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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period ________ to ________
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3847 East Loop 820 South
Fort Worth, Texas 76119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 496-4414
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.0024 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates
of the registrant was approximately $2,759,763 at March 10, 2001. At that date
there were 9,968,161 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 24, 2001, are incorporated by
reference in Part III of this report.
Forward-Looking Statements
This report contains forward-looking statements of management. There
are certain important risks that could cause results to differ materially than
those anticipated by some of the forward-looking statements. Some, but not all,
of the important risks which could cause actual results to differ materially
from those suggested by the forward-looking statements include, among other
things,
o changes from anticipated levels of sales, whether due to
future national or regional economic and competitive
conditions, including, but not limited to, retail craft buying
patterns, and possible negative trends in the craft and
western retail markets,
o failure to realized the anticipated benefits of the recent
acquisition of the assets of Tandy Leather,
o customer acceptance of existing and new products, or
otherwise, pricing pressures due to competitive industry
conditions,
o increases in prices for leather (which is a world-wide
commodity) and the Company's inability to pass these increased
costs on to customers,
o change in tax or interest rates,
o change in the commercial banking environment,
o problems with the importation of the products that the Company
buys in 22 countries around the world, including, but not
limited to, transportation problems or changes in the
political climate of the countries involved, including the
maintenance by these countries of Most Favored Nation status
with the United States of America, and
o other uncertainties, all of which are difficult to predict and
many of which are beyond the control of the Company.
The Company does not intend to update forward-looking statements.
2
PART I
Item 1. Business.
As used in this Report, the terms "we," "us," "our," "TLF,"
"management," and the "Company" mean The Leather Factory, Inc. and its
subsidiaries (unless the context indicates a different meaning).
General
The Leather Factory, Inc. ("TLF" or the "Company") is a Delaware
corporation whose common stock trades on the American Stock Exchange under the
symbol "TLF."
The Company sells its products worldwide and is managed on a business
entity basis, with those businesses being TLF, Tandy Leather Company ("Tandy
Leather"), and Roberts, Cushman & Company, Inc. ("Cushman"). See Note 13 to the
Consolidated Financial Statements for financial and additional information
concerning the Company's segments.
TLF, located in Fort Worth, Texas, is an international wholesale
manufacturer and distributor of a broad product line of leather, leatherworking
tools, buckles and other belt supplies, shoe care and repair supplies, leather
dyes and finishes, adornments for belts, bags, and garments, saddle and tack
hardware, and do-it-yourself leathercraft kits. TLF also carries a product line
of small finished leather goods such as cigar cases, wallets and western
accessories distributed under the name "Royal Crown Custom Leather".
Tandy Leather, located in Fort Worth, Texas, sells the same products as
TLF. Cushman, located in New York, produces and sells a related product line of
hat trims (the decorative piece of material that adorns the outside of a hat).
The Company frequently introduces new products either through its own
manufacturing capability or by purchasing from vendors. The Company holds a
substantial number of copyrights for its designs. These designs have been
incorporated throughout the Company's product line as a means of increasing its
competitive advantage.
Tandy Leather Acquisition
On November 30, 2000, Leather Tan Acquisition, Inc. ("Leather Tan"), a
newly-formed subsidiary of the Company, acquired the operating assets (the
"Tandy Leather assets") of TLC Direct, Inc., a Texas corporation, and Tandy
Leather Dealer, Inc., a Texas corporation, (collectively called the "Sellers").
The Sellers are subsidiaries of Tandycrafts, Inc. ("Tandycrafts"), a New York
Stock Exchange-listed company. Prior to this transaction, the Tandy Leather
assets were operated as the "Tandy Leather" business of Tandycrafts. The Tandy
Leather assets include machinery, equipment, materials, supplies, inventory,
trade booth inventory, catalog inventory, fixtures, goods in process,
intellectual property, goodwill, trade names including "Tandy Leather" and
"Tandy Leather Company," patents, trademarks, copyrights, leases, subleases,
contracts, agreements, accounts and other receivables, rights to the Sellers'
Internet Domain, certain leathercraft art, mailing lists and certain historic
furniture.
3
The consideration paid by Leather Tan for the Tandy Leather assets was
cash in the amount of $2.85 million plus the assumption of (a) all of the
Sellers' trade payables incurred in the ordinary course of business within
ninety days prior to November 30, 2000, (b) all liabilities relating to any
contracts assumed by the Company (including the obligations of the Sellers under
certain listed licenses, sub-licenses, leases, sub-leases, contracts, and other
arrangements), (c) certain other listed obligations, (d) filing, recording and
other similar fees, and (e) any liabilities arising after November 30, 2000. The
total amount of the liabilities assumed by Leather Tan was $658,000 at November
30, 2000. The purchase price was determined by arms' length negotiations between
representatives of the Company and Tandycrafts.
The source of Leather Tan's cash for this transaction was funds drawn
on the Company's line of credit with Wells Fargo Business Credit, Inc. See
"Management's Discussion of Financial Condition and Results of Operations."
Subsequent to the acquisition, Leather Tan was renamed Tandy Leather Company,
Inc. ("Tandy Leather").
Tandy Leather sells similar products as TLF; however, the current
target market of Tandy Leather is retail customers via the Internet and mail
order sales and wholesales to authorized dealers. Further details regarding the
Tandy Leather acquisition are provided in Note 12 to the Consolidated Financial
Statements and the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 15, 2000, as amended on February
14, 2001.
Management anticipates that this acquisition will create a great
opportunity for continued expansion. In years past, Tandy Leather had a strong
reputation for quality products, and its name recognition is highest in the
industry. Management believes that with its history and improving reputation for
product and customer service, Tandy Leather can expand its market share to once
again become one of the premier leaders in the industry.
Distribution and Manufacturing
The Company's customer base is comprised of over 60,000 customers
including individuals, institutions, retailers, wholesalers, assemblers,
distributors, and other manufacturers dispersed geographically throughout the
world. Most of our customers are wholesalers, while retail sales have
historically comprised less than 10% of the Company's sales. However, we have
been experiencing a shift in our sales mix during the last few years as our
retail sales have increased. In 1999, our sales mix was 85% wholesale and 15%
retail. In 2000, the mix was 80% wholesale and 20% retail. Sales of the
Company's products do not reflect significant seasonal patterns. Looking toward
2001, we expect this trend to continue to shift as Tandy's sales consist of a
much higher percentage of retail sales.
The Company primarily distributes its products through 28
sales/distribution units ("Units") located in nineteen states and Canada, its
manufacturing facility and show room in New York, Tandy Leather's mail-order
warehouse in Texas and through its websites. The location of the Units is
selected based on the location of its customers, so that delivery time to
customers is minimized. A two-day maximum delivery time is the Company's goal.
In addition to offering its customers rapid delivery, the Company also offers a
"one-stop shopping" concept for both leather and leathercraft materials. These
Units service customers through various means including walk-in traffic, phone
and mail order. Both wholesale and retail customers purchase from Units. These
same Units also service the Authorized Sales Centers (discussed below) as well
as the craft, western and other retail establishments located in close
geographic proximity.
Our Authorized Sales Center ("ASC") program was developed to generate
sales in geographical areas that we currently do not have a sales/distribution
unit without the capital investment needed to open a Unit. An unrelated person
who desires to become an ASC must apply with the Company and upon approval,
place a minimum initial order. There are also minimum annual purchase amounts
set that the ASC must adhere to in order to maintain ASC status. In exchange,
the ASC gets free advertising in certain sale flyers, price breaks on many
products, advance notice of new products, priority shipping and handling on all
orders, as well as various other benefits. Tandy Leather has an authorized
dealer program as well which is based on a similar concept. We plan to continue
this program by offering an expanded line of product combining both TLF and
Tandy Leather merchandise. The retail appeal of the Tandy Leather name should
enhance this program considerably.
4
TLF operates two manufacturing facilities - one in Fort Worth, Texas,
that primarily manufactures product (suede lace, garment fringe, leathercraft
and craft-related kits) that is sold through the Units, and one in Long Island
City, NY (Cushman), that sells its product directly to hat manufacturers. We
also purchase products from other manufacturers and distributors in twenty-two
countries.
The Company's principal offices are located at 3847 East Loop 820
South, Fort Worth, Texas 76119 and its phone number is (817) 496-4414.
History
The Company was first incorporated under the laws of the State of
Colorado in 1984 and reincorporated under the laws of the State of Delaware in
June 1994. The Company is the successor to certain entities that were parties to
a series of transactions including a merger in July 1993 which involved The
Leather Factory, Inc., a Texas corporation ("TLF-Texas"), and National Transfer
& Register Corp. ("National"), a Colorado corporation, which had no operations
and whose capital stock was widely held but had no active trading market prior
to the merger. The surviving entity changed its name to The Leather Factory,
Inc. and its business became that conducted by TLF-Texas. In the following year,
the Company reincorporated in Delaware.
As part of its strategy to develop a multi-location chain of wholesale
units the Company has made numerous acquisitions since its incorporation,
including the purchase of six wholesale units from Brown Group, Inc., a major
footwear retailer. The Company has also acquired several businesses located
throughout the United States that distribute shoe-related supplies to the shoe
repair and shoe store industry. In addition, the Company purchased Cushman, a
leading producer of hat trims, in 1995. In March of 1996, the Company acquired
all of the issued and outstanding capital stock of its Canadian distributor, The
Leather Factory of Canada, Ltd. As mentioned above, the Company acquired the
Tandy Leather assets in November 2000.
Business Strategy
The Company operates through the 28 Units described above that are
designed to combine the economies of scale of warehouse locations with the
marketing efficiencies that can be achieved through direct mail. Walk-in traffic
and mail order customers are served from the same location. The type of premises
utilized for the Unit locations is generally light industrial office/warehouse
space in proximity to a major freeway or with other similar access. This kind of
location typically provides lower rental expense compared to other more
retail-oriented locations.
The size and configuration of the Units 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 of
leather and leather goods. The Company maintains higher inventories of certain
imported items to ensure a continuous supply.
5
The Company's Units are staffed by experienced managers who are
primarily compensated based upon the operating profit of their location. Sales
from the Units are generated by the selling efforts of the location personnel
themselves, participation by the Company at trade shows, the use of sales
representative organizations and the aggressive use of direct mail advertising.
In addition to generating mail order business, the purpose of the Company's
direct mail program is to stimulate sales for the Units. The Company utilizes an
internally developed and maintained mailing list, which allows for very targeted
mailing to its various customer groups. As for the utilization of direct mail
and rapid delivery, the Company locates Units in order to get merchandise in the
customers' hands as soon as possible, with the added benefit of lower freight
cost.
The Company attempts to maintain the number of stock-keeping units
("SKU's") in the primary Leather Factory line of merchandise at the optimum
number of items necessary to balance the maintaining of the proper stock to
minimize out-of-stock situations with the carrying costs involved with such an
inventory level. The number of SKU's has been refined over the years by the
introduction of new products and the discontinuing of selected products. The
Company maintains approximately 4,600 items in the current lines of merchandise
- - 1,800 of which are exclusively TLF's, 1,800 of which are exclusively Tandy
Leather's, and 1,000 of which are carried in both.
Tandy Leather operates from one warehouse location and sells its
products via mail and phone orders and through its website. It currently does
not service walk-in customers at its location.
Competition
The Company sells its products in three highly fragmented markets -
leathercraft, leather accessories, and retail craft. Management believes that
the Company encounters competition in connection with certain product lines and
in certain areas from different companies, but has no direct competition
affecting the entire product line. The Company is larger than most of its direct
competitors, and we believe that the recent Tandy Leather acquisition will
continue this advantage. The fragmented nature of these markets is the primary
reason for the lack of broad-based competition.
The Company competes on price, availability of merchandise, and speed
of delivery. The size of the Company relative to most of its competitors creates
competitive advantage in its ability to stock a full range of products as well
as in buying merchandise. The Company believes it has a competitive advantage on
price in most product lines because it purchases in bulk and has an
international network of suppliers that can provide quality merchandise at lower
costs. Most of the Company's competitors do not have the multiple sources of
supply and cannot purchase sufficient quantities to compete along a broad range
of products. In fact, some of the Company's competitors are also customers,
relying on the Company as a supplier.
Expansion and Other Acquisitions
In 1997 and 1998, management focused on stabilizing operations and
obtaining long-term financing, and no acquisitions were made. As a result of the
improving operating results, the Company opened two new Units during 2000 and
four new Units during 1999. The Company plans to continue its expansion by: (i)
adding two to three Units per year, as and when such additions are determined
feasible; and (ii) acquiring companies in related areas/markets which offer
synergistic aspects based on the locations and/or product lines of the
businesses.
Products/Customers
The Company's core business consists of manufacturing, importing and
distributing leather, traditional leathercraft materials (do-it-yourself kits,
stamping sets, and leatherworking tools), craft-related items (leather lace,
beads, and wearable art accessories), hardware, metal garment accessories (belt
buckles, belt buckle designs, and conchos), fancy hat trims in braids, leather,
and woven fabrics, shoe care and repair supplies, leather finishes, and small
finished leather goods.
6
The products manufactured in Fort Worth generally involve cutting
leather into various shapes and patterns using metal dies ("clicking"),
fabrication, assembly, and packaging/repackaging tasks. Items made in Fort Worth
are primarily for wholesale distribution using the Company's sales/distribution
units. The Cushman facility manufactures hat trims and small finished leather
goods. Hat trims are sold to hat manufacturers and distributors directly. Small
finished leather goods are sold to various distributors and retailers through
attendance at trade shows and the use of sales representatives.
The customer groups served include wholesale distributors, tack and
saddle shops, shoe-findings customers, institutions (prisons and prisoners,
schools, hospitals), dealer stores, western stores, craft stores and craft store
chains, hat manufacturers and distributors, other large volume purchasers,
manufacturers, and retailers. No single customer's purchases represent more than
10% of the Company's total sales. Approximately five percent (5%) of the
Company's 2000 sales were export sales.
Suppliers
The Company currently purchases merchandise and raw materials from
approximately 200 vendors dispersed throughout the United States as well as in
twenty-one foreign countries. In 2000, the Company's ten largest vendors
accounted for approximately sixty-five percent (65%) of its total purchases.
Management believes that its relationships with suppliers are strong and does
not anticipate any material changes in these supplier relationships in the
future. Due to the number of alternative sources of supply, the loss of any or
all of these principal suppliers would not have a material impact on the
operations of the Company.
The Company receives some of its supplies and inventory from Europe. In
addition, because leather is sold internationally, market conditions abroad are
likely to affect the price of leather in the United States. We believe that the
recent outbreak of hoof-and-mouth disease (or foot-and-mouth disease) in the
United Kingdom and other parts of Europe and the resulting mass destruction of
herds is likely to influence the price of leather used in the Company's
products. At this time, we cannot predict the amount, if any, of this increase
in costs or if we will be able to pass some or all of the costs on to our
customers.
Patents and Copyrights
The Company presently owns 130 copyrights covering 239 registered
works, seven trademarks covering seven names, and two patents covering three
products. Registered trademarks include a federal trade name registration on The
Leather Factory. The trademarks expire at various times starting in 2002 and
ending in 2008, but can be renewed indefinitely. Most copyrights granted or
pending are on metal products, such as conchos, belt buckles, and instruction
books. The expiration period for the copyrights begins in 2062 and ends in 2072.
The Company has patents on two belt buckles and certain leather-working
equipment known as the "Speedy Embosser." The patents expire in 2011. Management
considers these intangibles to be valuable assets and defends them as necessary.
Compliance With Environmental Laws
Compliance by the Company with federal, state and local environmental
protection laws has not had, and is not expected to have, a material effect upon
capital expenditures, earnings or the competitive position of the Company.
7
Employees
As of December 31, 2000, the Company employed 274 people, with 263 on a
full- time basis. The Company is not a party to any collective bargaining
agreement. Eligible employees participate in The Leather Factory, Inc.
Employees' Stock Ownership Plan and Trust ("ESOP"). As of December 31, 2000, 174
employees and former employees were participants in or beneficiaries of the
ESOP. The Company has the option of contributing up to 15% of eligible
employees' compensation into the ESOP. Net contributions for 2000, 1999, and
1998 were 5.9%, 5.6%, and 11.6%, respectively, of eligible compensation. These
contributions are used to purchase shares of the Company's Common Stock.
Generally, contributions to the ESOP follow a similar pattern as overall
profitability. On January 21, 1999, the Company made an additional contribution
to the Plan (for the 1998 plan year) of $262,000 in order for the ESOP to pay
the entire balance owed on securities acquisition loans. Without the additional
contribution, the 1998 net contribution percentage would have been 3.7%.
Overall, management believes that relations with employees are good.
8
Item 2. Properties.
The Company leases all of its premises. Detailed below are the lease
terms for the Company's locations. The general character of each location is
light industrial office/warehouse space. The Company believes that all of its
properties are adequately covered by insurance.
Location Name Total Space (Sq. Ft.) Minimum Annual Rent * Lease Expiration
------------- --------------------- ------------------- ----------------
Chattanooga, TN 9,040 $ 42,739 May 2004
Denver, CO 5,879 30,000 September 2004
Harrisburg, PA 6,850 38,520 March 2002
Fort Worth, TX 101,000 370,702 March 2003
Fresno, CA 5,600 42,336 March 2002
Des Moines, IA 4,000 30,718 April 2004
Phoenix, AZ 4,500 25,920 March 2006
Springfield, MO 6,000 24,000 July 2003
Spokane, WA 5,400 21,360 February 2004
Albuquerque, NM 5,000 30,000 October 2003
Salt Lake City, UT 3,485 21,600 July 2004
Baldwin Park, CA 7,800 53,400 March 2005
Tampa, FL 5,238 39,212 January 2003
San Antonio, TX 5,600 40,320 October 2001
Columbus, OH 6,000 30,000 October 2001
El Paso, TX 5,000 27,896 August 2003
Oakland, CA 8,000 54,000 December 2003
Grand Rapids, MI 8,000 40,442 March 2004
Wichita, KS 5,150 21,360 May 2004
New Orleans, LA 5,130 22,200 August 2003
Portland, OR 5,232 22,902 April 2004
Charlotte, NC 6,202 29,025 February 2006
Billings, MT 2,600 11,100 April 2001
Austin, TX 3,800 23,250 April 2004
Tucson, AZ 3,600 20,304 May 2004
Houston, TX 4,250 24,000 November 2005
Dallas, TX 5,040 26,400 September 2005
Long Island City, NY 10,200 67,579 June 2003
Winnipeg, Canada 5,712 16,197** November 2002
---------- ----------
Totals 259,308 $1,610,482
========== ==========
-------------
* Represents the average minimum annual rent over the balance of the
unexpired lease term.
** As converted into U.S. dollars.
9
The Company's Fort Worth location includes the Fort Worth Unit, the
Company's central warehouse, the light manufacturing facility, Tandy Leather's
offices and warehouse, and the sales and administrative/executive offices. The
Company also leases a 284 square foot showroom in the Denver Merchandise Mart
for $4,896 per year. This lease will expire in October 2002.
Item 3. Legal Proceedings.
The Company is involved in litigation in the ordinary course of its
business but is not currently a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the Company's fiscal year ended December
31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of the Company is traded on the American Stock
Exchange using the symbol TLF. The high and low prices for each calendar quarter
during the last two fiscal years are as follows:
1999 2000
---- ----
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31, $0.8750 $0.2188 $1.6875 $0.8125
June 30, $0.7500 $0.3750 $1.5000 $0.9375
September 30, $0.7500 $0.5625 $1.4375 $0.9375
December 31, $1.1250 $0.8125 $1.5000 $0.9375
There were approximately 627 stockholders of record on March 15, 2001.
There have been no cash dividends paid on the shares of the Company's
Common Stock and currently dividends cannot be declared or paid without the
prior written consent of Wells Fargo Business Credit, Inc., the Company's
lender. The Board of Directors has historically followed a policy of reinvesting
the earnings of the Company in the expansion of its business. This policy is
subject to change based on future industry and market conditions, as well as
other factors beyond the control of the Company.
10
Item 6. Selected Financial Data.
The selected financial data presented below are derived from and should be
read in conjunction with the Company's Consolidated Financial Statements and
related notes. This information should also be read in conjunction with Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Data in prior years have not been restated to reflect acquisitions
that occurred in subsequent years.
Income Statement Data Years Ended December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ---------------- --------------- --------------- ---------------
Net sales $30,095,264 $27,164,399 $22,163,994 $25,399,116 $28,253,632
Cost of sales 15,147,547 14,907,768 12,428,324 14,844,376 17,689,973
--------------- ---------------- --------------- --------------- ---------------
Gross profit 14,947,716 12,256,631 9,735,670 10,554,740 10,563,659
Operating expenses 11,702,633 10,346,420 8,890,045 9,365,673 10,869,359
--------------- ---------------- --------------- --------------- ---------------
Operating income (loss) 3,245,084 1,910,211 845,625 1,189,067 (305,700)
Other (income) expense 653,778 900,304 970,340 887,543 1,000,604
--------------- ---------------- --------------- --------------- ---------------
Income (loss) before income taxes 2,591,305 1,009,907 (124,715) 301,524 (1,306,304)
Income tax provision (benefit) 1,049,985 574,851 (85,524) 231,232 (316,536)
--------------- ---------------- --------------- --------------- ---------------
Net income (loss) 1,541,320 435,056 (39,191) 70,292 (989,768)
=============== ================ =============== =============== ===============
Earnings (loss) per share 0.16 0.04 (0.00) 0.01 (0.10)
=============== ================ =============== =============== ===============
Earnings (loss) per share--
assuming dilution 0.15 0.04 (0.00) 0.01 (0.10)
=============== ================ =============== =============== ===============
Weighted average common
shares outstanding for:
Basic EPS 9,875,606 9,853,161 9,803,887 9,789,358 9,788,530
=============== ================ =============== =============== ===============
Diluted EPS 10,182,803 9,890,098 9,803,887 9,791,565 9,788,530
=============== ================ =============== =============== ===============
Balance Sheet Data As of December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ---------------- --------------- --------------- ---------------
Total assets $19,686,079 $18,220,775 $16,029,937 $17,024,549 $18,264,547
--------------- ---------------- --------------- --------------- ---------------
Notes payable and current
Maturities of long term debt 5,759,626 6,061,735 6,139,327 4,650,742 8,549,366
--------------- ---------------- --------------- --------------- ---------------
Notes payable and long-term
Debt, net of current maturities 13,025 121,686 61,389 2,602,728 17,378
--------------- ---------------- --------------- --------------- ---------------
Total Stockholders' Equity 10,295,637 8,680,425 8,170,278 8,132,646 8,022,937
=============== ================ =============== =============== ===============
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The Company continues to experience improved profitability as sales and
gross profit margins continue to rise. Gross profit margins rose from 45.1% in
1999 to another record-breaking high of 49.7% in 2000. Net sales for 2000 were
$30.1 million, up $2.9 million (10.8%) from fiscal 1999 while operating expenses
in 2000 increased by $1.3 million. Part of the operating expense increase was
due to the increase in sales while the acquisition of the Tandy Leather assets
in November 2000 also accounted for a portion of the increase. As a percentage
of sales, these expenses increased a mere 0.8% over 1999. The dramatic
improvement in profitability resulted primarily from:
o continued increases in retail sales,
o the opening of two new sales units in 2000, and
o increased efficiency in the purchasing of merchandise.
The results of operations in 1999 were encouraging as gross profit
margins reached a high of 45.1% and operating expenses decreased as a percentage
of sales over the prior year. During 1999, total sales were $27.2 million, while
operating expenses were $10.3 million. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Operating results for the fourth quarter of 2000 revealed slightly
better results in profit margins at 50.1% compared to the total year. Fourth
quarter 2000 revenues were up modestly ($226,000) from the same period last year
due to Tandy Leather's December sales of $575,000. Without Tandy Leather's sales
contribution, sales for the quarter would have been down $349,000 due to
decreases in export sales and certain wholesale categories (primarily shoe
care/repair). As discussed in previous years, the reduction in sales to shoe
care/repair customers is intentional as this industry historically produces very
low margins. Operating costs were up 10.5% from the fourth quarter of 1999 due
to the addition of operating expenses from Tandy Leather operations for the
month of December.
Obviously, we anticipate that the operations acquired from Tandy
Leather will represent a larger portion of the operational results for 2001.
12
Income Statement Comparison
The following table sets forth, for the fiscal years indicated, certain
items from the Company's Consolidated Statements of Income expressed as a
percentage of net sales:
2000 1999 1998
------ ------ ------
Net Sales 100.0 % 100.0 % 100.0 %
Cost of sales 50.3 54.9 56.1
------ ------ ------
Gross profit 49.7 45.1 43.9
Operating expenses 38.9 38.1 40.1
------ ------ ------
Operating income (loss) 10.8 7.0 3.8
Other (income) expense, net 2.2 3.3 4.4
------ ------ ------
Income (loss) before income taxes 8.6 3.7 (0.6)
Income tax provision (benefit) 3.5 2.1 (0.4)
------ ------ ------
Net income (loss) 5.1 % 1.6 % (0.2) %
====== ====== ======
Analysis of 2000 Compared to 1999
2000 1999 $ Change % Change
-------------- --------------- -------------- --------------
Net sales $30,095,264 $27,164,399 $2,930,864 10.79%
Cost of sales 15,147,547 14,907,768 239,779 1.61%
-------------- --------------- --------------
Gross profit 14,947,716 12,256,631 2,691,085 21.96%
Operating expenses 11,702,633 10,346,420 1,356,213 13.11%
-------------- --------------- --------------
Operating income (loss) 3,245,084 1,910,211 1,334,872 69.88%
Other (income) expense 653,778 900,304 (246,525) (27.38%)
-------------- --------------- --------------
Income (loss)
before income taxes 2,591,305 1,009,907 1,581,399 N/A
Income tax provision (benefit) 1,049,986 574,851 475,134 N/A
-------------- --------------- --------------
Net income (loss) $ 1,541,320 $ 435,056 $ 1,106,263 N/A
============== =============== ==============
Revenues
Sales for 2000 continued its growth trend with a 10.8% increase over
1999 with our retail sales and ASC programs accounting for the majority of the
increase. We also opened two new sales/distribution units in 2000, located in
Dallas and Houston, TX. Tandy Leather's sales for December 2000 added $575,000
to the total for the year.
The primary sales growth is currently being generated from the retail
customer market. Retail sales in 2000 increased 35% from 1999. In years past, we
have focused our marketing efforts primarily toward the wholesale customer.
Beginning in 1999, as a result of other companies' intentional decrease and/or
elimination of their marketing efforts toward the retail customer, we began to
specifically target retail customers in our direct mail advertising program as
well as in our sales/distribution units. As a result, we have experienced
significant growth in this market. Tandy Leather's mail-order and Internet sales
is dominated by retail sales and even though our sales for 2000 weren't impacted
(due to the timing of the acquisition), we expect it to contribute significantly
to our retail sales growth in the future.
13
Our ASC program generated sales of approximately $1.7 million in 2000,
with 145 approved ASC's in the program. This compares to 80 approvals for
approximately $900,000 in 1999. Tandy Leather has an authorized dealer program
in place as well with 74 dealers worldwide and is expected to generate strong
sales in this area going forward.
Our export sales decreased slightly in 2000 as well as specific
wholesale categories (shoe care/repair primarily), but were offset by increases
in sales in our other core markets (saddle and tack, small manufacturers, etc).
Costs, Gross Profit, and Expenses
Cost of sales for 2000 totaled $15.1 million or 50.3% of sales
resulting in a gross profit margin of 49.7%. This compares to a cost of sales
percentage of 54.9% and gross profit margin of 45.1% in 1999. The increase in
retail sales continues as the explanation of the improvement in gross profit
margins from year to year as well as an increased efficiency in the purchasing
of product from vendors due to volume discount and tougher price negotiations.
Operating expenses increased $1.3 million or 13.1% compared to 1999.
The increase is primarily the result of increases in payroll costs (increased
number of employees due to new sales/distribution units opened in 2000, Tandy
Leather acquisition, managers' bonuses (based on higher profits earned at the
sales/distribution units)), and advertising costs (increased efforts toward
retail customers via direct mailing pieces).
Other (Income) Expense
Other expenses were down 27.4% from 1999. This reduction is due to the
decrease in interest expense as the average outstanding debt balances continue
to drop.
Provision (Benefit) for Income Taxes
The provision for federal and state income taxes was 40% of 2000 income
before taxes compared to 57% in 1999. The reduction in the percentage resulted
because the non-deductible expenses (goodwill amortization) that has increased
the effective percentage of taxes to income in the past were relatively
unchanged in amount, but much smaller as a percentage of income before taxes due
to the significant increase in income before taxes in 2000.
Analysis of 1999 Compared to 1998
1999 1998 $ Change % Change
-------------- --------------- -------------- --------------
Net sales $27,164,399 $22,163,994 $5,000,405 22,56%
Cost of sales 14,907,768 12,428,324 2,479,444 19.95%
-------------- --------------- --------------
Gross profit 12,256,631 9,735,670 2,520,961 25.89%
Operating expenses 10,346,420 8,890,045 1,456,375 16.38%
-------------- --------------- --------------
Operating income (loss) 1,910,211 845,625 1,064,586 125.89%
Other (income) expense 900,304 970,340 (70,034) (7.21%)
-------------- --------------- --------------
Income (loss)
before income taxes 1,009,907 (124,715) 1,134,622 N/A
Income tax provision (benefit) 574,851 (85,524) 660,375 N/A
-------------- --------------- --------------
Net income (loss) $ 435,056 $(39,191) $474,247 N/A
============== =============== ==============
14
Revenues
The Company experienced encouraging growth in net sales during 1999
primarily due to the absorption of a portion of Tandycrafts' market share that
it abandoned during the year and the early signs of renewed interest in the
western apparel and craft markets. In addition, we opened four new
sales/distribution units in 1999, located in Portland, OR, Billings, MT, Austin,
TX, and Tucson, AZ.
It has been our experience that the western and craft industries are
subject to fads, to some extent. Movies, entertainers, etc. have a great impact
on the popularity of western apparel in particular. The key to success in the
craft industry, oversimplifying of course, is being the first company with a
popular idea - whether it be wearable art, photo albums and scrapbook creations,
etc. As a result, the Company's success in selling to these two industries
depends to a point on the latest successful craft idea, what is popular at the
box office, or who won Entertainer of the Year. We believe we are seeing the
beginnings of these two industries' popularity on the rise.
Partially offsetting the sales increases in retail, western and craft
markets was the continued reduction of sales of certain low margin items.
Because of the historically low margins earned in our shoe care/repair product
line, we intentionally eliminated a large portion of the line. This reduced 1999
sales to this industry by approximately $1 million from 1998. We compensated for
this reduction with the development and implementation of our new ASC program.
The ASC program began in April 1999, and as of December 31, 1999, we
had approximately 80 approved ASCs. In 1999, the ASCs generated sales of over
$900,000. Sales in our institutional (prisons and prisoners, schools, hospitals,
etc.) and other core markets (saddle and tack, semi-professional hobbyists,
small manufacturers) showed steady and positive growth trends as well.
Costs, Gross Profit, and Expenses
Cost of sales for 1999 totaled $14.9 million or 54.9% of sales. The
percentage increase over 1998 was 20%. The impact of this increase becomes
evident when compared to the 22.5% increase in sales. The 2.5% gain in gross
profit to sales in 1999 resulted in a gross profit percentage of 45.1% - the
highest in the Company's history - compared to 43.9% in 1998. The most
significant factor supporting this improvement is the increase in our retail
business as retail sales historically produce the highest profit margins. In
1999, we experienced a 70% jump in retail sales from 1998.
Operating expenses increased $1.45 million or 16.4% compared to 1998.
This increase is a result of higher payroll costs resulting from higher sales,
ESOP contribution (management's desire to reward employees for the Company's
financial improvement), managers' bonuses as a result of higher profits earned
at the sales/distribution units, and professional fees.
Other (Income) Expense
Other expenses were down 7.2% from 1998. This reduction is primarily in
interest expense due to the decrease in average outstanding debt balances in
1999 as compared to 1998.
Provision (Benefit) for Income Taxes
The provision for federal and state income taxes was 57% of 1999 income
before taxes due to $420,000 of non-deductible expenses, principally
amortization of goodwill. Without these non-deductible expenses, the Company's
effective tax rate approximates the Company's historical rate for combined
federal, state and local income taxes of 40%.
15
Financial Condition
At the end of 1999, the Company had inventory of $8.8 million and
$983,000 of property and equipment (net of depreciation and amortization).
Goodwill and intangible assets (net of amortization) were $4.8 million and
$191,000. Net total assets were $18.2 million. Current liabilities were $9.3
million (including current maturities of long-term indebtedness), and long-term
liabilities were $121,000. Total stockholders' equity was $8.7 million.
During 2000, net cash provided from operating activities was $3.9
million. Prior to the Tandy Leather transaction on November 30, 2000, the
Company had applied $2.54 million to reduce the outstanding balance of its
credit facility described below, leaving an outstanding principal balance of
$3.28 million. On November 30, 2000, the Company drew an additional $2.75
million on this line to fund the cash portion of the purchase price for the
Tandy Leather assets. The Company also assumed $658,000 of current liabilities
of the seller.
Upon consummation of the purchase of the Tandy Leather assets, the
Company recorded the following additions to the Company's assets:
Recorded Value
Assets at
------ Nov. 30, 2000
----------------
Accounts receivable, net $ 268,199
Inventory 1,960,209
Goodwill 409,920
Other Intangibles 391,179
Artwork 250,000
Property and equipment 167,742
Other 60,622
-----------------
TOTAL $ 3,507,871
=================
At December 31, 2000, the Company had inventory of $9.2 million and net
property and equipment of $1.2 million. Goodwill and other intangibles (net of
amortization and depreciation) were $5.0 million and $615,000, with the Tandy
Leather transaction resulting in the addition of $250,000 in artwork. Net total
assets were $19.7 million. Current liabilities were $9.3 million (including
current maturities of long-term indebtedness), while long-term liabilities were
$13,000. Total stockholders' equity at the end of 2000 had increased to $10.3
million, principally as a result of the $1.5 million of net income recorded by
the Company during 2000.
As a result of various adjustments arising out of the Tandy Leather
transaction, a total of $157,000 was owed to the Company by Tandycrafts, Inc. at
December 31, 2000, of which the entire amount has been paid as of March 15,
2001.
Capital Resources and Liquidity
On November 19, 1999, the Company entered into a Credit and Security
Agreement with Wells Fargo Business Credit, Inc. ("WFBC"), in which WFBC agreed
to provide a credit facility of up to $8,650,000 (the "Credit Facility"). The
Credit Facility has a three-year term and is secured by all of the assets of the
Company. The initial borrowings from WFBC were used to pay all amounts due by
the Company to FINOVA Capital Corporation and The Schlinger Foundation.
On November 30, 2000, the Company and its subsidiaries entered into a
First Amendment to Credit and Security Agreement (the Amendment"), with WFBC.
There, WFBC consented to the Tandy Leather transaction and amended certain
financial tests to reflect the acquisition of the Tandy Leather assets and to
make previously contemplated extensions of these tests. Among these changes, the
Amendment dropped a minimum debt service requirement in the existing credit
agreement, and increased the percent of eligible inventory book value and the
total amount of eligible inventory (both computed as provided in the credit
agreement) that can be included in the Company's borrowing base under the credit
agreement. Also, the Company's required minimum book net worth and minimum net
income (as these are computed under the agreement) were adjusted for the balance
of the calendar year 2000. In addition, extensions of these requirements were
negotiated that raised the standards for the Company from the earlier
provisions. The higher standards reflected the Company's improved financial
performance since the credit agreement was signed.
16
The Company is currently in compliance with all covenants and
conditions contained in the Credit Facility and has no reason to believe that it
will not continue to operate in compliance with the provisions of these
financing arrangements. The principal terms and conditions of the Credit
Facility are described in further detail in Note 5 to the Consolidated Financial
Statements.
The Company borrows and repays funds under revolving credit terms as
needed. Principal balances at the end of each quarter during both facilities'
existence are shown below:
4th Qtr. `99 1st Qtr. `00 2nd Qtr. `00 3rd Qtr. `00 4th Qtr. `00
------------ ------------ ------------ ------------ ------------
$5,818,652 $5,733,960 $5,070,780 $4,288,372 $5,650,965
Total indebtedness with WFBC (revolving credit and one term loan) at
the end of 1999 and 2000 are shown below:
December 31,
--------------------------------------------------------------------------
1999 2000
--------------------------------------------------------------------------
Accrued Accrued
Principal Interest Principal Interest
-------------------------------------------------------------------------
Revolving Line $5,818,652 $49,762 $5,650,965 $50,951
Term Loan 150,000 1,163 -0- -0-
-------------- ------------- ------------- -----------
TOTAL $5,968,652 $50,925 $5,650,965 $50,951
============== ============= ============= ===========
The primary source of liquidity and capital resources during 2000 was
cash flow provided by operating activities. Cash flows from operations for 2000
were $3.9 million. The largest portion of the operating cash flow was generated
from the decrease in inventory levels.
Accounts receivable decreased slightly to $2.2 million despite the
addition of $268,000 in accounts receivable from Tandy Leather acquisition
compared to $2.3 million at December 31, 1999. Inventory increased to $9.2
million at December 31, 2000 from $8.8 million at December 31, 1999. The Tandy
Leather acquisition on November 30, 2000 accounted for a $1.9 million inventory
increase while TLF's inventory decreased $1.4 million from December 31, 1999.
The aging of accounts receivable (excluding the impact of the accounts
receivable acquired from Tandy in November 2000) has remained virtually
unchanged from 1999 to 2000. Management is exploring various options to improve
the aging and increase the efficiency in which the accounts are monitored and
managed.
Inventory turned 3.64 times during 2000 (excluding the impact of the
Tandy inventory acquired in November 2000), improving slightly from the 1999
ratio of 3.45 times and the 1998 ratio of 3.11 times. The implementation of a
new information system has been very helpful in the monitoring of inventory
levels throughout the Company.
Accounts payable increased to $2.2 million at December 31, 2000 from
$1.8 million at the end of 1999. The balance would have remained constant with
the prior year had it not been for the trade payables assumed in connection with
the Tandy Leather acquisition.
17
The Company's current ratio remained fairly constant at December 31,
2000 and 1999 (1.36 and 1.31, respectively). If, however, accounting rules had
not required the Company's debt with WFBC to be classified as short-term (even
though the maturity is in November 2002), the current ratio at December 31, 2000
would have been 3.57.
The largest use of cash generated from the decrease in inventory and
accounts receivable in 2000 was for debt reduction prior to the Tandy Leather
acquisition and various capital expenditures. Capital expenditures totaled
$378,000 and $254,000 for the years ended December 31, 2000 and 1999,
respectively. Approximately 50% of 2000 capital spending was for new computer
equipment and software with the remainder split between office and warehouse
fixtures, machinery and other equipment, and leasehold improvements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's Credit Facility includes loans with interest rates that
vary with changes in the prime rate. An increase of one percentage point in the
prime rate would not have a material impact on the Company's future earnings.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Financial Statement Schedule are filed as
a part of this report. See page 15, Index to Consolidated Financial Statements.
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
18
THE LEATHER FACTORY, INC.
-------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Consolidated Balance Sheets at December 31, 2000 and 1999 .............. 20
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999, and 1998 .................................... 21
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 .................................... 22
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 1999, and 1998 .............................. 23
Notes to Consolidated Financial Statements ............................. 24
Financial Statement Schedules for the years ended December 31,
2000, 1999, and 1998:
II - Valuation and Qualifying Accounts and Reserves .................... 36
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule or because the information required is included in the
consolidated financial statements and notes thereto.
Report of Independent Auditors .................................... 37
19
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 234,141 $ 134,465
Cash restricted for payment on revolving credit facility 390,467 317,904
Accounts receivable-trade, net of allowance for doubtful accounts of
$338,000 and $177,000 in 2000 and 1999, respectively 2,191,996 2,292,645
Inventory 9,205,898 8,807,963
Deferred income taxes 130,802 160,165
Other current assets 510,473 533,841
------------ ------------
Total current assets
12,663,777 12,246,983
------------ ------------
PROPERTY AND EQUIPMENT, at cost 3,657,601 3,143,594
Less-accumulated depreciation and amortization (2,494,732) (2,160,336)
------------ ------------
Property and equipment, net 1,162,869 983,258
GOODWILL, net of accumulated amortization of $1,367,000
and $1,160,000 in 2000 and 1999, respectively 4,964,704 4,767,885
OTHER INTANGIBLES, net of accumulated amortization of
$100,000 and $45,000, in 2000 and 1999, respectively 615,647 191,048
OTHER assets 279,082 31,601
------------ ------------
$ 19,686,079 $ 18,220,775
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,159,910 $ 1,805,918
Accrued expenses and other liabilities 1,290,613 978,969
Income taxes payable 94,795 474,262
Notes payable and current maturities of long-term debt 5,759,626 6,061,735
------------ ------------
Total current liabilities 9,304,944 9,320,884
------------ ------------
DEFERRED INCOME TAXES 72,473 97,780
NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 13,025 121,686
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8) -- --
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, 9,908,161
and 9,853,161 shares issued and outstanding at 2000 and 1999,
respectively 23,780 23,648
Paid-in capital 3,946,608 3,901,740
Retained earnings 6,471,754 4,930,434
Less: Notes receivable - secured by common stock (120,339) (153,416)
Accumulated other comprehensive loss (26,166) (21,981)
------------ ------------
Total stockholders' equity 10,295,637 8,680,425
------------ ------------
$ 19,686,079 $ 18,220,775
============ ============
The accompanying notes are an integral part of these financial statements.
20
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
------------------ ---------------- -----------------
NET SALES $ 30,095,264 $ 27,164,399 $ 22,163,994
COST OF SALES 15,147,547 14,907,768 12,428,324
------------------ ---------------- -----------------
Gross profit 14,947,717 12,256,631 9,735,670
OPERATING EXPENSES 11,702,633 10,346,420 8,890,045
------------------ ---------------- -----------------
INCOME FROM OPERATIONS 3,245,084 1,910,211 845,625
OTHER INCOME (EXPENSE):
Interest expense (617,400) (923,092) (1,003,649)
Other, net (36,379) 22,788 33,309
------------------ ---------------- -----------------
Total other income (expense) (653,779) (900,304) (970,340)
------------------ ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES 2,591,305 1,009,907 (124,715)
PROVISION (BENEFIT) FOR INCOME TAXES 1,049,985 574,851 (85,524)
------------------ ---------------- -----------------
NET INCOME (LOSS) $ 1,541,320 $ 435,056 $ (39,191)
================== ================ =================
NET INCOME (LOSS) PER COMMON SHARE $ 0.16 $ 0.04 $ (0.00)
================== ================ =================
NET INCOME (LOSS) PER COMMON SHARE--Assuming Dilution $ 0.15 $ 0.04 $ (0.00)
================== ================ =================
The accompanying notes are an integral part of these financial statements.
21
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,541,320 $ 435,056 $ (39,191)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities-
Depreciation and amortization 582,778 567,452 527,443
(Gain) loss on sales of assets 5,089 -- (9,118)
Amortization of deferred financing costs 44,804 225,953 233,239
Other (128) 13,426 (5,273)
Net changes in assets and liabilities:
Accounts receivable-trade, net 368,848 (710,186) 282,817
Inventory 1,562,274 (1,851,357) 323,096
Income taxes payable (379,467) 615,201 57,031
Other current assets 83,990 (294,684) 115,140
Accounts payable (137,686) 786,849 77,023
Accrued expenses and other liabilities 230,732 448,180 (28,987)
----------- ----------- -----------
Total adjustments 2,361,234 (199,166) 1,572,411
----------- ----------- -----------
Net cash provided by operating activities 3,902,554 235,890 1,533,220
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (377,840) (254,274) (137,828)
Payments in connection with business acquired (2,999,159) -- --
Proceeds from sales of assets 2,484 -- 10,000
(Increase) decrease in other assets 2,519 2,235 (2,934)
Other intangible costs -- (8,174) (1,728)
----------- ----------- -----------
Net cash used in investing activities (3,371,996) (260,213) (132,490)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving credit loans (167,687) 2,220,664 (432,531)
Proceeds from notes payable and long-term debt -- 150,000 --
Payments on notes payable and long-term debt (243,083) (2,605,453) (620,223)
(Increase) decrease in cash restricted for payment on revolving credit facility (72,563) (85,066) 86,295
Payments received on notes receivable - secured by common stock 33,077 71,334 32,867
Proceeds from issuance of common stock 45,000 -- --
Deferred financing costs incurred (25,626) (103,090) (27,235)
----------- ----------- -----------
Net cash used in financing activities (430,882) (351,611) (960,827)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 99,676 (375,934) 439,903
CASH, beginning of year 134,465 510,399 70,496
----------- ----------- -----------
CASH, end of year $ 234,141 $ 134,465 $ 510,399
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 572,577 $ 697,996 $ 787,148
Income taxes paid during the period, net of (refunds) 1,424,648 (57,681) (117,609)
NON-CASH INVESTING ACTIVITIES:
Computer equipment acquired under capital lease financing arrangements $ -- $ 217,493 $ --
The accompanying notes are an integral part of these financial statements.
22
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Common Stock Notes Accumulated
---------------------------- receivable Other
Number Par Paid-in Retained - secured by Comprehensive
Of shares value capital earnings common stock Income (Loss)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 9,853,161 $ 23,648 $ 4,119,915 $ 4,534,569 $ (257,617) $ (14,018)
Payments on notes receivable -
secured by common stock -- -- -- -- 32,867 --
Allocation of suspended ESOP
shares committed to be released -- -- (258,175) -- -- --
Warrants issued to acquire
200,000 shares of common stock -- -- 40,000 -- -- --
Net Loss -- -- -- (39,191) -- --
Translation adjustment -- -- -- -- -- (11,720)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 9,853,161 $ 23,648 $ 3,901,740 $ 4,495,378 $ (224,750) $ (25,738)
Comprehensive loss for the year ended December 31, 1998
Payments on notes receivable -
secured by common stock -- -- -- -- 71,334 --
Net Income -- -- -- 435,056 -- --
Translation adjustment -- -- -- -- -- 3,757
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 9,853,161 $ 23,648 $ 3,901,740 $ 4,930,434 $ (153,416) $ (21,981)
Comprehensive income for the year ended December 31, 1999
Payments on notes receivable -
secured by common stock -- -- -- -- 33,077 --
Shares issued - employee stock
options exercised 55,000 132 44,868 -- -- --
Net Income -- -- -- 1,541,320 -- --
Translation adjustment -- -- -- -- -- (4,185)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2000 9,908,161 $ 23,780 $ 3,946,608 $ 6,471,754 $ (120,339) $ (26,166)
Comprehensive income for the year ended December 31, 2000
Unearned
ESOP Comprehensive
Shares Total Income (Loss)
------------ ------------ ------------
BALANCE, December 31, 1997 $ (273,851) $ 8,132,646
Payments on notes receivable -
secured by common stock -- 32,867
Allocation of suspended ESOP
shares committed to be released 273,851 15,676
Warrants issued to acquire
200,000 shares of common stock -- 40,000
Net Loss -- (39,191) (39,191)
Translation adjustment -- (11,720) (11,720)
------------ ------------
BALANCE, December 31, 1998 $ -- $ 8,170,278
------------
Comprehensive loss for the year ended December 31, 1998 $ (50,911)
============
Payments on notes receivable -
secured by common stock -- 71,334
Net Income -- 435,056 435,056
Translation adjustment -- 3,757 3,757
------------ ------------
BALANCE, December 31, 1999 $ -- $ 8,680,425
------------
Comprehensive income for the year ended December 31, 1999 $ 438,813
============
Payments on notes receivable -
secured by common stock -- 33,077
Shares issued - employee stock
options exercised -- 45,000
Net Income -- 1,541,320 1,541,320
Translation adjustment -- (4,185) (4,185)
------------ ------------
BALANCE, December 31, 2000 $ -- $ 10,295,637
-------------
Comprehensive income for the year ended December 31, 2000 $ 1,537,135
=============
The accompanying notes are an integral part of these financial statements.
23
THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
The Leather Factory, Inc. and subsidiaries (the "Company") is engaged in the
manufacture and distribution of a broad product line of leather, leather crafts
and finished goods, western apparel and related accessory items. The Company
operates sales/distribution units in 19 states and Canada. Numerous customers
including retailers, wholesalers, assemblers, distributors and other
manufacturers geographically disbursed throughout the world purchase the
Company's products. The Company also has light manufacturing facilities in Texas
and New York.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Inventory
The Company's inventory is valued at the lower of first-in, first-out cost or
market and consists of the following at December 31:
2000 1999
---- ----
Finished goods held for sale $8,175,429 $7,629,995
Raw Materials and work in process 1,030,469 1,177,968
---------- ----------
$9,205,898 $8,807,963
========== ==========
24
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense when incurred. The cost of assets retired or sold
and the related amounts of accumulated depreciation are removed from the
accounts, and any gain or loss is included in the statement of income.
Depreciation is determined using the straight-line method over the estimated
useful lives as follows:
Leasehold improvements 5-7 years (or lease term if shorter)
Equipment 5-10 years
Furniture and fixtures 5-7 years
Automobiles 5 years
Depreciation expense was $358,787; $347,651; and $308,568 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Goodwill
Goodwill resulting from business purchases accounted for using the purchase
method of accounting is being amortized on a straight-line basis over estimated
useful lives ranging from ten to forty years.
The Company assesses the recoverability of goodwill by determining whether the
asset balance can be recovered over its remaining life through undiscounted
future operating cash flows of the acquired asset. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows.
Amortization expense of $223,991 in 2000; $219,801 in 1999; and $218,875 in 1998
was recorded in operating expenses.
Advertising Costs
With the exception of catalog costs, advertising costs are expensed as incurred.
Catalog costs are capitalized and expensed over the estimated useful life of the
particular catalog in question, which is typically twelve to fifteen months.
Such capitalized costs are included in other current assets and totaled $40,579
and $29,635 at December 31, 2000 and 1999, respectively. Total advertising
expense was $1,353,520 in 2000; $1,040,671 in 1999; and $908,432 in 1998.
Revenue Recognition
Sales are recorded when goods are shipped to customers.
Income Taxes
Deferred income taxes result from temporary differences in the basis of assets
and liabilities reported for financial statement and income tax purposes.
Earnings Per Share
The Company computes earnings (loss) per share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128, Earnings
per Share ("SFAS 128"). SFAS No. 128 requires the disclosure of both "basic" and
"diluted" earnings per share. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding increased for potentially dilutive common shares outstanding during
the period. The dilutive effect of stock options, warrants and their equivalents
is calculated using the treasury stock method. Unearned shares held by the
Employees' Stock Ownership Plan are deemed not to be outstanding for earnings
per share calculations.
Accounting Estimates
The consolidated financial statements include estimates and assumptions made by
management that affect the reported amounts of assets and liabilities, the
reported amounts of revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Long-Lived Assets
The Company applies SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangible assets be reviewed for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable. The Company determined that as of December 31, 2000 and 1999, it
had no long-lived assets that met the impairment criteria of SFAS No. 121.
25
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, establishes financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted by SFAS No. 123, the Company has elected to continue to use
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") and related Interpretations, in accounting for its stock
option plans.
Foreign Currency Translation
Foreign currency translation adjustments arise from activities of the Company's
Canadian operations. Results of operations are translated into U.S. dollars
using the average exchange rates during the period, while assets and liabilities
are translated using period-end exchange rates. Foreign currency translation
adjustments of assets and liabilities are recorded in stockholders' equity.
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".
Reclassification
Certain reclassifications have been made to conform the 1998 financial
statements to the presentation in 1999 and 2000. The reclassifications had no
effect on net income.
3. OTHER CURRENT ASSETS
Other current assets consisted of the following at December 31:
2000 1999
---- ----
Accounts receivable - employees $106,370 $ 63,643
Accounts receivable - other 160,417 189,373
Prepaid expenses 177,535 237,152
Other 66,151 43,673
---------- ----------
$510,473 $533,841
========== ==========
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following at December
31:
2000 1999
---- ----
Accrued bonuses $ 784,528 $ 462,503
Accrued payroll 118,138 100,771
Accrued ESOP contribution 86,000 160,000
Sales and payroll taxes payable 52,851 41,047
Other 249,096 214,648
----------- -----------
$1,290,613 $ 978,969
=========== ===========
5. NOTES PAYABLE AND LONG-TERM DEBT
On November 19, 1999, the Company entered into a Credit and Security Agreement
with Wells Fargo Business Credit, Inc. ("Wells Fargo"), pursuant to which Wells
Fargo agreed to provide a credit facility of up to $8,650,000 in debt (the "Debt
Facility"). The Debt Facility has a three-year term and is made up of a
revolving credit facility and a $150,000 term note.
26
At December 31, 2000 and 1999, the amounts outstanding under the above
agreements and other long-term debt consisted of the following:
2000 1999
---- ----
Credit and Security Agreement with Wells Fargo - collateralized by all
of the assets of the Company; payable as follows:
Revolving Note dated November 19, 1999 in the maximum principal
amount of $8,500,000 with revolving features as more fully
described below - interest due monthly at prime plus 1/2% (9.5%
at December 31, 2000); matures November 30, 2002 $5,650,965 $5,818,652
Term Note dated November 19, 1999 in the original principal
amount of $150,000 -- $30,000 monthly principal payments plus
interest at prime plus1/2%; matured May 1, 2000 - $150,000
Capital Leases secured by computer equipment - total monthly principal
and interest payments of $9,324 at approximately 12% interest; maturing
in February through August of 2002 121,686 214,769
--------------- ---------------
5,772,651 6,183,421
Less - Current maturities (see below) 5,759,626 6,061,735
--------------- ---------------
$ 13,025 $ 121,686
=============== ===============
The current portion of long-term debt includes the Wells Fargo Revolving Credit
Loan although this obligation does not mature until November 30, 2002. The
classification of this debt was attributable to an accounting requirement that a
revolving credit agreement that includes both a subjective acceleration clause
and a requirement to maintain an arrangement, whereby cash collections from the
borrower's customers directly reduce the debt outstanding, to be classified as a
short-term obligation (Emerging Issues Task Force Issue 95-22). A covenant of
the Debt Facility is that collections from customers are to be deposited into a
cash collateral account that directly pays down the Revolving Credit Loan. The
balance in this account comprises the restricted cash on the Company's balance
sheet. Because of this arrangement and the fact that the debt agreement contains
a clause that would allow acceleration of payment of the debt in case of a
"material adverse change", this rule applies. Management does not believe that
any such acceleration will occur.
The Company periodically has outstanding letters of credit for inventory
purchase commitments with terms ranging from sight to 90 days. As of December
31, 2000, there were no letters of credit outstanding.
Pursuant to the Credit and Security Agreement with Wells Fargo, the overall
combined borrowings under the revolving credit facility and outstanding balance
on letters of credit is limited to a combined amount of $8,500,000. Of the
$8,500,000 limit, letters of credit cannot exceed $500,000. The unused portion
of the letter of credit limit can be utilized for borrowings, up to the limits
imposed for the indebtedness. Total borrowings under this arrangement are
subject to a percentage of trade accounts receivable and inventory reduced by
the outstanding balance of letters of credit and any required reserves. The
unused portion of the credit facility at December 31, 2000 and 1999 was $884,759
and $508,410, respectively.
The terms of the Debt Facility contain various covenants which among other
things require the Company to maintain a certain level of income and book net
worth and limit capital expenditures. Other covenants prohibit the Company from
incurring indebtedness except as permitted by the terms of the Debt Facility,
from declaring or paying cash dividends upon any of its stock and from entering
into any new business or making material changes in any of the Company's
business objectives, purposes or operations.
Scheduled maturities of the Company's notes payable and long-term debt are as
follows:
2001 $ 108,661
2002 5,663,990
-----------
$ 5,772,651
===========
6. EMPLOYEE BENEFIT PLAN
The Company has an Employee Stock Ownership Plan (the "Plan") for employees with
at least one year of service (as defined by the Plan) and who have reached their
21st birthday. Under the Plan, the Company makes annual cash or stock
contributions to a trust for the benefit of eligible employees. The trust
invests in shares of the Company's common stock. The amount of the Company's
annual contribution is discretionary. Benefits under the Plan are 100% vested
after three years of service and are payable upon death, disability or
retirement. Vested benefits are payable upon termination of employment.
27
The Company applies Statement of Position 93-6 (SOP 93-6"), "Employers'
Accounting for Employee Stock Ownership Plans," of the Accounting Standards
Division of the American Institute of CPAs. Contributions made during 1994 and
1995 in the amount of $99,962 and $226,222, respectively, represented securities
acquisition loans. In accordance with SOP 93-6, securities purchased with these
loans were recorded as unearned ESOP shares. The unearned ESOP share account is
reduced by the cost of the shares when they are committed to be released to
participants as payments are made on the loans using the principal and interest
method. Compensation expense is measured using the average fair market value
when shares are committed to be released to the employee. The Company
contributed $249,017, $208,214; and $125,408 in cash as current year
contributions to the plan during 2000, 1999, and 1998, respectively, and
recognized compensation expense related to these payments of $249,017, $208,214;
and $42,046 in 2000, 1999, and 1998, respectively. Furthermore, on January 21,
1999, the Company made an additional contribution to the Plan for December 1998
in the amount of $261,920. As a result of this contribution, the Company
recognized an additional compensation expense of $10,538 during 1998 relating to
the Plan.
The following table summarizes the number of shares held by the Plan and the
market value as of December 31, 2000, 1999, and 1998:
No. of Shares Market Value
------------- ------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Allocated 808,539 598,132 692,606 $808,539 $486,281 $173,152
Unearned - - - - - -
------- ------- ------- -------- -------- --------
Total 808,539 598,132 692,606 $808,539 $486,281 $173,152
======= ======= ======= ======== ======== ========
The Company currently offers no postretirement or postemployment benefits to its
employees.
7. INCOME TAXES
The provision for income taxes consists of the following:
2000 1999 1998
---- ---- ----
Current provision (benefit):
Federal $ 849,994 $ 370,053 $ (60,240)
State 191,070 207,171 (12,340)
---------- ---------- ----------
1,041,064 577,224 (72,580)
Deferred provision (benefit):
Federal 7,418 (2,373) (10,900)
State 1,503 - (2,044)
---------- ---------- ----------
8,921 (2,373) (12,944)
---------- ---------- ----------
$1,049,985 $ 574,851 $ (85,524)
========== ========== ==========
The income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities are as follows:
2000 1999
---- ----
Deferred income tax assets:
Allowance for doubtful accounts $ 33,621 $ 66,453
Capitalized inventory costs 88,575 85,175
Accrued expenses, reserves, and other 8,606 8,537
--------- ---------
Total deferred income tax assets 130,802 160,165
--------- ---------
Deferred income tax liabilities:
Property and equipment depreciation 63,395 83,598
Goodwill and other intangible assets amortization 11,643 11,337
Tax effect of translation adjustment and other (2,565) 2,845
--------- ---------
Total deferred income tax liabilities 72,473 97,780
--------- ---------
Net deferred tax asset $ 58,329 $ 62,385
========= =========
28
The effective tax rate differs from the statutory rate as follows:
2000 1999 1998
----- ----- -----
Statutory rate 34% 34% (34%)
State and local taxes 7% 20% (7%)
Non-deductible goodwill amortization 3% 8% 67%
ESOP transaction 0% 0% (112%)
Other (3%) (5%) 17%
----- ----- -----
Effective rate 41% 57% (69%)
===== ===== =====
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's primary office facility and warehouse are leased under a five-year
lease agreement that expires in March 2003. Rental agreements for the
sales/distribution units expire on dates ranging from March 2001 to February
2006. The Company's lease agreement for the manufacturing facility in Long
Island City, New York, expires on June 30, 2003.
Rent expense on all operating leases for the years ended December 31, 2000, 1999
and 1998, was $1,106,171; $1,047,882; and $1,017,491, respectively.
Capital Leases
The Company leases certain computer equipment under capital lease agreements.
Assets subject to the agreements totaling $346,601 and related accumulated
depreciation of $177,929 and $108,608 are included in property and equipment as
of December 31, 2000 and 1999, respectively.
Commitments
Future minimum lease payments under capital and noncancelable operating leases
at December 31, 2000 were as follows:
Capital Operating
Leases Leases
---------- -----------
Year ending December 31:
2001 $ 111,058 $ 1,214,827
2002 32,837 1,103,477
2003 - 687,054
2004 - 265,629
2005 and thereafter - 100,006
---------- -----------
Total minimum lease payments 143,895 $ 3,370,993
===========
Less amount representing interest 22,210
----------
Present value of net minimum capital lease payments 121,685
Less current installments of minimum capital lease payments 108,660
----------
Long-term capital lease obligations, excluding current installments $ 13,025
==========
Litigation
The Company is involved in various litigation that arise in the ordinary course
of its business and operations. There are no such matters pending that the
Company expects to have a material impact on its financial position and results
of operations.
9. SIGNIFICANT BUSINESS CONCENTRATIONS AND CREDIT RISK
Major Customers
The Company's revenues are derived from a diverse group of customers primarily
involved in the sale of leather crafts and western apparel items. While no
single customer accounts for more than 10% of the Company's consolidated
revenues in 2000, 1999 and 1998, sales to the Company's five largest customers
represented 14%, 19% and 18%, respectively, of consolidated revenues in those
years. While management does not believe the loss of one of these customers
would have a negative impact on the Company's operations, it does believe the
loss of several of these customers simultaneously or a substantial reduction in
sales generated by them could temporarily affect the Company's operating
results.
30
Major Vendors
The Company purchases a significant portion of its inventory through one
supplier. Due to the number of alternative sources of supply, loss of this
supplier would not have an adverse impact on the Company's operations.
Credit Risk
Due to the large number of customers comprising the Company's customer base,
concentrations of credit risk with respect to customer receivables are limited.
At December 31, 2000 and 1999, 18% and 29%, respectively, of the Company's
consolidated accounts receivable were due from three nationally recognized
retail chains. The Company does not generally require collateral for accounts
receivable, but performs periodic credit evaluations of its customers and
believes the allowance for doubtful accounts is adequate. It is management's
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 the
Company's results of operations and financial condition.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
---- ---- ----
Numerator:
Net income (loss) $ 1,541,320 $ 435,056 $ (39,191)
Numerator for basic and diluted earnings per -- --
share 1,541,320 435,056 (39,191)
Denominator:
Denominator for basic earnings per share -
weighted-average shares 9,875,606 9,853,161 9,803,887
Effect of dilutive securities:
Stock options 134,300 5,019 --
Warrants 172,897 31,918 --
----------- ----------- -----------
Dilutive potential common shares 307,197 36,937 --
----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 10,182,803 9,890,098 9,803,887
=========== =========== ===========
Basic earnings per share $ 0.16 $ 0.04 $ (0.00)
=========== =========== ===========
$ 0.15 $ 0.04 $ (0.00)
Diluted earnings per share =========== ============ ===========
For additional disclosures regarding the employee stock options and the
warrants, see note 11. Unexercised employee and director stock options to
purchase 6,000 and 150,000 shares of common stock as of December 31, 2000 and
1999, respectively, were not included in the computations of diluted earnings
per share ("EPS") because the options' exercise prices were greater than or
equal to the average market prices of the common stock and, therefore, the
effect would be antidilutive. The net effect of converting stock options to
purchase 452,000 and 447,000 shares of common stock at option prices less than
the average market prices has been included in the computations of diluted EPS
for the years ended December 31, 2000 and 1999, respectively.
11. STOCKHOLDERS' EQUITY
Stock Option Plans
1995 Stock Option Plan
In connection with its 1995 Stock Option Plan for officers and key management
employees, the Company has outstanding options to purchase its common stock. The
plan provides for the granting of either qualified incentive stock options or
non-qualified options at the discretion of the Compensation 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.
The Company has reserved 1,000,000 shares of common stock for issuance under
this plan.
31
1995 Director Non-Qualified Stock Option Plan
In connection with its 1995 Director Non-qualified Stock Option Plan for
non-employee directors, the Company has outstanding options to purchase its
common stock. The plan provides for the granting of non-qualified options at the
discretion of the Compensation 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. The Company has reserved 100,000 shares of
common stock for issuance under this plan.
Stock Option Summary
All options expire ten years from the date of grant and are exercisable at any
time after vesting. Of the combined 1,100,000 shares available for issuance
under the two plans, at December 31, 2000, 1999 and 1998, there were 587,000;
647,000; and 557,000; respectively, shares available for future grants.
A summary of stock option transactions for the years ended December 31, 2000,
1999, and 1998, is as follows:
2000 1999 1998
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
------------ ----------- ----------- ----------- ---------- ----------
Outstanding at January 1 453,000 $0.779 543,000 $0.758 566,000 $0.874
Granted 60,000 0.958 10,000 0.690 108,000 0.500
Forfeited or expired - - (100,000) 0.656 (131,000) 1.047
Exchanged - - - - - -
Exercised (55,000) 0.676 - - - -
------------ ----------- ----------- ----------- ---------- ----------
Outstanding at December 31 458,000 $0.814 453,000 $0.779 543,000 $0.758
============ =========== =========== =========== ========== ==========
Exercisable at end of year 358,000 $0.820 318,000 $0.813 255,000 $0.838
============ =========== =========== =========== ========== ==========
Weighted-average fair value of
Options granted during year $ 0.61 $ 0.45 $ 0.31
============ =========== ==========
The following table summarizes outstanding options into groups based upon
exercise price ranges at December 31, 2000:
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 67,000 $ 0.585 7.32 27,000 $0.642 7.79
More than $0.75 and
Less Than $1.00 375,000 0.829 5.42 325,000 0.813 4.75
More than $1.00 16,000 1.422 8.13 6,000 2.021 5.42
------------- ---------- ----------- ------------- ----------- -----------
458,000 $ 0.814 5.79 358,000 $ 0.820 4.99
============= ========== =========== ============= =========== ===========
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method. The fair value for
these options was estimated at the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 5.75% in 2000; 5.88% in 1999; and 5.00% in 1998; dividend
yields of 0% for all years; volatility factors of .821 for 2000, .851 for 1999;
and .693 for 1998; and an expected life of the valued options of 5 years for all
years other than some exchanged options reissued in 1997 which had an expected
remaining life of 4 years.
32
Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility, and changes in these input
assumptions can materially affect the fair value estimate they produce. Because
of this, it is management's opinion that existing models do not necessarily
provide a reliable single measure of fair value for the Company's stock options.
For pro forma disclosures, the estimated fair values determined by the model are
being amortized to expense on a straight-line basis over the options vesting
period as adjusted for estimated forfeitures. The Company's pro forma
information follows:
2000 1999 1998
---- ---- ----
Pro forma net income (loss) $ 1,419,693 $ 277,780 $ (310,098)
Pro forma net income (loss) per common share $ 0.14 $ 0.03 $ (0.02)
Pro forma net income (loss) per common share--Assuming Dilution $ 0.14 $ 0.03 $ (0.02)
Warrants
In connection with the issuance of a Subordinated Debenture in 1997, which has
since then been satisfied in its entirety, the Company issued warrants to
acquire up to 100,000 shares of Common Stock at $.54 per share to certain
unrelated individuals. The warrants may be exercised at anytime until expiration
on November 21, 2002.
Warrants to acquire up to 200,000 shares of common stock at approximately $0.44
per share were issued in conjunction with a consulting agreement to an unrelated
individual in August 1998. The warrants may be exercised at anytime until
expiration on August 3, 2003. The fair value for these warrants was estimated at
the date of grant using the Black Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 5.0%;
dividend yield of 0%; volatility factor of .645; and an expected life of 3
years. The estimated fair value of the warrants of $40,000 was recorded as an
expense in 1998.
Notes Receivable Secured by Common Stock
During 1996, the Company purchased certain notes from NationsBank that are
collateralized by the Company's common stock. These notes relate to shares
issued under the Company's 1993 Non-Qualified Incentive Stock Option Plan. These
notes, as renewed in 2000, are due from certain individuals including officers
and other members of management, require monthly payments, and have various
maturity dates ranging from June 30, 2001 to December 31, 2002.
12. BUSINESS ACQUISITION
In November 2000, the Company acquired the assets, primarily accounts
receivable, inventory, fixtures, and equipment, of TLC Direct, Inc. and Tandy
Leather Dealer, Inc. (dba Tandy Leather Company), a distributor of leather and
related products located in Fort Worth, Texas. Additionally, the Company
acquired the exclusive right to certain trademarks associated with the Tandy
Leather business. The total purchase price for the operating and intangible
assets was approximately $2,850,000, subject to adjustment. The purchase price
was funded with proceeds from the Company's revolving credit facility (see note
5). The transaction was accounted for under the purchase method of accounting
and the purchase price was allocated to the net assets acquired based on their
estimated fair values. The excess of cost over the fair value of net assets
acquired of approximately $410,000 was recorded as goodwill and is being
amortized over a period of 15 years. The operations of the acquired business
have been included in the Company's financial statements beginning December 1,
2000.
The following pro forma information (unaudited) has been prepared as if the
acquisition of Tandy Leather had occurred at the beginning of each of the years
ended December 31, 2000 and 1999. Such information is not necessarily reflective
of the actual results that would have occurred had the acquisition occurred on
those dates.
2000 1999
---- ----
Net Sales $36,708,000 $43,996,000
Net Income (loss) $ 1,637,000 $(4,327,000)
Net Income (loss) per common share $0.17 $(0.44)
Net Income (loss per common share - assuming dilution $0.16 $(0.44)
33
13. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for public companies relating to the
reporting of financial and descriptive information about their operating
segments in financial statements. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by chief operating decision makers in deciding how to
allocate resources and in accessing performance.
The Company identifies its segments based on the activities of three distinct
businesses: The Leather Factory, which sells product to both wholesale and
retail customers, consists of a chain of sales/distribution units located in the
United States and Canada; Tandy Leather Company, which sells product throughout
the United States via the Internet and mail-order, and internationally through
authorized dealers; and Roberts, Cushman & Company, which manufactures
decorative hat trims sold directly to hat manufactures and distributors.
The Company previously defined its operations as consisting of a single
reporting segment as provided for under the aggregation criteria of SFAS No.
131. During 2000, the Company revised its presentation of segment information to
reflect the Company initiative to establish strategic business units.
The Company's reportable operating segments have been determined as separately
identifiable business units. The Company measures segment earnings as operating
earnings, defined as income before interest and income taxes. The "Tandy Leather
Company" column for the year ended December 31, 2000 contains operating results
beginning after its November 30, 2000 acquisition.
The Leather Tandy Leather Roberts, Cushman
Factory Company & Co Total
------------------ ------------------ ------------------ ---------------
For the year ended December 31, 2000
Net Sales $ 27,060,406 $ 575,635 $2,459,223 $30,095,264
Gross Profit 13,735,454 252,453 959,810 14,947,717
Operating earnings (loss) 2,991,804 (43,724) 297,004 3,245,084
Interest expense (617,400) - - (617,400)
Other, net (36,280) - (99) (36,379)
---------------
Income (loss) before income taxes 2,338,124 (43,724) 296,905 2,591,305
---------------
Depreciation and amortization 423,313 4,895 154,570 582,778
Total assets $ 10,783,149 $3,688,976 $5,213,954 $ 19,686,079
------------------ ------------------ ------------------ ---------------
For the year ended December 31, 1999
Net Sales $ 24,735,228 - $ 2,429,171 $ 27,164,399
Gross Profit 11,449,475 - 807,156 12,256,631
Operating earnings (loss) 1,924,630 - (14,420) 1,910,211
Interest expense (923,092) - - (923,092)
Other, net 23,093 - (305) 22,788
---------------
Income (loss) before income taxes 1,024,632 - (14,725) 1,009,907
---------------
Depreciation and amortization 411,995 - 155,457 567,452
Total assets $ 12,707,527 - $ 5,513,248 $18,220,775
------------------ ------------------ ------------------ ---------------
For the year ended December 31, 1998
Net Sales $ 19,583,092 - $2,580,902 $ 22,163,994
Gross Profit 8,815,356 - 920,314 9,735,670
Operating earnings (loss) 923,783 - (78,158) 845,625
Interest expense (1,003,649) - - (1,003,649)
Other, net 33,309 - - 33,309
---------------
Income (loss) before income taxes (46,557) - (78,158) (124,715)
---------------
Depreciation and amortization 374,929 - 152,514 527,443
Total Assets $ 10,351,921 - $5,678,016 $ 16,029,937
------------------ ------------------ ------------------ ---------------
34
Net sales for geographic areas was as follows:
2000 1999 1998
---- ---- ----
United States $ 28,964,542 $ 25,847,946 $ 21,086,131
All other countries 1,130,722 1,316,453 1,077,863
--------------- ----------------- -----------------
$ 30,095,264 $ 27,164,399 $ 22,163,994
Geographic sales information is based on the location of the customer. Net sales
from no single foreign country was material to the Company's consolidated net
sales for the years ended December 31, 2000, 1999 and 1998.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable-trade and accounts payable
The carrying amount approximates fair value because of the short maturity of
those instruments.
Notes payable and long-term debt
The interest rates on the Company's notes payable and long-term debt fluctuate
with changes in the prime rate and are the rates currently available to the
Company; therefore, the carrying amount of those instruments approximates their
fair value.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
- ------------------------------------------- ---------------------------------------------------------------
Net sales $ 7,405,557 $ 7,602,405 $ 7,374,556 $ 7,712,746
Gross profit 3,570,591 3,801,033 3,713,560 3,862,533
Net income 383,942 493,394 315,099 348,885
Net income per common share:
Basic 0.04 0.05 0.03 0.04
Diluted 0.04 0.05 0.03 0.03
Weighted average number of common
shares outstanding:
Basic 9,859,754 9,873,161 9,876,422 9,887,509
Diluted 10,121,206 10,187,427 10,199,164 10,217,418
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- ------------------------------------------ ----------------------------------------------------------------
Net sales $ 5,513,000 $ 6,539,950 $7,625,169 $7,486,280
Gross profit 2,358,889 2,813,768 3,445,060 3,638,914
Net income (loss) (92,191) 6,708 272,565 247,974
Net income (loss) per common share:
Basic (0.01) - 0.03 0.02
Diluted (0.01) - 0.03 0.02
Weighted average number of common
shares outstanding:
Basic 9,853,161 9,853,161 9,853,161 9,853,161
Diluted 9,853,161 9,859,988 9,889,734 9,934,809
35
THE LEATHER FACTORY, INC.
SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Balance at beginning of year $ 177,000 $ 52,000 $ 28,000
Reserve "purchased" during year (Tandy) 248,000 - -
Additions (reductions) charged to income 22,000 157,000 3,000
Balances written off, net of recoveries (109,000) (32,000) 21,000
--------- --------- --------
Balance at end of year $ 338,000 $ 177,000 $ 52,000
========= ========= ========
36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Leather Factory, Inc.
We have audited the accompanying consolidated balance sheets of The
Leather Factory, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule referred to in the index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Leather Factory, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Hein + Associates LLP
Dallas, Texas
February 15, 2001
37
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" and "Executive
Officers of the Company" in the Proxy Statement for the 2001 Annual Meeting of
Stockholders.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 2001 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is incorporated by reference to the
material appearing under the heading "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Transactions" in the Proxy Statement for the
2001 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is incorporated by reference to the
material appearing under the heading "Certain Transactions" in the Proxy
Statement for the 2001 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements and financial statement schedules
---------------------------------------------------------
The financial statements and schedule listed in the accompanying index
to consolidated financial statements at Item 8 are filed as part of this Report.
2. Exhibits
-----------
The exhibits listed on the accompanying Exhibit Index, which
immediately precedes such exhibits, are filed or incorporated by reference as
part of this Report and such Exhibit Index.
(b) Reports on Form 8-K
-------------------
On December 15, 2000, the Company filed a report on Form 8-K (Items 2,
5 and 7) describing the asset purchase of Tandy Leather Company and the
resulting amendment to the Credit and Security Agreement with WFBC. This report
was amended on February 14, 2001 to include required financial information.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: March 27, 2001 By: /s/ Wray Thompson
---------------------------- -----------------
Wray Thompson
Chairman of the Board and Chief
Executive Officer
Date: March 27, 2001 By: /s/ Shannon L. Greene
----------------------------- ---------------------
Shannon L. Greene
Chief Financial Officer and Treasurer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature & Title Date
/s/ Wray Thompson March 27, 2001
- ------------------------------------
Wray Thompson, Chairman of the Board
/s/ Ronald C. Morgan March 27, 2001
- ------------------------------------
Ronald C. Morgan, Director
/s/ Robin L. Morgan March 27, 2001
- ------------------------------------
Robin L. Morgan, Director
/s/ William M. Warren March 27, 2001
- ------------------------------------
William M. Warren, Director
/s/ H. W. Markwardt March 27, 2001
- ------------------------------------
H. W. Markwardt, Director
/s/ Joseph R. Mannes March 27, 2001
- ------------------------------------
Joseph R. Mannes, Director
/s/ Anthony C. Morton March 27, 2001
- ------------------------------------
Anthony C. Morton, Director
/s/ Shannon L. Greene March 27, 2001
- ------------------------------------
Shannon L. Greene, Director
/s/ Michael A. Markwardt March 27, 2001
- ------------------------------------
Michael A. Markwardt, Director
39
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation of The Leather Factory, Inc., filed as
Exhibit 3.1 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.
3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to the
Registration Statement on Form SB-2 of The Leather Factory, Inc.
(Commission File No. 33-81132) filed with the Securities and Exchange
Commission on July 5, 1994, and incorporated by reference herein.
4.1 The Leather Factory, Inc. Stock Purchase Warrant for 200,000 shares
common stock, $.0024 par value issued to Evert I. Schlinger dated
August 3, 1998 and terminating on August 3, 2003, filed as Exhibit
4.13 to the Quarterly Report on Form 10-Q of The Leather Factory, Inc.
(Commission File No. 1-12368) filed with the Securities and Exchange
Commission November 12, 1998, and incorporated by reference herein.
4.2 Credit and Security Agreement dated November 22, 1999, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Roberts, Cushman & Company, Inc., and Hi-Line
Leather & Manufacturing and Wells Fargo Business Credit, Inc., filed
as Exhibit 4.1 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on December 16, 1999, and incorporated by
reference herein.
4.3 Revolving Note (Revolving Credit Loan) dated November 22, 1999, in the
principal amount of $8,500,000, payable to the order of Wells Fargo
Business Credit, Inc., which matures November 30, 2002, filed as
Exhibit 4.2 to the Current Report on Form 8-K of The Leather Factory,
Inc. (Commission File No. 1-12368) filed with the Securities and
Exchange Commission on December 16, 1999, and incorporated by
reference herein.
4.4 Term Note dated November 22, 1999, in the principal amount of
$150,000, payable to the order of Wells Fargo Business Credit, Inc.,
which matures May 1, 2000, filed as Exhibit 4.3 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on December 16,
1999, and incorporated by reference herein.
40
4.5 Copyright Security Agreement dated November 22, 1999, by and between
The Leather Factory, Inc., a Delaware corporation, The Leather
Factory, Inc., a Texas corporation, The Leather Factory, Inc., an
Arizona corporation, Roberts, Cushman & Company, Inc., and Hi-Line
Leather & Manufacturing and Wells Fargo Business Credit, Inc., filed
as Exhibit 4.4 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on December 16, 1999, and incorporated by
reference herein.
4.6 Amendment to Loan and Security Agreement dated November 30, 2000, by
and between The Leather Factory, Inc. a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather Factory, Inc.,
an Arizona corporation, Roberts, Cushman & Company, Inc., Hi-Line
Leather & Manufacturing, and Tandy Leather Company, Inc. (f/k/a
Leather Tan Acquisition, Inc.) and Wells Fargo Business Credit, Inc.
filed as Exhibit 99.1 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission on December 15, 2000, and incorporated by
reference herein.
10.1 Letter Agreement for Consulting Services dated July 24, 1998, by and
between The Leather Factory, Inc. and Evert I. Schlinger, filed as
Exhibit 4.13 to the Quarterly Report on Form 10-Q of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the Securities
and Exchange Commission November 12, 1998, and incorporated by
reference herein.
10.2 Asset Purchase Agreement dated November 30, 2000, by Tandy Leather
Company, Inc. (f/k/a Leather Tan Acquisition, Inc.), a Texas
corporation, TLC Direct, Inc., a Texas corporation, and Tandy Leather
Dealer, Inc., a Texas corporation, filed as Exhibit No. 2.1 to the
Current Report on Form 8-K of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange Commission on
December 15, 2000, and incorporated herein by reference.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Hein + Associates LLP dated March 29, 2001.
*27.1 Financial Data Schedule
------------
*Filed herewith.
41