|
7,166,105
|
|||
|
PROVISION
FOR INCOME TAXES
|
1,507,891
|
1,739,701
|
2,389,039
|
|||
|
NET
INCOME
|
$2,604,181
|
$3,088,131
|
$4,777,066
|
|||
|
NET
INCOME PER COMMON SHARE – BASIC
|
$0.24
|
$0.28
|
$0.44
|
|||
|
NET
INCOME PER COMMON SHARE – DILUTED
|
$0.24
|
$0.28
|
$0.43
|
|||
|
Weighted
Average Number of Shares Outstanding:
|
||||||
|
Basic
|
10,931,306
|
10,951,481
|
10,807,316
|
|||
|
Diluted
|
11,015,657
|
11,157,775
|
11,113,855
|
|||
The
accompanying notes are an integral part of these financial
statements.
Tandy
Leather Factory, Inc.
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2008, 2007 and 2006
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income
|
$2,604,181
|
$3,088,131
|
$4,777,066
|
|||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities -
|
||||||||||||
|
Depreciation
and amortization
|
985,549
|
634,291
|
392,915
|
|||||||||
|
Loss
(Gain) on disposal of assets
|
13,385
|
50,114
|
(3,750)
|
|||||||||
|
Non-cash
stock-based compensation
|
30,495
|
19,340
|
101,080
|
|||||||||
|
Deferred
income taxes
|
479,098
|
(63,893)
|
23,222
|
|||||||||
|
Other
|
(373,139)
|
241,182
|
(15,696)
|
|||||||||
|
Net
changes in assets and liabilities, net of effect of
|
||||||||||||
|
business
acquisitions:
|
||||||||||||
|
Accounts
receivable-trade, net
|
1,358,467
|
119,293
|
(420,431)
|
|||||||||
|
Inventory
|
1,462,205
|
156,052
|
(1,500,176)
|
|||||||||
|
Income
taxes
|
203,972
|
7,758
|
(140,189)
|
|||||||||
|
Other
current assets
|
325,286
|
(27,946)
|
(731,200)
|
|||||||||
|
Accounts
payable-trade
|
(348,987)
|
(327,726)
|
556,226
|
|||||||||
|
Accrued
expenses and other liabilities
|
1,109,554
|
(1,351,369)
|
873,437
|
|||||||||
|
Total
adjustments
|
5,245,885
|
(542,904)
|
(864,562)
|
|||||||||
|
Net
cash provided by operating activities
|
7,850,066
|
2,545,227
|
3,912,504
|
|||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase
of property and equipment
|
(2,845,548)
|
(1,705,367)
|
(471,753)
|
|||||||||
|
Payments
in connection with businesses acquired
|
-
|
(771,417)
|
-
|
|||||||||
|
Purchases
of certificates of deposit
|
(3,109,000)
|
-
|
-
|
|||||||||
|
Proceeds
from maturities of certificates of deposit
|
98,000
|
-
|
-
|
|||||||||
|
Purchases
of marketable securities
|
-
|
(500,000)
|
-
|
|||||||||
|
Proceeds
from sale of marketable securities
|
500,000
|
-
|
-
|
|||||||||
|
Proceeds
from sale of assets
|
42,114
|
32,281
|
3,750
|
|||||||||
|
Purchase
of intangible assets
|
(24,708)
|
-
|
-
|
|||||||||
|
Decrease
(increase) in other assets
|
122,140
|
(26,276)
|
10,320
|
|||||||||
|
Net
cash used in investing activities
|
(5,217,002)
|
(2,970,779)
|
(457,683)
|
|||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Payments
on notes payable and long-term debt
|
(135,000)
|
-
|
-
|
|||||||||
|
Payments
on capital lease obligations
|
(209,764)
|
(111,723)
|
(134,067)
|
|||||||||
|
Repurchase
of common stock (treasury stock)
|
(802,898)
|
-
|
-
|
|||||||||
|
Proceeds
from issuance of common stock and warrants
|
14,500
|
107,780
|
203,410
|
|||||||||
|
Net
cash provided by (used in) financing activities
|
(1,133,162)
|
(3,943)
|
69,343
|
|||||||||
|
NET
INCREASE IN CASH
|
1,499,902
|
(429,495)
|
3,524,164
|
|||||||||
|
CASH,
beginning of period
|
6,310,396
|
6,739,891
|
3,215,727
|
|||||||||
|
CASH,
end of period
|
$7,810,298
|
$6,310,396
|
$6,739,891
|
|||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Interest
paid during the period
|
$332,107
|
$122,209
|
$
-
|
|||||||||
|
Income
tax paid during the period, net of (refunds)
|
878,110
|
1,830,688
|
2,282,113
|
|||||||||
|
NON-CASH
INVESTING ACTIVITIES:
|
||||||||||||
|
Equipment
acquired under capital lease financing arrangements
|
$803,713
|
-
|
-
|
|||||||||
|
Land
and building acquired with long-term debt
|
-
|
$4,050,000
|
-
|
|||||||||
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, 2008, 2007 and 2006
|
Number
of Shares
|
Par
Value
|
Paid-in
Capital
|
Treasury
Stock
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Total
|
Comprehensive
Income
(Loss)
|
||||||||
|
BALANCE,
December 31, 2005
|
10,735,976
|
$25,780
|
$4,988,445
|
$(25,487)
|
$16,172,475
|
$96,645
|
$21,257,857
|
||||||||
|
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
|
10,879,209
|
$26,124
|
$5,292,591
|
$(25,487)
|
$20,949,541
|
$80,475
|
$26,323,243
|
||||||||
|
Comprehensive
income for the year ended December 31, 2006
|
$4,760,896
|
||||||||||||||
|
Shares
issued - stock options and warrants
exercised
|
97,883
|
235
|
107,545
|
-
|
-
|
-
|
107,780
|
||||||||
|
Stock-based
compensation
|
-
|
-
|
19,341
|
-
|
-
|
-
|
19,341
|
||||||||
|
Net income
|
-
|
-
|
-
|
-
|
3,088,131
|
-
|
3,088,131
|
$3,088,131
|
|||||||
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
277,009
|
277,009
|
277,009
|
|||||||
|
BALANCE,
December 31, 2007
|
10,977,092
|
$26,359
|
$5,419,477
|
$(25,487)
|
$24,037,672
|
$357,484
|
$29,815,504
|
||||||||
|
Comprehensive
income for the year ended December 31, 2007
|
$3,365,140
|
||||||||||||||
|
Shares
issued - stock options exercised
|
12,000
|
29
|
14,471
|
-
|
-
|
-
|
14,500
|
||||||||
|
Stock-based
compensation
|
-
|
-
|
30,495
|
-
|
-
|
-
|
30,495
|
||||||||
|
Purchase
of treasury stock
|
(324,537)
|
-
|
-
|
(802,898)
|
-
|
-
|
(802,898)
|
||||||||
|
Net income
|
-
|
-
|
-
|
-
|
2,604,181
|
-
|
2,604,181
|
$2,604,181
|
|||||||
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
(397,021)
|
(397,021)
|
(397,021)
|
|||||||
|
BALANCE,
December 31, 2008
|
10,664,555
|
$26,388
|
$5,464,443
|
$(828,385)
|
$26,641,853
|
$(39,537)
|
$31,264,762
|
||||||||
|
Comprehensive
income for the year ended December 31, 2008
|
$2,207,160
|
||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
TANDY
LEATHER FACTORY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, and 2006
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, Canada, and the United Kingdom. Numerous customers
including retailers, wholesalers, assemblers, distributors and other
manufacturers are geographically disbursed throughout the world. We
also have light manufacturing facilities in Texas.
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, Mid-Continent Leather
Sales, Inc. (an Oklahoma corporation), Roberts, Cushman & Company, Inc. (a
Texas corporation), The Leather Factory of Canada, Ltd. (a Canadian
corporation), and Tandy Leather Factory UK Limited (a UK
corporation). All intercompany accounts and transactions have been
eliminated in consolidation.
|
·
|
Foreign
currency translation
|
Foreign
currency translation adjustments arise from activities of our Canadian and
United Kingdom 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. We recognized a foreign currency translation loss of
$114,000 in 2008 and transaction gains of $9,000 and $52,000 in 2007 and 2006,
respectively.
|
·
|
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.
Sales tax
is excluded from revenue.
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,
five years for vehicles, and forty years for buildings and related
improvements. 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
|
2008
|
2007
|
2006
|
||
|
Net
income (loss)
|
$2,604,181
|
$3,088,131
|
$4,777,066
|
||
|
Weighted
average common shares outstanding
|
10,931,306
|
10,951,481
|
10,807,316
|
||
|
Earnings
per share – basic
|
$0.24
|
$0.28
|
$ 0.44
|
||
|
DILUTED
|
|||||
|
Net
income (loss)
|
2,604,181
|
3,088,131
|
$
4,777,066
|
||
|
Weighted
average common shares outstanding
|
10,931,306
|
10,951,481
|
10,807,316
|
||
|
Effect
of assumed exercise of stock options and warrants
|
84,351
|
206,294
|
306,539
|
||
|
Weighted
average common shares outstanding, assuming dilution
|
11,015,657
|
11,157,775
|
11,113,855
|
||
|
Earnings
per share - diluted
|
$0.24
|
$0.28
|
$ 0.43
|
||
|
Outstanding
options and warrants excluded as anti-dilutive
|
80,500
|
11,500
|
-
|
For
additional disclosures regarding the employee stock options and the warrants,
see Note 12. The net effect of converting stock options and warrants to purchase
232,200, 275,200 and 446,500 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, 2008, 2007 and 2006, 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, 2008, 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 14 – Segment Information.
A summary
of changes in our goodwill for the years ended December 31, 2008 and 2007 is as
follows:
|
Leather Factory
|
Tandy Leather
|
Total
|
|||
|
Balance,
December 31, 2006
|
$362,733
|
$383,406
|
$746,139
|
||
|
Acquisitions
and adjustments
|
225,000
|
-
|
225,000
|
||
|
Foreign
exchange gain/loss
|
19,397
|
-
|
19,397
|
||
|
Impairments
|
-
|
-
|
-
|
||
|
Balance,
December 31, 2007
|
$607,130
|
$383,406
|
$990,536
|
||
|
Acquisitions
and adjustments
|
-
|
-
|
-
|
||
|
Foreign
exchange gain/loss
|
(23,871)
|
-
|
(23,871)
|
||
|
Impairments
|
-
|
-
|
-
|
||
|
Balance,
December 31, 2008
|
583,259
|
$383,406
|
966,655
|
As of
December 31, 2008 and 2007, our intangible assets and related accumulated
amortization consisted of the following:
|
As
of December 31, 2008
|
|||||
|
Gross
|
Accumulated
Amortization
|
Net
|
|||
|
Trademarks,
Copyrights
|
$544,369
|
$319,776
|
$224,593
|
||
|
Non-Compete
Agreements
|
177,708
|
46,809
|
130,899
|
||
|
$722,077
|
366,585
|
$355,492
|
|||
|
As
of December 31, 2007
|
|||||
|
Gross
|
Accumulated Amortization
|
Net
|
|||
|
Trademarks,
Copyrights
|
$544,369
|
$283,485
|
$260,884
|
||
|
Non-Compete
Agreements
|
153,000
|
29,750
|
123,250
|
||
|
$697,369
|
$313,235
|
$384,134
|
|||
Excluding
goodwill, we have no intangible assets not subject to amortization under SFAS
142. Amortization of intangible assets of $53,350 in 2008, $51,542 in
2007, and $38,291 in 2006 was recorded in operating expenses. The
weighted average amortization period is 15 years for trademarks and copyrights,
and 4.22 years from non-compete agreements. 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
|
|
|
2009
|
$29,190
|
$30,337
|
$59,527
|
|
2010
|
29,190
|
30,337
|
59,527
|
|
2011
|
26,204
|
30,337
|
56,541
|
|
2012
|
1,250
|
30,337
|
31,587
|
|
2013
|
-
|
30,337
|
30,337
|
During
2007 and 2008, we acquired non-compete agreements in the amounts of $75,000 and
$24,708, respectively.
|
·
|
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 terms of the
long-term debt are considered reasonable for this type of financing; therefore,
the carrying amount approximates fair value.
|
·
|
Deferred
taxes
|
Deferred
income taxes result from temporary differences in the basis 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 $30,000, $19,000,
and $101,000 for the years ended December 31, 2008, 2007 and 2006, respectively,
as a component of operating expenses.
During
the years ended December 31, 2008 and 2007, 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, 2007
|
$2.05
|
296,200
|
||
|
Granted
|
-
|
-
|
||
|
Cancelled
|
-
|
-
|
||
|
Exercised
|
1.81
|
(59,500)
|
||
|
Outstanding,
December 31, 2007
|
$2.11
|
236,700
|
4.23
|
$270,780
|
|
Exercisable,
December 31, 2007
|
$1.97
|
220,770
|
4.11
|
$237,740
|
|
Weighted
Average
Exercise
Price
|
#
of
shares
|
Weighted
Average Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding,
January 1, 2008
|
$2.11
|
236,700
|
||
|
Granted
|
-
|
-
|
||
|
Cancelled
|
-
|
-
|
||
|
Exercised
|
1.21
|
(12,000)
|
||
|
Outstanding,
December 31, 2008
|
$2.16
|
224,700
|
3.09
|
$262,001
|
|
Exercisable,
December 31, 2008
|
$215
|
220,770
|
3.07
|
$259,461
|
Other
information pertaining to option activity during the twelve month periods ended
December 31, 2008, 2007 and 2006 are as follows:
|
2008
|
2007
|
2006
|
|
|
Weighted
average grant-date fair value of stock options granted
|
N/A
|
N/A
|
N/A
|
|
Total
fair value of stock options vested
|
$30,500
|
$30,500
|
$89,915
|
|
Total
intrinsic value of stock options exercised
|
$8,779
|
$62,280
|
$90,780
|
As of
December 31, 2008, there was $3,000 of total unrecognized compensation cost
related to nonvested stock options, which is expected to be recognized in
2009.
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.
Cash
received from the exercise of stock options and warrants for the years ended
December 31, 2008, 2007 and 2006 was $14,500, $107,780, and $203,410,
respectively.
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
$1,500,000, $1,641,000 and $1,611,000 for the years ended December 31, 2008,
2007 and 2006, 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 $137,000 and $218,000 at December 31, 2008 and
2007, respectively. Total advertising expense was $3,036,346 in 2008;
$3,440,762 in 2007; and $3,087,943 in 2006.
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 95 to 100 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.
|
·
|
Reclassifications
|
Certain
reclassifications have been made to the 2007 financial statements to conform to
the 2008 presentation.
3. SHORT-TERM
INVESTMENTS
All
current fixed maturity securities are classified as “available for sale” and are
reported at carrying value, which approximates fair value. We have
determined that our investment securities are available to support current
operations and, accordingly, have classified such securities as current assets
without regard to contractual maturities. Investments at December 31,
2008 consisted of certificates of deposit. Investments at December
31, 2007 consisted of auction rate securities. The contractual
maturities of the certificates of deposit as of December 31, 2008 are shown
below. Actual maturities may differ from the contractual maturities
because debtors may have the right to call obligations with or without call
penalties.
|
Due
within one year
|
$2,417,000
|
|
Due
between one and five years
|
99,000
|
|
Due
between five and ten years
|
99,000
|
|
Due
between ten and fifteen years
|
198,000
|
|
Due
between fifteen and twenty years
|
198,000
|
|
$3,011,000
|
4. 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 $43,014 and $104,634, respectively, at December 31,
2008 and 2007. The following is a roll forward of the allowance for
doubtful accounts:
|
Year
ended:
|
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
|
|
December
31, 2008
|
$104,634
|
-
|
65,921
|
(2,768)
|
(124,773)
|
$43,014
|
|
December
31, 2007
|
$149,172
|
(11,918)
|
98,508
|
3,192
|
(134,320)
|
$104,634
|
|
December
31, 2006
|
$137,587
|
-
|
85,439
|
241
|
(74,095)
|
$149,172
|
|
·
|
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.
5. BALANCE
SHEET COMPONENTS
|
December
31, 2008
|
December
31, 2007
|
||
|
INVENTORY
|
|||
|
On
hand:
|
|||
|
Finished
goods held for sale
|
$14,867,830
|
$16,482,845
|
|
|
Raw
materials and work in process
|
415,644
|
633,188
|
|
|
Inventory
in transit
|
727,673
|
357,319
|
|
|
TOTAL
|
$16,011,147
|
$17,473,352
|
|
|
PROPERTY AND EQUIPMENT
|
|||
|
Building
|
$5,160,522
|
$3,060,194
|
|
|
Land
|
1,451,132
|
1,451,132
|
|
|
Leasehold
improvements
|
669,329
|
1,163,947
|
|
|
Equipment
and machinery
|
5,725,442
|
4,431,432
|
|
|
Furniture
and fixtures
|
2,288,328
|
1,238,731
|
|
|
Vehicles
|
45,979
|
69,713
|
|
|
Construction
in progress
|
-
|
378,168
|
|
|
15,340,732
|
11,793,317
|
||
|
Less: accumulated
depreciation
|
(5,019,885)
|
(4,794,505)
|
|
|
TOTAL
|
$10,320,847
|
$6,998,812
|
|
|
OTHER CURRENT ASSETS
|
|||
|
Accounts
receivable – employees
|
$42,217
|
$38,972
|
|
|
Accounts
receivable – other
|
126,074
|
265,400
|
|
|
Prepaid
expenses
|
575,295
|
588,004
|
|
|
Payments
for merchandise not received
|
33,964
|
210,460
|
|
|
TOTAL
|
$777,550
|
$1,102,836
|
|
|
OTHER ASSETS
|
|||
|
Security
deposits - utilities, locations, etc.
|
$61,074
|
$74,057
|
|
|
Leather
art collection
|
252,000
|
252,000
|
|
|
Long-term
portion of note receivable
|
-
|
109,157
|
|
|
Computer
software not implemented yet
|
-
|
660,472
|
|
|
TOTAL
|
$313,074
|
$1,095,686
|
|
|
ACCRUED EXPENSES AND OTHER
LIABILITIES
|
|||
|
Accrued
bonuses
|
$1,068,426
|
$760,113
|
|
|
Accrued
payroll
|
327,816
|
220,555
|
|
|
Deferred
revenue
|
488,305
|
421,908
|
|
|
Sales
and payroll taxes payable
|
169,985
|
177,786
|
|
|
Inventory
in transit
|
727,673
|
357,318
|
|
|
Other
|
399,989
|
134,960
|
|
|
TOTAL
|
$3,182,194
|
$2,072,640
|
Depreciation
expense was $932,199, $577,405, and $348,797 for the years ended December 31,
2008, 2007 and 2006, respectively.
6. NOTES
PAYABLE AND LONG-TERM DEBT
On July
31, 2007, we entered into a Credit Agreement and Line of Credit Note with
JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with
a credit facility of up to $5,500,000 to facilitate our purchase of real estate
consisting of a 195,000 square foot building situated on 30 acres of land
located at 1900 SE Loop 820 in Fort Worth, Texas. Under the terms of
the Line of Credit Note, we could borrow from time to time until April 30, 2008,
up to the lesser of $5,500,000 or 90% of the cost of the property and make
monthly interest payments. On April 30, 2008, the principal balance
was rolled into a 10-year term note with an interest rate of 7.10% per
annum.
Proceeds
in the amount of $4,050,000 were used to fund the purchase of the property from
Standard Motor Products, Inc. under an Agreement of Purchase and Sale, dated
June 25, 2007, which closed on July 31, 2007. No further borrowings were
drawn.
At
December 31, 2008 and 2007, the amount outstanding under the above agreement
consisted of the following:
|
2008
|
2007
|
||
|
Credit
Agreement with JPMorgan Chase Bank – collateralized by real estate;
payable as follows:
|
|||
|
Line
of Credit Note dated July 31, 2007, converted to a 10-year term note on
April 30, 2008; $16,875 monthly principal payments plus interest at 7.1%
per annum;
matures
April 30, 2018
|
$ 3,915,000
|
$ 4,050,000
|
|
|
3,915,000
|
4,050,000
|
||
|
Less
- Current maturities
|
(202,500)
|
(135,000)
|
|
|
$3,712,500
|
$3,915,000
|
The terms
of the credit facility contain various covenants which among other things
require the Company to maintain a debt service coverage ratio of not less than
1.2 to 1.0. Scheduled maturities of the Company’s notes payable and
long-term debt are as follows:
|
2009
|
$202,500
|
|
2010
|
202,500
|
|
2011
|
202,500
|
|
2012
|
202,500
|
|
2013
|
202,500
|
|
2014
and thereafter
|
2,902,500
|
|
$3,915,000
|
7. CAPITAL
LEASE OBLIGATIONS
We lease
certain HVAC equipment under a capital lease agreement. The asset
subject to the agreement totaling $803,713 is included in Property and Equipment
as of December 31, 2008. Accumulated depreciation on the asset at
that date was $60,278. Amortization of the capitalized cost is
charged to depreciation expense.
At
December 31, 2008, the amounts outstanding under capital lease obligation
consisted of the following:
|
2008
|
|
|
Capital
Lease secured by certain HVAC equipment – total monthly principal payments
of $24,328, 5.7% interest, maturing February 2011
|
$632,538
|
|
Less
amount representing interest
|
38,589
|
|
Total
obligation under capital lease
|
593,949
|
|
Less
- Current maturities
|
265,111
|
|
$328,838
|
8. EMPLOYEE
BENEFIT AND SAVINGS PLANS
We had 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. 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 were made to the Plan and the accounts were fully distributed to
participants in 2008.
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 2008, 2007, and 2006, respectively, we
contributed $0; $0; and $225,350 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, 2008, 2007, and 2006:
|
Number of Shares
|
Market Value
|
||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||
|
Allocated
|
-
|
844,381
|
929,069
|
-
|
$2,761,126
|
$7,497,587
|
|
|
Unearned
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Total
|
-
|
844,381
|
929,069
|
-
|
$2,761,126
|
$7,497,587
|
|
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. In 2008 and 2006,
we matched pretax employee contributions up to 50% on the first 4% of eligible
earnings that are contributed by employees. In 2007, we matched
pretax employee contributions up to 100% on the first 3% of eligible earnings
and 50% on the next 2% of eligible earnings.
|
Year Ended December 31,
|
Maximum
Matching
Contribution per
Participant*
|
Total
Matching
Contribution
|
|
2008
|
$4,600
|
$120,025
|
|
2007
|
$9,000
|
$240,774
|
|
2006
|
$4,400
|
$108,565
|
** Due to the annual limit on
eligible earnings imposed by the Internal Revenue
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
2008, 2007 or 2006.
We
currently offer no postretirement or postemployment benefits to our
employees.
9. INCOME
TAXES
The
provision for income taxes consists of the following:
|
2008
|
2007
|
2006
|
||||
|
Current
provision:
|
||||||
|
Federal
|
$826,157
|
$1,494,181
|
$2,167,141
|
|||
|
State
|
202,636
|
309,413
|
198,676
|
|||
|
1,028,793
|
1,803,594
|
2,365,817
|
||||
|
Deferred
provision (benefit):
|
||||||
|
Federal
|
429,854
|
(57,153)
|
19,447
|
|||
|
State
|
49,244
|
(6,740)
|
3,775
|
|||
|
479,098
|
(63,893)
|
23,222
|
||||
|
$1,507,891
|
$1,739,701
|
$2,389,039
|
Income
before income taxes is earned in the following tax jurisdictions:
|
2008
|
2007
|
2006
|
|||
|
United
States
|
$3,716,554
|
$4,407,361
|
$6,560,994
|
||
|
United
Kingdom
|
(176,257)
|
-
|
-
|
||
|
Canada
|
571,775
|
420,471
|
605,111
|
||
|
$4,112,072
|
$4,827,832
|
$7,166,105
|
The
income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities are as
follows:
|
2008
|
2007
|
||
|
Deferred income tax assets:
|
|||
|
Allowance
for doubtful accounts
|
$13,351
|
$29,360
|
|
|
Capitalized
inventory costs
|
128,591
|
144,099
|
|
|
Warrants
and stock-based compensation
|
55,739
|
42,989
|
|
|
Accrued
expenses, reserves, and other
|
87,559
|
83,478
|
|
|
Total
deferred income tax assets
|
285,240
|
299,926
|
|
|
Deferred income tax
liabilities:
|
|||
|
Property
and equipment depreciation
|
549,465
|
78,567
|
|
|
Goodwill
and other intangible assets amortization
|
106,583
|
113,069
|
|
|
Total
deferred income tax liabilities
|
656,048
|
191,636
|
|
|
Net
deferred tax asset (liability)
|
$(370,808)
|
$108,290
|
The net
deferred tax liability is classified on the balance sheets as
follows:
|
2008
|
2007
|
||
|
Current
deferred tax assets
|
$229,501
|
$256,938
|
|
|
Long-term
deferred tax liabilities
|
(600,309)
|
(148,648)
|
|
|
Net
deferred tax asset (liability)
|
$370,808
|
$108,290
|
The
effective tax rate differs from the statutory rate as follows:
|
2008
|
2007
|
2006
|
||
|
Statutory
rate
|
34%
|
34%
|
34%
|
|
|
State
and local taxes
|
9%
|
6%
|
2%
|
|
|
Other
|
(6%)
|
(4%)
|
(3%)
|
|
|
Effective
rate
|
37%
|
36%
|
33%
|
The
Company files a consolidated U.S. income tax return as well as state tax returns
on a consolidated, combined or stand-alone basis, depending on the
jurisdiction. The Company is no longer subject to U.S. federal income
tax examinations by tax authorities for years prior to the tax year ended
December 2006. Depending on the jurisdiction, the Company is no
longer subject to state examinations by tax authorities for years prior to the
December 2005 and December 2006 tax years.
10. COMMITMENTS
AND CONTINGENCIES
Operating
Leases
We lease
our store locations under five-year lease agreements that expire on dates
ranging from April 2009 to April 2016. Rent expense on all operating
leases for the years ended December 31, 2008, 2007, and 2006, was $2,575,642,
$2,682,574 and $2,495,380, respectively.
Future
minimum lease payments under noncancelable operating leases at December 31, 2008
were as follows:
|
Year
ending December 31:
|
|
|
2009
|
$2,468,217
|
|
2010
|
2,061,710
|
|
2011
|
1,540,658
|
|
2012
|
995,635
|
|
2013
|
307,513
|
|
2014
and thereafter
|
106,484
|
|
Total
minimum lease payments
|
$7,480,217
|
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.
11. 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 6% of our consolidated revenues in 2008, 2007 and 2006, sales to our five
largest customers represented 6.2%, 8.3% and 9.5%, 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, 2008 and 2007, 21% and 38%, 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.
12. STOCKHOLDERS'
EQUITY
|
a)
|
Stock
Option Plans
|
|
·
|
2007 Director
Non-Qualified Stock Option
Plan
|
The 2007
Director Non-Qualified Stock Option Plan was adopted by the Board of Directors
effective March 22, 2007 subject to stockholder approval at the Company’s 2007
Annual Meeting of Stockholders. Pursuant to the plan, options to
acquire an aggreagate of 100,000 common shares may be granted to each individual
who is serving as an outside Director of the Company on the date of grant, at
the rate of 3,000 shares of Common Stock on March 22 of each calendar
year. No options have been awarded as of December 31, 2008 as the
Form S-8, Registration Statement under the Securities Act of 1933, has not been
filed with the Securities and Exchange Commission yet.
|
·
|
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, due to the expiration of the plan in 2005, there
are no un-optioned shares available for future grants.
A summary
of stock option transactions for the years ended December 31, 2008, 2007, and
2006, is as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||
|
Average
|
Average
|
Average
|
||||||||||
|
Option
|
Exercise
|
Option
|
Exercise
|
Option
|
Exercise
|
|||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||
|
Outstanding
at January 1
|
236,700
|
$2.11
|
296,200
|
$2.05
|
421,000
|
$1.93
|
||||||
|
Granted
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Forfeited
or expired
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exchanged
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exercised
|
(12,000)
|
1.21
|
(59,500)
|
1.81
|
(124,800)
|
1.63
|
||||||
|
Outstanding
at December 31
|
224,700
|
$2.16
|
236,700
|
$2.11
|
296,200
|
$2.05
|
||||||
|
Exercisable
at end of year
|
222,700
|
$2.15
|
220,700
|
$1.97
|
266,200
|
$1.82
|
||||||
|
Weighted-average
fair value of
|
||||||||||||
|
options
granted during year
|
-
|
-
|
-
|
|||||||||
The
following table summarizes outstanding options into groups based upon exercise
price ranges at December 31, 2008:
|
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
|
2,000
|
$0.690
|
0.74
|
2,000
|
$0.690
|
0.74
|
||||||
|
$0.76
to $1.125
|
42,000
|
0.943
|
1.70
|
42,000
|
0.943
|
1.70
|
||||||
|
$1.126
to $1.69
|
105,700
|
1.350
|
2.39
|
105,700
|
1.350
|
2.39
|
||||||
|
$1.70
to $2.55
|
2,000
|
1.900
|
2.74
|
2,000
|
1.900
|
2.74
|
||||||
|
$2.56
to $3.84
|
12,000
|
3.270
|
5.31
|
10,000
|
3.248
|
5.24
|
||||||
|
$3.85-$4.96
|
61,000
|
4.241
|
4.91
|
61,000
|
4.241
|
4.91
|
||||||
|
224,700
|
$2.160
|
3.09
|
222,700
|
$2.150
|
3.07
|
|||||||
|
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 expired 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 expired on February 24, 2009.
A summary
of warrant transactions for the years ended December 31, 2008, 2007, and 2006,
is as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||
|
Average
|
Average
|
Average
|
||||||||||
|
Warrant
|
Exercise
|
Warrant
|
Exercise
|
Warrant
|
Exercise
|
|||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||
|
Outstanding
at January 1
|
27,500
|
$3.620
|
98,300
|
$3.650
|
140,000
|
$3.7786
|
||||||
|
Granted
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Forfeited
or expired
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exchanged
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exercised
|
-
|
-
|
(70,800)
|
3.658
|
(41,700)
|
4.089
|
||||||
|
Outstanding
at December 31
|
27,500
|
$3.620
|
27,500
|
$3.620
|
98,300
|
$3.650
|
||||||
|
Exercisable
at end of year
|
27,500
|
$3.620
|
27,500
|
$3.620
|
98,300
|
$3.650
|
||||||
|
Weighted-average
fair value of
|
||||||||||||
|
warrants
granted during year
|
-
|
-
|
-
|
|||||||||
The
following table summarizes outstanding warrants into groups based upon exercise
price ranges at December 31, 2008:
|
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
|
20,000
|
$3.10
|
0.12
|
20,000
|
$3.10
|
0.12
|
||||||
|
$5.00
or More
|
7,500
|
5.00
|
1.15
|
7,500
|
5.00
|
1.15
|
||||||
|
27,500
|
$3.62
|
0.40
|
27,500
|
$3.62
|
0.40
|
|||||||
|
c)
|
Stock
Repurchase Program
|
On
September 9, 2008, our Board of Directors approved a limited stock repurchase
plan whereby all non-officer participants in Tandy Leather Factory, Inc. Stock
Ownership Plan (the “ESOP”) would have the option of selling the shares of our
common stock distributed to them upon termination of the ESOP back to us. The
option remained open to the non-officer participants for a period of sixty days
beginning on September 26, 2008 and ending on November 25, 2008. The purchase
price of the shares was calculated at a price-per-share equal to the closing
price of a share of our common stock on the American Stock Exchange on the
business day each non-officer participant notified the ESOP administrator of his
or her intent to sell his or her shares to us. We repurchased a total of 324,537
shares at a total purchase price of $802,898 in the fourth quarter of
2008.
13. BUSINESS
ACQUISITIONS
On
January 31, 2007, we acquired all of the issued and outstanding shares of
capital stock of Mid-Continent Leather Sales, Inc., an Oklahoma
corporation. The total purchase price was $575,000 which was funded
with cash generated from operations. For financial reporting
purposes, the transaction was accounted for under the purchase method, effective
February 1, 2007. We also entered into a non-compete agreement with
the former owner totaling $75,000 for a period of five years. This
company is included in our Wholesale Leathercraft segment.
14. SEGMENT
INFORMATION
We
identify our segments based on the activities of four distinct
operations:
|
a.
|
Wholesale
Leathercraft, which consists of a chain of warehouse distribution
units operating under the name, The Leather Factory,
located in North America;
|
|
b.
|
Retail
Leathercraft, which consists of a chain of retail stores operating
under the name, Tandy
Leather Company, located in North
America;
|
|
c.
|
International
Leathercraft, sells to both wholesale and retail
customers. It carries the same products as North American
stores. We started this operation in February 2008 and have one
store located in Northampton, United Kingdom;
and
|
|
d.
|
Other,
which consists of Roberts, Cushman and Co., a producer of decorative hat
trims sold directly to hat
manufacturers.
|
Our
reportable operating segments have been determined as separately identifiable
business units and we measure segment earnings as operating earnings, defined as
income before interest and income taxes.
|
Wholesale
Leathercraft
|
Retail
Leathercraft
|
International
Leathercraft
|
Other
|
Total
|
|
|
For
the year ended December 31, 2008
|
|||||
|
Net
Sales
|
$26,423,858
|
$25,231,145
|
$836,535
|
$745,556
|
$53,237,094
|
|
Gross
Profit
|
14,935,331
|
15,543,293
|
571,735
|
328,935
|
31,379,294
|
|
Operating
earnings
|
1,842,526
|
2,188,282
|
54,532
|
93,804
|
4,179,144
|
|
Interest
expense
|
332,107
|
-
|
-
|
-
|
332,107
|
|
Other,
net
|
(501,697)
|
5,872
|
230,790
|
-
|
(265,035)
|
|
Income
before income taxes
|
2,012,116
|
2,182,410
|
(176,258)
|
93,804
|
4,112,072
|
|
Depreciation
and amortization
|
844,305
|
126,326
|
13,443
|
1,475
|
985,549
|
|
Fixed
asset additions
|
3,481,851
|
74,550
|
92,859
|
-
|
3,649,260
|
|
Total
assets
|
$33,657,764
|
$6,404,198
|
$778,721
|
$135,230
|
$40,975,913
|
|
For
the year ended December 31, 2007
|
|||||
|
Net
Sales
|
$29,555,979
|
$24,663,751
|
-
|
$1,097,272
|
$55,317,002
|
|
Gross
Profit
|
16,446,853
|
14,733,478
|
-
|
492,071
|
31,672,402
|
|
Operating
earnings
|
2,826,710
|
1,544,320
|
-
|
139,971
|
4,511,001
|
|
Interest
expense
|
122,209
|
-
|
-
|
-
|
122,209
|
|
Other,
net
|
(425,145)
|
(11,975)
|
-
|
(1,920)
|
(439,040)
|
|
Income
before income taxes
|
3,129,646
|
1,556,295
|
-
|
141,891
|
4,827,832
|
|
Depreciation
and amortization
|
485,506
|
143,123
|
-
|
5,662
|
634,291
|
|
Fixed
asset additions
|
5,538,803
|
207,455
|
-
|
9,109
|
5,755,367
|
|
Total
assets
|
$32,217,748
|
$5,272,466
|
-
|
$161,292
|
37,651,506
|
|
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
|
Net sales
for geographic areas was as follows:
|
2008
|
2007
|
2006
|
|
|
United
States
|
$46,316,115
|
$48,756,696
|
$49,188,609
|
|
Canada
|
4,740,722
|
4,698,510
|
4,287,180
|
|
All
other countries
|
2,180,257
|
1,861,796
|
1,723,232
|
|
$53,237,094
|
$55,317,002
|
$55,199,021
|
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, 2008, 2007 and
2006. We do not have any significant long-lived assets outside of the
United States.
15. RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value, creates a
framework within GAAP for measuring fair value, and expands disclosures about
fair value measurements. In defining fair value, SFAS 157 emphasizes a
market-based measurement approach that is based on the assumptions that market
participants would use in pricing an asset or liability. SFAS 157 does not
require any new fair value measurements, but does generally apply to other
accounting pronouncements that require or permit fair value measurements. In
February 2008, FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157, which delays for one year the effective date of SFAS 157
for most nonfinancial assets and nonfinancial liabilities. Nonfinancial
instruments affected by this deferral include assets and liabilities such as
reporting units measured at fair value in a goodwill impairment test and
nonfinancial assets acquired and liabilities assumed in a business combination.
Effective January 1, 2008, we adopted SFAS 157 for financial assets and
financial liabilities recognized at fair value on a recurring basis. The
adoption of SFAS 157 for these items did not have a material impact on our
financial position, results of operations and cash
flows.
In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — including an amendment of FASB Statement
No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, including interim periods within that fiscal year. We
did not elect the fair value option for any of our existing financial
instruments. The adoption of SFAS 159 did not have a
material impact on our financial position, results of operations and cash
flows.
In
December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”). SFAS 141R defines a business combination as a transaction or other event
in which an acquirer obtains control of one or more businesses. Under SFAS 141R,
all business combinations are accounted for by applying the acquisition method
(previously referred to as the purchase method), under which the acquirer
measures all identified assets acquired, liabilities assumed, and noncontrolling
interests in the acquiree at their acquisition date fair values. Certain forms
of contingent consideration and certain acquired contingencies are also recorded
at their acquisition date fair values. SFAS 141R also requires that most
acquisition related costs be expensed in the period incurred. SFAS 141R is
effective for us in January 2009. SFAS 141R will change our accounting
for business combinations on a prospective basis.
In
December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51
(“SFAS 160”). SFAS 160 requires a company to recognize noncontrolling interests
(previously referred to as “minority interests”) as a separate component in the
equity section of the consolidated statement of financial position. It also
requires the amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated statement of income.
SFAS 160 also requires changes in ownership interest to be accounted for
similarly, as equity transactions; and when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary and the gain
or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS
160 is effective for us in January 2009. We are currently evaluating the
impact, if any, SFAS 160 will have on our financial position, results of
operations and cash flows.
In
March 2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires a
company with derivative instruments to disclose information that should enable
financial statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and how derivative instruments and
related hedged items affect a company’s financial position, financial
performance, and cash flows. SFAS 161 is effective for us in
January 2009.
16. QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
|||
|
2008
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||
|
Net
sales
|
$13,260,160
|
$13,847,964
|
$12,251,990
|
$13,876,980
|
||
|
Gross
profit
|
7,741,022
|
8,011,652
|
7,143,157
|
8,483,463
|
||
|
Net
income
|
584,498
|
655,250
|
421,014
|
943,419
|
||
|
Net
income per common share:
|
||||||
|
Basic
|
0.05
|
0.06
|
0.04
|
0.09
|
||
|
Diluted
|
0.05
|
0.06
|
0.04
|
0.09
|
||
|
Weighted
average number of common shares outstanding:
|
||||||
|
Basic
|
10,977,092
|
10,981,378
|
10,988,092
|
10,779,703
|
||
|
Diluted
|
11,067,863
|
11,076,340
|
11,073,942
|
10,845,517
|
||
|
First
|
Second
|
Third
|
Fourth
|
|||
|
2007
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||
|
Net
sales
|
$14,507,805
|
$13,376,987
|
$12,806,333
|
$14,625,877
|
||
|
Gross
profit
|
8,597,953
|
7,685,669
|
6,941,634
|
8,447,147
|
||
|
Net
income
|
1,346,355
|
396,692
|
171,606
|
1,173,478
|
||
|
Net
income per common share:
|
||||||
|
Basic
|
0.12
|
0.04
|
0.02
|
0.11
|
||
|
Diluted
|
0.12
|
0.04
|
0.02
|
0.11
|
||
|
Weighted
average number of common shares outstanding:
|
||||||
|
Basic
|
10,893,359
|
10,915,061
|
10,945,661
|
10,974,222
|
||
|
Diluted
|
11,150,246
|
11,114,466
|
11,129,757
|
11,160,034
|
||
REPORT OF
INDEPENDENT REGISTERED
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, 2008 and 2007, 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,
2008. The Company’s management is responsible for these financial
statements. 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 Company
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 Tandy Leather
Factory, Inc. and Subsidiaries as of December 31, 2008, and 2007 and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
WEAVER
AND TIDWELL, L.L.P.
Fort
Worth, Texas
March 31,
2009
None.
Evaluation of Disclosure
Controls and Procedures. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the design and operation of our “disclosure controls and procedures”
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this
report. Based upon their evaluation of these disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures were effective as of the
date of such evaluation in ensuring that information required to be disclosed in
the reports that we file or submit under the Exchange Act is (1) recorded,
processed, summarized and reported in a timely manner, and (2) accumulated and
communicated to our management, including our principal executive and principal
financial officers, as appropriate, to allow timely decisions regarding required
disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was
designed to provide reasonable assurance to management and the board of
directors regarding the effectiveness of our internal control processes over the
preparation and fair presentation of our published financial
statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
We have
assessed the effectiveness of our internal controls over financial reporting as
of December 31, 2008. In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commissions (COSO) in Internal
Control – Integrated Framework. Based on our assessment, we believe that,
as of December 31, 2008, our internal control over financial reporting is
effective based on that criteria.
This
annual report does not include an auditor’s attestation report regarding the
effectiveness of our internal control over financial reporting and our
independent registered public accounting firm has not attested to management’s
report on our internal control over financial reporting. Management’s
report was not subject to attestation by the company’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Changes in internal
control. There was no change in our internal control over
financial reporting that occurred during the fiscal quarter ended December 31,
2008 that has materially affected, or is reasonably likely to materially 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 2009 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 2009 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 2009 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 2009 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.tandyleatherfactory.com).
The
information required by this item is contained in our proxy statement for our
2009 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
2009 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
2009 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
2009 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, 2008 and
2007
|
|
·
|
Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006
|
|
·
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
|
·
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2008,
2007 and 2006
|
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.
SIGNATURES
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.
|
Dated: March 31, 2009
|
By:
|
 |
|
Ronald
C. Morgan
|
||
|
Chief
Executive Officer
|
||
|
|
By:
|
 |
|
Shannon
L. Greene
|
||
|
Chief
Financial Officer, Chief Accounting Officer and
Treasurer
|
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
31, 2009
|
|
Wray
Thompson
|
||
|
/s/
Ronald C. Morgan
|
Chief
Executive Officer and Director
|
March
31, 2009
|
|
Ronald
C. Morgan
|
||
|
/s/
Shannon L. Greene
|
Chief
Financial Officer, Chief Accounting Officer, Treasurer and
Director
|
March
31, 2009
|
|
Shannon
L. Greene
|
|
|
|
/s/
Jon W. Thompson
|
President
and Chief Operating Officer
|
March
31, 2009
|
|
Jon
W. Thompson
|
||
|
/s/
Mark J. Angus
|
Senior
Vice President
|
March
31, 2009
|
|
Mark
J. Angus
|
||
|
/s/
T. Field Lange
|
Director
|
March
31, 2009
|
|
T.
Field Lange
|
||
|
/s/
Joseph R. Mannes
|
Director
|
March
31, 2009
|
|
Joseph
R. Mannes
|
||
|
/s/
L. Edward Martin III
|
Director
|
March
31, 2009
|
|
L.
Edward Martin III
|
||
|
/s/
Robin L. Morgan
|
Vice
President and Assistant Secretary
|
March
31, 2009
|
|
Robin
L. Morgan
|
||
|
/s/
Michael A. Nery
|
Director
|
March
31, 2009
|
|
Michael
A. Nery
|
||
|
/s/
William M. Warren
|
Secretary
|
March
31, 2009
|
|
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 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
|
Consultation
Agreement, dated January 1, 2008, between Tandy Leather Factory, Inc. and
J. Wray Thompson, filed as Exhibit 10.1 to Form 8-K filed with the
Securities and Exchange Commission on April 1, 2008 and incorporated by
reference herein.
|
|
|
10.2
|
2007
Director Non-qualified Stock Option Plan of Tandy Leather Factory, Inc.
dated March 22, 2007, filed as an Exhibit to Tandy Leather Factory, Inc.’s
Definitive Proxy Statement, filed with the Securities and Exchange
Commission on April 18, 2007 and incorporated by reference
herein.
|
|
|
10.3
|
Agreement
of Purchase and Sale, dated June 25, 2007, by and between Standard Motor
Products, Inc. and Tandy Leather Factory, L.P., filed as Exhibit 10.4 to
Form 8-K filed with the Securities and Exchange Commission on August 6,
2007 and incorporated by reference herein.
|
|
|
10.4
|
Credit
Agreement, dated July 31, 2007, by and between The Leather Factory, L.P.
and JPMorgan Chase Bank, N.A., filed as Exhibit 10.2 to Tandy Leather
Factory’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 6, 2007 and incorporated by reference
herein.
|
|
|
10.5
|
Line
of Credit Note, dated July 31, 2007, by and between The Leather Factory,
L.P. and JPMorgan Chase Bank, N.A., filed as Exhibit 10.1 to Tandy Leather
Factory’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 6, 2007 and incorporated by reference
herein.
|
|
|
10.6
|
Deed
Of Trust, Assignment of Leases and Rents, Security Agreement and Financing
Statement, dated as of July 31, 2007, by and among The Leather Factory,
L.P., Randall B. Durant and JPMorgan Chase Bank, N.A., filed as Exhibit
10.3 to Tandy Leather Factory’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 6, 2007 and incorporated by
reference herein.
|
|
|
10.7
|
Consultation
Agreement, dated as of January 1, 2008, by and between Tandy Leather
Factory, Inc. and J. Wray Thompson, filed as Exhibit 10.1 to Tandy Leather
Factory’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 7, 2008 and incorporated by reference
herein.
|
|
|
10.8
|
Consultation
Agreement, dated as of January 1, 2009, by and between Tandy Leather
Factory, Inc. and J. Wray Thompson, filed as Exhibit 10.1 to Tandy Leather
Factory’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 17, 2009 and incorporated by reference
herein.
|
|
|
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 31, 2009
|
|
|
*31.1
|
Certification
by the Chief Executive Officer and President pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934
|
|
|
*31.2
|
Certification
by the Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934
|
|
|
*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.
|
||
30