Back to GetFilings.com
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period ________ to ________
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3847 East Loop 820 South
Fort Worth, Texas 76119
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 496-4414
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 $.0024 American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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. [ ]
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $9,793,833 at March 11, 2003. At that date
there were 10,197,961 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 15, 2003, are incorporated by
reference in Part III of this report.
1
PART I
ITEM 1. BUSINESS
- ------------------
As used in this Report, the terms "we," "us," "our," "TLF," "management,"
and the "Company" mean The Leather Factory, Inc. and its subsidiaries (unless
the context indicates a different meaning).
GENERAL
The Leather Factory, Inc. is a Delaware corporation whose common stock
trades on the American Stock Exchange under the symbol "TLF." The Company was
first incorporated under the laws of the State of Colorado in 1984 and
reincorporated under the laws of the State of Delaware in June 1994.
We are a wholesale distributor and retailer 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. The Company
sells its products worldwide through 27 Leather Factory stores and 19 Tandy
Leather stores (as of March 31, 2003), located throughout the U.S., three
combination Leather Factory/Tandy Leather stores located in Canada, and through
its websites (www.leatherfactory.com) and (www.tandyleather.com). Our
subsidiary, Roberts, Cushman & Co., designs and manufactures fancy hat trims
directly to hat manufacturers.
The Company is managed on a business entity basis, with those businesses
being The Leather Factory ("Leather Factory"), Tandy Leather Company ("Tandy" or
"Tandy Leather"), and Roberts, Cushman & Company, Inc. ("Cushman"). See Note 12
to the Consolidated Financial Statements, Segment Information, for financial and
additional information concerning the Company's segments, as well as its foreign
operations.
We frequently introduce new products either through our own manufacturing
capability or by purchasing from vendors. The Company holds a substantial number
of copyrights for its designs. These designs have been incorporated throughout
the Company's product line as a means of increasing its competitive advantage.
In 2002, the Company began opening retail stores under the Tandy Leather
name and had fourteen stores opened as of the end of the year. The Tandy
Leather retail store concept differs from that of a traditional Leather Factory
store. Tandy stores are designed to attract walk-in retail customers primarily,
while Leather Factory stores, although they can and do service retail customers,
generally tend to target wholesale customers including manufacturers and
resellers.
The Company has made numerous acquisitions in prior years, including the
purchase of the six original Leather Factory stores from Brown Group, Inc. in
1985. In 1995, the Company purchased Cushman. In 1996, the Company acquired its
Canadian distributor, The Leather Factory of Canada, Ltd. In November 2000, the
Company acquired the operating assets of two subsidiaries of Tandycrafts, Inc.
to form the Tandy Leather Company subsidiary. In 2002, Tandy Leather purchased
four independent leathercraft retail stores.
No single customer's purchases represent more than 10% of the Company's
total sales in 2002. Approximately 5.6% of our 2002 sales were export sales.
The Company's principal offices are located at 3847 East Loop 820 South,
Fort Worth, Texas 76119, and its phone number is (817) 496-4414.
2
LEATHER FACTORY OPERATIONS
The Leather Factory distributes its broad product line of leather and
leathercraft-related products in the United States and internationally. We
manufacture some of our products, while the majority of products are purchased
from manufacturers. Leather Factory operations accounted for 76.3%, 77.0%, and
89.9% of the total consolidated net sales of the Company for 2002, 2001, and
2000, respectively.
BUSINESS STRATEGY. We distribute Leather Factory products through 27
U.S.-based stores, three Canadian-based stores, and through our web site
(www.leatherfactory.com). 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 is the Company's goal. The type of premises
utilized for the store locations is generally light industrial office/warehouse
space in proximity to a major freeway or with other similar access. This kind
of location typically offers lower rents compared to other more retail-oriented
locations.
Leather Factory stores offer a "one-stop shopping" concept for both leather
and leathercraft materials. Our strategy is that a customer can purchase the
leather and related accessories and supplies necessary to complete his project
from one place. The size and configuration of the stores 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.
Leather Factory stores serve customers through various means including
walk-in traffic, phone and mail order. Both wholesale and retail customers
purchase from the stores.
We staff Leather Factory stores with experienced managers whose
compensation is tied to the operating profit of their store. Sales are generated
by the selling efforts of the store personnel themselves, the aggressive use of
direct mail advertising, participation by the Company at trade shows and, on a
limited basis, the use of sales representative organizations.
Our primary advertising efforts are through direct mail advertising aimed
at specific market groups. Like most direct mail marketers, our mailing list is
one of our most important assets. Over the years, we have spent considerable
time and money maintaining and updating this list. As a result, we have
developed what we consider to be the purest, most up-to-date, unique collection
of leathercraft customers' names and purchase information found anywhere in the
world. Our mailing list has been the key to our sales in the past and will
continue to be the key in the future. We estimate that in 2003, we will produce
and mail 35-40 different direct mail pieces from a simple black and white
postcard to our 140-page full color catalog.
CUSTOMERS. Leather Factory's customer base is comprised 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 make up the majority of our
Leather Factory business, although retail sales have increased somewhat during
the last several years. Generally speaking, Leather Factory's sales mix is 80%
wholesale and 20% retail. We are continuing efforts to attract retail customers
to Leather Factory; however, the strongest market for Leather Factory continues
to be the wholesale customer. Leather Factory sales generally do not reflect
significant seasonal patterns. Orders are filled as received, and Leather
Factory does not have any backlogs. We maintain inventory at a level that we
believe will fill most customer orders.
Leather Factory's Authorized Sales Center ("ASC") program was developed to
generate sales in geographical areas where we currently do not have a store
without the capital investment needed to open one. An unrelated person
operating an existing business who desires to become an ASC must apply with
Leather Factory and upon approval, place a minimum initial order. There are
also minimum annual purchase amounts set that the ASC must adhere to in order to
maintain ASC status. In exchange, the ASC gets free advertising in certain sale
flyers, price breaks on many products, advance notice of new products, priority
shipping and handling on all orders, as well as various other benefits. Leather
Factory stores service approximately 110 ASC's located throughout the United
States.
EXPANSION. We opened four new Leather Factory stores in 1999, and two new
stores in each of the years 2000 and 2001. While we do not believe there is a
significant and immediate opportunity for expansion of the Leather Factory store
system in terms of opening additional stores, we do believe expansion could be
achieved by acquiring companies in related areas/markets which offer synergistic
aspects based on the locations and/or product lines of the businesses.
3
TANDY LEATHER OPERATIONS
Tandy Leather Company bears the name of the oldest and best-known supplier
of leather and related supplies used in the leathercraft industry. Established
in 1919, originally as Hinkley-Tandy Leather Company, Tandy Leather has been the
primary resource for over five generations of leathercrafters. This subsidiary
offers a product line of quality tools, leather, accessories, kits and teaching
materials.
As noted above, we acquired the Tandy Leather assets in November 2000.
Tandy Leather accounted for 18.6%, 17.7% and 1.9% of the total consolidated net
sales of the Company for 2002, 2001, and 2000, respectively.
BUSINESS STRATEGY. Tandy Leather did not own any retail stores when its
assets were acquired by the Company and was operating as a catalog/mail
order/Internet fulfillment house. At one time, however, Tandy Leather operated
approximately 350 retail stores located throughout the United States and Canada.
Believing that Tandy Leather stores are a viable vehicle for growth, we began
opening Tandy Leather retail stores in 2002. As of December 31, 2002, there
were 14 retail stores located in the United States. More information about the
growth and expansion of the Tandy retail store chain is explained below.
The retail stores serve walk-in, mail and phone order customers from
convenient locations in established retail areas as well as orders generated
from its website, www.tandyleather.com. The Tandy stores also service
approximately 120 authorized dealers located throughout the United States. Tandy
Leather stores are staffed by knowledgeable sales people whose compensation is
based, in part, upon the profitability of their store. Our products are sold in
Canada through the three Leather Factory stores located there. These three
stores support approximately 40 Tandy Leather authorized dealers located
throughout the Canadian provinces.
Sales by Tandy Leather are driven through the efforts of the store staff,
trade shows, our 132-page catalog and a direct marketing program that includes
35-40 different sales flyers produced annually and e-mail announcements. Tandy's
mailing list is similar to that of The Leather Factory in that maintaining
detailed customer history allows us to target certain customer segments in our
mailings. This provides significant opportunity for sales retention and growth.
Tandy Leather has long been the entry point for new customers getting into
leathercraft. 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 the retail stores.
CUSTOMERS. Tandy's customer base is comprised mostly of individual
hobbyists but also includes a number of resellers, small manufacturers,
institutions and dealers. Individual retail customers are our largest customer
group, representing more than 65% of Tandy Leather sales. Youth camps and
schools, Authorized Dealers (similar to Leather Factory's Authorized Sales
Centers) and our wholesale customers complete our customer base. Like Leather
Factory, Tandy fills orders as they are received, and there is no order backlog.
Tandy maintains reasonable amounts of inventory to meet these orders.
Tandy's sales, when operating strictly as an order fulfillment house
(phone, fax, mail, and Internet orders), are generally consistent quarter to
quarter (25% per quarter). Its retail store operations historically generate
slightly more sales in the 4th quarter of each year (approximately 30%) and less
in the 2nd quarter (approximately 20%) while the 1st and 3rd quarters remain
steady at 25%.
EXPANSION. In December 2001, The Leather Factory, Inc. announced plans to
expand the Tandy Leather operation through the introduction of Tandy Leather
retail stores. We opened fourteen retail stores in 2002 - four by acquiring
existing leathercraft stores, nine by opening new stores, and one by converting
a Leather Factory store. Management expects to open a similar number of retail
stores in 2003.
4
ROBERTS, CUSHMAN SUBSIDIARY
Cushman is located in Long Island City, N.Y., and produces and sells
headwear adornments (decorations that adorn the outside of a hat), manufacturing
made-to-order trimmings for the headwear industry for over 140 years. Cushman
accounted for 5.1%, 5.3%, and 8.2% of the total consolidated net sales of the
Company for 2002, 2001, and 2000, respectively.
BUSINESS STRATEGY. Cushman has long been considered one of the leaders in
the field of headwear trimmings. It designs and manufactures exclusive trimmings
for all type of hats. Trims are sold to hat manufacturers directly. Cushman does
not employ an outside sales force. Instead, customers visit the facilities in
New York and, with a Cushman designer, incorporate their ideas into a customized
product. The customer is provided samples or photographs of each design before
they leave the premises who can then use the sample as a sales tool to obtain
hat orders from their customers. This "design-on-site" process is unique in the
industry.
CUSTOMERS. Currently, there are approximately 90 to 100 headwear
manufacturers worldwide. Cushman designs and manufactures trims for over 75 of
those manufacturers, supplying customized trims, as well as ribbons, buckle
sets, name pins, feathers, etc. Our success in developing and maintaining
long-standing relationships with our customers is due primarily to our ability
to deliver quality products in a timely manner. Generally, our delivery target
is three weeks or less. Cushman's backlog of in-house orders from customers as
of March 14, 2003 was $180,000, which approximates one month of sales. Cushman's
sales generally do not reflect significant seasonal patterns.
EXPANSION. Cushman has been successful providing a very specific product
line directly to headwear manufacturers. Given the current conditions, we do not
believe that there is much room for expansion in the industry, other than to
capture additional market share. We have considered the possibility of expanding
production to other leather products. However, even though the potential
products would be made from leather and therefore could be considered somehow
related, we have decided that Cushman's expansion into other products is not
feasible at this time.
5
ADDITIONAL INFORMATION
PRODUCTS. Our core business consists of manufacturing, importing and
distributing leather, traditional leathercraft materials (do-it-yourself kits,
stamping sets, and leatherworking tools), craft-related items (leather lace,
beads, and wearable art accessories), hardware, metal garment accessories (belt
buckles, belt buckle designs, and conchos), and leather finishes. We attempt to
maintain the optimum number of stock-keeping units ("SKUs") in the Leather
Factory and Tandy Leather lines to balance proper stock maintenance and minimize
out-of-stock situations against carrying costs involved with such an inventory
level. We try to maintain higher inventories of certain imported items to
ensure a continuous supply.
The number of SKUs has been refined over the years by the introduction of
new products and the discontinuing of selected products. The Company carries
approximately 3,400 items in the current lines of leather and leather-related
merchandise - 800 of which are exclusively Leather Factory products, 800
exclusively Tandy Leather and 1,800 carried by both Leather Factory and Tandy.
The products manufactured by the Company generally involve cutting leather
into various shapes and patterns using metal dies ("clicking"), fabrication,
assembly, and packaging/repackaging tasks. Items made in Fort Worth are
primarily distributed under the TejasTM brand name through our stores.
Cushman's hat bands are generally made from leather, ribbon, or woven
fabrics, depending on the style of hat. They are made by cutting leather and/or
other materials into strips, and enhancing the trim by attaching conchos and/or
three-piece buckle sets, braiding with other materials, finishing the end or
borders by stitching or by lacing with leather lace. Cushman also supplies
custom-designed buckles and conchos separate from the bands, feathers for dress
hats, and name pins.
PATENTS, COPYRIGHTS. We presently own 496 copyrights covering 605
registered works, twenty trademarks covering twenty names, and two patents
covering three products. Registered trademarks include federal trade name
registrations on "The Leather Factory" and "Tandy Leather Company". The
trademarks expire at various times starting in 2005 and ending in 2012, but can
be renewed indefinitely. Most copyrights granted or pending are on metal
products, such as conchos, belt buckles, instruction books, and kits. The
expiration period for the copyrights begins in 2062 and ends in 2072. The
Company has patents on two belt buckles and certain leather-working equipment
known as the "Speedy Embosser." The patents expire in 2011. We consider these
intangibles to be valuable assets and defend them as necessary.
Cushman's products are generally not copyrighted initially as hundreds of
new trim designs are continually in process. Once a trim has been selected by a
customer for production, has been completed for a line of hats, and has been a
strong seller for the season, selected components in the trim are often
transferred to Leather Factory, adapted to fit Leather Factory's product line,
and copyrighted. Given that the apparel market designs and produces styles at
least six months in advance of a particular season, Cushman's product design
contributes to Leather Factory's development of new products as we get insight
into what styles are expected to be popular in the near future.
SUPPLIERS. We currently purchase merchandise and raw materials from
approximately 200 vendors dispersed throughout the United States and in more
than 20 foreign countries. In 2002, the ten largest vendors accounted for
approximately 75% of Leather Factory's and Tandy Leather's combined 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 certain parts of the world
can influence the price of leather used in our products. As such an occurrence
is beyond the control of the Company, 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.
Cushman purchases components from over 25 vendors, located predominately in
the United States. In 2002, Cushman's top ten vendors (in dollars purchased)
represented approximately 40% of its total purchases.
Overall, we believe that our relationships with suppliers are strong and do
not anticipate any material changes in these supplier relationships in the
future. 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.
COMPETITION. We sell our leather and leathercraft-related products in
three highly fragmented markets - leathercraft, leather accessories, and retail
craft. We encounter competition in connection with certain product lines and in
certain areas from different companies, but have no direct competition affecting
the entire product line. We compete on price, availability of merchandise, and
speed of delivery. Our size relative to most of our competitors creates
competitive advantage in our ability to stock a full range of products as well
as in buying merchandise. We are able to purchase in bulk and have an
international network of suppliers that can provide quality merchandise at lower
costs. Most of our competitors do not have the multiple sources of supply and
cannot purchase sufficient quantities to compete along a broad range of
products. In fact, some of our competitors are also customers, relying on us as
a supplier.
Our Cushman line encounters some competition. However, we are not aware of
any single company whose primary product line is the same as Cushman's.
Cushman's market share has grown over the years because of its reputation in the
industry to deliver product timely.
6
COMPLIANCE WITH ENVIRONMENTAL LAWS
Compliance by the Company with federal, state and local environmental
protection laws has not had, and is not expected to have, a material effect upon
capital expenditures, earnings or the competitive position of the Company.
EMPLOYEES
As of December 31, 2002, the Company employed 340 people, with 323 on a
full-time basis. The Company is not a party to any collective bargaining
agreement. Overall, management believes that relations with employees are good.
Eligible employees participate in The Leather Factory, Inc. Employees'
Stock Ownership Plan and Trust ("ESOP"). As of December 31, 2002, 232 employees
and former employees were participants in or beneficiaries of the ESOP. The
Company has the option of contributing up to 25% of eligible employees'
compensation into the ESOP. Net contributions for 2002, 2001, and 2000 were
5.8%, 5.2%, and 5.9%, respectively, of eligible compensation. These
contributions are used to purchase shares of the Company's Common Stock.
Generally, contributions to the ESOP follow a similar pattern as overall
profitability.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company.
POSITION AND BUSINESS EXPERIENCE
NAME AND AGE DURING PAST FIVE YEARS SERVED AS OFFICER SINCE
------------ -------------------------------- -----------------------
J. Wray Thompson, 71 Chief Executive Officer since June 1993.
President from June 1993 to January 2001. 1993
Ronald C.Morgan, 55 President since January 2001.
Chief Operating Officer since June 1993. 1993
Robin L. Morgan, 52 Vice President of Administration
since June 1993. 1993
Shannon L. Greene, 37 Chief Financial Officer since May 2000.
Controller from January 1998 to May 2000.
Assistant Controller from September 1997 to
January 1998. 2000
Mr. and Mrs. Morgan are married. All officers are elected annually by the Board
of Directors to serve for the ensuing year.
7
ITEM 2. PROPERTIES.
- ----------------------
The Company leases all of its premises. Detailed below are the lease terms
for the Company's locations. The general character of the Leather Factory
("LF") store locations is light industrial office/warehouse space. Tandy
Leather ("TAN") store locations are generally found in retail strip centers.
The Company believes that all of its properties are adequately covered by
insurance. The Cushman facility ("RCC") is its manufacturing facility in Long
Island City, New York.
The Company's Fort Worth location includes the Fort Worth Leather Factory
store, the Company's central warehouse and manufacturing facility, and the
sales, advertising, administrative, and executive offices. The Company also
leases a 284 square-foot showroom in the Denver Merchandise Mart for $5,372 per
year. This lease will expire in October 2005.
Location Total Square Feet Minimum Annual Rent * Lease Expiration Lessee
Chattanooga, TN 9,040 $ 42,739 May 2004 LF
Denver, CO 5,879 30,000 September 2004 LF
Harrisburg, PA 6,850 40,417 March 2007 LF
Fort Worth, TX 115,000 410,958 March 2008 LF
Fresno, CA 5,600 44,456 March 2007 LF
Des Moines, IA 4,000 30,718 April 2004 LF
Phoenix, AZ 4,500 27,053 March 2006 LF
Springfield, MO 6,000 24,000 July 2003 LF
Spokane, WA 5,400 21,360 February 2004 LF
Albuquerque, NM 5,000 31,200 October 2003 LF
Salt Lake City, UT 3,485 21,600 July 2004 LF
Baldwin Park, CA 7,800 53,400 March 2005 LF
Tampa, FL 5,238 38,429 August 2008 LF
San Antonio, TX 5,600 42,256 October 2006 LF
Columbus, OH 6,000 38,461 October 2006 LF
El Paso, TX 5,000 28,252 August 2003 LF
Oakland, CA 8,000 54,000 December 2003 LF
Grand Rapids, MI 8,000 42,968 March 2004 LF
Wichita, KS 5,150 21,360 April 2004 LF
New Orleans, LA 5,130 22,200 September 2003 LF
Portland, OR 5,232 34,008 April 2004 LF
Charlotte, NC 6,202 29,025 February 2006 LF
Billings, MT 2,600 12,000 April 2004 LF
Tucson, AZ 3,600 21,033 May 2004 LF
Houston, TX 4,250 25,753 November 2005 LF
Dallas, TX 5,040 27,600 September 2005 LF
Chicago, IL 6,100 36,972 August 2006 LF
Long Island City, NY 10,200 71,146 June 2003 RCC
Oklahoma City, OK 3,160 20,012 December 2006 TAN
Boise, ID 1,800 16,200 February 2007 TAN
Sacramento, CA 1,600 22,907 April 2007 TAN
East Hartford, CT 1,200 9,600 May 2007 TAN
Salt Lake City, UT 1,750 21,000 May 2007 TAN
Fort Worth, TX 3,000 21,600 July 2007 TAN
Austin, TX 3,800 23,250 April 2005 TAN
Dallas, TX 1,700 23,052 July 2007 TAN
Albuquerque, NM 1,764 16,229 August 2007 TAN
Las Vegas, NV 1,350 20,250 June 2007 TAN
Indianapolis, IN 1,500 17,727 October 2007 TAN
Peoria, IL 1,350 14,833 October 2007 TAN
Memphis, TN 2,500 15,000 September 2005 TAN
Tempe, AZ 1,986 38,848 October 2007 TAN
Baltimore, MD 2,200 16,901 January 2008 TAN
Winnipeg, Manitoba, Canada 5,712 18,376** November 2007 LF
Toronto, Ontario, Canada 5,614 21,968** June 2006 LF
Edmonton, Alberta, Canada 5,210 21,572** August 2007 LF
----------------- ----------------------
Totals 317,092 $ 1,682,689
----------------- ----------------------
* Represents the average minimum annual rent over the balance
of the unexpired lease term.
** As converted into U.S. dollars.
8
ITEM 3. LEGAL PROCEEDINGS.
- ------------------------------
The Company is involved in litigation in the ordinary course of its
business but is not currently a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------------------
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------
The Common Stock of the Company is traded on the American Stock Exchange
using the symbol TLF. The high and low prices for each calendar quarter during
the last two fiscal years are as follows:
2002 2001
-------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------
March 31 $3.850 $2.010 $1.125 $0.900
June 30 $3.500 $2.850 $2.240 $0.950
September 30 $3.240 $2.450 $3.000 $1.800
December 31 $3.500 $2.800 $2.300 $1.750
There were approximately 644 stockholders of record on March 11, 2003.
There have been no cash dividends paid on the shares of the Company's
Common Stock and currently dividends cannot be declared or paid without the
prior written consent of Wells Fargo Minnesota, N.A., the Company's lender. The
Board of Directors has historically followed a policy of reinvesting the
earnings of the Company in the expansion of its business. This policy is
subject to change based on future industry and market conditions, as well as
other factors beyond the control of the Company.
9
ITEM 6. SELECTED FINANCIAL DATA.
- ------------------------------------
The selected financial data presented below are derived from and should be
read in conjunction with the Company's 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." In particular, see the information there relating to the adoption
of a new accounting pronouncement in 2002. The financial impact of the
acquisition of Tandy Leather Company in November 2000 is included in the
information presented for 2002, 2001 and 2000. Data in prior years have not
been restated to reflect acquisitions that occurred in subsequent years.
INCOME STATEMENT DATA Years Ended December 31,
2002 2001 2000
----------------- ----------- -----------
Net sales $ 39,728,615 $37,279,262 $30,095,264
Cost of sales 18,393,914 17,934,935 15,147,547
----------------- ------------ -----------
Gross profit 21,334,701 19,344,327 14,947,717
Operating expenses 17,202,927 15,442,359 11,702,633
------------------ ----------- -----------
Operating income 4,131,774 3,901,968 3,245,084
Other expense 311,918 533,482 653,779
------------------ ----------- -----------
Income (loss) before income taxes 3,819,856 3,368,486 2,591,305
Income tax provision (benefit) 1,224,868 1,362,053 1,049,985
------------------ ----------- -----------
Income (loss) before cumulative effect of change in accounting principle 2,594,988 2,006,433 1,541,320
Cumulative effect of change in accounting principle (4,008,831) - -
------------------ ----------- -----------
Net income (loss) $ (1,413,842) $ 2,006,433 $ 1,541,320
================== =========== ===========
Earnings (loss) per share $ (0.14) $ 0.20 $ 0.16
================== =========== ===========
Earnings (loss) per share- assuming dilution $ (0.13) $ 0.19 $ 0.15
================== =========== ===========
Weighted average common shares outstanding for:
Basic EPS 10,063,581 9,976,071 9,875,606
Diluted EPS 10,761,669 10,449,306 10,182,803
INCOME STATEMENT DATA YEARS ENDED DECEMBER 31,
1999 1998
----------- -----------
Net sales $27,164,399 $22,163,994
Cost of sales 14,907,768 12,428,324
----------- ------------
Gross profit 12,256,631 9,735,670
Operating expenses 10,346,420 8,890,045
----------- ------------
Operating income 1,910,211 845,625
Other expense 900,304 970,340
----------- ------------
Income (loss) before income taxes 1,009,907 (124,715)
Income tax provision (benefit) 574,851 (85,524)
----------- ------------
Income (loss) before cumulative effect of change in accounting principle 435,056 (39,191)
Cumulative effect of change in accounting principle - -
----------- ------------
Net income (loss) $ 435,056 $ (39,191)
=========== ============
Earnings (loss) per share $ 0.04 $ (0.00)
=========== ============
Earnings (loss) per share- assuming dilution $ 0.04 $ (0.00)
=========== ============
Weighted average common shares outstanding for:
Basic EPS 9,853,161 9,803,887
Diluted EPS 9,890,098 9,803,887
BALANCE SHEET DATA As of December 31,
2002 2001 2000 1999 1998
-------------- ----------- ----------- ----------- -----------
Total assets $ 19,675,602 $19,548,323 $19,686,079 $18,220,775 $16,029,937
-------------- ----------- ----------- ----------- -----------
Notes payable and current
Maturities of long term debt 4,218,968 4,527,904 5,759,626 6,061,735 6,139,327
-------------- ----------- ----------- ----------- -----------
Notes payable and long-term
Debt, net of current maturities 2,256 7,691 13,025 121,686 61,389
-------------- ----------- ----------- ----------- -----------
Total Stockholders' Equity $ 11,170,062 $12,423,671 $10,295,637 $ 8,680,425 $ 8,170,278
============== =========== =========== =========== ===========
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- ---------------
The Company is a leading provider of leather and leathercraft-related items
and headwear trims. Its products are sold worldwide through Leather Factory
stores, Tandy Leather stores, the Internet, and directly to headwear
manufacturers (Cushman only).
RESULTS OF OPERATIONS
The following tables present selected financial data by category for each
of the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
------------------------ ------------------------- ------------------------
OPERATING OPERATING OPERATING
SALES INCOME SALES INCOME SALES INCOME
----------- ---------- ----------- ----------- ----------- ----------
Leather Factory stores $30,313,478 $3,742,844 $28,711,006 $3,719,517 $27,060,406 $2,991,804
Tandy Leather stores * 7,387,874 371,372 6,606,090 281,998 575,635 (43,724)
Cushman 2,027,263 17,558 1,962,166 (99,547) 2,459,223 297,004
----------- ---------- ----------- ---------- ----------- ----------
Total Operations $39,728,615 $4,131,774 $37,279,262 $3,901,968 $30,095,264 $3,245,084
=========== ========== =========== ========== =========== ==========
*The Tandy Leather assets were acquired in November 2000.
11
ANALYSIS OF 2002 COMPARED TO 2001
Consolidated net sales for 2002 increased $2.4 million, or 6.6%, compared
to 2001. We had sales increases in all segments this year with Leather Factory
stores contributing $1.6 million to the increase, Tandy stores adding $782,000
and Cushman adding $65,000. The Company experienced an increase in operating
income of 5.9% from 2001 to 2002, due primarily to a continued improvement in
gross profit margins.
2002 2001 $CHANGE % CHANGE
----------- ----------- ---------- --------
Net sales $39,728,615 $37,279,262 $2,449,353 6.57%
Cost of sales 18,393,914 17,934,935 458,979 2.56%
----------- ----------- ---------- --------
Gross profit 21,334,701 19,344,327 1,990,374 10.29%
Operating expenses 17,202,927 15,442,359 1,760,568 11.40%
----------- ----------- ---------- --------
Operating income 4,131,774 3,901,968 229,806 5.89%
Other expense 311,917 533,482 (221,565) (41.53%)
----------- ----------- ---------- --------
Income before income taxes 3,819,857 3,368,486 451,371 13.40%
Income tax provision 1,224,868 1,362,053 (137,185) (10.07)%
----------- ----------- ---------- --------
Income before change in accounting principle $2,594,989 $2,006,433 $588,556 29.33%
Cumulative effect of chg in accounting principle (4,008,831) - (4,008,831) N/A
----------- ----------- ---------- --------
Net income (loss) $(1,413,842) $2,006,433 $(3,420,275) N/A
=========== ========== =========== --------
12
LEATHER FACTORY STORES
Net sales for Leather Factory, which is comprised of 30 stores as of December
2002, increased 5.6% as follows:
2002 2001 $INCR (DECR) % INCR (DECR)
------------ ------------ ------------ -------------
Same store sales (27 stores) $29,372,715 $28,014,932 $1,357,783 4.85%
% of total 96.90% 97.58% 84.73%
New store sales (3 stores) 809,752 193,674 616,078 318.10%
% of total 2.67% 0.67% 38.45%
"Transferred to Tandy" store sales (1 store) 131,011 502,400 (371,389) (73.92)%
% of total 0.43% 1.75% (23.18)%
----------- ----------- ---------- -------
Total sales $30,313,478 $28,711,006 $1,602,472 5.58%
=========== =========== ========== =======
100.00% 100.00% 100.00%
----------- ----------- ----------
We determine our sales mix based on internally-defined customer groups as
follows:
CUSTOMER GROUP GROUP CHARACTERISTICS
- -------------- ---------------------
Retail End users, consumers, individuals
Institution Prisons, prisoners, hospitals, schools, YMCA, Boy Scouts, etc.
Wholesale Saddle & tack stores, resellers and distributors, dealers, etc.
Craft Craft stores (individually owned) and craft store chains
Midas Small manufacturers
ASC Authorized Sales Centers
As the following table indicates, there was slight variation in our sales
mix from 2001 to 2002. However, the majority of the sales growth in dollars was
the result of increased sales in our Retail and Craft customer groups. Our
Retail sales, while holding steady at approximately 20% of our total 2002 sales,
increased in dollars by 19% over last year's retail sales and our Craft sales
increased 15% in dollars. We experienced sales gains in most markets, the
exception being minimal declines in our Wholesale and Institution groups (2% and
1% declines, respectively).
QTD 3/31/02 QTR 6/30/02 QTD 9/30/02 QTD 12/31/02 YTD 12/31/02
----------- ----------- ----------- ------------ ------------
CUSTOMER GROUP
- --------------
Retail 21% 18% 17% 27% 21%
Institution 7% 8% 7% 7% 7%
Wholesale 32% 34% 34% 29% 32%
Craft 26% 25% 28% 20% 25%
Midas 7% 8% 8% 9% 8%
ASC 7% 7% 6% 8% 7%
---------- ------------ ----------- ------------ -----------
100% 100% 100% 100% 100%
========== ============ =========== ============ ============
QTD 3/31/01 QTD 6/30/01 QTD 9/30/01 QTD 12/31/01 YTD 12/31/01
------------ ------------ ------------ ------------- -------------
CUSTOMER GROUP
- --------------
Retail 21% 16% 19% 21% 19%
Institution 8% 10% 6% 6% 8%
Wholesale 32% 34% 34% 38% 34%
Craft 21% 28% 26% 20% 24%
Midas 11% 5% 10% 7% 8%
ASC 7% 7% 5% 8% 7%
---------- ------------ ------------ ------------- -------------
100% 100% 100% 100% 100%
========== ============ ============ ============= =============
Operating income for the Leather Factory stores increased $23,000 or 0.63%.
Operating expenses were up 10.04% from 2001 - with increases in personnel costs
(wages and health insurance) and advertising contributing the majority of the
increase. Manager bonuses were up in 2002 as well due to the increased
operating profits of the stores over 2001.
Gross margin as a percentage of sales improved from 52.50% for 2001 to
53.56% for 2002. We believe, generally speaking, that the Leather Factory's
gross margin has little room for additional improvement due to the mix of
customers it serves. We continue to negotiate with vendors for lower pricing of
product that we purchase and we believe we were successful in that endeavor in
most of our product categories. We will continue to look for opportunities in
our purchasing efforts as those opportunities present themselves; however, we
also believe that we have maximized those efforts as much as can reasonably be
expected at the present time. Future fluctuations in gross margins will occur
primarily as a result of the mix of the product categories sold and the
correlating margins associated with those categories. Our product line is made
up of approximately 2,600 items. We have further expanded our merchandise
categories from those discussed in our 2001 Annual Report as follows:
MERCHANDISE CATEGORY 2002 GP % 2001 GP %
- ---------------------------------------------------- --------- ---------
Belt Strips and Straps 59.93% 56.26%
Books, Patterns and Videos 60.99% 58.39%
Buckles 62.13% 58.33%
Conchos 68.43% 65.94%
Craft Supplies 60.54% 57.54%
Custom Tools and Hardware 56.89% 52.08%
Dyes, Finishes, Glues and Supplies 53.52% 52.41%
Hand Tools 55.89% 54.78%
Hardware 58.33% 57.59%
Kits 51.47% 46.44%
Laces 47.06% 40.85%
Leather 41.54% 37.73%
Shoe Supplies 49.80% 45.97%
Stamping Tools 60.76% 57.66%
-------- --------
Leather Factory store gross profit margin (overall) 53.56% 52.50%
======== ========
13
TANDY LEATHER STORES
Tandy Leather was operated strictly as an order fulfillment house for
orders generated via phone, fax, mail order, and Internet in 2001. In 2002, we
began the development of the retail store chain while temporarily operating the
order fulfillment house. This unit was eliminated as of September 1, 2002. The
fourteen retail stores opened in 2002 were as follows:
LOCATION SQ FOOTAGE MONTH OPENED
- ------------------ ---------- ------------
Oklahoma City, OK (1) 3,160 January
Boise, ID (1) 1,800 March
Sacramento, CA 1,600 June
E Hartford, CT 1,200 April
Salt Lake City, UT 1,750 June
Fort Worth, TX 3,000 May
Austin, TX (2) 3,800 June
Dallas, TX 1,700 August
Albuquerque, NM 1,764 August
Las Vegas, NV 1,350 August
Indianapolis, IN 1,500 October
Peoria, IL 1,350 October
Memphis, TN (1) 2,500 October
Tempe, AZ (1) 1,986 November
(1) Purchased existing leathercraft store
(2) Formerly a Leather Factory store
Net sales for Tandy Leather, which was comprised of 14 retail stores as of
December 2002, increased 11.8% as follows:
2002 2001 $ INCR(DECR) % INCR(DECR)
----------- ----------- ------------ ------------
Order fulfillment house (closed 9/1/02) $3,605,087 $6,606,090 $(3,001,003) (45.43)%
% of total 48.80% 100.00% (383.87)%
New store sales (13 stores) 3,249,214 - 3,249,214 ***
% of total 43.98% 0.00% 415.62%
Former "Leather Factory" store sales (1 store) 533,573 - 533,573 ***
% of total 7.22% 0.00% 68.25%
------------ ----------- ------------
Total sales $7,387,874 $6,606,090 $ 781,784 11.83%
============ =========== ============
100.00% 100.00% 100.00%
We intend to continue the expansion of Tandy's retail store chain in 2003
by opening a total of 10-12 new stores throughout the year as long as the
domestic retail leathercraft market can support the additional stores. Through
the end of March, we have opened five stores in 2003: the Baltimore, MD store
opened in January, the Tulsa, OK store opened in February, and stores in
Pittsburgh, PA, Orange County, CA, and Atlanta, GA opened in March. We remain
committed to a conservative growth plan that minimizes risks to the Company's
profits and financial stability.
We moved Tandy to a new point-of-sale software in April 2002 which allows
us to track its sales mix in a similar fashion as that of the Leather Factory.
CUSTOMER GROUPS 2002 2001
- --------------- ---- ----
Retail 65% 53%
ASC 8% 18%
Wholesale 15% 14%
Institution 12% 15%
Craft * N/A
Midas * N/A
---- ----
100% 100%
==== ====
* less than 1%
On a quarterly basis in 2002, Tandy's sales mix was as follows:
CUSTOMER GROUPS Q1 Q2 Q3 Q4
- --------------- ---- ---- ---- ----
Retail 61% 57% 62% 65%
ASC 15% 9% 7% 8%
Wholesale 11% 16% 18% 15%
Institution 12% 17% 12% 11%
Craft 1% 0% * *
Midas 0% 1% * *
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
* less than 1%
As indicated by the percentages in the table above, Tandy's sales mix is
following that of historical performance in that sales to summer camps (in our
Institution customer category) is especially high in the second quarter of the
year and retail sales typically rise in the fourth quarter due to the holiday
shopping season.
Due to the elimination of the order fulfillment house ("OFH") during the
year and the introduction of the fourteen retail stores, we present the
financial performance of the two operational structures separately:
OFH % STORES % TOTAL %
---------- ------- ---------- ------- ---------- -------
Net sales $3,605,087 100.00% $3,782,787 100.00% $7,387,874 100.00%
Cost of sales 1,519,404 42.15% 1,473,086 38.94% 2,992,490 40.51%
---------- ---------- ----------
Gross profit 2,085,683 57.85% 2,309,701 61.06% 4,395,384 59.49%
Operating expenses 2,021,976 56.09% 2,002,036 52.92% 4,024,012 54.47%
---------- ---------- ----------
Operating income $ 63,707 1.77% $ 307,665 8.14% $ 371,372 5.02%
---------- ---------- ----------
While we believe that the stores are able to improve their operating
efficiency and will continue to work toward that end, we also believe that the
table above proves our theory that the retail stores can operate much more
efficiently than a centralized order fulfillment house. The largest expenses for
the stores, as a percentage of sales, are salaries and wages, advertising, and
shipping. While it is unrealistic to expect an elimination of shipping expenses
(shipping product to customers) by the stores, we do expect this expense to
decrease as more stores are open and our over-the-counter sales increase.
14
CUSHMAN
Cushman's sales were up modestly in 2002 (3.3%) while gross profit margins
increased from 28.6% to 34.6%, an improvement of 21%. We still believe Cushman
is continuing to gain market share in the industry and that belief was further
strengthened in 2002 as one of our main competitors went out of business in late
2002. Operating income increased from a $99,000 loss in 2001 to income of
$17,000 for 2002. The elimination of goodwill amortization accounted for the
improvement. Overall, we are pleased with Cushman's performance in 2002 and
believe we will see continued improvement in 2003.
See "Financial Condition" section below for detailed discussion regarding
the effect of the change in accounting principle and the resulting write-down of
Cushman's goodwill in 2002.
OTHER EXPENSE AND PROVISION FOR INCOME TAXES
Other expenses decreased approximately 42%. The decrease is attributable
to the interest paid on our outstanding debt. While there was only a slight
drop in the interest rate during 2002 compared to 2001, the average outstanding
debt balance dropped significantly. Our average outstanding debt balance in
2002 was $3,600,000 while the 2001 average outstanding debt balance was
$4,900,000.
The provision for federal and state income taxes was 32% of 2002 income
before taxes compared to 40% in 2001. The reduction results from the conversion
of the operating entities from corporations to more tax-favored entities
(limited partnership) in certain states in which we operate and the elimination
of goodwill amortization for book purposes in 2002.
15
ANALYSIS OF 2001 COMPARED TO 2000
Consolidated net sales for 2001 increased $7.2 million, or 23.9%, compared
to 2000. Tandy contributed $6.0 million to the increase as 2001 included a full
year of Tandy's operations, while 2000 only included December operations.
Leather Factory added an additional $1.7 million in sales in 2001, partially
offset by a sales decline at Cushman of $500,000. The Company experienced an
increase in operating income of 20.2% from 2000 to 2001, due primarily to an
overall improvement in gross profit margins.
2001 2000 $ CHANGE % CHANGE
----------- ----------- ----------- ---------
Net sales $37,279,262 $30,095,264 $7,183,998 23.87%
Cost of sales 17,934,935 15,147,547 2,787,388 18.40%
---------- ----------- -----------
Gross profit 19,344,327 14,947,717 4,396,610 29.41%
Operating expenses 15,442,359 11,702,633 3,739,726 31.96%
---------- ----------- -----------
Operating income 3,901,968 3,245,084 656,884 20.24%
Other expense 533,482 653,778 (120,296 (18.40%)
---------- ----------- -----------
Income before income taxes 3,368,486 2,591,306 777,180 29.99%
Income tax provision 1,362,053 1,049,986 312,067 29.72%
---------- ----------- -----------
Net income $2,006,433 $1,541,320 $ 465,113 30.18%
=========== ========== ===========
16
LEATHER FACTORY STORES
Net sales for Leather Factory, which is comprised of 30 stores as of
December 2001, increased 6.1%. The four new stores opened in late 2000 and 2001
contributed a significant portion (77.8%) of the sales increase; while same
store sales contributed the remainder.
The majority of the overall sales increase was to our Craft customers. Our
Retail sales, while holding steady at 20% of our total sales, increased in
dollars by 8% over last year's retail sales. We experienced sales declines in
our Institution and Midas markets, but compensated by gains in the Wholesale and
ASC groups.
Operating income for Leather Factory increased by $728,000 and improved the
operating margin to net sales from 11.1% in 2000 to 12.9% in 2001. The increase
in operating income results from improved gross profit margins as well as a
slight improvement in operating efficiency. Operating expenses decreased
slightly (0.42%) as a percentage of sales. Management's target for Leather
Factory's operating expenses as a percentage of sales is 40% or less and that
target was met for 2001.
Gross margin as a percentage of sales improved by 1.75 basis points
primarily as a result of the changes we made in sourcing product - purchasing
from different vendors at a lower price. Leather represents approximately 40%
of our inventory (in dollars) at any given time and also represents
approximately 40% of our sales. However, we earn the smallest amount of gross
profit margin on the leather we sell - for 2001 and 2000, gross profit margin on
leather sold was approximately 38%. The improvement in our margins comes from
the items sold in the other categories.
17
TANDY LEATHER ORDER FULFILLMENT
Tandy Leather was acquired by the Company in November 2000; therefore our
results for 2000 only included one month's operation for Tandy Leather. In 2001,
Tandy operated strictly as an order fulfillment house for orders generated via
phone, fax, mail order, and Internet.
Our 2001 sales target was $7.0 million, based on Tandy's annual sales prior
to acquisition. Tandy missed that target by $394,000. However, we discovered
early in the year that some of Tandy's sales were at very low profit margins
and, in a few cases, were below cost. We quickly adjusted selling prices to
eliminate these low-margin sales problems and as a result, lost some sales from
customers who were not willing to pay the new prices. Therefore, even though
Tandy's 2001 sales were slightly below expectation, we improved gross profit
margins by over 12 percentage points. Operating expenses as a percentage of
sales were held virtually constant from 2000 to 2001 at 51.8%.
CUSHMAN
Cushman's sales were down 20% in 2001, even though we believe that we
continue to gain market share from our competitors because of our commitment to
timely delivery of quality product. The primary reason for this decrease is not
caused by a reduction in number of trims produced, but in the type of trims
produced.
The popularity of the straw hat, which is a more casual hat versus the felt
hat, is increasing every year due in part to straw hats being less expensive
than felt and in part to the fashion trends. Historically, straw hats were worn
in the spring and summer seasons while felt hats were the hat of choice in the
fall and winter. Now it is acceptable to wear straw hats year round. The global
warming theory may also contribute to this shift in the headwear trend as straw
hats are cooler to wear than felt hats. As a result, the trims being requested
by the manufacturers are made from materials other than leather. Leather trims
are the most expensive, but generally are not put on straw hats. Therefore, even
though we produced as many trims in 2001 as we did in 2000, the selling price of
these non-leather trims is much lower than that of the leather trims.
Operating income decreased significantly due primarily to a drop in gross
profit margin. In 2001, we sold some trims at substantially-reduced prices for
two reasons: (1) the market conditions and trends in the headwear industry in
general, and (2) to clear out some of our inventory that does not fit with the
fashion trends developing. We reduced our personnel costs late in 2001 to help
offset the low gross profit margins.
OTHER EXPENSE AND PROVISION FOR INCOME TAXES
Other expenses decreased approximately 18%. The decrease is attributable
to the reduction in the interest rates during 2001 compared to 2000. Our
average interest rate in 2000 was 9.7% while the average interest rate in 2001
was 7.4%. In addition, there was a slight decrease in our average outstanding
debt balance from $5.1 million in 2000 to $4.9 million in 2001.
The provision for federal and state income taxes was 40% of 2001 pre-tax
income - the same as in 2000. The dollar increase in our income tax expense
results from the increase in income.
18
FINANCIAL CONDITION
At December 31, 2001, we had inventory of $9.0 million and net property and
equipment of $1.3 million. Goodwill and other intangibles (net of amortization
and depreciation) were $4.5 million and $477,000, respectively. The Company
also holds $250,000 in a leather artwork collection, most of which was created
by Al Stohlman, a legendary leathercrafter. Net total assets were $19.5
million. Current liabilities were $7.1 million (including $4.5 million of
current maturities of long-term debt), while long-term debt was $8,000. Total
stockholders' equity at the end of 2001 had increased to $12.4 million,
principally as a result of the $2.0 million of net income recorded during 2001.
During 2001, net cash provided from operating activities was $2.0 million.
We applied $1.2 million to reduce the outstanding balance on our credit facility
described below, leaving an outstanding principal balance of $4.5 million as of
December 31, 2001.
As a result of various acquisitions made during our history, we had
recorded goodwill on our consolidated balance sheet and had amortized this
goodwill through the end of 2001. In June 2001, the Financial Accounting
Standards Board ("FASB") issued a new accounting rule regarding the amortization
of goodwill (SFAS No. 142, Goodwill and Other Intangible Assets). As a result
of that pronouncement, effective January 1, 2002, the amortization of goodwill
(and other intangible assets with indefinite lives) ceased and goodwill was
subject to an impairment test based on its fair value.
The majority of the goodwill ($4.5 million) as presented on our
consolidated balance sheet at December 31, 2001 belonged to Cushman. Given the
current trends of the industry in which Cushman operates and Cushman's financial
results over the last several years, we felt it necessary to engage a business
valuation firm to determine Cushman's fair value. Based on that assessment, we
incurred an impairment write-down of all of the Cushman goodwill in the first
quarter of 2002 in the amount of $4.0 million.
The write-down was only partially offset by the Company's 2002 income
before giving effect to this accounting change. Retained earnings and total
stockholders' equity at the end of 2002 were $7.1 million and $11.2 million,
down from $8.5 million and $12.4 million at the end of 2001. The Company does
not anticipate any other similar write-downs at this time.
At December 31, 2002, we owned $12.7 million of inventory and $2.0 million
of property and equipment. Goodwill and other intangibles (net of amortization
and depreciation) were $686,000 and $483,000, respectively and we still hold
$250,000 in a leather artwork collection. Net total assets were $19.7 million.
Current liabilities were $8.3 million (including $4.2 million of current
maturities of long-term debt), while long-term debt was $2,000. Total
stockholders' equity at the end of 2002 had decreased to $11.2 million,
principally as a result of the $1.4 million net loss recorded during 2002.
19
CAPITAL RESOURCES AND LIQUIDITY
On March 20, 2002, the Company entered into a Credit and Security Agreement
with Wells Fargo Bank Minnesota, N.A. ("Wells Fargo"), which replaced the
borrowing arrangement with Wells Fargo Business Credit, Inc. ("WFBC"). The
facility matures in November 2004 and is secured by all of the assets of the
Company.
The Company is currently in compliance with all covenants and conditions
contained in the Credit Facility and has no reason to believe that it will not
continue to operate in compliance with the provisions of these financing
arrangements. The principal terms and conditions of the Credit Facility are
described in further detail in Note 4 Notes Payable and Long-Term Debt to the
Consolidated Financial Statements.
The Company borrows and repays funds under revolving credit terms as
needed. Principal balances at the end of each quarter are shown below:
4TH QTR. '01 1ST QTR. '02 2ND QTR. '02 3RD QTR. '02 4TH QTR. '02
- ------------- ------------- ------------- ------------- -------------
(WFBC) (WELLS FARGO) (WELLS FARGO) (WELLS FARGO) (WELLS FARGO)
$4,500,422 $2,978,645 $3,323,269 $3,899,379 $4,213,533
Total indebtedness with WFBC at the end of 2001 and with Wells Fargo at the
end of 2002 are shown below:
DECEMBER 31,
2001 2002
----------------------------- -----------------------------
WFBC WELLS FARGO
----------------------------- -----------------------------
PRINCIPAL ACCRUED INTEREST PRINCIPAL ACCRUED INTEREST
----------- ----------------- ----------- -----------------
Revolving Line $ 4,500,422 $ 19,657 $ 4,213,533 $ 15,706
=========== ================= =========== ================
The primary source of liquidity and capital resources during 2002 was cash
flow provided by operating activities and our Credit and Security Agreement with
Wells Fargo. Cash flows from operations for 2002 were $1.4 million. The
largest portion of the operating cash flow was generated from income before the
goodwill write-off.
Consolidated accounts receivable decreased to $1.9 million at December 31,
2002 compared to $2.3 million at December 31, 2001. Average days to collect
accounts improved from 47.86 days in 2001 to 43.54 days in 2002 on a
consolidated basis. Individually, Leather Factory's days to collect was 41.52
days for 2002, an improvement over 2001 of 2.01 days. Tandy's days to collect
was 34.09 days for 2002, an improvement of 17.59 days from 2001. Cushman's days
to collect was 63.26 for 2002, an improvement of 11.87 days from 2001. Tandy's
significant improvement in average days to collect is the result of the
significant collection of delinquent accounts obtained in the Tandy Leather
acquisition.
Inventory increased to $12.7 million at December 31, 2002 from $9.0 million
at the end of 2001. This increase was principally attributable to (1) our
efforts to boost inventory in anticipation of the dock strike on the West Coast
of the United States that has since ended, (2) the surge in flow of goods to us
after the strike ended and the backlog of shipments unloaded, and (3) the
addition of the fourteen new Tandy Leather stores in 2002. We have reduced our
inventory purchases considerably in the first quarter of 2003 in order to return
inventory to customary levels, although we anticipate it will be into the 2nd
quarter of 2003 before the inventory begins to level out.
Consolidated inventory turned 3.65 times during 2002, a slight slowdown
from 2001 (4.08 times) and essentially the same as 2000 (3.64 times).
Separately, Tandy Leather's 2002 and 2001 inventory turns were 8.10 times and
4.79 times, respectively. Leather Factory's inventory turned 3.20 times in 2002
and 3.96 times in 2001, and Cushman's inventory turned 4.12 times and 3.86 times
in 2002 and 2001, respectively. The significant improvement in the inventory
turn rate for Tandy Leather is due to the elimination of its central warehouse
in September 2002 (combined into Leather Factory's warehouse). We now record
only merchandise held in Tandy Leather stores as Tandy Leather inventory.
Leather Factory's turns slowed slightly in 2002 because it added the Tandy
Leather warehouse inventory to the goods held for the Leather Factory store
system. Additionally, the increase in inventory arriving at the central
warehouse in the fourth quarter adversely affected Leather Factory's inventory
turns. Leather Factory store inventory turns, excluding the central warehouse
inventory, were approximately 7.0 and 6.5 turns in 2002 and 2001, respectively.
We compute our inventory turnover rates as sales divided by average inventory.
Accounts payable increased to $1.6 million at December 31, 2002 from $1.3
million at the end of 2001. The increased inventory on hand at the end of 2002
accounted for the increase.
The Company's current ratio improved at December 31, 2002 to 1.94, compared
to 1.82 at December 31, 2001. If, however, accounting rules had not required
the Company's debt with Wells Fargo to be classified as short-term (even though
the stated maturity is in November 2004), the current ratio at December 31, 2002
would have been 3.94.
The largest use of operating cash in 2002 was for debt reduction and
various capital expenditures. Capital expenditures totaled $1,073,000 and
$630,000 for the years ended December 31, 2002 and 2001, respectively. Capital
expenditures in 2002 included approximately $600,000 in leasehold improvements
for the central warehouse and factory consolidation and remodeling of the Fort
Worth Leather Factory store.
The following table summarizes by years our contractual obligations and
commercial commitments as of December 31, 2002:
PAYMENTS DUE BY PERIODS
------------------------------------------------------------------
LESS THAN 1 - 3
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS 4 -5 YEARS AFTER 5 YEARS
- ----------------------------- -------------- --------- ----------- ---------- -------------
LONG-TERM DEBT* $ 4,213,533 - $4,213,533 - -
CAPITAL LEASE OBLIGATIONS 8,002 $ 6,859 1,143 - -
OPERATING LEASES 5,744,905 1,594,438 3,349,950 $ 800,517 -
-------------- ---------- ---------- --------- -------------
TOTAL CONTRACTUAL OBLIGATIONS $ 9,966,440 $1,601,297 $7,564,626 $ 800,517 $ -
============== ========== ========== ========= =============
_____________
* The Company's loan from Wells Fargo matures in November 2004. The loan's maturity can be accelerated in the event of
a material adverse change or upon other occurrences described in the related credit agreement.
20
CRITICAL ACCOUNTING POLICIES
The analysis and discussion of our financial condition and results of
operations is based upon our consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States (US GAAP). The preparation of financial statements in accordance
with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and the
disclosure of contingent assets and liabilities. US GAAP provides the framework
from which to make these estimates, assumptions and disclosures. We choose
accounting policies within US GAAP that we believe are appropriate to accurately
and fairly report the Company's operating results and financial position in a
consistent manner. Management regularly assesses these policies in light of
current and forecasted economic conditions. The Company's accounting policies
are stated in Note 2 to the consolidated financial statements. We have
summarized below the accounting policies that we believe are most critical to an
understanding of the preparation of our 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, The 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 is "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 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 periodically reduce the value of our inventory for slow-moving
or obsolete inventory. This reduction is based on management's review of items
on hand compared to their estimated future demand. If actual future demand is
less favorable than those projected by management, 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 have indicated above that a change in the accounting rules
necessitated a change in 2002 in how we report goodwill on our balance sheet.
As a result, we incurred an impairment write-down in the first quarter of 2002
of our investment in Cushman in the amount of $4 million. The remaining
goodwill on our balance sheet is analyzed by management periodically to
determine the appropriateness of its carry value. As of December 31, 2002,
management has 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
differs significantly from management's 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 the Company's balance sheet.
21
FORWARD-LOOKING STATEMENTS
"Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this report contain
forward-looking statements of management. In general, these are predictions or
suggestions of future events and statements or expectations of future
occurrences. There are certain important risks that could cause results to
differ materially from those anticipated by some of the forward-looking
statements. Some, but not all, of the important risks which could cause actual
results to differ materially from those suggested by the forward-looking
statements include, among other things:
- - Involvement by the United States in war and other military operations in
the Middle East could disrupt international trade and affect the Company's
inventory sources.
- - The recent slump in the economy in the United States, as well as abroad,
may cause our sales to decrease or not to increase or adversely affect the
prices charged for our products. Also, hostilities, terrorism or other events
could worsen this condition.
- - As a result of the on-going threat of terrorist attacks on the United
States, consumer buying habits could change and decrease our sales.
- - The prices of hides and leathers also fluctuate in normal times, and these
fluctuations can affect the Company.
- - If, for whatever reason, the costs of our raw materials and inventory
increase, we may not be able to pass those costs on to our customers,
particularly if the economy has not recovered from its downturn.
- - Other factors could cause either fluctuations in buying patterns or
possible negative trends in the craft and western retail markets. In addition,
our customers may change their preferences to products other than ours, or they
may not accept new products as we introduce them.
- - We might fail to realize the anticipated benefits of the opening of Tandy
Leather retail stores or other retail initiatives might not be successful.
- - Tax or interest rates might increase. In particular, interest rates are
likely to increase at some point from their present low levels. These increases
will increase our costs of borrowing funds as needed in our business.
- - Any change in the commercial banking environment may affect us and our
ability to borrow capital as needed.
- - Other uncertainties, which are difficult to predict and many of which are
beyond the control of the Company, may occur as well.
The Company does not intend to update forward-looking statements.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------------
We face exposure to financial market risks, including adverse movement in
foreign current exchange rates and changes in interest rates. These exposures
may change over time and could have a material impact on our financial results.
We do not use or invest in market risk sensitive instruments to hedge any of
these risks or for any other purpose.
FOREIGN CURRENCY EXCHANGE RATE RISK
Our primary foreign currency exposure is related to our subsidiary in
Canada. The Leather Factory of Canada, Ltd. has local currency (Canadian
dollar) revenue and local currency operating expenses. Changes in the currency
exchange rate impacts the U.S. dollar amount of revenue and expenses. See Note
12 to the Consolidated Financial Statements, Segment Information, for financial
information concerning the Company's foreign activities.
INTEREST RATE RISK
We are subject to market risk associated with interest rate movements on
outstanding debt. Our borrowings under the credit facility with Wells Fargo
accrue interest at a rate that changes with fluctuations in the prime rate.
Based on the Company's level of debt at March 15, 2003, an increase of one
percent in the prime rate would result in additional interest expense of
approximately $60,000 during a twelve-month period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------------
The Financial Statements and Financial Statement Schedule are filed as a
part of this report. See page 22, Index to Consolidated Financial Statements.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ----------------------
23
None
THE LEATHER FACTORY, INC.
-------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Consolidated Balance Sheets at December 31, 2002 and 2001 25
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 27
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000 28
Notes to Consolidated Financial Statements 29
Financial Statements Schedules for the years ended
December 31, 2002, 2001 and 2000:
II - Valuation and Qualifying Accounts and Reserves 41
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule or
because the information required is included in the consolidated financial
statements and notes thereto.
Report of Independent Auditors 42
24
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------------- --------------
ASSETS
CURRENT ASSETS:
Cash $ 101,557 $ 409,040
Cash restricted for payment on revolving credit facility 553,839 491,729
Accounts receivable-trade, net of allowance for doubtful accounts
of $78,000 and $191,000 in 2002 and 2001, respectively 1,938,698 2,297,953
Inventory 12,695,344 9,054,269
Prepaid income taxes 55,644 -
Deferred income taxes 159,090 128,111
Other current assets 672,117 479,390
-------------- --------------
Total current assets 16,176,289 12,860,492
-------------- --------------
PROPERTY AND EQUIPMENT, at cost 5,321,749 4,201,368
Less-accumulated depreciation and amortization (3,301,898) (2,858,869)
-------------- --------------
Property and equipment, net 2,019,851 1,342,499
GOODWILL, net of accumulated amortization of $734,000
and $1,583,000 in 2002 and 2001, respectively 686,484 4,535,412
OTHER INTANGIBLES, net of accumulated amortization of
$113,000 and $66,000, in 2002 and 2001, respectively 483,507 476,908
OTHER assets 309,471 333,012
-------------- --------------
$ 19,675,602 $ 19,548,323
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,594,909 $ 1,303,596
Accrued expenses and other liabilities 2,503,331 1,171,152
Income taxes payable - 52,662
Notes payable and current maturities of long-term debt 4,218,968 4,527,904
-------------- --------------
Total current liabilities 8,317,208 7,055,314
-------------- --------------
DEFERRED INCOME TAXES 186,076 61,647
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 2,256 7,691
COMMITMENTS AND CONTINGENCIES (Note 7) - -
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, 10,149,961 and
9,991,161 shares issued and outstanding at 2002 and 2001, respectively 24,360 23,979
Paid-in capital 4,163,901 4,030,508
Retained earnings 7,064,345 8,478,187
Less: Notes receivable - secured by common stock (44,003) (71,939)
Accumulated other comprehensive loss (38,541) (37,064)
-------------- --------------
Total stockholders' equity 11,170,062 12,423,671
-------------- --------------
$ 19,675,602 $ 19,548,323
============== ==============
The accompanying notes are an integral part of these financial statements.
25
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ -----------
NET SALES $39,728,615 $37,279,262 $30,095,264
COST OF GOODS SOLD 18,393,914 17,934,935 15,147,547
----------- ----------- -----------
Gross Profit 21,334,701 19,344,327 14,947,717
OPERATING EXPENSES 17,202,927 15,442,359 11,702,633
----------- ----------- -----------
INCOME FROM OPERATIONS 4,131,774 3,901,968 3,245,084
OTHER EXPENSE:
Interest Expense (246,878) (458,558) (617,400)
Other, net (65,039) (74,924) (36,379)
----------- ----------- -----------
Total Other Expense (311,917) (533,482) (653,779)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES and CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,819,857 3,368,486 2,591,305
PROVISION FOR INCOME TAXES 1,224,868 1,362,053 1,049,985
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 2,594,989 2,006,433 1,541,320
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (4,008,831) - -
----------- ----------- -----------
NET INCOME (LOSS) $(1,413,842) $2,006,433 $1,541,320
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE - BASIC:
Income before Cumulative Effect of Accounting Principle $ 0.26 $0.20 $0.16
Cumulative Effect of Change in Accounting Principle, net (0.40) - -
----------- ----------- -----------
NET INCOME PER COMMON SHARE $(0.14) $0.20 $0.16
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED:
Income before Cumulative Effect of Accounting Principle $ 0.24 $0.19 $0.15
Cumulative Effect of Change in Accounting Principle, net (0.37) - -
----------- ----------- -----------
NET INCOME PER COMMON SHARE - DILUTED $(0.13) $0.19 $0.15
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 10,063,581 9,976,181 9,875,606
Diluted 10,761,670 10,449,306 10,182,803
The accompanying notes are an integral part of these financial statements.
26
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,413,842) $2,006,433 $1,541,320
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 491,312 730,153 582,778
Loss on disposal of assets - 5,588 5,089
Amortization of deferred financing costs 37,038 45,753 44,804
Deferred income taxes (30,184) (8,135) 4,056
Other (2,502) (10,898) (4,184)
Cumulative effect of change in accounting principle 4,008,831 - -
Net changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable-trade, net 359,255 (105,957) 368,848
Inventory (3,463,866) 151,629 1,562,274
Income taxes 16,124 (42,133) (379,467)
Other current assets (192,726) 230,695 83,990
Accounts payable 291,311 (856,314) (137,686)
Accrued expenses and other liabilities 1,332,179 (119,461) 230,732
------------ ------------ ------------
Total adjustments 2,846,772 20,920 2,361,234
------------ ------------ ------------
Net cash provided by operating activities 1,432,930 2,027,353 3,902,554
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,073,515) (629,773) (377,840)
Payments in connection with businesses acquired (435,747) - (2,999,159)
Proceeds from sale of assets - 3,200 2,484
(Increase) decrease in other assets (14,754) (1,386) 2,519
Other intangible costs (1,625) - -
------------ ------------ ------------
Net cash used in investing activities (1,525,641) (627,959) (3,371,996)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (286,889) (1,150,543) (167,687)
Payments on notes payable and long-term debt (27,482) (105,189) (243,083)
Increase in cash restricted for payment on revolving credit loans (62,110) (101,262) (72,563)
Payments received on notes secured by common stock 27,936 48,400 33,077
Deferred financing costs incurred - - (25,626)
Proceeds from issuance of common stock 133,774 84,099 45,000
------------ ------------ ------------
Net cash used in financing activities (214,772) (1,224,495) (430,882)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (307,483) 174,899 99,676
CASH, beginning of period 409,040 234,141 134,465
------------ ------------ ------------
CASH, end of period $101,557 $409,040 $234,141
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $213,791 $443,925 $572,557
Income tax paid during the period 1,254,679 1,414,404 1,424,648
NON-CASH INVESTING ACTIVITIES:
Equipment acquired under capital lease financing arrangements - $18,676 -
The accompanying notes are an integral part of these financial statements.
27
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock
---------------------------------
Number Par Paid-in Retained
of shares value capital earnings
------------- ----------------- ---------- ---------------
BALANCE, December 31, 1999 9,853,161 $ 23,648 $3,901,740 $ 4,930,434
Payments on notes receivable secured by common stock - - - -
Shares issued - stock options exercised 55,000 132 44,868 -
Net income - - - 1,541,320
Translation adjustment - - - -
------------ ----------------- ---------- ---------------
BALANCE, December 31, 2000 9,908,161 $ 23,780 $3,946,608 $ 6,471,754
Payments on notes receivable secured by common stock - - - -
Shares issued - stock options exercised 83,000 199 83,900 -
Net income - - - 2,006,433
Translation adjustment - - - -
------------ ----------------- ---------- ---------------
BALANCE, December 31, 2001 9,991,161 $ 23,979 $4,030,508 $ 8,478,187
Payments on notes receivable secured by common stock - - - -
Shares issued - stock options and warrants exercised 158,800 381 133,393 -
Net loss - - - (1,413,842)
Translation adjustment - - - -
------------ ----------------- ---------- ---------------
BALANCE, December 31, 2002 10,149,961 $ 24,360 $4,163,901 $ 7,064,345
============ ================= ========== ===============
Notes Accumulated
Receivable Other Comprehensive
secured by Cumulative Income
common stock Loss Total (Loss)
-------------- ------------ ----------- ----------------
BALANCE, December 31, 1999 $ (153,416) $ (21,981) $ 8,680,425
Payments on notes receivable secured by common stock 33,077 - 33,077
Shares issued - stock options exercised - - 45,000
Net income - - 1,541,320 $ 1,541,320
Translation adjustment - (4,185) (4,185) (4,185)
-------------- ------------ ----------- ----------------
BALANCE, December 31, 2000 $ (120,339) $ (26,166) $10,295,637
Comprehensive income for the year ended December 31, 2000 $ 1,537,135
================
Payments on notes receivable secured by common stock 48,400 - 48,400
Shares issued - stock options exercised - - 84,099
Net Income - - 2,006,433 2,006,433
Translation adjustment - (10,898) (10,898) (10,898)
-------------- ------------ ----------- ----------------
BALANCE, December 31, 2001 $ (71,939) $ (37,064) $12,423,671
Comprehensive income for the year ended December 31, 2001 $ 1,995,535
================
Payments on notes receivable secured by common stock 27,936 - 27,936
Shares issued - stock options and warrants exercised - - 133,774
Net Loss - - (1,413,842) (1,413,842)
Translation adjustment - (1,477) (1,477) (1,477)
-------------- ------------ ----------- ----------------
BALANCE, December 31, 2002 $ (44,003) $ (38,541) $11,170,062
============== ============ ===========
Comprehensive loss for the year ended December 31, 2002 $ (1,415,319)
================
The accompanying notes are an integral part of these financial statements.
28
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
1. ORGANIZATION AND NATURE OF OPERATIONS
The Leather Factory, Inc. and subsidiaries (the "Company") is engaged in the
manufacture and distribution of a broad product line of leather, leathercrafts,
western apparel and related accessory items. The Company operates stores
throughout the United States and Canada. Numerous customers including retailers,
wholesalers, assemblers, distributors and other manufacturers geographically
disbursed throughout the world purchase the Company's products. The Company also
has light manufacturing facilities in Texas and New York.
Certain reclassifications have been made to conform the 2000 and 2001 financial
statements to the presentation in 2002. The reclassifications had no effect on
net income.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
INVENTORY
The Company's inventory is valued at the lower of first-in, first-out cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense when incurred. The cost of assets retired or
sold and the related amounts of accumulated depreciation are removed from the
accounts, and any gain or loss is included in the statement of income.
Depreciation is determined using the straight-line method over the estimated
useful lives as follows:
Leasehold improvements 5-7 years
Equipment 5-10 years
Furniture and fixtures 5-7 years
Automobiles 5 years
Depreciation expense was $443,029, $460,741; and $358,787 for the years ended
December 31, 2002, 2001 and 2000, respectively.
GOODWILL
In June 2001, the FASB issued Statements of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. This standard requires
companies to stop amortizing goodwill and certain intangible assets with
indefinite useful lives. Instead, goodwill and intangible assets deemed to have
indefinite useful lives are subject to an annual review of impairment. The new
standard was effective for the Company in the first quarter of 2002. Upon
adoption of SFAS No. 142, the Company recorded a one-time, noncash charge of
approximately $4.0 million to eliminate the carrying value of its goodwill
relating to its subsidiary, Roberts, Cushman & Co., Inc. This charge is
non-operational in nature and is reflected as a cumulative effect of an
accounting change in the accompanying consolidated statement of income. For
additional discussion on the impact of adopting SFAS No. 142, see Note 13.
ADVERTISING COSTS
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 $116,611
and $162,495