Attached files
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,
2009
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
[ ] No [ ] (The registrant is not
yet required to submit Interactive Data)
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] Smaller reporting
company [ ]
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 $17,145,950 at June 30, 2009 (the last business day
of its most recently completed second fiscal quarter). At March 10,
2010, there were 10,141,522 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 18, 2010, are incorporated by reference in Part
III of this report.
TABLE
OF CONTENTS
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Item
|
Page
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Part
1
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||
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1
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Business
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1
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|
1A
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Risk
Factors
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5
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2
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Properties
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6
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3
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Legal
Proceedings
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7
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4
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Submission
of Matters to a Vote of Security Holders
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7
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Part
II
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||
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5
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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7
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6
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Selected
Financial Data
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8
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7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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9
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7A
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Quantitative
and Qualitative Disclosures about Market Risk
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13
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8
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Financial
Statement and Supplementary Data
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14
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9
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Change
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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30
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9A
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Controls
and Procedures
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30
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9B
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Other
Information
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30
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Part
III
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||
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10
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Directors,
Executive Officers and Corporate Governance
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30
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11
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Executive
Compensation
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30
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12
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Security
Ownership of Certain Owners and Management and Related Stockholder
Matters
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30
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13
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Certain
Relationships and Related Transactions and Director
Independence
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30
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14
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Principal
Accountant Fees and Services
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30
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Part
IV
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||
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15
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Exhibits,
Financial Statement Schedules
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31
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PART
I
ITEM
1. BUSINESS
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 some of our do-it-yourself
kits. During 2009, our consolidated sales totaled $54.5 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 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.", and 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 making 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 stores. 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. In 2009, we opened two retail stores in the
U.S.
At
December 31, 2009, 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 75
retail stores operating under the Tandy Leather name (69 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.
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 store count information for our Leather Factory wholesale stores and
Tandy Leather retail stores in each of our fiscal years from 1999 to
2009.
STORE
COUNT
YEARS
ENDED DECEMBER 31, 1999 through 2009
|
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
|
|
2009
|
0
|
0
|
30
|
2
|
0
|
75
|
(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
2009. Sales to our five largest customers combined to represent 6.3%,
6.2% and 8.3% of consolidated sales in 2009, 2008 and 2007,
respectively. 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.
1
Our
Operating Divisions
We
service our customers primarily through the operation of three
divisions. We identify those divisions based on management
responsibility, customer focus, and store location. The Wholesale
Leathercraft division consists of 30 wholesale stores of which 27 are located in
the United States and three are located in Canada. As of March 1,
2010, the Retail Leathercraft division consists of 76 Tandy Leather retail
stores of which 69 are located in the United States and seven 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.
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
$25.1 million, $26.4 million and $29.6 million for 2009, 2008 and 2007,
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
stores range in size from 2,350 square feet to 15,000 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 focuses on 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 a single
source. The size and layout 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. 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, internet 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 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, preferred
pricing on many products, advance notice of new products, and priority shipping
and handling on all orders. Our wholesale stores service 132
ASC's: 81 located in the U.S., 43 located in Canada, and 8 located
outside North America.
Merchandise Our
products are generally organized into 13 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 analysis 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
2009 and 2008, Wholesale Leathercraft division sales by product category were as
follows:
|
Product Category
|
2009 Sales Mix
|
2008 Sales Mix
|
|
|
Belts
strips and straps
|
2%
|
2%
|
|
|
Books,
patterns, videos
|
2%
|
1%
|
|
|
Buckles
|
4%
|
4%
|
|
|
Conchos^
|
4%
|
5%
|
|
|
Craft
supplies
|
6%
|
6%
|
|
|
Custom
tools and hardware
|
0%
|
0%
|
|
|
Dyes,
finishes, glues
|
6%
|
6%
|
|
|
Hand
tools
|
13%
|
12%
|
|
|
Hardware
|
7%
|
7%
|
|
|
Kits
|
8%
|
8%
|
|
|
Lace
|
9%
|
9%
|
|
|
Leather
|
35%
|
36%
|
|
|
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 2009 and 2008, 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 2009, our 10 largest vendors accounted for approximately 75% 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. Because an occurrence
of such an event 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.
2
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 to 29. 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 store 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 $28.1 million, $25.2 million and $24.7 million for 2009, 2008 and 2007,
respectively.
General As
of March 1, 2010, the Tandy Leather retail chain has 76 stores located in 36
states and six 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 approximately 65% of
Tandy Leather's 2009 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% of annual sales), while the other three
quarters remain fairly even at 23-25% of annual sales each quarter.
Merchandise
Our products are generally organized into 13 categories. We carry a
wide assortment of products including leather, hand tools, kits, dyes &
finishes and stamping tools. During 2009 and 2008, Retail
Leathercraft division sales by product category were as follows:
|
Product Category
|
2009 Sales Mix
|
2008 Sales Mix
|
|
|
Belts
strips and straps
|
5%
|
4%
|
|
|
Books,
patterns, videos
|
3%
|
3%
|
|
|
Buckles
|
4%
|
4%
|
|
|
Conchos
|
4%
|
4%
|
|
|
Craft
supplies
|
4%
|
4%
|
|
|
Dyes,
finishes, glues
|
8%
|
8%
|
|
|
Hand
tools
|
16%
|
15%
|
|
|
Hardware
|
6%
|
6%
|
|
|
Kits
|
10%
|
11%
|
|
|
Lace
|
4%
|
4%
|
|
|
Leather
|
31%
|
31%
|
|
|
Stamping
tools
|
5%
|
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; one was opened in 2008, and two were opened in
2009. Of the 75 stores opened as of December 2009, 11 were
independent leathercraft stores that we acquired. Separately, these
acquisitions are not material. The other 64 stores have been new
stores opened by us. In 2010, we plan to open one to two retail
stores.
3
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 $1.3 million and $836,000 in 2009
and 2008, respectively.
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 our website,
www.tandyleatherfactory.com. 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 we have no specific 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.
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 9.
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, 2009, we employed 447 people, 351 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 15 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 our website through the
"Corporate Governance" link.
4
Executive
Officers of the Registrant
The
following table sets forth information concerning our executive officers as of
March 20, 2010:
|
Name and Age
|
Position
and Business Experience During Past Five Years
|
Served as Officer Since
|
|
Jon
W. Thompson, 48
|
Chief
Executive Office since July 2009; President since June 2008; Senior Vice
President from June 1993 to June 2008
|
2008
|
|
Shannon
L. Greene, 44
|
Chief
Financial Officer since May 2000
|
2000
|
|
Mark
J. Angus, 49
|
Senior
Vice President since June 2008; Vice President of Merchandising since June
1993
|
2008
|
|
William
M. Warren, 66
|
Secretary
and Corporate Counsel
|
1993
|
Jon W. Thompson has served as
our Chief Executive Officer since July 2009. He has also served as
President and Chief Operating Officer since June 2008. 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, 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. He served as Vice President of
Merchandising since January 1993.
William M. Warren has served
as Secretary and General Counsel since 1993. Since 1979, Mr. Warren
has been President and Director of Loe, Warren, Rosenfield, Kaitcer, Hibbs,
Windsor & Lawrence, P.C., a law firm located in Fort Worth,
Texas.
All officers are elected annually by
the Board of Directors to serve for the ensuing year.
ITEM
1A. RISK FACTORS
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.
5
ITEM
2. PROPERTIES
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 us are described in Item 1 in
the description of each of our three operating segments. 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, sales, advertising, administrative, and executive
offices. 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, 2009:
|
State
|
Wholesale
Leathercraft
|
Retail
Leathercraft
|
International
|
|
Alabama
|
-
|
1
|
-
|
|
Alaska
|
-
|
1
|
-
|
|
Arizona
|
2
|
3
|
-
|
|
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
|
-
|
|
North
Dakota
|
-
|
1
|
-
|
|
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
|
6
ITEM
3. LEGAL PROCEEDINGS
We are
involved in litigation in the ordinary course of business but are 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 our security holders during the fourth
quarter of our fiscal year ended December 31, 2009.
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PRUCHASES
OF EQUITY SECURITIES
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:
|
2009
|
High
|
Low
|
2008
|
High
|
Low
|
|
|
4th
quarter
|
$4.08
|
$3.00
|
4th
quarter
|
$2.75
|
$1.72
|
|
|
3rd
quarter
|
$3.30
|
$2.35
|
3rd
quarter
|
$3.07
|
$2.49
|
|
|
2nd
quarter
|
$2.85
|
$1.90
|
2nd
quarter
|
$3.37
|
$2.63
|
|
|
1st
quarter
|
$2.42
|
$1.55
|
1st
quarter
|
$3.32
|
$2.30
|
There
were approximately 476 stockholders of record on March 1,
2010.
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, 2009 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, 2009:
|
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
|
-
|
-
|
-
|
974,773
|
|
November
1 through November 30
|
-
|
-
|
-
|
974,773
|
|
December
1 through December 31
|
35,700(1)
|
$3.69
|
35,700
|
964,300
|
|
Total
|
35,700
|
$3.69
|
35,700
|
964,300
|
|
(1)
|
Represents
shares purchased through a stock repurchase program permitting us to
repurchase up to one million shares of our common stock at prevailing
market prices not to exceed $3.70 per share. We announced the
program on December 9, 2009, such program replacing our previous stock
repurchase program which permitted us, on the date of its termination, to
repurchase up to 974,773 shares of our common stock at prevailing prices
not to exceed $2.85 per share. Purchases under the program
commenced on December 9, 2009 and will terminate on December 10,
2010.
|
7
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, 2004 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
04
|
Dec
05
|
Dec
06
|
Dec
07
|
Dec
08
|
Dec
09
|
|
TANDY
LEATHER FACTORY
|
100
|
192.96
|
227.32
|
92.11
|
60.56
|
110.14
|
|
S&P
SMALLCAP 600 INDEX
|
100
|
107.68
|
123.96
|
123.59
|
85.19
|
106.97
|
|
S&P
SPECIALTY STORES
|
100
|
118.10
|
143.57
|
105.38
|
66.82
|
101.21
|
Data
Source: Research Data Group, Inc., San Francisco, CA
ITEM 6. SELECTED
FINANCIAL DATA
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,
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||
|
Net
sales
|
$54,482,739
|
$52,491,538
|
$54,219,728
|
$53,458,649
|
$49,069,483
|
||||
|
Cost
of sales
|
21,873,365
|
21,441,179
|
23,039,396
|
22,435,222
|
20,774,584
|
||||
|
Gross
profit
|
32,609,374
|
31,050,359
|
31,180,332
|
31,023,427
|
28,294,899
|
||||
|
Operating
expenses
|
27,514,273
|
27,025,017
|
26,859,301
|
24,129,115
|
22,806,049
|
||||
|
Operating
income
|
5,095,101
|
4,025,342
|
4,321,031
|
6,894,312
|
5,488,850
|
||||
|
Other
(income) expense
|
133,699
|
67,072
|
(316,831)
|
(97,161)
|
(134,502)
|
||||
|
Income
from continuing operations before income taxes
|
4,961,402
|
3,958,270
|
4,635,942
|
6,991,473
|
5,623,352
|
||||
|
Income
tax provision (benefit)
|
1,700,259
|
1,446,423
|
1,740,420
|
2,362,725
|
1,867,820
|
||||
|
Net
income from continuing operations
|
3,261,143
|
$2,511,847
|
$2,895,522
|
$4,628,748
|
$3,755,532
|
||||
|
Income
from discontinued operations, net of tax
|
56,914
|
92,336
|
192,609
|
148,318
|
(41,818)
|
||||
|
Net
income
|
$3,318,057
|
$2,604,183
|
$3,088,131
|
$4,777,066
|
$3,713,714
|
||||
Net
income per share from continuing operations
|
Basic
|
$0.31
|
$0.23
|
$0.26
|
$0.43
|
$0.35
|
||||
|
Diluted
|
$0.31
|
$0.23
|
$0.26
|
$0.42
|
$0.34
|
Net
income per share including discontinued operations
|
Basic
|
$0.32
|
$0.24
|
$0.28
|
$0.44
|
$0.35
|
|||||
|
Diluted
|
$0.31
|
$0.24
|
$0.28
|
$0.43
|
$0.34
|
|||||
|
Weighted
average common shares outstanding for:
|
||||||||||
|
Basic
EPS
|
10,471,103
|
10,931,306
|
10,951,481
|
10,807,316
|
10,643,004
|
|||||
|
Diluted
EPS
|
10,535,736
|
11,015,657
|
11,157,775
|
11,113,855
|
10,975,178
|
|||||
|
Balance
Sheet Data, as of December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||
|
Cash
and certificates of deposit
|
$12,908,962
|
$10,821,298
|
$6,810,396
|
$6,739,981
|
$3,215,727
|
||||
|
Total
assets
|
43,327,231
|
40,975,913
|
37,651,506
|
31,916,635
|
25,680,473
|
||||
|
Capital
lease obligation, including current portion
|
-
|
593,949
|
-
|
111,723
|
245,789
|
||||
|
Long-term
debt, including current portion
|
3,712,500
|
3,915,000
|
4,050,000
|
-
|
-
|
||||
|
Total
Stockholders’ Equity
|
$33,359,655
|
$31,264,762
|
$29,815,504
|
$26,323,243
|
$21,257,857
|
8
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 2009 and 2008 and the two years then ended and the notes
accompanying those financial statements. You are also urged to
consider the information under the caption "Summary of Critical Accounting
Policies."
Summary
We are
the world's largest specialty retailer and wholesale distributor of leather and
leathercraft-related items. Our operations are centered on operating
retail and wholesale stores. We have built our business by offering
our customers quality products in one location at competitive
prices. The key to our success is our ability to grow our base
business. We grow that business by opening new locations and by
increasing sales in our existing locations. We intend to continue to
expand both domestically, in the short-term, and internationally, in the
long-term.
We
operate in three segments. First, Wholesale Leathercraft, consisting
of our Leather Factory stores and our national account group, is our oldest
segment with sales of $25.1 million in 2009. Historically, in normal
economic conditions, this division generally offers steady but very modest
increases in sales. Sales in 2009 declined 5.0% compared to
2008. The wholesale stores’ sales declined 5.3% compared to 2008 and
national account sales were down 3.4%. Much of the sales decline at
the stores and in national accounts is attributed to an overall weakness in
consumer spending as a result of the weak U.S. economy.
Since
acquiring its assets in 2000, Tandy Leather has been re-established as the
operator of retail leathercraft stores. These retail stores comprise
our second segment, Retail Leathercraft. This segment has experienced
the greatest increases in sales ($28.1 million in 2009, up from $25.2 million in
2008) and in 2009, surpassed our Wholesale Leathercraft segment to become our
largest source of revenues. Our business plan calls for opening an
average of 10-12 stores annually as we work toward a goal of 100+ stores from 75
stores at the end of 2009. We have slowed down our new store openings
in recent years due to the general economic conditions in the U.S. and because
of the lack of personnel qualified for store manager positions. We
plan to open one to two new stores in 2010, 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.
On a
consolidated basis, a key indicator of costs, gross margin as a percent of total
net sales, increased in 2008 and in 2009. Operating
expenses increased 2% between 2008 and 2009 and between 2007 and
2008.
We
reported consolidated net income for 2009 of $3.3
million. Consolidated net income for 2008 and 2007 was $2.6 million
and $3.1 million, respectively. We use our cash flow to fund our
operations, to fund the opening of new Tandy Leather stores, to purchase
necessary property and equipment and to 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 $33.3 million from $31.3 million the previous
year.
Comparing
the December 31, 2009 balance sheet with the prior year’s balance sheet, we
increased our investment in inventory from $16.0 million to $16.9 million, while
total cash (including certificates of deposit and other short-term investments)
increased from $10.8 million from $12.9 million.
Net
Sales
Net sales
for the three years ended December 31, 2009 were as follows:
|
Year
|
Wholesale Leathercraft
|
Retail Leathercraft
|
International Leathercraft
|
Total Company
|
Incr (Decr) from Prior
Year
|
|
2009
|
$25,095,392
|
$28,079,862
|
$1,307,485
|
$54,482,739
|
3.8%
|
|
2008
|
$26,423,858
|
$25,231,145
|
$836,535
|
$52,491,537
|
(3.2)%
|
|
2007
|
$29,555,978
|
$24,663,750
|
N/A
|
$54,219,728
|
1.4%
|
Our net
sales increased by 3.8% in 2009 when compared with 2008 and fell by 3.2% in 2008
when compared with 2007. In 2009 and 2008, our Retail and
International Leathercraft segments reported sales increases while our Wholesale
Leathercraft segment reported sales declines. The reduction in sales
in our wholesale stores is the result of the overall economic slowdown in the
U.S. That economic slowdown has impacted our retail stores as well,
although not as significantly.
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 2009,
our cost of sales decreased as a percentage of total net sales when compared to
2009, resulting in an increase in consolidated gross profit margin from 59.2% to
59.9%. Our 2008 cost of sales as a percentage of our total net sales
decreased as a percentage of total net sales when compared to 2007, resulting in
an increase in consolidated gross profit margin from 57.5% to
59.2%. 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, 2009 were as
follows:
|
Year
|
Wholesale Leathercraft
|
Retail Leathercraft
|
International Leathercraft
|
Total Company
|
|
2009
|
58.5%
|
60.9%
|
63.6%
|
59.9%
|
|
2008
|
56.5%
|
61.6%
|
68.4%
|
59.2%
|
|
2007
|
55.7%
|
59.7%
|
-
|
57.5%
|
9
Our
operating expenses decreased 1.0% as a percentage of total net sales to 50.5% in
2009 when compared with 51.5% in 2008. This decrease indicates that
our operating expenses grew more slowly than our sales during this
period. 2009 operating expenses were $490,000 higher than those of
2008. Significant expense fluctuations in 2009 compared to 2008 are
as follows:
|
Expense
|
2009 amount
|
Incr (Decr) over 2008
|
|
Employee
compensation & benefits
|
$14.5
million
|
$500,000
|
|
Rent
& utilities
|
3.3
million
|
(90,000)
|
|
Depreciation
and amortization
|
1.1
million
|
100,000
|
|
Loss
on impairment and disposal of equipment
|
365,000
|
365,000
|
|
Professional
fees and licenses
|
700,000
|
(62,000)
|
|
Freight
out – shipping product to customers
|
1.3
million
|
(160,000)
|
|
Property
taxes
|
340,000
|
80,000
|
|
Outside
services
|
102,000
|
(157,000)
|
Our
operating expenses increased 2.0% as a percentage of total net sales to 51.5% in
2008 when compared with 49.5% in 2007. This increase indicates that
our operating expenses grew faster than our sales during this
period. 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)
|
Other
Income/Expense (net)
Other
Income/Expense consists primarily of currency exchange fluctuations, interest
income and interest expense. In 2009, we had other expense (net) of
$134,000 compared to other income (net) of $67,000 in 2008. We
received $32,000 in gas royalties. We earned $128,000 in interest
income on our cash and paid $297,000 in interest expense on our bank
debt. We had a currency exchange loss of $98,000 in 2009 compared to
$114,000 in 2008.
In 2008,
we had other expense (net) of $67,000 compared to other income (net) of $315,000
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.
Net
Income
During
2009, we earned net income of $3.3 million, a 27% increase over our net income
of $2.6 million earned during 2008. The increase in net income was
the result of the increase in sales and gross profit, partially offset by the
reduction in other 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.
Wholesale
Leathercraft
The
increases (or decreases) 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, 2009 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
|
|
2009
|
(5.3)%
|
$2,382,998
|
29.3%
|
9.5%
|
|
2008
|
(10.6)%
|
$1,842,526
|
(34.8)%
|
6.9%
|
|
2007
|
(3.7)%
|
$2,826,710
|
(41.3)%
|
9.6%
|
Wholesale
Leathercraft, consisting of our 30 wholesale stores and our national account
group, accounted for 45.6% of our consolidated net sales in 2009, which compares
to 49.6% in 2008 and 53.4% in 2007. 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 5.3% in 2009 compared to sales in 2008 while the
sales decline in our national account group was 3.4% from 2008 to
2009. By customer group, we increased sales to our retail customers,
but had sales declines in all other groups. The most significant
decreases were in our wholesale and manufacturer groups. The
customers comprising 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
|
2009
|
2008
|
2007
|
|
Retail
|
29%
|
26%
|
23%
|
|
Institution
|
7%
|
8%
|
8%
|
|
Wholesale
|
42%
|
41%
|
42%
|
|
National
Accounts
|
15%
|
17%
|
15%
|
|
Manufacturers
|
7%
|
8%
|
12%
|
|
100%
|
100%
|
100%
|
The 2009
increase in operating income as a percentage of divisional sales resulted from a
decrease in operating expenses of $500,000. Significant operating
expense decreases occurred in legal and professional fees ($57,000), moving
expenses ($114,000), advertising and marketing ($200,000), outside services
($158,000), rent and utilities ($95,000) and freight out
($143,000). These decreases were offset somewhat by a loss incurred
on the impairment of certain computer equipment totaling $365,000.
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 3.4% 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.
10
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, 2009 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
|
|
2009
|
11.3%
|
$2,900,701
|
32.6%
|
10.3%
|
|
2008
|
2.3%
|
$2,188,282
|
41.7%
|
8.7%
|
|
2007
|
9.5%
|
$1,544,320
|
(33.2)%
|
6.3%
|
Reflecting
the growth previously discussed, Retail Leathercraft accounted for 51.1% of our
total net sales in 2009, up from 47.4% in 2008 and 44.6% in 2007.
Growth in
net sales for our Retail Leathercraft division in 2009 resulted primarily from
an increase in same store sales.
Our sales
mix by customer group in the Retail Leathercraft division was as
follows:
|
Customer Group
|
2009
|
2008
|
2007
|
|
Retail
|
65%
|
65%
|
63%
|
|
Institution
|
7%
|
9%
|
8%
|
|
Wholesale
|
27%
|
25%
|
27%
|
|
National
Accounts
|
0%
|
0%
|
0%
|
|
Manufacturers
|
1%
|
1%
|
2%
|
|
100%
|
100%
|
100%
|
Operating
income as a percentage of sales increased to 10.3% for 2009 compared to 8.7% for
2008. Gross margin decreased to 60.9% in 2009 from 61.6% in
2008. Operating expenses as a percent of sales in 2008 decreased by
2.3%, from 52.9% for 2008 to 50.6% for 2009 as operating expenses grew at a
slower pace than that of sales.
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.
We intend
to continue the expansion of Tandy Leather’s retail store chain in 2010 by
opening one to two 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 2010 if we
determine that the U.S. retail sector can not support additional store openings
at that time or if the feasibility of additional successful openings is deemed
likely.
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 2.4% and 1.6% of our total sales in 2009 and 2008,
respectively. Operating income was $176,000 and $54,000 in 2009 and
2008, respectively. We expect this segment to become a larger part of
our total operations as our international customer base continues to
grow.
Financial
Condition
At
December 31, 2009, we held $12.9 million of cash and certificates of deposit,
$16.9 million of inventory, accounts receivable of $1.2 million, and $9.8
million of property and equipment. Goodwill and other intangibles
(net of amortization and depreciation) were $984,000 and $308,000,
respectively. Net total assets were $43.3 million. Current
liabilities were $5.8 million (including $203,000 of current maturities of
long-term debt), while long-term debt was $3.5 million. Total
stockholders’ equity at the end of 2009 was $33.4 million.
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.
Specific
ratios on a consolidated basis at the end of each year ended December 31 were as
follows:
|
2009
|
2008
|
2007
|
||
|
Solvency
Ratios:
|
||||
|
Quick
Ratio
|
(Cash+Accts
Rec)/Total Current Liabilities
|
2.44
|
2.37
|
2.48
|
|
Current
Ratio
|
Total
Current Assets/Total Current Liabilities
|
5.55
|
5.72
|
7.47
|
|
Current
Liabilities to Net Worth
|
Total
Current Liabilities/Net Worth
|
0.17
|
0.16
|
0.13
|
|
Current
Liabilities to Inventory
|
Total
Current Liabilities/Inventory
|
0.34
|
0.32
|
0.22
|
|
Total
Liabilities to Net Worth
|
Total
Liabilities/Net Worth
|
0.30
|
0.31
|
0.26
|
|
Fixed
Assets to Net Worth
|
Fixed
Assets/Net Worth
|
0.29
|
0.33
|
0.23
|
|
Efficiency
Ratios:
|
||||
|
Collection
Period (Days Outstanding)
|
Accounts
Receivable/Credit Sales x 365
|
37.22
|
54.89
|
63.42
|
|
Inventory
Turnover
|
Sales/Average
Inventory
|
3.35
|
3.18
|
3.19
|
|
Assets
to Sales
|
Total
Assets/Sales
|
0.79
|
0.77
|
0.68
|
|
Sales
to Net Working Capital
|
Sales/Current
Assets - Current Liabilities
|
2.09
|
2.22
|
2.27
|
|
Accounts
Payable to Sales
|
Accounts
Payable/Sales
|
0.02
|
0.02
|
0.03
|
|
Profitability
Ratios:
|
||||
|
Return
on Sales (Profit Margin)
|
Net
Profit After Taxes/Sales
|
0.06
|
0.05
|
0.06
|
|
Return
on Assets
|
Net
Profit After Taxes/Total Assets
|
0.08
|
0.06
|
0.08
|
|
Return
on Net Worth (Return on Equity)
|
Net
Profit After Taxes/Net Worth
|
0.10
|
0.08
|
0.10
|
11
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 191,000 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 2009, 2008 and 2007 required net cash of $2.4 million,
$1.1 million, and $4,000, respectively.
Our
primary source of liquidity and capital resources during 2009 was cash flow
provided by operating activities. Cash flow from operations for 2009
and 2008 was $5.3 million and $7.8 million, respectively. In 2009,
cash flow from operations was generated from income, partially offset by the
increase in inventory. In 2008, cash flow from operations was
generated from net income and the decreases in accounts receivable and
inventory. Cash flow from operations in 2007 was $2.5
million.
Consolidated
accounts receivable remained virtually unchanged at $1.2 million as of December
31, 2009 and 2008. Average days to collect accounts improved from
54.9 days in 2008 to 40.0 days in 2009 on a consolidated basis. We
have tightened our credit policy and are aggressively monitoring our customer
accounts to ensure collectability. 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
increased from $16.0 million at the end of 2008 to $16.9 million at December 31,
2009. We expect our inventory to slowly trend upward as we continue
our expansion of the Tandy Leather store chain. In 2010, we expect to
maintain a fairly steady inventory due to 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 2009 was at a very reasonable level given our expansion plans as it was
within 2% of our internal targets of optimum inventory levels.
Consolidated inventory turned 3.34 times during 2009, improving over the 2008 turns at 3.18 times. We compute our inventory turnover rates as sales divided by average inventory.
By
operating division, inventory turns are as follows:
|
Segment
|
2009
|
2008
|
2007
|
|
Wholesale
Leathercraft
|
2.18
|
2.14
|
2.37
|
|
Retail
Leathercraft
|
6.13
|
6.05
|
5.87
|
|
International
Leathercraft
|
3.95
|
4.61
|
n/a
|
|
Wholesale
Leathercraft stores only
|
6.82
|
7.14
|
6.87
|
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, totaling $1.1 million, remained virtually unchanged at the end of 2009
compared to the end of 2008.
As
discussed above, the largest use of operating cash in 2009 was in the increase
of inventory. Cash paid for capital expenditures totaled $792,000 and
$2.8 million for the years ended December 31, 2009 and 2008,
respectively. Total capital expenditures (both cash and non-cash)
totaled $792,000 and $3.6 million for the years ended December 31, 2009 and
2008, respectively. 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). In 2009, the primary capital expenditures were for
computer equipment, software and licenses totaling $472,000. Other
capital expenditures were building improvements ($209,000), including parking
lot repaving and fence installation, and factory machines and dies
($56,000). Although we intend to continue opening or acquiring new
Tandy Leather retail stores and therefore expenditures related to this expansion
should continue into 2010, we do expect our 2010 capital expenditures to be less
than that of 2009 as the expenditures related to our building have been
completed.
Cash
applied toward stock repurchases totaled $1,624,264 and $802,898, in 2009 and
2008, respectively.
We
believe that cash flow from operations will be adequate to fund our operations
in 2010, 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.
12
Off-Balance
Sheet Arrangements
We did
not have any off-balance sheet arrangements during 2009, 2008 and 2007, 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, 2009 (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)
|
$3,712,500
|
$202,500
|
$405,000
|
$405,000
|
$2,700,000
|
|
Operating
Leases(2)
|
7,405,586
|
2,485,289
|
3,598,560
|
1,223,489
|
98,248
|
|
Total
Contractual Obligations
|
$11,118,086
|
$2,687,789
|
$4,003,560
|
$1,628,489
|
$2,798,248
|
____________________
(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 carrying value. As of December 31, 2009,
we determined that the present value of the discounted estimated future cash
flows of the operating divisions associated with the goodwill is sufficient to
support their respective goodwill balances. If actual financial
performance of these divisions differs 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 include 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.
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 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
15 to the Consolidated Financial Statements, Segment Information, for
financial information concerning our foreign activities.
Interest
Rate Risk
In the
past, we have been 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.
13
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Tandy
Leather Factory, Inc.
Consolidated
Balance Sheets
December
31, 2009 and 2008
|
December
31,
2009
|
December
31,
2008
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
|
$7,891,962
|
$7,810,298
|
|||||
|
Short-term
investments, including certificates of deposit
|
5,017,000
|
3,011,000
|
|||||
|
Accounts
receivable-trade, net of allowance for doubtful accounts
|
|||||||
|
of
$136,000 and $43,000 in 2009 and 2008, respectively
|
1,202,811
|
1,180,349
|
|||||
|
Inventory
|
16,865,826
|
16,011,147
|
|||||
|
Deferred
income taxes
|
271,481
|
229,501
|
|||||
|
Other
current assets
|
791,884
|
777,550
|
|||||
|
Total
current assets
|
32,040,964
|
29,019,845
|
|||||
|
PROPERTY
AND EQUIPMENT, at cost
|
15,111,497
|
15,340,732
|
|||||
|
Less
accumulated depreciation and amortization
|
(5,431,776)
|
(5,019,885)
|
|||||
|
9,679,721
|
10,320,847
|
||||||
|
GOODWILL
|
983,823
|
966,655
|
|||||
|
OTHER
INTANGIBLES, net of accumulated amortization of
|
|||||||
|
$418,000
and $367,000 in 2009 and 2008, respectively
|
307,802
|
355,492
|
|||||
|
OTHER
assets
|
314,921
|
313,074
|
|||||
|
$43,327,231
|
$40,975,913
|
||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable-trade
|
$1,185,032
|
$1,148,577
|
|||||
|
Accrued
expenses and other liabilities
|
3,988,144
|
3,182,194
|
|||||
|
Income
taxes payable
|
399,536
|
271,122
|
|||||
|
Current
maturities of capital lease obligation
|
-
|
265,111
|
|||||
|
Current
maturities of long-term debt
|
202,500
|
202,500
|
|||||
|
Total
current liabilities
|
5,775,212
|
5,069,504
|
|||||
|
DEFERRED
INCOME TAXES
|
682,364
|
600,309
|
|||||
|
CAPITAL
LEASE OBLIGATION, net of current maturities
|
-
|
328,838
|
|||||
|
LONG-TERM
DEBT, net of current maturities
|
3,510,000
|
3,712,500
|
|||||
|
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,
11,021,951 and 10,994,951 shares issued at 2009 and 2008,
|
|||||||
|
10,130,628
and 10,664,555 outstanding at 2009 and 2008, respectively
|
26,453
|
26,388
|
|||||
|
Paid-in
capital
|
5,491,736
|
5,464,443
|
|||||
|
Retained
earnings
|
29,959,910
|
26,641,853
|
|||||
|
Treasury
stock at cost (891,323 shares at 2009; 330,396 shares at
2008)
|
(2,452,649)
|
(828,385)
|
|||||
|
Accumulated
other comprehensive income
|
334,205
|
(39,537)
|
|||||
|
Total
stockholders' equity
|
33,359,655
|
31,264,762
|
|||||
|
$43,327,231
|
$40,975,913
|
||||||
The
accompanying notes are an integral part of these financial
statements.
14
Tandy
Leather Factory, Inc.
Consolidated
Statements of Income
For
the Years Ended December 31, 2009, 2008 and 2007
|
2009
|
2008
|
2007
|
||||
|
NET
SALES
|
$54,482,739
|
$52,491,538
|
$54,219,728
|
|||
|
COST
OF SALES
|
21,873,365
|
21,441,179
|
23,039,396
|
|||
|
Gross
Profit
|
32,609,374
|
31,050,359
|
31,180,332
|
|||
|
OPERATING
EXPENSES
|
27,514,273
|
27,025,017
|
26,859,301
|
|||
|
INCOME
FROM OPERATIONS
|
5,095,101
|
4,025,342
|
4,321,031
|
|||
|
OTHER
(INCOME) EXPENSE:
|
||||||
|
Interest
expense
|
297,864
|
332,107
|
122,209
|
|||
|
Other,
net
|
(164,165)
|
(265,035)
|
(437,120)
|
|||
|
Total
other expense
|
133,699
|
67,072
|
(314,911)
|
|||
|
INCOME
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
4,961,402
|
3,958,270
|
4,635,942
|
|||
|
PROVISION
FOR INCOME TAXES
|
1,700,259
|
1,446,423
|
1,740,420
|
|||
|
NET
INCOME FROM CONTINUING OPERATIONS
|
3,261,143
|
2,511,847
|
$2,895,522
|
|||
|
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX
|
56,914
|
92,334
|
192,609
|
|||
|
NET
INCOME
|
$3,318,057
|
$2,604,181
|
$3,088,131
|
|||
|
NET
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
|
||||||
|
BASIC
|
$0.31
|
$0.23
|
$0.26
|
|||
|
DILUTED
|
$0.31
|
$0.23
|
$0.26
|
|||
|
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX PER COMMON SHARE:
|
||||||
|
BASIC
|
$0.01
|
$0.01
|
$0.02
|
|||
|
DILUTED
|
$0.01
|
$0.01
|
$0.02
|
|||
|
NET
INCOME PER COMMON SHARE:
|
||||||
|
BASIC
|
$0.32
|
$0.24
|
$0.28
|
|||
|
DILUTED
|
$0.31
|
$0.24
|
$0.28
|
|||
|
Weighted
Average Number of Shares Outstanding:
|
||||||
|
Basic
|
10,471,103
|
10,931,306
|
10,951,481
|
|||
|
Diluted
|
10,535,736
|
11,015,657
|
11,157,775
|
|||
The
accompanying notes are an integral part of these financial
statements.
15
Tandy
Leather Factory, Inc.
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2009, 2008 and 2007
|
2009
|
2008
|
2007
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income
|
$3,318,057
|
$2,604,181
|
$3,088,131
|
|||||||||
|
Income
from discontinued operations
|
56,914
|
92,334
|
192,609
|
|||||||||
|
3,261,143
|
2,511,847
|
2,895,522
|
||||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities -
|
||||||||||||
|
Depreciation
and amortization
|
1,125,009
|
975,903
|
628,622
|
|||||||||
|
Loss
on disposal or abandonment of assets
|
21,540
|
13,385
|
52,034
|
|||||||||
|
Impairment
of equipment
|
343,543
|
-
|
-
|
|||||||||
|
Non-cash
stock-based compensation
|
2,540
|
30,495
|
19,340
|
|||||||||
|
Deferred
income taxes
|
40,776
|
477,490
|
(56,980)
|
|||||||||
|
Other
|
339,305
|
(373,139)
|
241,182
|
|||||||||
|
Net
changes in assets and liabilities, net of effect of
|
||||||||||||
|
business
acquisitions:
|
||||||||||||
|
Accounts
receivable-trade, net
|
(99,994)
|
1,327,899
|
29,633
|
|||||||||
|
Inventory
|
(900,466)
|
1,469,762
|
147,731
|
|||||||||
|
Income
taxes
|
147,310
|
204,858
|
12,492
|
|||||||||
|
Other
current assets
|
(14,334)
|
325,286
|
(27,946)
|
|||||||||
|
Accounts
payable-trade
|
36,455
|
(348,987)
|
(327,726)
|
|||||||||
|
Accrued
expenses and other liabilities
|
810,564
|
1,115,586
|
(1,349,961)
|
|||||||||
|
Total
adjustments
|
1,852,248
|
5,218,538
|
(631,579)
|
|||||||||
|
Net
cash provided by continuing operating activities
|
5,113,391
|
7,730,385
|
2,263,943
|
|||||||||
|
Cash
provided from discontinued operating activities
|
161,070
|
119,681
|
281,284
|
|||||||||
|
Net
cash provided by operating activities
|
5,274,461
|
7,850,066
|
2,545,227
|
|||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase
of property and equipment
|
(791,565)
|
(2,845,548)
|
(1,692,491)
|
|||||||||
|
Payments
in connection with businesses acquired
|
-
|
-
|
(771,417)
|
|||||||||
|
Purchases
of certificates of deposit
|
(8,671,000)
|
(3,109,000)
|
-
|
|||||||||
|
Proceeds
from maturities of certificates of deposit
|
6,665,000
|
98,000
|
-
|
|||||||||
|
Purchases
of marketable securities
|
-
|
-
|
(500,000)
|
|||||||||
|
Proceeds
from sale of marketable securities
|
-
|
500,000
|
-
|
|||||||||
|
Proceeds
from sale of assets
|
2,510
|
42,114
|
6,942
|
|||||||||
|
Purchase
of intangible assets
|
-
|
(24,708)
|
-
|
|||||||||
|
Decrease
(increase) in other assets
|
(1,847)
|
122,140
|
(26,276)
|
|||||||||
|
Net
cash provided by continuing investing activities
|
(2,796,902)
|
(5,217,002)
|
(2,983,242)
|
|||||||||
|
Cash
provided from discontinued investing activities
|
-
|
-
|
12,463
|
|||||||||
|
Net
cash used in investing activities
|
(2,796,902)
|
(5,217,002)
|
(2,970,779)
|
|||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Payments
on notes payable and long-term debt
|
(202,500)
|
(135,000)
|
-
|
|||||||||
|
Payments
on capital lease obligations
|
(593,949)
|
(209,764)
|
(111,723)
|
|||||||||
|
Repurchase
of common stock (treasury stock)
|
(1,624,264)
|
(802,898)
|
-
|
|||||||||
|
Proceeds
from issuance of common stock and warrants
|
24,818
|
14,500
|
107,780
|
|||||||||
|
Net
cash used in continuing financing activities
|
(2,395,895)
|
(1,133,162)
|
(3,943)
|
|||||||||
|
Cash
provided from discontinued financing activities
|
-
|
-
|
-
|
|||||||||
|
Net
cash used in financing activities
|
(2,395,895)
|
(1,133,162)
|
(3,943)
|
|||||||||
|
NET
INCREASE IN CASH
|
81,664
|
1,499,902
|
(429,495)
|
|||||||||
|
CASH,
beginning of period
|
7,810,298
|
6,310,396
|
6,739,891
|
|||||||||
|
CASH,
end of period
|
$7,891,962
|
$7,810,298
|
$6,310,396
|
|||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Interest
paid during the period
|
$297,864
|
$332,107
|
$122,209
|
|||||||||
|
Income
tax paid during the period, net of (refunds)
|
1,622,273
|
878,110
|
1,830,688
|
|||||||||
|
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.
16
Tandy
Leather Factory, Inc.
Consolidated
Statements of Stockholders' Equity
For
the Years Ended December 31, 2009, 2008 and 2007
|
Number
of Shares
|
Par
Value
|
Paid-in
Capital
|
Treasury
Stock
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Total
|
Comprehensive
Income
(Loss)
|
||||||||
|
BALANCE,
December 31, 2006
|
10,879,209
|
$26,124
|
$5,292,591
|
$(25,487)
|
$20,949,541
|
$80,475
|
$26,323,243
|
||||||||
|
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
|
||||||||||||||
|
Shares
issued - stock options exercised
|
27,000
|
65
|
24,753
|
-
|
-
|
-
|
24,818
|
||||||||
|
Stock-based
compensation
|
-
|
-
|
2,540
|
-
|
-
|
-
|
2,540
|
||||||||
|
Purchase
of treasury stock
|
(560,927)
|
-
|
-
|
(1,624,264)
|
-
|
-
|
(1,624,264)
|
||||||||
|
Net income
|
-
|
-
|
-
|
-
|
3,318,057
|
-
|
3,318,057
|
$3,318,057
|
|||||||
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
373,742
|
373,742
|
373,742
|
|||||||
|
BALANCE,
December 31, 2009
|
10,130,628
|
$26,453
|
$5,491,736
|
$(2,452,649)
|
$29,959,910
|
$334,205
|
$33,359,655
|
||||||||
|
Comprehensive
income for the year ended December 31, 2009
|
$3,691,799
|
||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
17
TANDY
LEATHER FACTORY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008, and 2007
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 foreign currency translation losses of
$98,000 and $114,000 in 2009 and 2008, respectively, and a transaction gain of
$9,000 in 2007.
|
·
|
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 machinery and 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. 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.
18
|
BASIC
|
2009
|
2008
|
2007
|
||
|
Net
income (loss)
|
$3,318,057
|
$2,604,181
|
$3,088,131
|
||
|
Weighted
average common shares outstanding
|
10,471,103
|
10,931,306
|
10,951,481
|
||
|
Earnings
per share – basic
|
$0.32
|
$0.24
|
$0.28
|
||
|
DILUTED
|
|||||
|
Net
income (loss)
|
$3,318,057
|
$2,604,181
|
$3,088,131
|
||
|
Weighted
average common shares outstanding
|
10,471,103
|
10,931,306
|
10,951,481
|
||
|
Effect
of assumed exercise of stock options and warrants
|
64,633
|
84,351
|
206,294
|
||
|
Weighted
average common shares outstanding, assuming dilution
|
10,535,736
|
11,015,657
|
11,157,775
|
||
|
Earnings
per share - diluted
|
$0.31
|
$0.24
|
$
0.28
|
||
|
Outstanding
options and warrants excluded as anti-dilutive
|
61,000
|
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
197,700, 232,200 and 275,200 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, 2009, 2008 and 2007, respectively.
|
·
|
Goodwill
and other intangibles
|
Goodwill
represents the excess of the purchase price over the fair value of net assets
acquired in a business combination. Goodwill is required to be tested for
impairment on an annual basis, absent indicators of impairment during the
interim. Application of the goodwill impairment test requires
exercise of judgment, including the estimation of future cash flows,
determination of appropriate discount rates and other important assumptions.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for each reporting unit.
A two-step process is used to test for goodwill 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, 2009, we determined that the present value
of the discounted estimated future cash flows of the operating divisions
associated with the goodwill is sufficient to support their respective goodwill
balances. Goodwill impairment is deemed to exist if the carrying
value of the goodwill exceeds its implied fair value. Our reporting
units are generally the same as the operating segments identified in Note 15 –
Segment Information.
A summary
of changes in our goodwill for the years ended December 31, 2009 and 2008 is as
follows:
|
Leather Factory
|
Tandy Leather
|
Total
|
|||
|
Balance,
December 31, 2007
|
$607,130
|
$383,406
|
$990,536
|
||
|
Acquisitions
and adjustments
|
-
|
-
|
-
|
||
|
Foreign
exchange gain/loss
|
(23,881)
|
-
|
(23,881)
|
||
|
Impairments
|
-
|
-
|
-
|
||
|
Balance,
December 31, 2008
|
$583,249
|
$383,406
|
$966,655
|
||
|
Acquisitions
and adjustments
|
-
|
-
|
-
|
||
|
Foreign
exchange gain/loss
|
17,168
|
-
|
17,168
|
||
|
Impairments
|
-
|
-
|
-
|
||
|
Balance,
December 31, 2009
|
600,417
|
$383,406
|
983,823
|
As of
December 31, 2009 and 2008, our intangible assets and related accumulated
amortization consisted of the following:
|
As
of December 31, 2009
|
|||||
|
Gross
|
Accumulated
Amortization
|
Net
|
|||
|
Trademarks,
Copyrights
|
$544,369
|
$356,067
|
$188,302
|
||
|
Non-Compete
Agreements
|
181,636
|
62,136
|
119,500
|
||
|
$726,005
|
418,203
|
$307,802
|
|||
|
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
|
|||
19
Excluding
goodwill, we have no intangible assets not subject to amortization under U.S.
GAAP. Amortization of intangible assets of $51,291 in 2009, $53,350
in 2008, and $51,542 in 2007 was recorded in operating expenses. The
weighted average amortization period is 15 years for trademarks and copyrights
and 4.22 years for 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
|
|
|
2010
|
$29,190
|
$30,337
|
$59,527
|
|
2011
|
28,263
|
30,337
|
58,600
|
|
2012
|
7,427
|
30,337
|
37,764
|
|
2013
|
-
|
30,337
|
30,337
|
|
2014
|
-
|
30,337
|
30,337
|
During
2007, we acquired non-compete agreements in the amounts of $24,708 and
$75,000.
|
·
|
Fair
value of financial Instruments
|
We
measure fair value as an exit price, which is the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As a basis for considering such
assumptions, accounting standards establish a three-tier value hierarchy, which
prioritizes the inputs used in the valuation methodologies in measuring fair
value:
Level 1 –
observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 –
include other inputs that are directly or indirectly observable in the
marketplace.
Level 3 –
unobservable inputs which are supported by little or no market
activity.
Classification
of the financial asset or liability within the hierarchy is determined based on
the lowest level input that is significant to the fair value
measurement.
Our
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
|
We have
one stock option plan which provides for stock option grants to non-employee
directors. No options have been awarded as of December 31,
2009. 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 expirations of the plans had 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. We recognized share based
compensation expense of approximately $3,000, $30,000, and $19,000 for the years
ended December 31, 2009, 2008 and 2007, respectively, as a component of
operating expenses.
During
the years ended December 31, 2009 and 2008, 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, 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
|
$2.15
|
220,770
|
3.07
|
$259,461
|
|
Weighted
Average
Exercise
Price
|
#
of
shares
|
Weighted
Average Remaining Contractual Term
(in
years)
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding,
January 1, 2009
|
$2.16
|
224,700
|
||
|
Granted
|
-
|
-
|
||
|
Cancelled
|
-
|
-
|
||
|
Exercised
|
0.92
|
(27,000)
|
||
|
Outstanding,
December 31, 2009
|
$2.33
|
197,700
|
2.29
|
$246,088
|
|
Exercisable,
December 31, 2009
|
$2.33
|
197,700
|
2.29
|
$246,088
|
Other
information pertaining to option activity during the twelve month periods ended
December 31, 2009, 2008 and 2007 are as follows:
|
2009
|
2008
|
2007
|
||
|
Weighted
average grant-date fair value of stock options granted
|
N/A
|
N/A
|
N/A
|
|
|
Total
fair value of stock options vested
|
$2,540
|
$30,500
|
$30,500
|
|
|
Total
intrinsic value of stock options exercised
|
$15,913
|
$8,779
|
$62,280
|
20
As of
December 31, 2009, all stock options were fully vested so there is no
unrecognized compensation cost related to nonvested stock options to be
recognized in future periods.
Cash
received from the exercise of stock options and warrants for the years ended
December 31, 2009, 2008 and 2007 was $24,818, $14,500, and $107,780,
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 expected 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
$1,342,000, $1,500,000 and $1,641,000 for the years ended December 31, 2009,
2008 and 2007, 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 $144,000 and $137,000 at December 31, 2009 and
2008, respectively. Total advertising expense was $2,953,000 in 2009;
$3,036,346 in 2008; and $3,440,762 in 2007.
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 2008 financial statements to conform to
the 2009 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,
2009 and 2008 consisted of certificates of deposit, which are considered to be
Level 2 assets. The contractual maturities of the certificates of
deposit as of December 31, 2009 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
|
$2,132,000
|
|
Due
between one and five years
|
2,687,000
|
|
Due
between five and ten years
|
-
|
|
Due
between ten and fifteen years
|
99,000
|
|
Due
between fifteen and twenty years
|
99,000
|
|
$5,017,000
|
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 $136,023 and $43,014, respectively, at December 31,
2009 and 2008. 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, 2009
|
$43,014
|
-
|
112,272
|
632
|
(19,895)
|
$136,023
|
|
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
|
|
·
|
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.
21
5. BALANCE
SHEET COMPONENTS
|
December
31, 2009
|
December
31, 2008
|
||
|
INVENTORY
|
|||
|
On
hand:
|
|||
|
Finished
goods held for sale
|
$14,861,855
|
$14,867,830
|
|
|
Raw
materials and work in process
|
609,002
|
415,644
|
|
|
Inventory
in transit
|
1,394,969
|
727,673
|
|
|
TOTAL
|
$16,865,826
|
$16,011,147
|
|
|
PROPERTY AND EQUIPMENT
|
|||
|
Building
|
$5,324,404
|
$5,160,522
|
|
|
Land
|
1,451,132
|
1,451,132
|
|
|
Leasehold
improvements
|
677,431
|
669,329
|
|
|
Equipment
and machinery
|
5,234,868
|
5,725,442
|
|
|
Furniture
and fixtures
|
2,377,683
|
2,288,328
|
|
|
Vehicles
|
45,979
|
45,979
|
|
|
15,111,497
|
15,340,732
|
||
|
Less: accumulated
depreciation
|
(5,431,776)
|
(5,019,885)
|
|
|
TOTAL
|
$9,679,721
|
$10,320,847
|
|
|
OTHER CURRENT ASSETS
|
|||
|
Accounts
receivable – employees
|
$36,644
|
$42,217
|
|
|
Accounts
receivable – other
|
9,600
|
126,074
|
|
|
Prepaid
expenses
|
612,779
|
575,295
|
|
|
Payments
for merchandise not received
|
132,861
|
33,964
|
|
|
TOTAL
|
$791,884
|
$777,550
|
|
|
OTHER ASSETS
|
|||
|
Security
deposits - utilities, locations, etc.
|
$62,921
|
$61,074
|
|
|
Leather
art collection
|
252,000
|
252,000
|
|
|
TOTAL
|
$314,921
|
$313,074
|
|
|
ACCRUED EXPENSES AND OTHER
LIABILITIES
|
|
|
|
|
Accrued
bonuses
|
$1,119,399
|
$1,068,426
|
|
|
Accrued
payroll
|
360,738
|
327,816
|
|
|
Deferred
revenue
|
542,812
|
488,305
|
|
|
Sales
and payroll taxes payable
|
267,465
|
169,985
|
|
|
Inventory
in transit
|
1,394,969
|
727,673
|
|
|
Other
|
302,761
|
399,989
|
|
|
TOTAL
|
$3,988,144
|
$3,182,194
|
Depreciation
expense was $1,073,713, $932,199, and $577,405 for the years ended December 31,
2009, 2008 and 2007, respectively.
In 2009,
we recorded an impairment loss due to the discontinued use and abandonment of
specific computer software. The software was purchased in 2004 for
the purpose of upgrading and replacing our current point-of-sale and accounting
systems. We have been using the software in a limited capacity for
several years and amortizing the cost of the system
accordingly. However, we made the decision in the fourth quarter of
2009 that we would not continue its use due to inconsistencies and
incompatibility with our current systems and discontinued use
accordingly. Due to licensing restrictions, we are unable to sell the
software to a third party. The resulting fair value of $0 for the
asset is considered a Level 3 valuation. The impairment loss totaled
$343,543 and is included in operating expenses. The amortization to
date and the impairment loss is reported in our Wholesale Leathercraft
segment.
Also, in
2009, we recorded a loss on disposal of equipment due to the abandonment and/or
disposal of obsolete equipment. The disposal consisted of numerous
pieces of various computer equipment purchased between 2002 and
2006. The loss totaled $21,540 and is included in Operating expenses,
$5,393 of which is reported in our Retail Leathercraft and $16,147 which is
reported in our Wholesale Leathercraft segment.
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 191,000 square foot building situated on 30 acres of land
located 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.
22
At
December 31, 2009 and 2008, the amount outstanding under the above agreement
consisted of the following:
|
2009
|
2008
|
||
|
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
|
$ 3,712,500
|
$ 3,915,000
|
|
|
3,712,500
|
3,915,000
|
||
|
Less
- Current maturities
|
(202,500)
|
(202,500)
|
|
|
$3,510,000
|
$3,712,500
|
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. We were in compliance with these covenants as of December
31, 2009. Scheduled maturities of the Company’s notes payable and
long-term debt are as follows:
|
2010
|
$202,500
|
|
2011
|
202,500
|
|
2012
|
202,500
|
|
2013
|
202,500
|
|
2014
|
202,500
|
|
2015
and thereafter
|
2,700,000
|
|
$3,712,500
|
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, 2009. Accumulated depreciation on the asset at
that date was $140,650. Amortization of the capitalized cost is
charged to depreciation expense.
At
December 31, 2009 and 2008, the amounts outstanding under capital lease
obligation consisted of the following:
|
2009
|
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
|
This
capital lease obligation was paid in full during 2009.
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.
The
following table summarizes the number of shares held by the Plan and the market
value as of December 31, 2009, 2008, and 2007:
|
Number of Shares
|
Market Value
|
||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||
|
Allocated
|
-
|
-
|
844,381
|
-
|
-
|
$2,761,126
|
|
|
Unearned
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Total
|
-
|
-
|
844,381
|
-
|
-
|
$2,761,126
|
|
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 2009 and 2008,
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
|
|
2009
|
$4,900
|
$124,488
|
|
2008
|
$4,600
|
$120,025
|
|
2007
|
$9,000
|
$240,774
|
* Due to the annual limit on eligible
earnings imposed by the Internal Revenue Code
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
2009, 2008 or 2007.
We
currently offer no postretirement or postemployment benefits to our
employees.
23
9. INCOME
TAXES
The
provision for income taxes consists of the following:
|
2009
|
2008
|
2007
|
||||
|
Current
provision:
|
||||||
|
Federal
|
$1,461,655
|
$766,333
|
$1,482,774
|
|||
|
State
|
197,828
|
202,600
|
314,626
|
|||
|
1,659,483
|
968,933
|
1,797,400
|
||||
|
Deferred
provision (benefit):
|
||||||
|
Federal
|
37,632
|
428,660
|
(52,044)
|
|||
|
State
|
3,144
|
48,830
|
(4,936)
|
|||
|
40,776
|
477,490
|
(56,980)
|
||||
|
$1,700,259
|
$1,446,423
|
$1,740,420
|
Income
before income taxes is earned in the following tax jurisdictions:
|
2009
|
2008
|
2007
|
|||
|
United
States
|
$4,437,072
|
$3,716,554
|
$4,407,361
|
||
|
United
Kingdom
|
324,924
|
(176,257)
|
-
|
||
|
Canada
|
284,350
|
571,775
|
420,471
|
||
|
$5,046,346
|
$4,112,072
|
$4,827,832
|
The
income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities are as
follows:
|
2009
|
2008
|
||
|
Deferred income tax assets:
|
|||
|
Allowance
for doubtful accounts
|
$50,650
|
$13,351
|
|
|
Capitalized
inventory costs
|
131,447
|
128,591
|
|
|
Warrants
and stock-based compensation
|
45,116
|
55,739
|
|
|
Accrued
expenses, reserves, and other
|
89,384
|
87,559
|
|
|
Total
deferred income tax assets
|
316,597
|
285,240
|
|
|
Deferred income tax
liabilities:
|
|||
|
Property
and equipment depreciation
|
604,287
|
549,465
|
|
|
Goodwill
and other intangible assets amortization
|
123,193
|
106,583
|
|
|
Total
deferred income tax liabilities
|
727,480
|
656,048
|
|
|
Net
deferred tax asset (liability)
|
$(410,883)
|
$(370,808)
|
The net
deferred tax liability is classified on the balance sheets as
follows:
|
2009
|
2008
|
||
|
Current
deferred tax assets
|
$271,481
|
$229,501
|
|
|
Long-term
deferred tax liabilities
|
(682,364)
|
(600,309)
|
|
|
Net
deferred tax asset (liability)
|
$(410,883)
|
$(370,808)
|
The
effective tax rate differs from the statutory rate as follows:
|
2009
|
2008
|
2007
|
||
|
Statutory
rate
|
34%
|
34%
|
34%
|
|
|
State
and local taxes
|
4%
|
9%
|
6%
|
|
|
Domestic
production activities deduction
|
(2%)
|
(2%)
|
(1%)
|
|
|
Other,
net
|
(2%)
|
(4%)
|
(3%)
|
|
|
Effective
rate
|
34%
|
37%
|
36%
|
We file 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. We are no longer subject to U.S. federal income tax
examinations by tax authorities for years prior to the tax year ended December
2007. Depending on the jurisdiction, we are no longer subject to
state examinations by tax authorities for years prior to the December 2006 and
December 2007 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 2010 to May 2016. Rent expense on all operating
leases for the years ended December 31, 2009, 2008, and 2007, was $2,513,297,
$2,575,642 and $2,682,574, respectively.
Future
minimum lease payments under noncancelable operating leases at December 31, 2009
were as follows:
|
Year
ending December 31:
|
|
|
2010
|
$2,485,289
|
|
2011
|
2,071,300
|
|
2012
|
1,527,261
|
|
2013
|
802,327
|
|
2014
|
421,161
|
|
2015
and thereafter
|
98,248
|
|
Total
minimum lease payments
|
$7,405,586
|
24
Litigation
We are
involved in various litigation that arises 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 5% of our consolidated revenues in 2009, 2008 and 2007, sales to our five
largest customers represented 6.3%, 6.2% and 8.3%, 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, 2009 and 2008, 27% and 21%, 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 aggregate 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, 2009 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.
|
·
|
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.
|
·
|
Stock Option
Summary
|
All
options expire ten years from the date of grant and are exercisable at any time
after vesting. Of the combined 1,200,000 shares available for
issuance under the three plans. There are 100,000 un-optioned shares available
for future grants.
A summary
of stock option transactions for the years ended December 31, 2009, 2008, and
2007, is as follows:
|
|
2009
|
2008
|
2007
|
|||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||
|
Average
|
Average
|
Average
|
||||||||||
|
Option
|
Exercise
|
Option
|
Exercise
|
Option
|
Exercise
|
|||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||
|
Outstanding
at January 1
|
224,700
|
$2.16
|
236,700
|
$2.11
|
296,200
|
$2.05
|
||||||
|
Granted
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Forfeited
or expired
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exchanged
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exercised
|
(27,000)
|
0.92
|
(12,000)
|
1.21
|
(59,500)
|
1.81
|
||||||
|
Outstanding
at December 31
|
197,700
|
$2.33
|
224,700
|
$2.16
|
236,700
|
$2.11
|
||||||
|
Exercisable
at end of year
|
197,700
|
$2.33
|
222,700
|
$2.15
|
220,700
|
$1.97
|
||||||
|
Weighted-average
fair value of
|
||||||||||||
|
options
granted during year
|
-
|
-
|
-
|
|||||||||
25
The
following table summarizes outstanding options into groups based upon exercise
price ranges at December 31, 2009:
|
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
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
$0.76
to $1.125
|
17,000
|
0.952
|
0.71
|
17,000
|
0.952
|
0.71
|
||||||
|
$1.126
to $1.69
|
105,700
|
1.350
|
1.39
|
105,700
|
1.350
|
1.39
|
||||||
|
$1.70
to $2.55
|
2,000
|
1.900
|
1.74
|
2,000
|
1.900
|
1.74
|
||||||
|
$2.56
to $3.84
|
12,000
|
3.270
|
4.31
|
12,000
|
3.270
|
4.31
|
||||||
|
$3.85-$4.96
|
61,000
|
4.241
|
3.91
|
61,000
|
4.241
|
3.91
|
||||||
|
197,700
|
$2.330
|
2.29
|
197,700
|
$2.330
|
2.29
|
|||||||
|
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, 2009, 2008, and 2007,
is as follows:
|
|
2009
|
2008
|
2007
|
|||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||
|
Average
|
Average
|
Average
|
||||||||||
|
Warrant
|
Exercise
|
Warrant
|
Exercise
|
Warrant
|
Exercise
|
|||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||
|
Outstanding
at January 1
|
7,500
|
$5.000
|
27,500
|
$3.620
|
98,300
|
$3.650
|
||||||
|
Granted
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Forfeited
or expired
|
(7,500)
|
5.000
|
(20,000)
|
3.100
|
-
|
-
|
||||||
|
Exchanged
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Exercised
|
-
|
-
|
-
|
-
|
(70,800)
|
3.658
|
||||||
|
Outstanding
at December 31
|
-
|
-
|
7,500
|
$5.000
|
27,500
|
$3.620
|
||||||
|
Exercisable
at end of year
|
-
|
-
|
7,500
|
$5.000
|
27,500
|
$3.620
|
||||||
|
Weighted-average
fair value of
|
||||||||||||
|
warrants
granted during year
|
-
|
-
|
-
|
|||||||||
|
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 NYSE Amex 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.
On
February 27, 2009, our Board of Directors authorized a share repurchase program
of up to 1 million shares of our common stock at prevailing market prices not to
exceed $2.85. The share repurchase program commenced on April 1,
2009. On December 4, 2009, our Board amended the repurchase program
to increase the maximum purchase price to $3.70. The plan terminates
on December 10, 2010. We repurchased a total of 60,927 shares in 2009
for a total purchase price of $199,264.
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. DISCONTINUED
OPERATIONS
Our
subsidiary, Roberts, Cushman and Company, Inc., is classified as discontinued
operations. The distributor of custom hat trims ceased doing business
in the fourth quarter of 2009 as a result of decreased sales. All
prior periods presented have been adjusted to reflect this
presentation. Sales, earnings before income tax, and provision for
income taxes of the discontinued operation for each year were as
follows:
|
2009
|
2008
|
2007
|
|
|
Sales
|
$498,234
|
$745,556
|
$1,097,274
|
|
Earnings
before income taxes
|
$84,942
|
$153,804
|
$191,890
|
|
Current
provision (benefit):
|
||||
|
Federal
|
$29,205
|
$59,825
|
$11,407
|
|
|
State
|
(475)
|
35
|
(5,212)
|
|
|
28,730
|
59,860
|
6,195
|
||
|
Deferred
provision (benefit):
|
||||
|
Federal
|
(645)
|
1,194
|
(5,109)
|
|
|
State
|
(56)
|
414
|
(1,804)
|
|
|
(701)
|
1,608
|
(6,913)
|
||
|
$28,029
|
$61,468
|
$(718)
|
26
The
classes of assets and liabilities of discontinued operations in our consolidated
balance sheet as of December 31 were as follows:
|
2009
|
2008
|
||
|
Trade
receivables, less allowance
|
$5,908
|
$83,441
|
|
|
Inventory
|
671
|
45,787
|
|
|
Property
and equipment, net
|
-
|
5,046
|
|
|
Deferred
income tax asset
|
-
|
956
|
|
|
Total
assets
|
6,579
|
135,230
|
|
|
Accrued
expenses and other liabilities
|
-
|
4,614
|
|
|
Income
taxes payable
|
31,795
|
50,691
|
|
|
Deferred
income tax liability
|
-
|
986
|
|
|
Total
liabilities
|
31,795
|
56,291
|
|
|
Net
assets (liabilities)
|
$(25,216)
|
$78,939
|
15. SEGMENT
INFORMATION
We
identify our segments based on the activities of three distinct
operations:
|
a.
|
Wholesale
Leathercraft, which consists of a chain of wholesale stores
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, which 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.
|
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
|
Discontinued
Operations
|
Total
|
|
|
For
the year ended December 31, 2009
|
|||||
|
Net
Sales
|
$25,095,392
|
$28,079,863
|
$1,307,484
|
$54,482,739
|
|
|
Gross
Profit
|
14,678,410
|
17,099,499
|
831,465
|
32,609,374
|
|
|
Operating
earnings
|
2,017,915
|
2,900,701
|
176,485
|
5,095,101
|
|
|
Interest
expense
|
297,864
|
-
|
-
|
297,864
|
|
|
Other,
net
|
45,342
|
(4,614)
|
123,437
|
(164,165)
|
|
|
Income
before income taxes
|
1,765,393
|
2,896,087
|
299,922
|
4,961,402
|
|
|
Depreciation
and amortization
|
994,759
|
116,439
|
13,811
|
1,125,009
|
|
|
Fixed
asset additions
|
653,792
|
137,386
|
387
|
791,565
|
|
|
Total
assets
|
$37,216,532
|
$5,607,481
|
$496,639
|
$6,579
|
$43,327,231
|
|
For
the year ended December 31, 2008
|
|||||
|
Net
Sales
|
$26,423,858
|
$25,231,145
|
$836,535
|
$52,491,538
|
|
|
Gross
Profit
|
14,935,331
|
15,543,293
|
571,735
|
31,050,359
|
|
|
Operating
earnings
|
1,782,526
|
2,188,283
|
54,533
|
4,025,342
|
|
|
Interest
expense
|
332,107
|
-
|
-
|
332,107
|
|
|
Other,
net
|
(501,697)
|
5,872
|
230,790
|
(265,035)
|
|
|
Income
before income taxes
|
1,952,116
|
2,182,411
|
(176,257)
|
3,958,270
|
|
|
Depreciation
and amortization
|
836,134
|
126,326
|
13,443
|
975,903
|
|
|
Fixed
asset additions
|
3,481,852
|
74,550
|
92,859
|
3,649,261
|
|
|
Total
assets
|
$33,657,764
|
$6,404,198
|
$778,721
|
$135,230
|
$40,975,913
|
|
For
the year ended December 31, 2007
|
|||||
|
Net
Sales
|
$29,555,978
|
$24,663,750
|
-
|
$54,219,728
|
|
|
Gross
Profit
|
16,446,853
|
14,733,479
|
-
|
31,180,332
|
|
|
Operating
earnings
|
2,776,711
|
1,544,320
|
-
|
4,321,031
|
|
|
Interest
expense
|
122,209
|
-
|
-
|
122,209
|
|
|
Other,
net
|
(425,145)
|
(11,975)
|
-
|
(437,120)
|
|
|
Income
before income taxes
|
3,079,647
|
1,556,295
|
-
|
4,635,942
|
|
|
Depreciation
and amortization
|
485,499
|
143,123
|
-
|
628,622
|
|
|
Fixed
asset additions
|
5,535,036
|
207,455
|
-
|
5,742,491
|
|
|
Total
assets
|
$32,217,748
|
$5,272,466
|
-
|
$161,292
|
37,651,506
|
27
Net sales
by geographic areas were as follows:
|
2009
|
2008
|
2007
|
|
|
United
States
|
$47,433,609
|
$45,794,226
|
$47,906,206
|
|
Canada
|
4,686,330
|
4,740,722
|
4,698,510
|
|
All
other countries
|
2,362,800
|
1,956,590
|
1,615,012
|
|
$54,482,739
|
$52,491,538
|
$54,219,728
|
Geographic
sales information is based on the location of the customer. Except
for Canada, we had no sales to any single foreign country that was material to
our consolidated net sales for the years ended December 31, 2009, 2008 and
2007. We do not have any significant long-lived assets outside of the
United States.
16. RECENT
ACCOUNTING PRONOUNCEMENTS
In June
2009, the FASB issued The Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, which establishes the FASB Accounting
Standards Codification (the “Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“GAAP”) recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases issued by the Securities and Exchange Commission (“SEC”) are also
sources of authoritative GAAP for SEC registrants. The Codification
supersedes all existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
became nonauthoritative. The Codification was effective for us July
1, 2009 and its adoption did not have a material impact on our consolidated
financial condition or results of operations.
In May
2009, the FASB issued accounting guidance on subsequent events which requires
companies to address the accounting and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. Specifically, companies must name the two types of
subsequent events either as recognized or non-recognized subsequent
events. We adopted this standard, as required, for the period
ended June 30, 2009. The adoption of this accounting guidance did not
have a material impact on our financial position, results of operations and cash
flows.
In April
2009, the FASB issued accounting guidance requiring disclosure about the method
and significant assumptions used to establish the fair value of financial
instruments for interim reporting periods as well as annual statements. The
adoption of this accounting guidance did not have a material impact on our
consolidated financial condition or results of operations.
In
December 2007, the FASB issued accounting guidance which requires all companies
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 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. This guidance was
effective for us in January 2009 and did not have a material impact on our
financial position, results of operations and cash flows.
17. QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
First
|
Second
|
Third
|
Fourth
|
|||
|
2009
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||
|
Net
sales
|
$13,183,095
|
$13,046,498
|
$12,663,604
|
$15,589,542
|
||
|
Gross
profit
|
7,740,446
|
7,676,041
|
7,559,149
|
9,633,738
|
||
|
Net
income from continuing operations
|
673,058
|
736,097
|
551,142
|
1,300,846
|
||
|
Net
income
|
697,916
|
761,251
|
552,965
|
1,305,925
|
||
|
Net
income from continuing operations per common share:
|
||||||
|
Basic
|
0.06
|
0.07
|
0.05
|
0.12
|
||
|
Diluted
|
0.06
|
0.07
|
0.05
|
0.12
|
||
|
Net
income per common share:
|
||||||
|
Basic
|
0.07
|
0.07
|
0.05
|
0.12
|
||
|
Diluted
|
0.07
|
0.07
|
0.05
|
0.12
|
||
|
Weighted
average number of common shares outstanding:
|
||||||
|
Basic
|
10,670,111
|
10,673,245
|
10,387,462
|
10,160,119
|
||
|
Diluted
|
10,792,954
|
10,731,998
|
10,457,318
|
10,238,142
|
||
|
First
|
Second
|
Third
|
Fourth
|
|||
|
2008
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||
|
Net
sales
|
$13,050,723
|
$13,647,446
|
$12,047,794
|
$13,745,575
|
||
|
Gross
profit
|
7,657,247
|
7,911,954
|
7,055,440
|
8,425,718
|
||
|
Net
income from continuing operations
|
570,117
|
622,118
|
393,393
|
926,219
|
||
|
Net
income
|
584,498
|
655,250
|
421,014
|
943,419
|
||
|
Net
income from continuing operations per common share:
|
||||||
|
Basic
|
0.05
|
0.06
|
0.04
|
0.09
|
||
|
Diluted
|
0.05
|
0.06
|
0.04
|
0.09
|
||
|
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
|
||
28
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, 2009 and 2008, 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,
2009. 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, 2009, and 2008 and the
consolidated results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
WEAVER
AND TIDWELL, L.L.P.
Fort
Worth, Texas
March 25,
2010
29
ITEM 9. CHANGE IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
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, 2009. 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, 2009, 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,
2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER
INFORMATION
None
PART
III
Certain
information required by Part III is omitted from this annual report as we will
file a proxy statement for our 2010 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.
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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 2010 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 2010 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 2010 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).
ITEM
11. EXECUTIVE COMPENSATION
The
information required by this item is contained in our proxy statement for our
2010 Annual Meeting of Stockholders under the heading "Report of the
Compensation Committee,” which is incorporated herein by reference.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by this item is contained in our proxy statement for our
2010 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.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this item is contained in our proxy statement for our
2010 Annual Meeting of Stockholders under the heading “Other Relationships
Involving Directors, Executive Officers, or their Associates” and is
incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this item is contained in our proxy statement for our
2010 Annual Meeting of Stockholders under the headings "Audit Committee” and
“Report of the Audit Committee” and is incorporated herein by
reference.
30
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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, 2009 and
2008
|
|
·
|
Consolidated
Statements of Income for the years ended December 31, 2009, 2008 and
2007
|
|
·
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
|
|
·
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2009,
2008 and 2007
|
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.
|
||
| March 26, 2010 |
By:
|
/s/ Jon Thompson
|
|
Jon
Thompson
|
||
|
Chief
Executive Officer and President
|
||
| March 26, 2010 |
By:
|
/s/ Shannon L. Greene
|
|
Shannon
L. Greene
|
||
|
Chief
Financial Officer, Chief Accounting Officer and
Treasurer
|
|
Signature
|
Title
|
Date
|
|||
|
/s/
Wray Thompson
|
Chairman
of the Board
|
March
26, 2010
|
|||
|
Wray
Thompson
|
|||||
|
/s/
Jon W. Thompson
|
Chief
Executive Officer, President and Director
|
March
26, 2010
|
|||
|
Jon
Thompson
|
|||||
|
/s/
Shannon L. Greene
|
Chief
Financial Officer, Chief Accounting Officer, Treasurer and
Director
|
March
26, 2010
|
|||
|
Shannon
L. Greene
|
|
||||
|
/s/
Mark J. Angus
|
Senior
Vice President and Assistant Secretary
|
March
26, 2010
|
|||
|
Mark
J. Angus
|
|||||
|
/s/
T. Field Lange
|
Director
|
March
26, 2010
|
|||
|
T.
Field Lange
|
|||||
|
/s/
Joseph R. Mannes
|
Director
|
March
26, 2010
|
|||
|
Joseph
R. Mannes
|
|||||
|
/s/
L. Edward Martin III
|
Director
|
March
26, 2010
|
|||
|
L.
Edward Martin III
|
|||||
|
/s/
Michael A. Nery
|
Director
|
March
26, 2010
|
|||
|
Michael
A. Nery
|
|||||
|
/s/
William M. Warren
|
Secretary
|
March
26, 2010
|
|||
|
William
M. Warren
|
|||||
31
|
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.
|
||||
|
10.1
|
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.
|
||||
|
10.2
|
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.
|
||||
|
10.3
|
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.
|
||||
|
10.4
|
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.
|
||||
|
10.5
|
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.
|
||||
|
10.6
|
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.
|
||||
|
10.7
|
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.
|
||||
|
10.8
|
Consultation
Agreement, dated as of January 1, 2010, 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 January 5, 2010 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, 25, 2010
|
||||
|
*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.
|
|||||